Mutual Funds

Mutual funds are investment vehicles that pool money from multiple investors to buy a diversified portfolio of stocks, bonds, or other securities managed by a professional investment manager. When an individual invests in a mutual fund, they’re purchasing shares of the fund, and the value of those shares is based on the fund’s net asset value (NAV), which is calculated at the end of each trading day. The portion of holding of the fund is provided as ‘Units’ to each investor in proportion to the amount invested by them. The income generated from the scheme is distributed among all the investors in proportion to their investment, by calculating Net Asset Value or NAV.

Know the Basics of Mutual Funds

• What are Mutual Funds?
• How to Invest in Mutual Funds?
• Assets Under Management (AUM)
• Asset Management Companies
• What is Expense Ratio?
• Systematic Investment Plan (SIP)
• Systematic Withdrawal Plan (SWP)

Types of Mutual Funds

Mutual Funds can be categorized on the basis of Asset Class, Types of Securities Opted, Investment Goals, Risk Factors, and so on.

A. Based on Asset Class

1. Equity Mutual Funds

Equity Mutual Funds can be defined as a pool of funds collected from various investors and invested in a diversified portfolio of equities (stocks) across different sectors and market capitalisations. Equity mutual funds are a popular investment option that offers individuals the opportunity to invest in the stock market without directly buying individual stocks.

Types	Description	Best Suited For
Multi Cap Funds	Multi-cap funds are equity mutual funds that do not focus on a specific company’s capitalisation but are exposed to all sectors and companies with different capitalisations.	Diveserified Investors Moderate Risk Moderate Return
Large Cap Mutual Fund	A mutual fund that primarily invest in stocks of well-established and financially stable companies with large market capitalisation.	Long-Term Potential Low Risk Tolerence Stable & Consistet Income
Mid Cap Mutual Funds	It is a type of mutual fund that primarily invests in stocks of mid-sized companies in the share market.	Moderate Risk Moderate Return Long-term Investors
Small-Cap Mutual Funds	A mutual funds that primarily invest in stocks of small companies with small market capitalisation.	High Risk Investors High Return Tremendous Growth
Value Mutual Funds	A mutual fund that primarily focuses on investing in stocks and securities of companies perceived to be undervalued by the market.	Conservative Investors Long-Term Investors Income-Oriented Investors
Focused Fund	A mutual fund that maintains a concentrated portfolio of securities by investing in a limited number of equities or other securities.	Experienced Investors High-Risk Tolerance Long-Term Horizon
Dividend Yield Mutual Funds	A mutual fund that in most cases put money into shares of groups regarded for paying ordinary dividends to their shareholders.	Regular Income Investors Low-Risk Tolerance Short-Term Investors

2. Debt Schemes Mutual Funds

Debt mutual funds are a category of mutual funds that primarily invest in fixed-income securities such as government and corporate bonds, treasury bills, commercial papers, and other debt instruments. These funds aim to provide regular income along with the preservation of capital.

Types	Description	Best Suited For
Overnight Fund	Mutual Funds focused on investing in short-term debt instruments and money market securities with very short maturity periods typically no longer, than one day.	High Net Worth Investors Low Risk Tolerence Liquidity & Safety Seekers
Liquid Mutual Fund	Mutual Fund that offers investors a secure and highly liquid option to invest their extra cash or short-term funds.	Short Term Financial Goals Retail Investors Emergency Fund Builders
Ultra Short-Term Mutual Funds	Mutual Fund that caters to investors looking for a low-risk option to temporarily invest their funds (typically 91 days or less).	Individuals Seeking Returns Risk-Averse Investors Short to Medium Term Investment Goals
Low Duration Mutual Funds	Mutual funds, also known as short-term bond funds, are a category of mutual funds that primarily invest in fixed-income securities with relatively short maturities.	Income-Oriented Investors Conservative Investors Risk-Averse Investors
Medium Duration Mutual Funds	Mutual Fund that provides investors with a balanced investment option, between short-term and long-term.	Balanced Investors Moderate Risk Tolerance Diversification Seekers
Corporate Bond Debt Funds	Mutual funds that primarily invest in debt instruments, such as corporate bonds.	Stable Income Investors Conservative Investors Moderate Risk Profile
Gilt Funds	Gilt funds are defined as a type of fund that mainly invests in government securities.	Long-term Investors Income Focused Investors Risk Averse Investors

3. Hybrid Schemes Mutual Funds

Hybrid mutual funds, also known as balanced funds, are investment vehicles that combine different asset classes within a single fund. These funds invest in a mix of both equity and debt instruments to provide a diversified portfolio that aims to balance returns and risks.

