When you invest in a mutual fund, your money is combined with the money of other investors, creating a significant pool of assets. The professional fund manager overseeing this pool uses the funds to purchase a wide range of investments, including stocks, bonds, and other securities. The objective of the fund manager is to achieve the fund’s investment objectives, which may be to outperform a benchmark or meet a particular risk-return profile.
What are the Different Types of Mutual Funds?
Mutual funds can be grouped in various ways, depending on their investing methods, the type of securities they hold, their structure, and other factors. The Securities and Exchange Board of India (SEBI) has categorized mutual funds according to their investment strategies.
Below is a list of the most common types of Mutual Funds:
- Equity Fund: These mutual funds expose investors to the stock market by making their principal investments in stocks.
- Bond funds: These mutual funds primarily invest in bonds, which are generally considered less volatile stocks but still carry risks such as interest rate and credit risk.
- Money Market Funds: Mutual funds that invest in short-term, low-risk securities like treasury bills and commercial paper. Certificates of deposit (CDs) are less commonly included in these funds in India.
- Balanced funds: These mutual funds aim to balance risk and return by investing in a combination of stocks, bonds, and other securities.
Benefits of Investing in Mutual Funds
The main factor contributing to mutual funds’ popularity in India is their abundance of benefits, which entices investors to make the investment.
Diversification
A mutual fund aggregates the money of several investors and uses it to buy a variety of stocks and assets. This helps lower the likelihood of significant losses due to adverse events by spreading investment risk among a number of securities.
Liquidity
Another significant advantage of investing in mutual funds is their high liquidity. Mutual fund units are relatively simple to buy and sell, While redemption times may vary, many funds process redemptions within a few business days.
Tax Benefits
In India, there are numerous varieties of mutual funds to choose from. One of them, the Equity Linked Savings Scheme (ELSS), allows you to save a significant amount of tax by offering tax benefits up to Rs. 1.5 lakhs in a financial year in the form of deductions from your total taxable amount.
Affordability
Mutual funds often require a relatively small initial investment making them accessible to a broad spectrum of investors. However, the minimum investment amount can vary depending on the mutual fund scheme.
Transparency
To help investors make well-informed investment decisions, mutual funds are obligated to furnish investors with periodic reports on the fund’s holdings and performance.
Flexibility
You can personalize your investments with mutual funds as much as you like. For example, you can choose to start a Systematic Investment Plan (SIP) or make a lump sum investment. In the case of a SIP, you control the investment’s size, duration, and frequency.
These are the biggest reasons to invest in mutual funds since they can dynamically grow your wealth for the future.