A mutual fund is a professionally-managed investment scheme, usually run by an asset management company that brings together a group of people and invests their money in stocks, bonds and other securities.
The biggest advantage of investing through a mutual fund is that it gives small investors access to professionally-managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult to create with small amount of capital.
"A mutual fund is a basket of various investments, such as stocks, bonds, and cash. A mutual fund is funded by the investments of individual investors and institutions."
Types of Mutual Funds
Investment in stocks of various sizes and domicile. For example, there are mutual funds that are classified as global, which have the ability to invest anywhere in the world.
These schemes invest directly in stocks. These schemes can give superior returns but can be risky in the short-term as their fortunes depend on how the stock market performs. Investors should look for a longer investment horizon of at least 5 to 10 years to invest in these schemes.
Under these schemes one invest in debt securities. Investors should opt for debt schemes to achieve their short-term goals that are below 5 years. These schemes are safer than equity schemes and provides modest returns.
Under these schemes one invest in a mix of equity and debt, and an investor must pick a scheme based on his risk appetite.
These schemes are devised for particular solutions or goals like retirement and child’s education. These schemes have a mandatory lock-in period of 5 years.
Under these funds one can mainly invest in bond-oriented investments, such as corporate bonds and municipal bonds. You may come across a municipal bond mutual fund that is state-specific. For example, an Ohio tax-free bond fund typically invests only in Ohio municipal bond funds, so that interest received by the mutual fund holder is exempt from taxation at both the federal and state income tax levels.
Through these funds one can I.nvest in high-quality, short-term debt instruments, such as government treasury bills (also known as T-bills). The returns on money market funds have historically been greater than savings account but less than certificates of deposits. Please note that investments in money market funds are typically not guaranteed by the FDIC. It is important to understand this prior making an investment.
As an investor, you can buy mutual fund 'units', which basically represent your share of holdings in a particular scheme. These units can be purchased or redeemed as needed at the fund's current Net Asset Value (NAV). These NAVs keep fluctuating, according to the fund's holdings. So, each investor participates proportionally in the gain or loss of the fund.
All the mutual funds are registered with SEBI. They function within the provisions of strict regulation created to protect the interest of an investor.
The biggest advantage of investing through a mutual fund is that it gives small investors access to professionally-managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult to create with a small amount of capital.
A mutual fund collects money from investors and invests the money on their behalf. It charges a small fee for managing the money. Mutual funds are an ideal investment vehicle for regular investors who do not know much about investing. Investors can choose a mutual fund scheme based on their financial goal and start investing to achieve the goal.
How to invest in mutual funds?
One can either invest directly with a mutual fund or hire the services of a mutual fund advisor. If someone is investing directly then they will invest in the direct plan of a mutual fund scheme. If they are investing through an advisor or intermediary then they will invest in the regular plan of the scheme.
If one wants to invest directly, then they will have to visit the website of the mutual fund or its authorized branches with relevant documents. The advantage of investing in a direct plan is that one can save on the commission and the money invested would add good returns over a long period. The biggest drawback of this method is that one will have to complete the formalities, do the research, monitor their investment, all by themselfs.
Mutual Fund Charges:
*The total expenses incurred by mutual fund schemes are collectively called expense ratio.
*The expense ratio measures the per unit cost of managing a fund.
*The expense ratio is generally in between 1.5-2.5 per cent of the average weekly net assets of the schemes.