Posted: February 18th, 2022
WHAT IS A MUTUAL FUND?
Mutual funds are investment vehicles managed by investment firms that gather money from a wide range of clients and invest that money for those investors on their behalf. Mutual funds represent many asset classes, but stock, bond, commodities, and short-term debt funds are most often employed.
DIFFERENT TYPES OF MUTUAL FUNDS
The structure, asset class, investment purpose, and specialist funds of mutual funds in India vary widely. Rather than a fixed deposit, debt funds are better suited for short-term investments.
Stock market funds: Stock funds are a significant part of the stock market. Investors who want to profit from an increase in the value of their investments favor stock mutual funds (think younger, more aggressive-minded investors who are trying to accumulate wealth over the long haul.)
Growth Stock Funds: Funds that invest in stocks are expected to grow in value. An up-and-coming company’s stock has the potential to outperform the market on a high level, which is what growth stock fund managers look for.
Dividend-paying investments: These funds concentrate on dividend-paying equities.
Index Funds: Funds that track the performance of the overall stock market. This type of mutual fund follows a certain stock market index, such as the Standard & Poor’s 500 (SP500) or the Russell 2000 Index (RTY).
Sector Funds: These are funds dedicated to a specific industry. Stock sector funds target specific financial market sectors, like energy, banks/financials, or technology stocks.
Investments in the bond market: It is common for bond funds to invest in many types of bonds, such as Treasury bills and bonds and corporate bonds, but it is also common for bond funds to invest in municipal debt.
Money Market Funds: Investments are less risky than investments in stocks, just as bond funds. Federal, state, and municipal government bonds and some business bonds are the only short-term investments allowed in money market funds by law.
Open-Ended Funds: Mutual funds that allow investing at any time of the day or night are known as open-ended funds and have a high level of liquidity. Net Asset Value (NAV) is when these funds can be purchased and sold (NAV).
Close Ended Funds: Investors can only invest in the fund when it is launched, and they can only withdraw their money when the fund matures. They are traded like stocks on the stock exchange. They are, however, not highly liquid due to their low trading volumes.
WORKING OF MUTUAL FUNDS
Investors in mutual funds pool their money to purchase various securities, such as stocks, bonds, and government securities. During the NFO, each mutual fund scheme determines its strategy (New Fund Offer). Mutual fund investment is a four-step process:
STEP1: Launch of an NFO
STEP 2: Money is pooled.
STEP 3: Invest in Stocks and Bonds
STEP4: Fund Return
When an individual invests in a mutual fund, their money is pooled with other investors’ funds. The fund managers gather the money and utilize it to make investments on behalf of the fund. Mutual fund investments are often made in equities and bonds.
STRUCTURE OF MUTUAL FUNDS IN INDIA
There are three main institutions in the mutual fund framework in India. According to SEBI (Securities and Exchange Board of India) regulations, these three institutions are engaged in creating and managing a mutual fund.
SPONSOR: Those who contribute to the fund are known as sponsors.
TRUST AND TRUSTEES: After receiving SEBI’s clearance, the fund sponsor creates a Public Trust under the Indian Trust Act of 1882, registered with SEBI.
Asset management company: AMC is in charge of finding and selecting a qualified fund manager who has a thorough knowledge of the financial markets. AMC is also in charge of developing new products to meet the diverse financial needs of its customers.
BENEFITS OF MUTUAL FUNDS
Diversification. Diversifying one’s investing portfolio helps protect one’s assets while delivering decent returns. Mutual funds provide built-in security against a drop in the value of a few fund investments because of the pooling of assets.
Features of capital gains: The price of mutual funds fluctuates constantly. For example, when the price of a fund investment rises, a capital gain is triggered for the fund when it sells the security it holds. Capital gains and losses will be distributed to fundholders at the end of the year, minus any losses.
Receiving dividends: Dividends are paid to fund shareholders by many stock mutual funds, particularly income funds. Dividends are paid to fund shareholders when a fund can generate them.
Customers looking for professional management can choose mutual funds as an investment option. Small investors might save money regularly by using these. Investors can now confidently begin their mutual fund investments thanks to a better understanding of how mutual funds work. Investors can use Scripbox to put money toward a certain life goal. When the goal and investments diverge, it aids in rebalancing the portfolio.
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