BASICS OF MUTUAL FUNDS

WHAT IS MUTUAL FUND?

Mutual Funds is an investment option that pools money from a number of investors who share a common investment objective and invests this money in stocks, bonds and other such securities. The pool of money is managed by a professional fund manager or a team of managers. These managers make investment decisions on behalf of the investors. The combined holdings, that is, the collection of securities, in the mutual funds is known as portfolio. The composition of the portfolio depends upon the fund’s investment objective and strategy.

WHAT ARE THE FEATURES OF MUTUAL FUND?

The following are some of the key features of mutual fund that make them unique investment vehicles.

1. Diversification– The money pooled from investors is invested in a diversified portfolio. The portfolio of mutual fund is diversified means that the money is invested in a number of securities like stocks, bonds, etc. This helps spread risk across different assets and thereby the reducing the impact of poor performance of one investment by better performance of other investments.

2. Professional Management– Mutual Funds are managed by experienced professional or fund managers who conduct research and make decisions in buying, selling and holding of shares within the funds’ portfolio. The goal of the fund manager is to achieve the objectives of the mutual fund and maximize the returns for the investors.

3. Variety of Investment Options– There different types of mutual funds like equity funds, money market funds, hybrid funds, etc. Depending upon the type of mutual fund the objectives of these funds also changes. This wide variety of options helps the investors in choosing the mutual fund which aligns with their investment objectives and risk tolerance.

4. Affordability– Mutual funds typically has a low minimum investment requirement, making the accessible to large a number of investors. This feature of mutual funds allows investors to participate without needing a large capital.

5. Liquidity– Mutual Funds is easily redeemable. They can be bought or sold on any day at their net asset value (NAV) price. This helps the investors in converting their investments into cash easily.

WHAT ARE THE TYPES OF MUTUAL FUNDS?

Mutual Funds come in various types, each with its own objectives, strategies and risk profiles. Here are some of the different types of mutual funds.

1. Equity Funds– These funds invest primarily in stocks. They can be further subcategorized based on the type of stocks such as small-cap, mid-cap, large-cap, etc.

2. Bond Funds- They invest in bonds and other fixed income securities. Bond Funds focus on government bonds, corporate bonds and municipal bonds.

3. Money Market Funds– They invest in bonds and other fixed income securities. Money market funds are considered low-risk and it also provide stability to investors.

4. Hybrid Funds– They are also called Balanced Funds. They invest in a hybrid of asset classes like stocks, bonds and money market instruments. The objective of this fund is to reduce risk by exposure to different asset classes.

5. Sector Funds– They concentrate their investment to a particular sector or industry of the economy such as technology, health care, agriculture or energy.

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