A salaried employee or an individual always dreams of having enough money so that they can save and invest an equal amount to make themselves financially secure. When one has money in their bank account, they either save it by making FDs or invest it in the stock exchange. Some also invest the money in Mutual Funds. Mutual Funds are a type of investment where the money of numerous traders is put together and is managed by a proficient person, who then invests this amount in many portfolios, like securities, bonds, etc.
In this blog, we will learn about mutual funds, their types, and their advantages and disadvantages.
What is a Mutual Fund?
Mutual funds are collective investments that accumulate the funds of numerous investors to put money into a professionally managed, diversified portfolio of stocks, bonds, and/or money market instruments. Income and capital gains of the fund are distributed to the investors on a per-unit basis. This method offers individual investors the ability to diversify their investment without putting in a significantly large amount and also permits them to take advantage of a professional fund manager’s experience.
Types Of Mutual Funds
| Category | Type | Description |
| Based on Asset Class | Equity Funds | Invest primarily in stocks aiming for long-term capital appreciation. Classified by market capitalisation (large-cap, mid-cap, small-cap) and strategy (sectoral, value, contra). |
| Debt Funds | Invest in fixed-income securities like bonds, government securities, and corporate debentures for steady income. Differentiated by the duration of the bond, which can be liquid, medium-term, or long-term. | |
| Hybrid Funds | Put your money into both equity and debt instruments. This helps in balancing risk and return. | |
| Money Market Funds | Put your money into interim debt instruments such as government money bills and bills of exchange. This offers low risk with modest returns. | |
| Based on Investment Objective | Growth Funds | Make sure you look for monetary growth by putting money into enterprises with high growth potential. |
| Income Funds | Focus on generating regular income for investors through dividends or interest payments. | |
| Liquid Funds | Invest in highly liquid, short-term instruments; suitable for parking surplus funds temporarily. | |
| Tax-Saving Funds (ELSS) | Invest in equities; offer tax benefits under Section 80C of the Income Tax Act with a 3-year lock-in period. | |
| Solution-Oriented Funds | Designed for specific financial goals like retirement or children’s education. | |
| Based on Structure and Other Categories | Index Funds | Passively managed funds that replicate the performance of a specific market index (e.g., Nifty 50, Sensex). |
| Exchange Traded Funds (ETFs) | Funds traded on stock exchanges like individual stocks. | |
| Fund of Funds | Invest in other mutual funds instead of directly in securities. | |
| Open-ended Funds | Allow investors to buy/sell units anytime based on the current Net Asset Value (NAV). | |
| Close-ended Funds | Have a fixed maturity period; units can only be purchased during the New Fund Offer (NFO). |
Advantages and Disadvantages of Mutual Funds
Depending on the kinds of investment and the time duration of those investments, their are some pros and cons of Mutual funds. They are mentioned as follows:
The Advantages of Mutual Funds
- Diversification: When an individual invests in a mutual fund, they are basically investing in a wide range of securities, which helps to spread risk across different assets, sectors and companies.
- Professional Management: There are trained and experienced fund managers who make investment decisions on behalf of the individual who is giving them money. This seems to be beneficial for beginners or those who lack the time and expertise to manage their own portfolios.
- Liquidity: You can generally redeem your units at any time, providing flexibility for withdrawals.
- Affordability: Investors can start with small amounts with the help of SIPs, which means Systematic Investment Plan (SIP), with some plans starting as low as INR 500 per month.
- Accessibility and Transparency: The funds are very easily accessible and operate under strict regulations by the Securities and Exchange Board of India (SEBI) while also making sure there is transparency in their operations.
Disadvantages of Mutual Funds
- Costs and charges: There are some mutual funds which attract a high cost. In case you exit from your investment before the given time period, then you have to pay the exit charges. Your money is blocked for a longer period of time, which means at least for 2-3 years for better ROI.
- Lack of Control: You do not have control over the specific securities the fund manager chooses to invest in.
- Tax Inefficiency: Depending on the type of fund and how long you have invested (time period), there can be tax implications on your gains, though some types of funds have tax benefits.
- Potential for Delays: While generally liquid, there can be delays in redemption, especially in certain market conditions.
Conclusion
Mutual Funds are types of investments where there are multiple owners of a single stock or security investment. Some experts manage your SIPs and mutual fund investments, which is helpful for beginners or busy people.