Types	Description	Best Suited For
Balanced Fund	Balanced funds are the type of mutual fund that invests in specific proportions of debt and equity segments.	Moderate Returns Low-Risk Tolerance Short-Term Investors
Aggressive Mutual Funds	Aggressive Mutual Funds are defined as hybrid funds that invest 65-80% of their total assets in equities and equity-related instruments, with the remaining 20-35% in debt securities and money market instruments.	Long term investors High-Risk Tolerence Higher Returns
Dynamic Mutual Funds	Also known as Dynamic Asset Allocation Funds is a type of investment fund specifically designed to respond to the changing market conditions.	Causious Investors Low Risk Tolerence Long-term Goals
Arbitrage Funds	Arbitrage Funds are equity-oriented hybrid funds that take advantage of market arbitrage opportunities.	Temporary Investors Low Risk Tolerence Tax Savers
Equity Savings Schemes Funds	Equity Savings Funds are hybrid mutual funds that invest nearly the same proportion of their assets in equities, FD-like instruments, and safe hedge funds.	Regular Returns Risk Averse Investors Small Investment Horizon

4. Money Market Funds

Money Market Funds (MMFs) are defined as a type of fund that offers investors an easily accessible way to manage their cash while preserving their invested capital.

B. Based on Investment Goals

Types	Description	Best Suited For
Income Funds	Income funds are described as a type of fund designed to provide investors with a consistent income flow.	Conservative Investors Income Seeking Investors Low Risk Investors

C. Based on Maturity Period

Types	Description	Best Suited For
Open Ended Funds	Mutual Funds that pools money from multiple investors and uses it to purchase a diversified portfolio of stocks, bonds, or other securities without having any maturity period.	Liquidity Preference Not so Active Investors Diversification Seekers
Closed Ended Mutual Funds	A specific type of investment idea characterised by a fixed number of shares or units issued during the fund’s initial public offering (IPO).	Long Term Investors Value Oriented Investors Stability Seekers
Interval Funds	A mutual fund that promises to buy back a specified part of its shares from shareholders regularly.	Short-term Goals Investors Low to Moderate Risk Tolerence Unconventional Assets Seekers

D. Sector Mutual Funds

Sector mutual funds are equity investment plans that focus on a specific economic sector. Sector mutual funds are also known as sectoral funds, which can invest in stocks of firms with different market capitalisations and security classes. These funds enable investors to invest in the best-performing stocks of a certain sector. Utilities, energy, and infrastructure are examples of such sectors.

Types	Description	Best Suited For
Index Funds	A mutual fund that aims to replicate the performance of a specific stock market index, such as the S&P 500 or the Nifty 50 in India.	Novice Investors Long-Term Investors Cost-Conscious Investors
Global Mutual Fund	A Mutual fund that invests in stocks from all over the world, including the investor’s home country.	Global Investors Diversification Seekers High Risk Investors
International Mutual Funds	Mutual Funds in which an investor invests in securities of foreign countries.	Global Investors Diversification Seekers High Risk Investors
Real Estate Funds	Real Estate Funds can be described as a pool of funds collected from various investors and invested in the real estate market.	Diversification Seekers Income-oriented Investors Busy Professionals
Multi-Asset Allocation Fund	It can be described as an approach to investing in a variety/combination of asset classes.	Stable and Consistent Growth Diversification Seekers Low Risk Investors
Exchange Traded Funds (ETF)	Financial instruments that can be easily traded on a stock exchange like any other securities. ETFs are a combination of mutual funds and equities of the listed company.	High Risk Investors Higher Returns Highly Active Professionals

E. Other Funds

Types	Description	Best Suited For
Commodity Mutual Funds	Mutual Fund that primarily invests in commodities and offers returns to investors based on the market performance of the commodity chosen by the AMC or fund manager.	High-Risk Appetite Diversification Seekers Higher Returns
Hedge Funds	A hedge fund is an unregistered private investment partnership that brings together money from many people or groups to invest in different markets, strategies, and instruments.	High Net Worth Investors Higher Returns Less Personal Interference

Difference between Various Mutual Funds

• Difference between Dividend Yield Mutual Funds and Dividend Options
• Difference between Hedge Funds and Mutual Funds

How do Mutual Funds Work?

