A mutual fund pools the money of people with similar investment goals. The money in turn is invested in various securities depending on the objective of the mutual fund scheme, and the profile (or loss) is share among investors in proportion to their investment.
Mutual fund schemes are usually open end (perpetually open for investments and redemption) or close end (with a fixed term). A mutual fund scheme issue units that are normally price at Rs. 10 during the initial offer. Thus, the number of units you own as against the total number of units issued by the mutual fund scheme determines your share in the profits or loss of a scheme.
In the case of open end schemes, units can be purchased from or sold back to the fund at a net Asset value (NAV) based price on all business days.
The NAV is the actual value of a unit of the fund on given day. Thus, when you invest in a mutual fund scheme, you normally get an account statement mentioning the number of unites that have been allotted. The account statement is similar to your bank passbook… when you buy more units or redeem your units in part or full, you get an updated account statement, reflecting your transaction.
Where do mutual funds invest?
Broadly, mutual fund invests basically in four types of asset classes:
Stock: Stocks represent ownership or equity in a company popularly known as shares
Gold: Gold is a precious metal which is most popular and widely accepted.
Bonds: These represent debt from companies, financial institutions or government agencies.
Money market instruments: These include short-term debt instruments such as treasury bills, certificate of deposits and inter-bank call money.
What are the types of mutual fund?
Mutual funds can be classified based on their objective as:
Sector Equity Schemes: These schemes invest in shares of companies in a specific sector.
Diversified Equity Schemes: These schemes invest in shares of companies across different sectors of the economy.
Hybrid Schemes: These schemes invest in a mix of shares and fixed incomes instruments.
Income Schemes: These schemes invest in fixed income instruments such as bonds issued by corporate and financial institutions, and government securities.
Money Market Schemes: These schemes in invest in short term instrument such as certificate of deposits, treasury bills and short term bonds.
What are the benefits of investing mutual funds?
As opposed to investing directly in the three asset classes, accessing them through a mutual fund has several advantages:
Your money is managed by professionals who have the experience and resource to thoroughly analyze the economy and financial markets, and spot good opportunities.
With smaller amounts, you can achieve a higher degree of diversification and reduce your risk.
Liquidity and convenience:
Investing and getting back your money is easy. Also, there is very little paper work, and it is very easy to track and monitor your investments.
Some mutual fund scheme offers you tax benefits under section 80C. In addition, your returns from mutual funds (dividends and capital appreciation) are also eligible for favourable tax treatment.
What are ETFs (Exchange Traded Funds)?
An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. In India Most of the ETFs track an index, such as the NIFTY or SENSEX and lately GOLD. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features. ETFs are the most popular type of exchange-traded product.
To sum up, the key to investment success is determining your needs and selecting and allocating your saving across appropriate asset classes that can help you achieve them. Mutual funds offer you a low cost, convenient and professional investment vehicle to access different asset classes.