The BuyT Desk
Mutual funds are investment products that combine different instruments such as shares, bonds, or both into one product. An expert fund manager handles buying and selling of assets associated with a mutual fund. An investor puts his/her money into a mutual fund, the fund manager invests these funds by following predefined investment strategies. Before investing in a fund, please find out the underlying asset classes of the fund, its risk profile, and whether it has been consistent in the historical performance. A mutual fund is ideal for you when its investment objective is the same as your financial goal.
Types of Mutual Funds
A classification of mutual funds is based on the time of investment. Open-ended funds, you can buy and sell units at any point in time for open-ended funds. But in the case of closed-ended funds, you can buy units only at the time of launch. After the New Fund Offer (NFO), you can neither buy nor sell units of a closed-ended fund till the maturity period (three to seven years). The fund house may list the closed-ended fund on the stock exchange to allow you to purchase and sell the units.
Another classification of mutual funds depends on the financial instruments bought under the fund. There are three basic mutual fund types: equity funds, balanced funds, and debt funds. An equity-oriented fund invests primarily in stocks of publicly traded companies. Debt funds invest in fixed-income securities of governments and corporations. Balanced funds are also called hybrid funds. They balance the limitations of equity funds with the advantages of debt funds or vice versa.
Advantages of Mutual Funds
Mutual funds offer several benefits to investors.
Ease of transaction: Mutual funds are simple products, which are convenient to transact. You can buy them simply over the internet. The ability to buy whenever you want, to sell your holdings whenever you need the money or switch products with ease makes them a desirable investment product.
Affordability: They are affordable for everybody, and you can even invest an amount as low as Rs.500. Once you start investing, you can gradually increase the investment amount as you gain more confidence or accumulate a surplus.
Different investment plans: You can invest a lump sum amount in a mutual fund or opt for a Systematic Investment Plan (SIP). In SIP, you can automatically invest a fixed sum of money in a mutual fund at pre-specified intervals of time by simply giving a one-time instruction. A SIP offers many advantages. It introduces a sense of investor discipline, provides flexibility in choosing the investment amount, tenure, and frequency; and offers automation ease.
Professional management: In mutual funds, a full-time professional team manages the investment of your money.
Greater returns: Banks and post offices offer zero risk investment options like FD and RD. However, mutual funds can generate higher returns compared to these investments. To mitigate the risk, choose a type of mutual fund that has less risk. For example, gilt funds are the most secure mutual funds that invest money only in Government securities.
Options for Mutual Funds
In mutual funds, you have to choose between growth or dividend option. Either choice decides how the fund manager deals with the gains made on your investment. The fund manager does not reinvest the profit in case of dividend option. The dividend is paid every quarter, month, or year. The frequency of dividend payments is not fixed. The fund manager announces the distribution of dividends only when profit is generated. He redeems the units from your mutual fund account to pay the dividend. In the growth option, the fund manager reinvests the gains into the mutual fund. As a result, the value of units available in your account will increase automatically. You can receive the gains only by selling the units.
Depending upon your financial goal and needs, you can select either growth or dividend option. If you want to accumulate funds for long-term goals like a daughter’s wedding, choose the growth option for wealth creation. If you are a retired individual without a pension, then generate a regular income through the dividend option