The portion of holding of the fund is provided as ‘Units’ to each investor in proportion to the amount invested by them. The income generated from the scheme is distributed among all the investors in proportion to their investment, by calculating Net Asset Value or NAV. NAV can be defined as the market value of all the securities (equities, bonds, money market instruments, and other securities) held by the scheme.

For example, if a person invests ₹5,000 in a mutual fund with a NAV of ₹20, he will get 250 Units ( ) of the mutual fund.

Now, NAV of a scheme fluctuates on day to day basis, i.e., if the market value of any security that a mutual fund invests in goes up, the same will reflect in the NAV of the mutual fund. So if the NAV of the mutual fund goes up to ₹30, then the value of 250 Units that amounted to ₹5,000 will now amount to ₹7,500. If the investor chooses to redeem their mutual funds on this date, they shall receive ₹7,500 against the originally invested amount, i.e., ₹5,000.

Frequently Asked Questions (FAQs on Mutual Fund)

1. What is a Mutual Fund?

Answer:

A mutual fund is an investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities managed by professional portfolio managers.

2. How do Mutual Funds Work?

Answer:

Investors buy shares in the mutual fund, and the fund’s managers use that pooled money to invest in a range of assets according to the fund’s objectives. The fund’s value is based on the net asset value (NAV) of its underlying securities.

3. What are the Types of Mutual Funds?

Answer:

There are various types including equity funds, bond funds, balanced funds, index funds, sector-specific funds, and money market funds, each with different investment objectives and risk profiles.

4. What are the Benefits of Investing in Mutual Funds?

Answer:

• Diversification: Spread risk across multiple investments.
• Professional Management: Expert managers make investment decisions.
• Accessibility: Easily buy and sell shares.
• Liquidity: Ability to convert shares into cash.

5. What are the Risks Associated with Mutual Funds?

Answer:

• Market Risk: Fluctuations in the market can affect fund performance.
• Manager Risk: Success of the fund depends on the skill of the fund manager.
• Fees and Expenses: Funds may charge management fees, sales loads, or other expenses.

6. How do I Invest in Mutual Funds?

Answer:

Investors can buy mutual fund shares directly from the fund company or through a brokerage account. Some funds may have minimum investment requirements.

7. What are Expense Ratios in Mutual Funds?

Answer:

The expense ratio represents the annual fee charged by the fund to cover operating expenses. It’s expressed as a percentage of the fund’s average net assets.

8. How Are Mutual Funds Taxed?

Answer:

Mutual funds can generate taxable events through capital gains distributions and dividends. Capital gains taxes are incurred when fund shares are sold at a profit.

9. Can I Lose Money in Mutual Funds?

Answer:

Yes, mutual funds are subject to market fluctuations. If the value of the underlying securities decreases, the fund’s value and thus the value of an investor’s shares can also decrease.

10. What is a Prospectus and Why is it Important?

Answer:

A prospectus is a legal document that provides detailed information about a mutual fund. It includes the fund’s objectives, investment strategies, risks, fees, historical performance, and other essential information. It’s crucial for investors to review the prospectus before investing in a fund.

11. Can I Switch Between Mutual Funds?

Answer:

Many mutual funds allow investors to switch their investment from one fund to another within the same fund family. However, there might be restrictions or fees associated with these transfers, so it’s essential to check the fund’s policies.

12. Can I Set Up Automatic Investments in Mutual Funds?

Answer:

Many mutual funds allow investors to set up automatic investments, making regular contributions from their bank account or paycheck into the fund.

13. What Should I Consider Before Investing in a Mutual Fund?

Answer:

Factors to consider include your investment goals, time horizon, risk tolerance, fees and expenses, historical performance, and the fund’s investment objectives.

14. How Often Should I Review My Mutual Fund Investments?

Answer:

It’s wise to review your mutual fund investments periodically, considering changes in your financial situation, market conditions, and whether the fund’s performance aligns with your investment goals.