So You've Bought Mutual Fund: Meaning, Features, Types and Benefits.

In India, people are becoming more aware of investing in mutual funds. The AMFI (Association of Mutual Funds in India) said that as of December 2022, there were an astounding 6.12 crore mutual fund SIP accounts. Just this statistic attests to the growing acceptance of mutual funds in India. To help you make more informed decisions before investing, we have answered all of your mutual fund-related questions in this blog. Now let's get started!

Mutual Funs Meaning, Features, Types and Benefits.

A Mutual Fund: What Is It?

An investment vehicle known as a mutual fund collects investor capital and uses it to purchase securities including stocks, shares, government bonds, and other money market instruments. Giving investors the best returns possible is a mutual fund scheme's main goal. A fund manager establishes the goal of a mutual fund scheme and oversees its management. 

But depending on the investment strategy—passive versus active—the fund manager's responsibilities would change. More on this later. These fund firms are governed by the Association of Mutual Funds in India (AMFI) and the Securities and Exchange Board of India (SEBI).

Mutual fund types available in India.

There are different types of mutual funds in India which are as follows.

1. According to Asset Class.

Funds are according to asset class.

1. Funds for Equity.

Due to their primary investment in stocks of different companies, equity funds are also known as stock funds. These mutual funds have the potential to yield large profits, but they also include a risk of significant losses if stock prices decline. The performance of these shares directly impacts the gains or losses that an investor in mutual funds may have.

2. Debt Management Funds.

Mutual funds specialising in debt are less hazardous than equity and hybrid funds. They are therefore appropriate for those seeking respectable returns on low-risk investments. Investments in fixed-income assets, including corporate bonds, money market instruments, and government securities, are made by debt mutual funds.

3. Balanced or Hybrid Funds.

A suitable combination of stock and bond funds a hybrid or balanced mutual fund. For both assets, the ratio of this blend can be either constant or variable. For respectable returns, investors willing to assume greater risk than debt funds but less risk than equity funds may choose hybrid funds.

Hybrid or Balanced Mutual Fund.

2. Accordance With Structure.

Funds are according to structure.

1. Funds with No Ends.

Trading of units occurs continuously in open-ended mutual funds. As a result, investors have the flexibility to invest and redeem fund units as needed. Fund houses typically experience fluctuations in the pricing of their outstanding units when they decide to buy or sell their current units.

2. Funds with a Close End.

Investments in closed-ended mutual funds are accepted during the NFO (New Fund Offer) period. Moreover, investors are restricted from withdrawing their capital for a period of approximately five to seven years. To give investors an exit option, closed-ended funds are listed on stock exchanges.

Open Ended or Closed Ended Mutual Funds.

3. Depending on Investment

Funds are according to investment.

1. Tax Savings Funds/ELSS.

The lock-in period for Equity-linked Savings Schemes (ELSS) is three years. Under Section 80C, you can reduce your income tax by using these funds. You can invest in a wide variety of equities across industries and market capitalizations with ELSS funds.

2. Funds for Growth.

Investors use this mutual fund, as the name implies, to boost their capital growth. Mutual funds of this kind carry significant risks in addition to large profits. Growth funds are therefore a good choice for investors that have a long-term investing goal and a strong tolerance for risk.

Long-Term Mutual Fund.

3. Retirement Funds.

Pension funds, often called superannuation funds, enable investors to set aside a substantial sum of money for their post-retirement years. For consistent returns, these mutual funds often invest in low-risk government assets and bonds.

4. Liquid Funds.

Certain debt securities with a short maturity of up to 91 days are invested in by liquid mutual funds. As implied by their name, they offer high liquidity and have no lock-in time. Additionally, liquid funds are a less hazardous investment than growth funds because of their short maturity time.

Liquid Mutual Funds.

4. According to Plans.

Funds are according to plans.

1. Direct Plan.

Purchasing mutual fund units straight from the Asset Management Company (AMC) is known as a direct plan. Direct plans are typically preferred by seasoned investors or those who are comfortable selecting mutual schemes on their own without the help of a third party. The expense ratio is lower for these plans.

