“What is a mutual fund?” you ask? The simple way to explain is that it is an investment vehicle where many investors pool their money to earn returns on their capital over a period. The said pool of funds is managed by an investment professional who is referred to as a fund manager or portfolio manager. These managers are responsible for investing the pool of money in different securities such as gold, stocks, bonds and other assets. By investing in the securities, the fund manager seeks to provide potential revenue to the investors. The profits or even the losses on the investment are shared collectively by the investors based on the proportion of their contribution to the fund.
What are the popular examples of mutual funds?
Before investing in a mutual funds scheme, it is important to keep in mind that mutual funds are not a monolith. There are numerous types of mutual funds. Listed below are some of them:
- Debt funds:
Fixed-income funds or debt funds are known for investing in assets such as corporate bonds and government securities. Amongst their main objectives is to offer reasonable income to the investor. These funds are an ideal choice if you aim for a steady income and are looking for a safe investment option.
- Hybrid funds:
Consider this scenario. You want your money to be invested in both debt and equity. Then, hybrid funds might be the answer. These types of funds are known for investing in a mix of both equity and fixed-income securities. Depending on the allocation between equity and debt, hybrid funds are further classified into various sub-categories such as multi-asset allocation funds, aggressive hybrid funds, balanced hybrid funds and dynamic asset allocation or balanced advantage funds.
- Equity funds:
Equity mutual funds invest the investor’s money in stocks. These funds come with an important objective, which is, capital appreciation. However, it is important to note that since the revenue on equity funds is linked to market movements of stocks, you need to be prepared for a higher degree of risk. They are a good choice if you are investing with a long-term goal in your mind. Long term goals include things such as retirement planning or buying a house.
- Equity-linked saving scheme:
An equity-linked saving scheme (ELSS) is an open-ended equity mutual fund that invests primarily in equities and related products. They are a category among mutual funds that enjoy tax deductions under Section 80C of the Income Tax Act, 1961. Therefore, ELSS is also referred to as tax saving mutual funds.
How to sign up for a mutual scheme?
If you want to invest in a mutual fund scheme, you firstly need a portfolio. Please follow the steps below to open a portfolio:
- Provide details on a registration form:
Firstly, you need to fill out the registration form either physically or online with details such as your name, number, address and email address. Once that’s done, you can proceed to the next step.
- Head towards the KYC process:
After providing personal details on the registration form for the first step, you need to provide documents that will verify the details on the form. The Aadhar card, PAN card, bank documents and passport are some of the documents that can be used for the KYC process.
- Determine which mutual fund suits you:
Once documents are submitted for KYC, you need to determine the mutual fund that will help you to reach your financial goals. After selecting the mutual fund, you can proceed to the next step, which is to transfer the required amount.
- Transfer the required amount:
To complete the entire process, you need to transfer the amount which is required for the mutual fund. Also, please note that you can also leave a standing instruction with your bank if you are investing in a mutual fund every month.
What are the benefits of mutual funds?
Here are some of the benefits of mutual funds:
- It is possible to diversify your portfolio:
By investing your money in a single asset, you could risk a loss if the market crashes. But this problem can be avoided by investing in different asset classes i.e., diversifying your investment portfolio. Therefore, if you were investing in stocks and were looking to diversify your portfolio, you would need to select at least ten stocks carefully from different sectors. Usually, diversification is a lengthy process, but it can be completed instantly in a mutual fund scheme. Diversifying may reduce your risk.
- They offer liquidity:
Mutual funds can be easily redeemed i.e., liquidated. So, if an investor has some financial emergency, money can be withdrawn. On any business day i.e., whenever the market or banks are open, a mutual fund portfolio can be redeemed easily. This aspect ensures that you have easy access to your money. After redemption, the amount will be credited into your bank account within one day to 3-4 days, depending upon the type of scheme. For example, in the case of liquid funds and overnight funds, the redemption amount is paid to the investors on the next business day.
- Mutual funds are light on the wallet:
Another benefit is that mutual funds unlike other investment tools are inexpensive. The minimum initial investments for most mutual funds are affordable.
Investing in mutual funds may help you to achieve your financial goals on time. However, before investing, make sure to go through the different fund options. Moreover, identify your goals and invest accordingly. If you need help, you can approach a financial advisor to make the right investment decisions and plan your financial journey.
Disclaimer: Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
