Introduction to Mutual Funds

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Before moving to the main content, let us relate Mutual Funds with an example…

During the rainy season, we mostly wanted to eat corns? Right!. But we know if we eat the complete part of the corn our stomach will get filled. So, if we eat only 3/4 of the corn & the rest 1/4th we dig inside the soil what will it happen? Exactly, 1/4th part which is Dig inside the soil will start growing & in future we can still have enough to eat & obviously, the 3/4th part can enough fill our stomach.

In the same case, if we select our salary/money instead of the corn the 1/4th part we keep in somewhere so that it could become our future partner then where should we keep it? MUTUAL FUNDS because SAHI HAI BOSS!

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So, let us have a detailed introduction to mutual funds & why should we invest from today?

What is Mutual Fund ?

In simple words, Mutual Funds means collecting money in form of Fund from different peoples & those collected funds or money is called AUM (Asset Under Management). Those collected funds are invested in such assets which helps us to gain as high as getting the possible returns.

Every Mutual Fund is managed by professionals which are known as the Fund manager. They are well-trained professionals. They know when & where they should invest our fund to gain more high returns.

Types of Mutual Fund

Mutual Fund are mainly of two types – Assets & Structures.

Assets

Assets are mainly of 3 (three) types :

  1. Equity Mutual Fund
  2. Debt Mutual Fund
  3. Hybrid Mutual Fund

Now, let us discuss those three types of assets one-by-one.

Equity Mutual Fund

An Equity Mutual Fund is a Mutual Fund that invests mainly in stocks. It can be actively or passively managed. Equity funds are also known as Stock Funds. Stock mutual funds are being categorized according to company size, the investment style of the holdings in the portfolio, and geography.

In simple words, an Equity Mutual Fund is that when your fund is being invested in Stock Markets. Some Examples are ICICI Prudential Mutual Fund, Axis Long Term Equity Fund, SBI Small Cap Fund, etc…

Debt Mutual Fund

A Debt Mutual Fund may be an open-end fund scheme that invests in fixed income instruments, like Corporate and Government Bonds, Corporate Debt Securities, and Market Instruments, etc. that provide capital appreciation. Debt funds also are mentioned as Fixed Income Funds or Bond Funds.

In simple words, a Debt Mutual Fund is that when your fund is being invested in Corporate Bonds or Government Bonds. Some Examples are UTI Asset Management, State bank of India, Axis bank, etc…

Note: The risk & return in Debt Mutual Fund is much lower (sometimes it’s equal to Zero) than the Equity Mutual Fund.

Hybrid Mutual Fund

Hybrid Mutual Fund is a sort of mutual fund that invests in additional than one asset class. Most frequently, they’re a mixture of Equity and Debt assets, and sometimes they also include Gold or maybe Real Estate.

In simple words, a Hybrid Mutual Fund is that when your fund is being invested in both Share Market (Equity Mutual Fund) & Corporate or Government Bonds (Debt Mutual Fund).

Note: The risk & return in Hybrid Mutual Fund is lower than Equity Mutual Fund but it is higher than the Debt Mutual Fund.

Structure

Structures are also mainly of 3 (three) types:

  1. Open Ended Mutual Funds
  2. Closed Ended Mutual Funds
  3. Interval Mutual Funds

Now, let us discuss those three different types of structures one-by-one.

Open-ended Mutual Fund

The Open-ended Fund is a collective investment scheme that will issue and redeem shares at any time. An investor will generally purchase shares within the fund directly from the fund itself, instead of from the prevailing shareholders.

In simple words, here the investors can invest or sell anytime.

Closed-ended Mutual Fund

A Closed-end Mutual Fund may be a portfolio of pooled assets that raises a hard and fast amount of capital through an Initial Public Offering (IPO), then lists shares for trade on a stock market.

In simple words, here once we invest our fund we cannot re-invest or sell the fund until the mentioned term of the Mutual Fund gets ended.

Interval Mutual Fund

An Interval Fund may be a sort of investment trust that periodically offers to repurchase its shares from shareholders. That is, the fund periodically offers to shop for back a stated portion of its shares from shareholders.

In simple words, the investor can only invest or sell during the provided interval duration & this interval duration is being set by the Mutual Fund.

Benefits for investing in Mutual Funds

There are a variety of funds, covering different industries and different asset classes available. Some of the benefits of such kind of investment include Dividend Re-investment, Risk Reduction, Convenience, and Fair Pricing.

Let us have a detailed look on those benefits for investing in Mutual Fund:

Dividend Re-investment

As dividends and other interest income sources are declared for the fund, it is often won’t to purchase additional shares within the open-end fund, therefore helping your investment grow.

Risk Reduction

Reduced portfolio risk is achieved through the utilization of diversification, as most mutual funds will invest in anywhere from 50 to 200 different securities—depending on the main target . Numerous stock market index mutual funds own 1,000 or more individual stock positions.

Convenience, and Fair Pricing

Mutual funds are easy to shop for and straight-forward to know . They typically have low minimum investments and that they are traded just one occasion per day at the closing net asset value (NAV). This eliminates price fluctuation throughout the day and various arbitrage opportunities that day traders practice.

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Conclusion

Lastly, what would be the conclusion from your side! Should you start investing your money in Mutual Funds? From my side: “YES” if you are thinking about investing a lump sum amount, start today because as per Crisil said assets under management (AUM) in equities saw a CAGR growth rate of close to 13.5% in the decade between March 2010 to March 2020. Additionally, from the period between March 2020 to March 2025, the AUM is projected to be at 15% CAGR.

Also remember, the money we invest in mutual funds are 100% safe in India because of SEBI (Securities and Exchange Board of India) which is governed by the Ministry of Finance.

Investing is the most legitimate way of earning from a lump sum amount to a huge amout.

Start Your Journey From Today ! Have a Nice Day ! Thank You

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