2. Regular Plan.

Regular plans are mutual fund schemes in which units are purchased through a third party. Novice investors think about investing in regular plans because the brokers help them choose the funds. To make matters worse, the fund's overall cost may rise due to the broker's potential commission fee, which might dramatically raise the expense ratio.

Direct Plan or Regular Plans Mutual Fund.

Mutual Fund Features.

Here are some most important features of mutual funds.

1. Easy Access.

You no longer need to physically visit a fund house thanks to the rise in popularity of online mutual fund investing. You can use your computer or phone to invest in any fund of your choice. To complete a purchase, simply go to the AMC website or mobile app and log in.

2. Investing Flexibility.

This is just one of the appealing aspects of mutual funds. When investing in mutual funds, you can choose any mode between lump payment and systematic contributions.

Lump Payment Plan.

3. Availability of Liquid Resources.

In case of an emergency, you can also take money out or redeem it. You will get the money in 3–4 business days, depending on your plan. This sum is deposited into your account using liquid funds the next business day. Since investors can redeem mutual funds at any moment, they have reasonable liquidity.

4. Benefits of Income Tax.

Because mutual funds are so tax-efficient, you can save money on taxes over the long run by investing in them. By making large returns on your investments in ELSS funds, you can also receive income tax deductions.

ELSS Funds or Tax Saving Funds.

5. Minimal Costs.

Additionally affordable for all income levels are mutual funds. If you want to invest in mutual funds, you have to pay your fund companies a modest fee, which is called the expense ratio. Fund houses may differ in the expense ratio and other extra fees. Still, the expenses are lower than those of other managed funds.

6. Governed by SEBI.

Before releasing a mutual fund scheme, each fund firm is required to register with SEBI. In protecting investors, SEBI ignores fund houses' responsibility and transparency. SEBI inhibits any capricious use of investor funds by doing this. Mutual funds are thus protected against fraud and wrongdoing.

SEBI

7. Beneficial for Diversifying Portfolios.

You can avoid putting all of your eggs in one basket by using mutual fund strategies. To keep your profits and losses in check, they consistently make investments in mutual funds with high and low risk on your behalf. This gives you access to a diverse portfolio that can generate returns even in times of economic recession.

The Advantages of Mutual Fund Investing.

Any investor's main objective should be to outperform inflation. Mutual fund investments are now required to stay ahead of the market because other savings options offer poor returns. Additionally, investing in mutual funds can be chosen due to the following advantages.

1. Differentiation.

As was previously said, there are many different kinds of mutual funds. Mutual fund schemes that align with investors' financial goals are available for selection. A varied investment portfolio can be accumulated by investors at a reasonable cost thanks to the variety of possibilities accessible.

2. Investing with Discipline.

Investing for an extended time is encouraged by mutual funds, which is essential for creating substantial wealth. To invest in a disciplined way, you can also choose to use a Systematic Investment Plan (SIP), which allows you to set aside a certain amount of money and make regular contributions.

SIP Plan.

3. Different Investment Modes.

You can make a lump amount or a one-time investment in mutual funds. Alternatively, you may choose to pursue choices including a Systematic Withdrawal Plan (SWP), Systematic Transfer Plan (STP), and Systematic Investment Plan (SIP).

4. Availability.

Individuals can invest as little as Rs. 1000 in mutual funds as a lump sum through many fund firms. In addition, a SIP can be chosen, and investing as little as Rs. 10 can be started.

How to Make a Mutual Fund Investment.

1. SIP.

Investors in a mutual fund scheme make fixed monthly payments under a Systematic Investment Plan (SIP). A set sum is invested at a predetermined frequency in SIPs. This eliminates the need for investors to time the market and makes investing hassle-free.

2. Lump Sum.

This is a one-time investment of around Rs 1,000,000. If you have a large amount of money to invest and a high tolerance for risk, consider making a lump-sum investment.

Lump-Sum Investment Plan.

Conclusion.

Among investing options, mutual funds are particularly easy to use for both novice and experienced investors. In addition to providing portfolio diversification, mutual funds typically yield higher returns than traditional savings options. When it's convenient for you, you can begin investing online with a lump payment or through a SIP. 

Before investing, people must ascertain their level of risk tolerance, time horizon, and financial objectives.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.