All about Mutual Funds – How does Mutual Fund work

Investors are looking for avenues that help them grow their money and achieve their financial goals. Investing in stock markets is one such avenue that can help investors grow their money over the long term. But investing in the stock market may not be easy for the first-time investor. Mutual Fund investments on the other hand simplify the process of investing in a pool of diversified stocks, thus taking the hassle out of stock selection for beginners by allowing them to invest in mutual funds.

The meaning of mutual funds is that it is a financial instrument that essentially collects money from investors and puts them in a basket of diversified securities. Let’s understand more about mutual funds and its types.

Types of Mutual Funds

There are three types of mutual funds classified based on their underlying assets. These include:

• Equity Mutual Funds: Equity Mutual Fund is a type of mutual fund that invests in stocks that have the potential to grow and generate wealth over the long term. These funds can, in turn, be classified based on market capitalization, i.e. Large cap, Midcap and Small-cap. It can also be classified based on a theme or a sector such as healthcare or IT. Investors can choose equity funds based on their investment horizon and their financial goal.

• Debt Mutual Funds: Debt Mutual Fund is a type of mutual fund that invests in fixed income securities issued by the Government or corporates. These include treasury bills, certificates of deposit, debentures, corporate bonds, etc. These can be classified based on their duration (short-term or Long Term Debt Funds called Gilt Funds).

• Hybrid Mutual Funds: This is a type of mutual fund that invests in debt, equity-related instruments and gold or other commodity. The objective of this fund is to balance the risk-reward potential for its investors. The equity component enables capital appreciation thereby generating wealth for investors while the debt component acts as a portfolio diversifier and diversify the impact of volatility.

 Five Features of Mutual Funds

These are the five features of mutual funds:

1. Mutual Funds are managed by professional fund managers.
2. Mutual Funds can be open-ended or close-ended.
3. Mutual Fund diversifies investor’s money by investing across asset classes
4. It offers different options according to the investor’s goals, duration, or risk profile
5. Mutual funds guarantee no fixed returns

Advantages of Mutual Funds

These are the five key advantages of mutual funds:

1. Liquidity – One of the key benefits about mutual funds is that it offers liquidity and can be redeemed completely or partially and at the prevailing NAV (net asset value).
2. Transparency: Investors can be at ease about mutual funds since they are regulated by the Security and Exchange Board of India (SEBI) and allows them to track and monitor their mutual fund performance.
3. Diversification: Mutual funds invest in different stocks and multiple securities, thereby offering diversification and reducing the downside risk of investing in just one stock. A typical equity fund could hold about 35-60 stocks.
4. Suitable for any wallet size: The good thing about Mutual Fund Investment is that it can be started using a monthly SIP (Systematic Investment Plan) as low as Rs. 500.
5. Professional Fund Management: Mutual funds are managed by qualified fund managers allowing you convenience and ease of investing. 

Thus. mutual funds with the plethora of options and benefits make it a preferred choice for investors. It can help investors achieve their long-term and short -term objectives. Before investing, it is however important to know more about the mutual fund through its scheme information document (SID).

Disclaimer: The views expressed here in this Article / Video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The Article / Video has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of the Article / Video should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. None of the Quantum Advisors, Quantum AMC, Quantum Trustee or Quantum Mutual Fund, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in the Article / video.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.