Growing expenses and inflation has made it important to save money. One way it can be done is to invest wisely, and that’s where mutual funds come in the picture. It is a professionally managed investment scheme that is run by an asset management company that brings together a group of people and invests their money in stocks, bonds, and other securities.
Benefits of a mutual fund
There are several benefits of investing in a mutual fund such as:
Instead of putting all your money in a single place you can spread it out in different companies. A small amount can reap you a lot of benefits, and you will have multiple investments.
Professionally managed and regulated
The funds are run by professionals who hold a good knowledge of market scenario and the current economy. Their expertise helps you in choosing profitable investment opportunities. All the mutual funds are registered with SEBI and are under strict regulation to protect the interests of the investor.
Types of mutual funds
There are a plethora of mutual funds to choose from, and a basic of knowledge of their kind can help you select the best one for you:
#1. Open Ended Fund- One of the most common types of mutual fund where investors can choose to invest as per their convenience. There is no limit to the number of investors or the size of the fund unless the fund manager refrains from including new investors. The market close determines the value of the fund, and it is called Net Asset Value (NAV).
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#2. Close Ended Fund- This type of fund comes with a fixed maturity period ranging from 5-7 years. After the launch of the scheme, it is opened for a selected period. Investors can invest during the initial public issue and later sell them on the stock exchange where they are listed.
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#3. Interval Schemes- This type of scheme has features of both open ended and close ended funds. The investor can trade the units on a stock exchange, or they may be open for sales at selected time intervals at NAV related prices.
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#4. Equity Mutual Funds- This type of fund is where a major part goes into equity holdings. The structure of the fund depends on both the scheme and the fund manager and are best for longer time frame. Equity funds are also known as stock funds. SBI Blue Chip Fund is an example of equity fund. The equity funds also have categories:
1. Diversified equity funds
2. Mid-cap funds
3. Small cap funds
4. Sector specific funds
5. Tax savings funds (ELSS)
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#5. Debt Mutual Fund- If you are not interested in too much risk than this type of investment scheme is best for you as this particular type of fund promises lower risk and a stable income.
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#6. Balanced Funds- A perfect combination of growth and stability, this type of fund invests in both equities and fixed income securities by the investment objectives of the scheme.
#7. Funds-Of-Funds- This requires investing in other funds. They make asset allocation and diversification easier for the investors.
You can also decide your mutual fund depending upon your investment objective:
Growth Schemes: They are also called equity schemes and aim at capital appreciation for medium to long term. A major capital is put in equity schemes even at the risk of short- term decline to get a favorable future appreciation.
Income Schemes: Income schemes or debt schemes focus on fixed income securities and not much on capital appreciation.
Index Schemes: These are index based schemes which would aim to recreate the result of a particular index. The portfolio of Index scheme consists of those stocks that constitute the index. The returns that you will get from such scheme are similar to that of that of the index.
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People invest based on the approaches they prefer for their fund investments:
1. Top-Down Approach: It involves investing money in the biggest companies in a particular industry.
2. Bottom-Up Approach: It involves investing money in the companies who are doing fairly well, irrespective of their industries.
3. Hybrid: It contains choosing the best performing industry and then selecting the companies that are just doing fine and investing money.
4. Technical Approach: Investment is done by analyzing statistical data and market trends by an expert.
Do share your experiences regarding mutual fund investments. We would love to hear from you. Kindly use the comment box to share your thoughts and opinions with us.
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