What is Mutual funds
A mutual fund is basically a collection of stocks and/or bonds. It is an investment company that pools money from many numerous investors who wish to save or make money and invests the money in stocks, bonds, short-term investments, other securities or assets, or some combination of these investments. It is also a trust which takes care of all the funds or money that its members are put in yours, the investor’s money. Know About Mutual Funds The combined holdings of stocks and bonds that the mutual fund owns are known as its portfolio. The professional manager of the mutual fund invests the money in different types of assets including stocks or shares of companies, government bonds, commodities, etc.
An investor purchases shares in the mutual fund. These shares represent an investor’s proportionate ownership of the assets that is owned by the fund. Mutual funds are designed only for longer-term investors and are not meant to be traded due to their fee structures. They are also very liquid. It is very easy to buy and redeem shares in mutual funds.
Investing in a mutual fund by the investor is easier than buying and selling of stocks and bonds on your own. Investors can sell their shares for the purpose of:
- Professional Management: Qualified professionals are responsible for choosing and monitoring each fund’s investments and use this money to create a portfolio. A portfolio contains stocks, bonds, money market instruments or combination of those.
- Fund Ownership: As an investor, we have our own shares of the mutual fund but not the individual securities. Mutual funds allow us to invest small amounts of money and also to get benefit from getting being involved in a large pool of cash invested by the other people.
Types of Mutual Funds:-
Depending on investment objectives, Mutual funds are of the following types:
Money market funds
Money market funds are mostly under short term debt instruments like Treasury bills. They have relatively low risks in comparison to other mutual funds and most other investments. They pose very low risks but they will also not protect our initial investment’s buying power. According to law, they can invest in only certain high quality and short-term investments issued under by the governments and corporations of US and state and local governments.
It is a safe place where we park our money. We won’t get great returns and but we also won’t have to worry about losing our principal.
Money market funds always try to keep their net asset value (NAV), representing the value of one share in a fund, at a stable rate of $1.00 per share. They pay the dividends that reflect short-term interest rates.
In this, a typical return is double of the amount that we obtain in a regular checking or savings account and a little less than the average of certificate of deposit (COD).
Bond Funds or Income Funds :-
Bond funds are also called income funds, fixed income funds or debt funds.
The purpose of these funds is to provide current income on a steady basis. Debt funds invest all your money primarily in government and corporate debt like Government Bonds and fixed income investments for ensuring a fixed rate of returns to an extent. They are less volatile and have less risk.
An income fund is a part of investible fund which focus financial instruments like debentures, government securities, and other debt instruments. Its primary objective is to provide a steady cashflow to investors.
Stock Funds or Equity Funds:-
Equity Funds, also known as Stock funds, invest your money in the stock markets and provide returns that are dependent on market performance. They mainly invest in stocks. Equity fund gives better returns over any other form of investment. It increases the risks with regards to our returns. Its investment objective is long-term for capital growth with some income.
Stock funds have some types:
- Growth funds are those that focus on stocks and may not pay a regular dividend but have a potential for large capital gains. They are mainly used by investors at prime earning stage and for long-term benefits.
- Income or Tax funds are those that invest in stocks that pay regular dividends. They offer tax benefits to its investors. They are invested in equities for offering long-term growth opportunities.
- Index funds are those whose purpose is to achieve the same return as an index of particular market by investing in companies included in an index. It follows a passive investment strategy in which your investments replicate the movements of all the benchmark indices like Nifty, Sensex, etc.
Balanced funds are the best in all over the world. They invest a part of your fund in equity and another part of your fund in debt. They guarantee you a certain percentage of returns on investment after a period of time. Their objective is to provide a balanced mixture of safety, income and capital. Their strategy is to invest as a combination of fixed income and equities.
There are some other categories of mutual funds, which include:
Open Ended Funds
Open-Ended Funds allow investors to buy or sell shares at any point of time. They do not have a fixed maturity date. They allow investors to enter and exit at any time. So, investors have the flexibility to buy or sell shares or any part of investment at any time at a price that is linked to the fund’s Net Asset Value.
We can invest money in these funds and can redeem our money at any time we want, without having to wait for the stipulated time period.
Close Ended Funds
Close-Ended Funds have a stipulated maturity period and investors can invest their shares only during the initial launch period called the New Fund Offer (NFO) period. They have a fixed number of shares outstanding and operate for a fixed duration generally 3 years.
So, they have some lock-in period, usually 3 years, before which we cannot withdraw or redeem the value of funds.
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