This post is a Mutual fund wiki to help you with key resources and tools you require to understand mutual funds.
Understanding Mutual Funds
Mutual Funds as the name suggests are the collection of funds from numerous small investors. As an individual, it is very difficult for an investor to buy a variety of stocks and bonds because of the limited investment. As the individual investment in stocks lacks diversity, it is a high risk or unstable investment. On the other hand, mutual funds offer the benefit of diversity. Which means that the investment of the individuals is divided into different types of stocks and bonds from different sectors. As a result, loss in any particular bond is easily compensated by other bonds. This is how mutual funds offer a safer option for the small investors who cannot afford to invest in a variety of bonds.
Mutual fund Wiki: -Types of Mutual Funds
This type of mutual fund involves investment in bonds. This category of mutual funds has a potential of significantly higher returns but also carry high risk with them. It is not ideally suited for a short term investment as any downfall in the market can result in loss of investment but prospects are better with a longer term of the investment.
Money Market Funds:
This type of mutual fund looks for short-term fixed-income investment options that can offer stable returns. The money is invested in secure bonds such as government bonds. The returns in this type of mutual fund are not great but it also involves a lower risk. It is ideally suited for those investors who are looking for a safer investment option without significant returns.
Fixed Income Funds:
This type of mutual fund ensures a reasonably fixed rate of returns by investing in funds that offer fixed returns. The money in this category of funds is invested in high-yield corporate bonds and government bonds. The amount of risk in Fixed Income Funds mainly depends on the share of corporate bonds. Government bonds provide guaranteed returns in the form of interest earned but returns from corporate bonds are largely dependent on market growth.
This category of mutual funds try to provide a balance between equity funds and fixed income funds. The investment is carefully divided between equity funds and fixed income funds according to the requirements of the investor. These are the most popular types of mutual funds as they offer some level of protection to the investors during volatile market conditions. Equity funds ensure that the investor is able to take advantage of the market during growing periods while fixed income funds minimize the risk during tough market conditions.
These are the four main types of mutual funds. Some other types of mutual funds are specialty funds, index funds, fund-of- funds etc. The amount or risk may vary from one type of mutual fund to another but all types of mutual funds are regulated by standard government authorities in different countries. In India, Security and Exchange Board of India (SEBI) formulates the rules and regulations that govern investment in mutual funds.
Mutual Funds are managed by Experts
One of the main factors that make mutual funds an ideal option for inexperienced or initial investors is the fact that all types of mutual funds are managed by financial experts and professionals. An individual does not need to have any idea about choosing and investing in stocks and bonds to take advantage of the growing market. Mutual Funds Regulations by SEBI provide complete transparency about the different bonds and stocks where the money of an individual is invested in a mutual fund along with the complete profile of the experts that manage the funds. Mutual fund Regulations PDF by SEBI provide complete details about each and every regulation that governs investment in mutual funds in India including the latest additions or changes made in 2016.
Benefits of Investing in Mutual Funds
1. Diverse Portfolio: Mutual funds distribute the investments of the individuals into numerous funds to offer a diverse portfolio to every individual investor.
2. Complete Transparency of Investment: The rules and regulations but the government authorities allow every investor to monitor his or her investment. along with the names and the amount invested in each fund. Thus, an individual enjoys complete transparency while investing in mutual funds.
3. Well regulated: There are very little chances of frauds while investing in Mutual Funds as all types of mutual funds are regulated by government bodies in each country such as SEBI in India.
4. High Liquidity: Mutual Funds can be easily sold or bought at any point of time without any lock-in period unlike some of the other investment options like fixed deposits.
5. Professional Management:
Drawbacks of Investing in Mutual Funds
1. Lack of Control over Investment: You do not decide which stock or security to purchase
2. Returns are Unpredictable: The returns in mutual funds are market dependent
3. Fees: All types of mutual funds involve small fees that need to be paid for managing funds irrespective of your gains or losses
Taxation of Mutual funds
Equity and debt funds have separate tax treatment. Please read the article below to get more details
Mutual Fund Wiki : Video Resources for mutual funds
Top Videos on Mutual funds to get you started
1 What is a Mutual fund
2. Benefits of Investing in Mutual funds
3. What are tax saving fund/ELSS Funds?
4. How to select a ELSS Fund?