The Buyt Desk
The term mutual fund means a fund collected with mutual agreement from investors by an investing firm.
You can better understand it with this example. Suppose you want to invest money in stock or shares but have no clue about the stock market. For this, you need the help of an experienced person, the mutual fund acts as a guide for you by investing your money in the right shares. A mutual fund scheme launched by different companies collects money from you, and from that money, it buys or sells stock collectively.
Here, the money managers manage the corpus. They allocate the collected fund across various portfolios to make higher profits or capital gains. You don’t have to be a part of this process. It allows investors to pick one fund instead of multiples that comprise different stocks.
There are different types of mutual funds with diverse patterns of investment and risk. One needs to choose it wisely as some of them are high-risk schemes while some are low. Here are various mutual funds available for Indian investors.
Equity Funds – In this fund, the investing company invests the collected money in equity shares. These schemes are high-risk ones as most money goes into shares. Equity funds are for those investors who are ready to take risks. And because this is a risk involved scheme, it gives higher returns than other mutual funds, and in the worst scenario, you might lose as well.
Debt Funds – Debt funds are risk-free schemes. In this scheme, most money goes into debt funds such as corporate debt, debt issued by banks, government securities and gilts. Debt funds offer an assured or fixed return on investment, most of the time. It is a good investment product for those investors who want an assured return and no risk.
Balanced Funds – This is a mutual fund that invests money in both debt and equity. But if you see their investment pattern, they put a higher portion of the asset in the equity than debt to get higher returns. The investment pattern in this mutual fund varies from other funds. To know more about balanced funds, do a thorough check.
Gilt Fund – Among all types of mutual fund, gilt fund is one of the safest mutual funds around as it has government backing. They invest the majority of the amount in government securities.
Money Market Mutual Fund – This is also called a Liquid fund, and these mutual funds often come for a smaller duration. They invest a higher percentage of their money in safe short-term instruments like treasury and commercial paper, certificates of Deposit. This mutual fund involves a medium risk.
Understand How Mutual Fund Operates With This Example
E.g., an XYZ company launched a mutual fund with the name XYZ mutual fund. Suppose the fund comes with a new offer called XYZ Mid Cap Scheme. When the scheme collects an amount, say 10 Crores from investors, it invests in the stock market. If it is an equity scheme, it will put the major portion of money in equity. If it is debt, it will spend the most money in debt and so on.
Now the same fund will offer units of this scheme to small investors. Suppose the mutual fund offers a unit of it for Rs 10, and you purchased 1000 units. One year later, the stock in which XYZ Mid Cap Scheme invested rose, and its net asset value jumped from Rs 10 to 12. You can sell back the 1000 units to the mutual fund at Rs 12 to earn a profit of Rs 2 for each share. So, you purchased 1000 units for Rs 10,000, and you sold it for Rs 12,000.
