What is Mutual Fund and its Types

News Lekhak March 02, 2023 0

A mutual fund is an investment vehicle that pools money from different investors to invest in a diversified portfolio of stocks, bonds, or other securities. Mutual funds are managed by professional fund managers who use their expertise to make investment decisions on behalf of the investors. Mutual funds offer investors the opportunity to invest in a variety of asset classes, sectors, and geographies, providing diversification and reducing risk. They are an ideal investment option for investors who do not have the time or expertise to manage their own portfolio and want to benefit from professional management.

One of the biggest advantages of investing in mutual funds is that they offer diversification, which means that your money is spread across multiple securities, reducing the impact of any one security on your portfolio. This can help reduce risk and volatility, making mutual funds a great option for investors who want to achieve long-term growth. Another advantage of investing in mutual funds is that they are professionally managed by experienced fund managers who have the expertise and knowledge to make investment decisions on behalf of the investors. This can help investors benefit from the expertise of experienced professionals and save them the time and effort required to research and analyze investments on their own.

What is Mutual Fund?

A mutual fund is a type of investment vehicle that pools money from a large number of investors to invest in a diversified portfolio of stocks, bonds, or other securities. The fund is managed by a professional fund manager who makes investment decisions on behalf of the investors. When investors buy shares in a mutual fund, they effectively become shareholders in the portfolio of investments held by the fund. Mutual funds are regulated by securities regulators to ensure that they operate in the best interests of their investors.

Mutual funds offer investors the benefits of diversification, professional management, and access to a wide range of investment options. They also provide a low-cost and convenient way for investors to invest in the stock market, especially for those who do not have the time or expertise to manage their own investments. Mutual funds can be purchased and sold easily through a broker or an online investment platform, and they can be held in a tax-advantaged account such as an individual retirement account (IRA) or a 401(k) plan. Overall, mutual funds are a popular investment choice for individuals looking to build wealth over the long term.

History of Mutual Funds in India?

Mutual funds were introduced in India in 1963 with the formation of the Unit Trust of India (UTI), which was created by the Reserve Bank of India (RBI) and the government of India. The main objective of UTI was to mobilize small savings from individuals and invest them in the capital market to generate returns for investors.

In the 1980s, the Indian government allowed private sector mutual funds to enter the market. The first private sector mutual fund in India, Kothari Pioneer Mutual Fund, was established in 1993. This was followed by the entry of other private sector mutual funds such as HDFC Mutual Fund, ICICI Prudential Mutual Fund, and Reliance Mutual Fund.

The mutual fund industry in India saw significant growth in the 1990s and 2000s, fueled by the liberalization of the Indian economy and the entry of foreign investors. The total assets under management (AUM) of the mutual fund industry in India grew from Rs. 47 billion in 1990 to Rs. 24.7 trillion in 2020. The industry has also witnessed the launch of various new types of mutual funds such as index funds, exchange-traded funds (ETFs), and hybrid funds.

Today, mutual funds are an important investment option for individual investors in India, with a wide range of investment options available across different asset classes and investment styles. The industry is regulated by the Securities and Exchange Board of India (SEBI) to protect the interests of investors and ensure that mutual funds are managed in a professional and transparent manner.

Types of Mutual Funds?

There are several types of mutual funds available in India. Here are some of the most common types:

• Equity Funds: These funds invest in stocks of companies across various sectors. Equity funds offer potentially high returns but are also subject to market volatility. 
• Debt Funds: These funds invest in fixed-income securities such as bonds, government securities, and money market instruments. Debt funds provide regular income and are generally considered less risky than equity funds. 
• Hybrid Funds: These funds invest in a mix of equity and debt instruments. They provide investors with the benefits of both equity and debt funds. 
• Index Funds: These funds invest in the same stocks as a particular market index, such as the Nifty 50 or BSE Sensex. They aim to replicate the performance of the underlying index. 
• Sectoral Funds: These funds invest in stocks of companies belonging to a particular sector such as banking, pharmaceuticals, or technology. 
• Tax Saving Funds: These funds, also known as Equity-Linked Savings Schemes (ELSS), offer tax benefits under Section 80C of the Income Tax Act. 
• Exchange-Traded Funds (ETFs): These are funds that are traded on stock exchanges like individual stocks. ETFs track a particular market index or a commodity. 
• Fund of Funds (FoFs): These funds invest in other mutual funds instead of investing directly in stocks or bonds.

How to invest money in Mutual Fund?

There are multiple ways to invest money in mutual funds in India:

1. Online through the AMC's website or mobile app: Many mutual fund companies offer online investment options on their website or mobile app. You can register and complete the KYC process online, select the scheme you want to invest in, and make the payment through net banking, UPI, or other online payment modes. 
2. Online through third-party websites: There are various online platforms like Groww, Paytm Money, and Zerodha Coin, which offer an easy and user-friendly platform to invest in mutual funds. You can register, complete the KYC process, select the mutual fund scheme, and make the payment online. 
3. Offline through the AMC or Registrar's office: You can also visit the mutual fund company or its registrar's office and submit the application form along with a cheque or demand draft for the investment amount. 
4. Through a broker: If you have a broker or financial advisor, you can place the order for mutual fund investment through them. 
5. Systematic Investment Plan (SIP): SIP is a popular way to invest in mutual funds, where you invest a fixed amount of money at regular intervals (usually monthly). You can start a SIP online or offline through any of the above-mentioned modes.

Note: To invest in mutual funds, you need to complete the KYC (Know Your Customer) process, which involves submitting identity proof, address proof, and PAN card details. You can complete the KYC process either offline through the AMC or Registrar's office or online through any of the above-mentioned platforms.

Advantages of Mutual Funds?

There are several advantages of investing in mutual funds, including:

• Diversification: Mutual funds invest in a variety of securities across different sectors, which helps in reducing the risk of the portfolio. This diversification helps investors to minimize the risk of loss due to the under performance of any single security. 
• Professional Management: Mutual funds are managed by professional fund managers who have expertise in analyzing the market trends, selecting securities and managing the portfolio to achieve optimal returns for the investors. 
• Liquidity: Mutual funds are easily redeemable, which means that investors can buy or sell their units at any time, unlike other investments like real estate or fixed deposits, which are not easily liquidated. 
• Low Investment Amount: Mutual funds have a low minimum investment amount, which makes it accessible for small investors to participate in the market. 
• Tax Benefits: Some types of mutual funds offer tax benefits under Section 80C of the Income Tax Act, 1961, which allows investors to save tax on their investments. 
• Transparency: Mutual funds are required to disclose their portfolio and other details on a regular basis, which ensures transparency and helps investors to make informed decisions.

Overall, mutual funds offer a convenient and hassle-free way of investing in the stock market and other securities, making it a popular investment option for investors of all levels.

Conclusion:
In conclusion, mutual funds offer an excellent opportunity for investors to gain exposure to a diversified portfolio of securities managed by a professional fund manager. They provide a convenient and cost-effective way to invest in the stock market or other asset classes, without the need for investors to conduct extensive research and analysis.

However, like any investment, mutual funds also involve some level of risk, and investors should carefully consider their investment goals and risk tolerance before investing. It's important to select mutual funds that align with your investment goals, and regularly review your portfolio to ensure that it remains diversified and aligned with your investment objectives.