Guide to Mutual Fund

With a steady increase in Time Value of Money, people are more attracted towards options like Shares and Stocks, Mutual Funds, Bonds, Debentures etc. Hence, choosing between various options is a difficult task which a common man cannot do perfectly. Therefore to solve this problem the concept of investing in Mutual Funds has come up which encourages people to invest at the right place by using the right knowledge of the professionals.

What is a Mutual Fund Investment?
A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in mixed portfolio of stocks, bonds, other assets. It is operated by Professional Money Managers who allocate the funds to produce maximum profit for the investors. Mutual Funds are registered with the SEBI (Securities and Exchange Board of India) that regulates security markets prior to the collection of the funds from the investors.

How Mutual Funds work?
It is both an investment and an actual company. It is not different from how a share of ITC Limited is a representation of ITC Limited. When an investor buys ITC Stock, he is buying an ownership of the company and its assets. Similarly, a mutual fund investor is buying part ownership of the mutual fund company and its assets. The difference is that ITC Limited is in the sector of FMCG (Fast Moving Consumer Goods) and mutual fund is in the business of making investments.
Before investing into mutual funds, one should have a deep knowledge of the types of Mutual Funds. Mutual funds in India can be categorised on various categories like based on Asset class, based on Structure, and based on Investment Objective and many more.

Types of Mutual Funds based on Asset class

1. Equity Funds
These type of funds primarily invest in shares of the different companies and returns or losses are determined by how these shares perform in the stock market. As equity funds come with a quick growth, the risk of losing money is comparatively higher. These are considered as high-risk funds.

2. Debt Funds
These type of funds invest in fixed-income securities like Government bonds, company debentures, and fixed income assets. As they provide fixed returns, they are known to be Safe Investment Instrument.

3. Money Market Funds
These type of funds trade money in the money market. These funds invest in liquid instruments like T-Bills, Certificate of deposits. They are quite safe investment option, since one can get moderate return on the investment.

4. Hybrid Funds
Hybrid funds also known as the Balanced funds is an optimum mix of bonds and stocks, thereby bridging the gap between equity funds and debt funds. This is suitable for the investors willing to take more risks for debt plus returns benefit rather than sticking to lower but steady income schemes.

5. Tax Saving Funds
Equity Linked Saving Schemes (ELSS) or tax saving mutual funds mainly invest in equity stocks and shares and qualify for a deduction of up to INR 1,50,000 per financial year under section 80C of the Income Tax Act, 1961. While these are usually considered high-risk, returns can be high if the funds perform well.

6. Funds of Funds (FOF)
 These funds are also known as Multi-Manager Investments these schemes work by investing in other types of mutual funds. Return, in this case, depends on the overall performance of the targeted funds.

Types of Mutual Funds based on Structure
1. Open-ended Funds
 Open-ended funds are attractive mainly because they offer instant liquidity. They can be bought and redeemed throughout the year and have no definite expiration date. However, they can only be bought at the current Net Asset Value (NAV).

2. Close-ended Funds
Close-ended funds are preferred by those who want to lock in their money for a fixed period. They can only be bought during an initial period and can only be redeemed on maturity. In order to provide liquidity, they are listed and traded on the stock exchange.

Types of Mutual Funds based on Investment Objective
1. Income Funds
These schemes help to invest mostly in fixed income options like debentures and bonds to give investors a regular income and capital protection.

2. Liquid Funds
Liquid Funds mostly invest in short-term options like CP’s and T-Bills with the singular goal of providing liquidity. They are considered low-risk with moderate Return on Investment (ROI) and are best for investors with short-term investment plans.

3. Growth Funds
Growth funds usually put a huge portion in shares and growth sectors, suitable for investors who have a surplus of idle money to be distributed in riskier plans or are positive about the scheme. The objective behind this type of investment is that it provides Capital Appreciation.

Advantages of Mutual Fund
1. Diversification
One mutual fund can invest in various different investment securities, making it possible to achieve diversification by investing in just one fund. However, it is smart to diversify into several different mutual funds.

2. Professional Management
 The greatest benefit of mutual funds is that investors can save countless hours of time, energy and frustration involved with the research and analysis required to find quality investments to hold in a portfolio. The risk of losses also decreases by consulting a professional.

3. Accessibility
Mutual funds are offered at brokerage firms, discount brokers online, mutual fund companies, banks, and insurance companies.  Except for the mutual funds which are locked for a certain period of time, like ELSS, the units of the open-ended mutual funds can be purchased or redeemed on any of the business days unless specified otherwise by the fund house. Since there is no restriction on the liquidation of the units, the subscribers have easy access to their invested money.

4. Tax Saving
A mutual fund investment also provides tax-saving benefits to investors. Investing the money in mutual funds such as equity-linked savings schemes (ELSS) is eligible to get tax-deduction benefits under Section 80C of the Income Tax Act, 1961.

5. Low-cost Investment
This is a very interesting feature of mutual funds. Since mutual funds get money from multiple investors, the asset management services provided by the company come at a comparatively low cost or charge since the amount is equally divided between all the investors.