A mutual fund is an investment company that pools money from multiple investors. It invests in securities like stocks, bonds, or short-term debt. To earn the best possible returns, mutual funds are managed collectively by professional fund managers. Mutual funds are a safe and reliable investment option for wealth creation, tax savings and reaching financial goals.
All over the globe, there are three major types of mutual fund:
- Equity or Growth Funds: These funds invest mainly in stocks and shares of companies. These funds are ideal for long-term investment because they offer the best returns due to the company’s performance. Examples of these funds include Large Cap, Mid-Cap, Sector, Thematic, and Tax-saving funds.
- Fixed Income or Bond Funds or Income or Bond: These funds invest primarily in fixed income securities such as Government Securities or Bonds or Commercial Papers and Debentures or Bank Certificates of Deposits. These securities are good for income generation and can be used as safer investments. These funds include liquid, short term, floating rate and corporate debt funds.
- Hybrid funds: These combine growth and income funds to get the best of both worlds. These include Pension Plans, Child Plans and Conservative Balance Funds.
It is important to determine which mutual funds will help you reach your financial goals based on the timeframe, budget and risk assessment. For short term needs, liquid funds work better than income funds. Equity funds can be used for medium-term growth.
Although they may sound similar in the beginning, mutual funds are safer investments than stocks. You don’t have to pick stocks from thousands available on the stock exchange. Instead, you can trust fund managers who will make the investments for you. Instead of tracking individual stocks, you can track the entire fund. You can create wealth by buying company stocks. These stocks will allow you to invest your money in growing their business and creating value for yourself. Mutual fund investments offer flexibility with top-ups and the ability to withdraw/transfer your money, as well as growth/dividend options. Your investment is protected because all Mutual Funds have been registered with the Securities Exchange and Board of India. It is easier to choose mutual investment over stock when deciding on the mutual funds vs issue.
Mutual funds are preferred over share because they offer diversification, convenience and lower costs.
Although most Indian Mutual Funds only invest in India, there are other options for investors. SEBI approves all investments after reviewing the Scheme Information Document (SID). This document clearly states the scheme’s investment objectives and the type of securities that will be invested in. It also lists the countries and regions where the investment is taking place. The SID also outlines the risks associated with each security. Indian Mutual Funds must comply with all SEBI regulations, including providing daily Net Asset Value, liquidity, and ensuring portfolio disclosure, even if they invest in foreign securities.