A mutual fund is a way of investing in stocks in a less risky way an investment. It allows a group of investors to pool their money and hire a portfolio manager to invests this money (the fund’s assets) in stocks, bonds or other investment securities (or a combination of all of these) as per a predetermined investment objective. The fund manager then continues to buy and sell stocks and securities as per the priorities of fund as mentioned in fund’s prospectus.
Why to invest in Mutual Fund
Mutual funds are considered to be one of the best available investments as they are very cost efficient and also easy to invest in. By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs and with minimum risk than if they tried to do it on their own. The biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns. And you need not know all about the stocks as there is a professional fund manager to take care of that.
Types of Mutual Funds Schemes in India ( By the liquidity)
1. Open - Ended Schemes:
AnAvailable for subscription all through the year.
No fixed maturity period.
Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices at any time.( Or these are very liquid as they say).
2. Close - Ended Schemes:
These schemes have a pre-specified maturity period.
Categorisation of Mutual Funds By Investment Nature
1. Equity fund:
These funds invest a maximum part of their corpus into equities.
The structure of the fund may vary different for different schemes.
The Equity Funds are sub-classified depending upon their investment objective, as follows:
- Diversified Equity Funds ( diversified over different sectors )
- Mid-Cap Funds (medium capital companies )
- Sector Specific Funds(Pharma, infrastucture... )
-Tax Savings Funds (ELSS) (You get a deduction of Income Tax u/s 80 C of IT ACT) .
2. Debt funds:
The objective of these Funds is to invest in debt instruments of government authorities, private companies, banks and financial institutions .
3. Balanced funds:
As the name suggest they, are a mix of both equity and debt funds to give the best of both of these.
By Dividend declaration
They declare dividends(or simply a profit on your investment) from time to time, which is distributed to holder of units (eg Rs.3 for a unit)
They declare dividends, but these dividends are reinvested in the scheme, thus increasing your number of units.
They dont declare dividends for the entire period of the scheme, instead if your scheme is in profit, the unit value increases. So you get your profit only when you sell your units.