What are Mutual Funds?

What are Mutual Funds?

A Mutual Fund is an investment option where a group of investors pool in their money, to be collectively invested across stocks, shares, bonds and other securities. There is usually a fund manager who invests this money on their behalf and charges a small fee. This is an ideal investment option for people who are looking to invest their money but do not have the time to look for the right investment option.

Types of Mutual Funds

Mutual Fund can be of various types, each suitable for different investment goals.

Equity (Growth) Funds – These are funds with their assets invested only in stocks. They grow faster than money market and fixed-income funds. Naturally, they also involve more risk.

Fixed-Income Funds – These are funds invested only in fixed-income securities. These funds pay a fixed rate of return, similar to government bonds, investment-linked corporate bonds and high-yield corporate bonds. These are considered safer investment options as the risk is less and the returns are usually consistent.

Balanced – These funds are invested partly in stocks and partly in fixed-income securities in order to maintain a balance between high returns and risk. The money is split among different investments. The risk is higher than fixed income funds, but still lesser than that of pure equity funds.

Money Market Funds – These funds are invested in short-term fixed income securities such as government bonds, treasury bills, commercial paper and certificates of deposit. They are considered a safe investment option, but with a lower potential return than other Mutual Funds.

Index Funds – These funds aim to track the performance of a specific index such as Sensex or Nifty. The value of the Mutual Fund fluctuates with the value of the index.

Sectoral Funds – These funds are invested in stocks belonging to specific sectors such as real estate, commodities, or companies that support social causes such as environmental welfare and human rights.

Fund-of-funds – These funds invest in other funds. They are similar to balanced funds, where they make asset allocation and diversification easier.

Lump Sum v/s SIP?

You can choose to invest in Mutual Funds via a single lump sum investment or smaller regular investments made periodically (weekly, monthly, or quarterly) known as SIPs. There are various advantages of choosing SIPs over lump sum. The investment required is low; investors can start as low as ₹100 per month. The power of compounding also ensures that interest earned from previous instalments are reinvested. SIPs also help create the habit of disciplined savings. However, when the market is down, lump sum investments may be preferred as it will earn higher returns.

1 Like