Long-term Mutual Funds are a type of Safe Investment that eliminates the risk of Individual Stocks Investments and Management Selections.
What is the meaning of Mutual Funds?
A ‘Mutual Fund’ is essentially a form of trust that is established to raise money by the sale of units to the public under various schemes. The schemes that are specified by the Boards may include investments in securities, gold and related instruments, instruments of the money market, real estate, etc. In layman’s terms, a Mutual Fund is a pool of funds created by various investors wherein the money is invested according to the Fund’s Objectives.
Who creates Mutual Funds?
Asset Management Companies (AMC) or Fund Houses offer Mutual Fund Schemes in India. These companies are regulated by government bodies like AMFI and SEBI to take precautions against any illegal activities and scams. Some Global Agencies actively analyze and rate the performances of the fund over time. Such reports help the investors to make the right investment decisions.
What are the different types of Mutual Funds?
Mutual Funds Investments have several categories based on the types of securities and the returns they offer. Every type of investor can choose mutual funds based on his requirements.
Perhaps one of the most popular Mutual Fund schemes that allow investors to participate in stock markets. Equity Mutual funds mean high-risk schemes that offer a higher potential for returns in the long run. Equity funds are further divided into Sector-specific funds, Tax-saving funds, and Index Funds.
These Mutual Fund schemes divide the investments between equity and debt. The allocated percentage may change with the associated market risks. Balanced funds are ideal for investors who are willing to take comparatively lower risks.
Fixed-Income mutual funds have a predetermined rate of return. The basic idea is to generate interest income for the shareholders. Fixed-Income Funds include Corporate Bonds, Government Bonds, etc.
The Money Market Funds a.k.a. Liquid Funds are short-term instruments that give back a reasonable return in a short period. The investors who are willing to invest their surplus funds for a short period at lower risks prefer Liquid Funds.
A Global Fund has investments made in assets anywhere in the world including the investor’s home country. Such Mutual Funds are subject to risks related to the country’s political rules and market volatility.
Monthly Income Plans (MIP) or Hybrid Funds are similar to Balanced Funds but here the proportion of Equity assets is less. This is why Hybrid Funds are also called Marginal Equity Funds. Investors who want to have a regular income with low risks choose such Hybrid Funds.
How do Mutual Funds Work?
Mutual Funds have a dual nature since it is both an investment and an actual company. When an investor buys stakes in a mutual fund company, he/she is buying partial ownership of the company as well as its assets. Mutual funds can give returns to the investors in the following ways:-
- If the Mutual Funds increase in price, it has a capital gain. The gains are distributed to the investors by the fund companies.
- Dividends on stocks and interest on bonds act as the income for the investors. The Mutual Funds Investors have an option to either receive payment of the profits or reinvest the earnings to get more shares.
- If the Mutual Funds increase in price but are not sold by the fund’s manager, the investor can sell the shares for a profit in the market.
What are the benefits of Mutual Funds?
Mutual Funds, although being simple investments, are often misunderstood as complex investments vehicles. There are a lot of ways in which you can advantage from investing in mutual funds. Some of them are:-
- Diversification of Investments in various Asset Classes
- Easy to Invest and Manage
- Safe Investments since the Mutual Funds are Well Regulated
- High Liquidity of Investments
- Professionally managed funds
- Tax Benefits in Mutual Funds from the government
- Higher ROI
- Different Options for Investments
- Easy Accessibility
- Lower Minimum Investments
What are the Different Modes of Investing in Mutual Funds?
The Modes of Investing in Mutual Funds are:-
- Dividend Transfer Plan
- Systematic Transfer Plan
- Single Investment or Lump Sum Investment
- Systematic Investment Plan
- Systematic Withdrawal Plan
FAQs on Mutual Funds (Frequently Asked Questions)
The right time to invest in mutual funds is as soon as possible.
There is no correct answer to this. You can start with as low as ₹500 and go as high as you wish to.
Yes, any investment made in an open-ended scheme can be withdrawn at any point in time. But closed-ended schemes will be released only on their maturity dates.
Yes, Mutual Funds are safe if you understand them correctly. Choose the plans that are in sync with your financial goals or seek professional help for the same.
In order to yield mutual funds with higher returns, investments in Mutual Funds should be made for the long term.
A popular way to earn passive income is by investing in mutual funds. With the investments made in the present, you can build wealth for the future.
Not being clear with your financial goals and starting without a proper plan are some of the common mistakes that new investors often commit.
Yes, many banks in India function as the official distributors of mutual funds. The Banks operate as a sales channel for the funds but they do not sell all the mutual funds available in the market.
The Bond Mutual Funds such as Government Bond Funds, Corporate Bond Funds, and Municipal Bond Funds are considered as the safest types of Mutual Funds.
With so many mutual fund options to choose from, you can select the one that aligns with your financial goals. This way you can generate passive income and fulfill your financial objectives.
There are a few risks in mutual fund investments such as market risk, price risk, liquidity risk, etc.
Mutual Funds can provide tax benefits with some tax savings schemes. Certain mutual funds are tax-free up to a limit. They are also known as Equity Linked Savings Scheme (ELSS). Deduction of up to 1 lakh is given in Mutual Funds under 80C Section of Income Tax Act.
Yes, you can fill the Mutual Fund KYC form online to eliminate all the paperwork.