A mutual fund is an amount of money raised by individual persons collectively and entrusted to money managers to invest on their behalf. The most preferred investment tools are stocks and bonds.
Because the money is owned collectively, every investor or shareholder earns a dividend or bears the loss in equal measure.
Mutual funds are some of the most popular investment vehicles since they’re flexible, bring high returns and costs are relatively low. Most people with extra money prefer investing in mutual funds rather than opening savings accounts since they know that investing in a mutual fund makes them own shares in the company.
Mutual funds invest in securities. The type of company which you invest in will determine how you’ll make money. If you own a stock fund, you already know that your profits lie in an increase in the stock price or dividend that is paid to you out of the company’s shared profits.
Investing in bonds
If you invest in bonds, you can make money through interest income and if you focus on real estate, you can make money from rent, property appreciation and profit from the business operations.
Types of mutual funds in India
Here are the types of mutual funds found in India:
- Equity Funds
Another name for equity funds is stock funds. In equity funds, investors invest in stocks in shares of different companies. The dividend paid out is determined by how the shares perform in the stock market.
2. Debt Funds
Debt funds target securities like bonds and treasury bills with a fixed maturity plan, FMP. Others are liquid funds, gilt funds, short-term plans, and long-term bond. All have a fixed rate of interest and maturity date.
3. Money Market Funds
Money market funds are usually run by the government, large corporations or banks. The issue money market securities like certificates of deposits, bonds, Treasury bills among others. The fund managers invest on your behalf and issue regular dividends in return.
4. Open-ended funds
Open-ended funds are not restrictive in a time period and an investor can trade his funds at his convenience and leave when he likes at the Net Asset Value, NAV. The unit capital changes frequently with new entries and exits.
5. Closed-Ended Funds
In a closed-ended fund, the unit capital that is to be invested in fixed beforehand, and therefore you can’t sell more than the pre-agreed units. Sometimes there is a deadline to buy units. Closed-ended funds have specific maturity tenure and managers can choose any fund size, however large.
6. Interval Funds
Interval funds have features of both open-ended and closed-ended funds. They can be bought or exited only at specific intervals and are closed the rest of the time. No dealing is allowed for at least 2 years. Interval funds are suitable for those who want to save a sizable amount for a specific purpose.
11. Income Funds
Income funds distribute their money in a variety of bonds, certificates of deposits and securities among others. Bolstered by security fund managers, who closely watch the portfolio as regards rate fluctuations, without risking the credit-worthiness, income funds have earned a reputation for earning better returns than deposits and are best suited to risk-weary investors for up to 3 years.
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