What Is Mutual Fund? Here’s What to Know About This Investment Scheme
An investment plan is necessary to create funds for the future if you are dependent on only your monthly income. As you don’t have another source to provide for the requirement in the future, you will need a plan to grow your money over the years. For people who have predictable requirements for themselves or their dependents, mutual funds can be of much use. Investing in the best mutual funds can help you accumulate more money than conventional savings schemes. But if you don’t know what is mutual funds investment or its working or type, you’re at the right place.
What Is a Mutual Fund Investment?
If you are unaware of what is mutual funds, then you must first know about securities. Securities are the risk purchase of any product’s popularity or performance, and when its value grows in the future, you can sell it for profit. But sometimes, due to underperformance, you can also incur losses. There are several types of securities, such as equity, futures, commodities, bonds, and mutual funds. And all these have their own risk level and return rates.
Mutual funds are securities, but the investor does not have any say in purchasing products other than the sector to which they belong. In equity, the investor purchases the shares at their discretion, but a fund manager handles the purchase in mutual funds. So, when you invest money regularly into mutual funds, the fund manager uses your investment to purchase securities in your stead.
The best mutual funds have multiple fund managers or teams of professionals to manage the purchase of products and investments. So, with their varied experience, they invest in plans which seem profitable in the future. But there can be miscalculations leading to loss of capital or returns. It is always wise to ensure the credibility and the history of the mutual funds and the issuing authority.
How Do the Best Mutual Funds work?
As mentioned earlier, an investor has to invest in mutual funds periodically over a set duration. During this time, the fund’s manager invests the funds into the best securities available. The investor cannot instruct the fund manager on the products to purchase with their money. They can only provide a preferable sector for investment, and the fund manager sticks to investing money into securities belonging to that sector. Some of the available sectors in mutual funds are IT, healthcare, financials, energy, utilities, commodities, real estate, industrials, consumer staples, etc.
At the end of the pre-decided duration, the mutual funds will return the investment along with the interest and returns gained over the years. Now, if the products underperformed, there can be losses, so knowing the mutual fund and its type before investing is necessary.
Types Of Mutual Funds
The Securities and Exchange Board of India (SEBI) manages and regulates mutual funds and their functioning in India. They have issued Mutual Funds Basics which are the standard guidelines for both investors and agencies. Based on that, there is also a categorization of mutual funds. Here are the major types of mutual funds and the sub-categories.
Mutual Funds Categories by Structure
Open-Ended Mutual Funds
Open-ended mutual funds are the most generic form of mutual funds with the least restrictions. An investor can join or leave the investment without much trouble. The major benefit of open-ended mutual funds is that you can invest in any number of shares regardless of the high demand if the shares are available at a low cost. So, when you sell them as the costs go up, you can have high returns.
Close Ended Mutual Funds
There are limitations in close-ended mutual funds, making them less popular, but they have their own perks. They have lower prices than the Net Asset Value (NAV) which is the actual price of the share. And they also provide two exit routes for the investor, making exiting a mutual fund easier but not as much as those of open-ended mutual funds.
Interval Mutual Funds
Interval mutual funds combine open-ended mutual funds and close-ended mutual funds.
Mutual Funds Categories by Investment Objective
Categorization of mutual funds is also possible through the investment objective. Given below are its major sub-categories.
- Growth or Equity-oriented schemes
- Income or Debt-oriented schemes
- Balanced schemes
- Money Market or Liquid Funds
- Gilts Funds
- Fund or Funds Schemes
- Floating Rate Funds
Apart from these, there are also categories that are useful on different occasions. Some examples are:
- Tax-savings schemes
- Index schemes
- Sector-specific schemes
- Load or No-Load schemes
- Dividend Payout schemes
- Dividend Reinvestment schemes
Now that you know what is mutual funds investment and the best mutual funds types, you won’t have trouble choosing the right category for you. But it is equally important to make wise investment choices by thorough research on the chosen investment plan. This will reduce any chances of losses and allow you to accumulate the necessary funds for your future with security.