Unraveling Mutual Funds: Basics, Types, and Advantages

It can seem difficult to start equity investing, especially if you are new to it. There are so many numbers, graphs, and insights to remember. But there is a simple solution: mutual funds. They are more like a shared piggy bank, which is managed by an expert called a fund manager. The manager invests the money, which many people contribute, in stocks and bonds. And whatever the profit is, they distribute it among themselves. It is more like investing in pairs.

In this blog, we’ll unravel the basics of mutual funds, their types, and their advantages. First, let’s understand the basics of mutual funds.

What is a mutual fund?

A mutual fund is an investment vehicle in which multiple investors pool their funds to purchase a variety of assets, including bonds, equities, and money market instruments. Professional investment managers oversee the assets with the goal of making money for the investors. The Securities and Exchange Board of India (SEBI) oversees mutual funds.

Now that you have an idea about mutual funds, let’s explore the types of mutual funds.

Mutual Fund Types

• Open-ended Mutual Funds: Those mutual fund schemes that are accessible for subscription and redemption on a daily basis throughout the year are termed open-ended mutual funds. They are similar to savings bank accounts, where deposits and withdrawals can be made at any time of the day. An open-ended mutual fund doesn’t have a maturity date.
• Close-ended Mutual Funds: Similar to a fixed-term deposit, a close-ended fund has a defined tenor and fixed maturity date and is only available for subscription during the first offer period. Close-ended fund units may only be redeemed at maturity, and early redemption is not allowed. Therefore, following the new fund offer, the units of a closed-ended fund are required to be listed on the stock exchange and traded similarly to other equities. This allows investors who wish to exit the scheme prior to its maturity to sell their units on the exchange.
• Active funds: An actively managed fund is a mutual fund scheme where the fund manager uses analytical research to support his or her professional judgment in making decisions about which stocks to buy, sell, or hold. This involves “actively” managing the fund’s portfolio and regularly monitoring it. The goal of an active fund manager is to outperform the scheme’s benchmark and provide maximum returns.
• Passive funds: In contrast, a passively managed fund replicates or tracks the scheme’s benchmark index in exactly the same proportion as a market index. In other words, the fund manager in a passive fund remains inactive or passive because they do not use their judgment or discretion to choose which stocks to buy, sell, or hold. The goal of passive fund management is not to outperform the scheme’s benchmark index, but rather to duplicate the scheme’s benchmark index and produce returns that are equal to or greater than the index.

Have you ever heard of debt funds and equity funds? Are you curious to know what makes them different? Read here.

Advantages of Mutual Funds

1. Liquidity: Investors can easily access their money invested in mutual funds by buying or selling units at the current net asset value (NAV).
2. Diversification: It provides portfolio diversification that minimizes the risk. If one fund performs poorly, then it will be balanced by others, fostering stability.
3. Low-investment: You can start investing in mutual funds with a minimum investment.
4. Professional Management: Mutual funds are managed by fund managers, and with skill, expertise, and experience, they make informed decisions.
5. Variety of offerings: Mutual funds offer a wide selection of investment options to meet varying risk tolerances and financial objectives, so each investor can find a solution that works for them.

Conclusion

Investing in mutual funds is not a heavy task. You can start investing as soon as you are prepared. Do a thorough research and get advice from a professional financial manager.