Mutual Funds: Meaning, Types, Features, Benefits & Prices
Table of Contents
- jaro education
- 15, September 2023
- 4:00 pm
Mutual funds are a type of pooled investment that allows several shareholders to participate in bonds, stocks and other assets. It can be difficult for individual investors to buy shares in high-profile portfolios. Various kinds of mutual funds are available in the market depending on their risk-to-return ratio. Mutual funds enable investors to diversify their investments rather than putting all their money in one single place. A mutual fund manager selects where and when people can invest their money in this fund. Each investor has units, a percentage of the fund’s holdings. After subtracting certain fees, the income/gains created from this mutual fund investment are dispersed proportionately among the participants by computing a scheme’s Net Asset Value, or NAV.
Mutual fund investment and other types of investment are great areas of study in the commerce sector. If commerce interests you and if you 10+2 qualified student, you can pursue ample of courses such as Online B.com Courses. For now, let’s dive deeper into the fundamentals of mutual funds.
Mutual Funds: Meaning
This is an investment body that merges capital from shareholders and places it into financial instruments such as bonds, stocks, securities, and other assets with value. These funds are secured and upheld to align with the investment goals outlined in the prospectus by the shareholders. Expert financial managers handle these resources and utilize them for financial returns and profits for the investors of the fund.Â
One can choose mutual funds as an ideal investment option as it provides entry to professionally managed portfolios of bonds, equities, stocks and other financial instruments. As a result, each stakeholder shares equal profits or losses. Mutual funds invest in a broad array of assets and their success is often measured as the change in the fund’s total market value, calculated by summing up the performance of the underlying investments.
Types of Mutual Funds
Different types of mutual funds are available in the commerce industry. These funds are tailored in terms of structure, asset class, and investment objectives.
Interval funds
These mutual funds allow for transactions at certain times. When the trading window opens, investors can buy or sell their units.
Open-ended funds
These funds have no restrictions on when or how many units can be acquired. Investors can enter and depart at the current net asset value throughout the year. Investors wanting liquidity might choose open-ended funds.
Close-ended funds
The funds that have a predetermined unit capital amount and may only be bought within a specific time period are called closed-ended funds. The maturity date governs redemption in this case. Schemes, on the other hand, trade on stock markets to enhance liquidity.
Debt funds
Debt funds put money into fixed-income investments, including treasury bills, corporate bonds, and government securities. People focusing on stability and a consistent income while posing little risk should go for debt funds.
Equity funds
Equity funds put money in company shares, and their returns are determined by how the stock market performs. While offering significant returns, these funds are also considered dangerous, like every other investment scheme.
Solution-oriented funds
It is designed to achieve certain goals, such as saving for a person’s children’s marriage, education or retirement, solution-oriented funds are commonly opted for by individuals with various liabilities. These types of mutual funds have a minimum five-year lock-in duration.
Hybrid funds
To balance debt and equity, hybrid funds invest in both debt and equity products. Depending on the funding company, the investment ratio might be fixed or variable. Balanced and aggressive funds are the two primary categories of hybrid funds. Multi-asset allocation funds invest in a minimum of 3 asset classes.
Capital protection funds
Capital protection funds invest partly in equities and partly in fixed-income instruments. This ensures capital protection, which ensures minimal loss. But, returns from this fund are taxable.
Growth funds
These funds invest largely in high-performing companies with capital appreciation as the objective. These funds may appeal to investors seeking large returns over a lengthy period.
Pension funds
Pension funds invest with the goal of producing consistent returns over a long period of time. These are hybrid funds that produce low returns but are capable of providing consistent returns in the future.
Tax-saving funds
Tax-saving funds are mutual funds that primarily invest in corporate stocks. They qualify for tax breaks under Section 80C of the Income Tax Act, having an investment term of a minimum of 3 years.
Fixed-maturity funds
These funds invest in debt market securities with the same or a comparable maturity length as the fund.
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Liquidity-based funds
Some funds can be classified depending on the liquidity of their investments. For short-term goals, ultra-short-term and liquid funds are excellent.
Features of Mutual Funds
Investment flexibility
This is one of the most appealing features of mutual funds. To invest in mutual funds, individuals can choose between SIP and lump sum payments.
Great for portfolio diversification
Mutual funds can be invested evenly in high and low-risk funds on people’s behalf to balance one’s profits and losses instead of putting all money into one place. This gives individuals access to a diverse portfolio that can generate profits even during economic downturns.
Professional operation
To operate mutual funds, every fund house hires experts known as fund managers. They analyse market trends and invest the money in shares or bonds based on the scheme’s objectives.
Tax benefits
Because of their great tax efficiency, mutual funds are a good long-term investment. Investing in tax-saving funds while producing large returns might also result in income tax deductions.
Liquidity
In case of an emergency, people can withdraw or redeem money from the fund. Depending on the scheme, people get the ransom in 3-4 business days in the form of liquid money. Thus, mutual funds have adequate liquidity, since investors can redeem them at any moment.
Minimal charges
Mutual funds are also accessible to people of all income levels. To invest in mutual funds, you must pay a tiny fee to your fund companies, known as the expense ratio. The fee ratio and any extra charges may differ between investment companies. However, the fees are lower than those of comparable managed funds.
Benefits of Mutual Funds
Mutual funds come with various benefits. Some of the most important ones are as follows:
Accessibility
Many firms enable consumers to contribute as little as Rs.1000 in mutual funds as a single amount. Furthermore, one may choose a SIP and begin investing with a minimum of Rs.10.
Diversity
Mutual funds come in various distinct forms, as previously stated. Investors can choose a mutual fund scheme that meets their financial goals. They may develop a diverse investment portfolio at a low cost, because of the various possibilities that are offered.
Systematic investing
A mutual fund fosters long-term investment, which is essential for large asset accumulation. Furthermore, you may select a Systematic Investment Plan (SIP) and invest a certain amount at regular intervals, allowing you to invest systematically.
Various methods of investment
Mutual funds can be bought as a one-time or lump-sum investment. You can even go for a Systematic Investment Plan (SIP), a Systematic Transfer Plan (STP) or a Systematic Withdrawal Plan (SWP).
Convenience
With the popularity of online mutual fund investment, people no longer need to visit a fund house in person. Using a phone or computer, individuals may invest in any fund of their choice.
Prices of Mutual Funds
The price of a mutual fund depends on the securities’ performance where the money has been invested. When an investor purchases a unit or share of a mutual fund, he or she is purchasing the portfolio’s performance or, more accurately, a portion of the portfolio’s worth. Investing in mutual fund shares differs in many ways from investing in stocks. The mutual fund price share is known as the net asset value (NAV) per share, which is commonly abbreviated as NAVPS. The NAV of a fund is calculated by dividing the entire value of the securities in the portfolio by the total number of shares outstanding. All institutional investors, corporate executives, shareholders or insiders own outstanding shares.
Mutual fund shares are normally redeemed or acquired at the fund’s latest net asset value (NAV). This does not differ during market hours. However, it is settled at the conclusion of each trading day. When the NAVPS is resolved, the price of a mutual fund is likewise adjusted. The average mutual fund invests in a variety of securities, providing mutual fund owners with diversification.
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