The term Mutual Fund (MF) is being used around a lot lately, what are they and how do they benefit retail investors?
MF’s are investments where investors’ pool in money and invest in a specific scheme or plan, which in turn is managed by a fund manager. Profits and losses from the investment are shared equally by the investors contributing to the mutual fund’s scheme.
At the end of July 2017, the Average Assets under Management (AAUM) by the 42 SEBI registered Indian Mutual funds stood at Rs 20.42 Lakh crores.
Since 2014, investments in MF’s have seen a steady inflow and the monthly MF Systematic Investment Plans (SIP’s) have more than doubled since then. An SIP allows an investor to invest fixed sums of money on a monthly or annual basis into a MF asset class of their choice. What follows are units of the specific MF getting added into the investors’ portfolio at the market price.
Generally asset classes of MF’s are classified into equities, commodities and fixed income instruments like bonds, debentures, T- bills, certificates of deposit and so on. The risk and reward varies depending on the market condition of the asset class in which the MF chooses to invest.
Some MF’s have a lock-in period while others do not. Following are some of the options that investors can look for when choosing a mutual fund
Open Ended – This scheme allows investors to buy and sell their investment without worrying about the maturity period.
Close Ended – This scheme has a defined period and investors have to subscribe to it during the “New fund offer.”
Interval Funds – Combine both the Open and Close Ended schemes and investors can transact during specific intervals.
There are a number of mutual funds tailored to meet the specific needs of individual investor’s. Mentioned below are some funds that retail investors can look to add to their portfolio
- Debt Funds – Generally known to be a low risk MF scheme, debt funds are invested in Government securities, money market instruments and corporate debentures.
- Equity Funds – As the name suggests, this scheme invests in industry specific stocks or a basket comprising of multiple sectors. Considered to be high risk, these funds are generally recommended for long term investors.
- Balanced Funds – They invest across asset classes. These funds are moderately risky compared to the high risk equity funds since they invest in multiple sectors and asset classes.
- Sector Funds – This scheme invests in specific sectors like Banks, Pharma, Auto, etc. Picking the right sector would be the key to maximize returns from this scheme.
- Index Funds – The funds in this scheme are invested in indices like the Sensex, Nifty, etc. Index based funds track the broader index and the NAV is completely dependent on the direction of the index.
- Money Market Funds – This fund invests in money market instruments such as T-Bills or Treasury Bills, Certificates of deposit, Commercial Paper etc. which have a maturity of less than 1 year.
- Tax Saving Schemes –Also called ELSS (Equity Linked Savings Scheme), the scheme has a lock in period and the funds are completely invested in equities.
- Fund of Funds – This mutual fund scheme invests in schemes of other MF’s and the growth in investment depends on how the targeted MF performs.
All mutual funds carry market risk. Before investing in a MF scheme, investors should be conscious of their financial goals and risk profile and should choose a mutual fund and asset class that closely matches their prerequisites. In addition, investors should take a look at the past and current performance of the various schemes of the asset management company of the mutual fund, credit rating of the scheme and all documents related to the scheme before pouring in funds.
TakeStock Research delivers client- specific content for the financial services industry- FX, equities, commodities and personal finance. Our content writing services include real- time market commentaries, research articles based on fundamental & technical analysis, real- time coverage of global economic events, corporate earnings, trading advice on the global financial markets and marketing content. In addition, we also provide customer/ technical support for intermediaries in the financial services industry.