What are mutual funds?

Mutual Funds

Hello everyone and welcome to FinanceBread. What are mutual funds in India and its types is our topic today.

Hope all of you are well and taking good care of yourselves. So the topic of today’s post is what is mutual funds and its types and its definition

Don’t this question ever arise in your mind? WHAT ARE MUTUAL FUNDS IN INDIA? I am sure for at least once you wanted to know but you open google and typed and you were bombarded with figures but never understood what it really means.

So I got you covered after reading this post you will come to know:-

  • What are mutual funds?
  • Types of mutual funds.
  • Pros and Cons 
  • A simple platform to invest in MFs

NOTE – This guide is beginner-friendly so it won’t be containing and funds to invest. This basically about what are mutual funds in India.

So now you have an idea of what you will be learning today so without any further due let’s get started.

What are mutual funds

What are Mutual Funds?

A Mutual Fund is an investment vehicle formed when an asset management company(AMC) or fund house pools investment from several individuals and institutional investors with a common investment mandate.

A fund manager, who is a financial professional manages the pooled investment. He or She purchases securities such as stocks and bonds that are in line with the investment mandate.

Mutual funds, unlike stocks, do not invest only in a particular share. Instead, a mutual fund plan would invest across several investment options to provide investors with the best possible returns. Also, investors are not required to pick the stocks as the fund manager does the research and picks the best-performing instruments that have the potential to offer high returns.

 

Types of Mutual Funds

Mutual Funds in India are classified into three categories:-

  1. Equity Funds
  2. Debt Funds
  3. Balanced Funds

The above three categories will be containing some further types so I won’t be going in deep in those but will give a piece of brief information about what are mutual funds in India.

EQUITY MUTUAL FUNDS

Equity Funds as the name suggests investing mostly in shares of companies across all market capitalization.

A mutual fund is categorized under equity fund only if it invests at least 65% of its portfolio in equity instruments.

Equity Funds have the potential of offering high returns than any other mutual funds

The returns provided by equity funds depends on the market fluctuations.

Small-Cap Funds
Small-cap funds are those equity funds that invest in shares of companies with small market. SEBI defines small-cap companies as those that are ranked after 251 in market.

Mid-Cap Funds
Mid-cap funds are those equity funds that invest in shares of companies with medium market capitalisation. SEBI defines mid-cap companies as those that are ranked between 101 and 250 in market.

Large-Cap Funds
Large-cap funds are those equity funds that invest in shares of companies with large market capitalisation. SEBI defines large-cap companies as those that are ranked between 1 and 100 in market.


Multi-Cap Funds
Multi-Cap Funds invest across stocks of companies of all market. The fund manager would change the asset allocation depending on the market condition to reap the maximum returns for investors.
Sector or Thematic Funds
Sectoral funds invest in stocks of a particular sector like FMCG and IT. Thematic funds invest in stocks of companies that operate with a similar theme like travel.
Index Funds
Index Funds are a type of equity funds having the intention of tracking and emulating the performance of a popular stock market index. The asset allocation of an index fund would be the same as that of its underlying index.
Classification of Equity Funds

DEBT MUTUAL FUNDS

Debt fund invest mostly in debt and fixed income instruments such as government bonds, treasury bills, certificates of deposits etc.

A mutual fund is said to be debt mutual fund if it invests atleast 65% in debt securities.

Debt funds are good for low risk appetite investors as their performance is not based on market fluctuations.

Returns provided by debt funds are easily predictable.

Dynamic Bond Funds
Dynamic Bond Funds are those debt funds in which the fund manager modifies the portfolio depending on the fluctuations in the interest rates.
Income Funds
Income Funds invest in securities that come with a long maturity period and therefore, provide stable returns. The average maturity period of these funds is five years.
Short-Term and Ultra Short-Term Debt Funds
are those debt funds that invest in securities that mature in one to three years. These funds are ideal for risk-averse investors.
Liquid Funds
Liquid funds are debt funds that invest in assets and securities that mature within ninety-one days. Liquid funds are a great option to park surplus funds, and they offer higher returns than a regular savings account.
Gilt Funds
Gilt Funds are debt funds that invest in high-rated government securities. It is for this reason that these funds carry extremely low risk and are apt for risk-averse investors.



Credit Opportunities Funds
Credit Opportunities Funds mostly invest in low rated securities that have the potential to provide higher returns. It is for this reason that these funds are the riskiest class of debt funds.

Classification of debt funds

BALANCED MUTUAL FUNDS

Balanced or hybrid funds invest across both equity and debt instruments. The main objective of hybrid funds is to balance the risk-reward ratio by diversifying the portfolio.

The fund manager would modify the asset allocation of the fund depending on the market condition, to benefit the investors.

Investing in hybrid funds is an excellent way to diversify your portfolio as you would gain exposure to both equity and debt instruments.

Equity-Oriented Hybrid Funds
 invest at least 65% of its portfolio in equities while the rest is spent on money market or debt instruments.



Debt-Oriented Hybrid Funds
Debt-oriented hybrid funds allocate at least 65% of its portfolio in purchasing debt instruments such as treasury bills and government securities, and the rest is invested inequities.

Monthly Income Plans
Monthly income plans are mostly invest in debt instruments and aim at providing a steady return over time. The exposure to equities is generally restricted to 20%. Investors can decide if they like to receive dividends on a monthly, quarterly, or annual basis.
Arbitrage Funds
Arbitrage funds aim at increasing the returns by purchasing securities in one market at lower prices and selling them in another market at a premium. However, if the opportunities for arbitrage are not available, the fund manager may choose to invest in debt securities or cash.
Classification of balanced funds

Avoiding Fraud when dealing with MFs

According to law of SEBI ( Securities Exchange Board of India) each mutual fund is required to file a prospectus and regular shareholders reports with the SEC.

Before you invest in be sure to read the details of fund manager and thoroughly go through the prospectus.

PROS AND CONS OF MUTUAL FUNDS

ADVANTAGESDISADVANTAGES

1. Investment is looked by experts
2. No lock-in period
3. Low cost
4. Systematic Investment Plan
5. Goal-based
6. Diversification*
7. Flexibility
1. Fees
2. less control over timing of gains
3. less predictable
4. No opportunity to switch
Table showing pros and cons

A simple platform to start investing in MFs

I am sharing about Paytm Money because I used it myself.

You can go with the Grow app also but I don’t think that I can recommend something which I don’t use myself.

You can check Financebread Facebook page there you will find a screenshot of my Paytm screen and lot other content.

So the process its pretty simple adn interface of Paytm Money app is also user interactive. I don’t remember the whole process adn thats not topic of todays post.

But don’t worry I will not leave you hanging below is the list of things which are required.

  • Adhaar Card
  • Pan Card
  • Self video with an introduction
  • GSTIN( if you have).

CONCLUSION

A mutual fund is an investment vehicle that pools money from individuals and investors which is invested in buying bonds and securities and managed by the fund manager(financial professional ). Equity, Debt, and Balanced are three types of mutual funds. A low-risk appetite individual should go with Debt security as they are not very affected by the market. Check fund manager prospectus and do extensive research before investing in mutual funds or any other fund.

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