Mutual Funds are investment instruments that combine different instruments such as stocks or shares, bonds or both into a single product which is managed by an expert fund manager.
How do they work?
A number of investors with a common objective invest in a mutual fund product and their collectively pooled investment corpus is then invested into a desired combination of assets by a professional expert.
While investing in a mutual fund, you must look at the where the fund invests, the time horizon of your investment, the risk profile of the product, consistent historical performance across time horizons and more importantly, if the fund’s investment objective aligns with yours. A fund manager (a professional expert) then invests the money according to that pre-defined investment objective such as capital appreciation (looking for high growth in companies) or income (looking for more predictable investments such as debt securities) or a combination of both.
You can invest in mutual funds by making a one-time investment (lump sum) or via automated, periodic investments of fixed amounts (the highly popular Systematic Investment Plans).
Let’s look at the wide range of mutual funds available today.
Categories of mutual funds
Mutual fund schemes fall under two broad categories based on entry-exit restrictions:
1. Open-ended funds, in which the investor can buy and sell units at any point of time
2. Close-ended funds, which offer units to investors at the time of the initial launch only. Once the initial launch is over, the units are only listed on the stock exchange where investors can buy and sell them. They cannot be bought or sold directly from the asset management company after the initial launch period.
Open-ended funds technically exist till perpetuity while close-ended funds exist for a fixed duration of time.
In addition to being categorized as open-ended and close-ended, mutual funds are also generally categorized based on their underlying securities and investment objectives.
Types of mutual funds
There is a wide range of mutual funds that are suitable for different investors with differing needs and risk profiles.
The various types of debt funds include:
Benefits of mutual funds
Mutual funds offer a number of benefits to investors:
How to invest?
Investing in mutual funds is a simple process. The various ways through which you can invest in mutual funds include:
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