A mutual fund is a type of financial instrument that aggregates money out of several investors to invest in securities such as stocks, bonds, money market instruments, and other assets. Professional money managers manage mutual funds, allocating assets and aiming to generate capital gains or income for the investors.
You can be an investor of mutual funds by investing your money in those funds and you can earn returns on your investment.
Table of Contents
How do Mutual Funds work?
- Mutual Funds collect money from people who are willing to invest in exchange for promising returns on their investment.
- Mutual Funds invest that money in various securities and generate returns, those returns are shared with the investors.
- Mutual Funds charges an annual fee, commissions.
- The performance of Mutual Funds depends upon the securities on which they invest their money.
- When you purchase a mutual fund unit, you are purchasing the portfolio’s performance or, more specifically, a portion of the portfolio’s value.
Investing in Stocks vs Investing in Mutual Funds
- Investing in stocks gives you ownership of the company and shareholder voting rights, whereas Investing in the stock market does not give you any of them.
- Investing in the stock market is buying a share of a particular company or company, whereas investing in mutual funds is investing in many different securities at once.
- In the stock market price of a share is known as share price or share value, whereas in mutual funds price of mutual funds is known as net asset value(NAV) per share or NAVPS.
How do investors earn from Mutual Funds?
- Dividend Income – Funds earn income from dividends or interests in the case of bonds, so further this income is distributed among mutual fund shareholders or they also have a choice to reinvest.
- Capital Gains – Funds enjoy capital gain when they sell securities at high prices, so at the end of the year these capital gains are distributed among mutual fund shareholders.
- Increase in Net Asset Value – Price of securities in which mutual funds are investing, increases, the value of your mutual fund increases, so your net asset value increases, you can sell your mutual funds share and enjoy the increase in NAV.
Types of Mutual Funds
Mutual Funds are of many types and divided into three categories mentioned below:
Structure-Based
1] Open-ended mutual funds: These are highly liquid and you can sell these at any day as per your requirements at their NAV.
2] Close-ended mutual funds: These have a maturity period already defined at the time of your entry. You can invest only when these types of funds are launched and can be out at maturity time.
Investment Based
1] Growth funds: These have high risk because they invest more in equity. Their main motive is capital appreciation, it is beneficial if you invest for the long term in these types of funds.
2] Income Funds: These are for investors who want the lower risk. These funds invest in government securities, bonds, etc, and generate stable income.
3] Liquid Funds: These funds provide you with surplus money. These funds invest in short-term money market instruments. This helps to make emergency money.
4] Tax saving Funds: These types of funds gives you Tax benefit under section 80C of the Income Tax Act, 1961. You can claim income tax deductions under these funds.
Asset class Based
1] Debt Funds: These are less risky funds, they are similar to Income Funds. These invest in government securities and are best if you want a stable return on your investment.
2] Equity Funds: These funds invest money in the stock market and these are similar to growth funds. These are comparatively high risks but can generate high returns. These are for capital appreciation.
3] Hybrid Funds: These are the combination of debt funds and equity funds. These funds can give stable good returns to investors.
FAQs
1] How I can invest in Mutual Funds?
There are many apps and websites through which you can invest in mutual funds. The most popular platform is Groww. Click on Groww to know more about it.
2] Can I withdraw my money any time from mutual funds?
Yes, if you invest in open-ended mutual funds you can withdraw your money anytime.
3] What is an expense ratio?
It is an annual maintenance charge applied by your mutual fund company on your investment. It combines costs likes operating costs, management charges, and more.
4] Is the expense ratio charged every year?
Yes, It is an annual fee, charges every year as long as you keep your money invested.
5] What is Net Asset Value?
Net Asset Value is the state’s worth of one share of the fund. It’s obtained by dividing the total worth of the portfolio’s cash and securities, minus any debts (if any), by the number of remaining shares.
