What is a mutual fund?

Mutual funds are financial institutions formed by collecting small funds from individuals to form a collective fund and invest the same fund into multiple investments.  Each type of mutual fund has a specific investment objective.  Usually the money that is collected from individuals are invested in bonds, stocks etc.

Why mutual funds?

Mutual funds are for the individuals who are not experts in the investment sector.  Professionals who have got enough expertise in these avenues take care of the fund of the investor and invest them in diverse areas.  It is never invested in one avenue, but the fund is divided and distributed to different areas so as to reduce the risk factor.  The professionals who are well versed with the capital market decide where to invest and this helps the investor to be off the headache of investing at the correct places.  As the finance arena has developed so much over the years, conventional investments/low returns like fixed deposits etc., people have opted to go beyond it and earn a better income with their own savings.

Types of mutual funds schemes

1. Open- ended scheme.  In this scheme, the investor can buy or sell its securities to the fund at anytime and the size of the fund is not a pre-fixed amount.

2. Close-ended scheme. The fund is fixed and the fund manager can use the fund for long term investment plan and derive benefit out of it on behalf of the investor.

The sub-classifications of open-ended scheme and the close-ended schemes are the following:

a. Return based classification:

1.  Income funds for the investors who opts for regular income from the investments.

2.  Growth fund for the investors who is inclined to increase the value of the asset and not regular returns.

3.  Conservative funds which give a regular income as well as capital appreciation.

b.  Investment based classification:

1.  Equity funds, which have high risk as well as good returns if the market is rising. The investment is done to equity shares of companies.

2.  Bond funds, as the name suggests, gets invested in bonds, etc. and the fund will be more secured.

3.  Balanced fund is a mix of equity shares and bonds. Depending up on the trends in the market either portion will be increased.

c.  Sector-based classification.

In this category, the funds will be invested in only the sectors that are previously offered in the documents.  It will be basically invested in sectors like petroleum stocks, fast moving consumption goods, and other industries and the returns depends upon how well these industries perform. They have high risks associated with it, but high returns too.

d.  Leverage-Based Classification:

As the name suggests, this is leverage based, that is, funds are borrowed from the market and invested for the mutual fund investor which will give good returns.

e.  Index-based Classification:

The investments in this scheme are in the securities in the similar portfolio of a particular index.  The net asset value could get increased or decreased in accordance with the rise or fall in the index.

f. Gift Fund:

This is a sort of risk-free investment as these are done entirely to the government securities.

These are the basics of mutual funds.  This is definitely one of the many investment options that one could make.  It has its risks involved, but could give good returns also.  Investing in diverse areas is the new age investment mantra and mutual funds are one among them and keeping aside a small, fixed amount to invest in mutual funds and see how well it does, may not be a bad idea.

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