What is a mutual fund?
The equity and investment market has evolved so much in the past decade that it has attracted a huge sum of investors.
A strong financial market with broad participation is essential for developing the economy.
People with investment opportunities rely on gains more than bank accounts to experience wealth creation.
Probably all of them do not have the right knowledge of investment or any considerable amount to invest and therefore loses the chances of gains in any investment instrument.
To solve this problem of low investing capacity and lack of knowledge, mutual funds came into existence.
A mutual fund is a kind of trust made up of money that is pooled together by a large number of small investors.
This sum is handed to fund managers who have expertise with the investment world and therefore ensure positive returns on the whole amount.
The mechanism of positive returns passes onto your small shared amount into the fund and you get to enjoy proportionate gains.
The gains and current value of mutual fund performance are reflected by the Net Asset Value (NAV) which changes on daily basis depending upon the changes in the performance of invested instruments.
“The AUM of the Indian MF industry has grown from ₹ 6.82 trillion as of November 30, 2011, to ₹37.34 trillion as of November 30, 2021, more than 5 fold increase in a span of 10 years.”
Everything being online, the technology now is accessible to all and therefore easy to assess the right choice for your spare amount.
Mutual funds are of various types with numerous instruments underlying, where an investor can hedge the risk by risk-sharing with other similar interest fellow investors.
Types of mutual funds
A mutual fund is categorised based on asset classes and structures.
With various asset classes of funds, the structures go in combination and therefore the categories are complementary to each other.
Based on asset class
Based on asset class and allocation the risk for funds depends upon the instrument as well as the capacity of performance of the fund. Under this category we have the following fund types:-
Equity funds
As the name suggests equity funds are related to equity investments. The amount pooled by investors goes into equity instruments like shares or stocks of companies.
Depending upon the investment goal, these funds can be diversified among large-cap, small-cap and mid-cap stocks for maximum returns.
The major ratio of investment is inclined towards the stock market on NSE and BSE and possess the quality of higher returns compared to other asset classes.
Mirae Asset Tax Saver Fund is a perfect example of an equity-based mutual fund that has a growth potential of +191.52% over 5 years.
Debt funds
Debt funds are equipped with instruments in the debt market such as debentures, bonds, treasury bills etc. that ensures some amount of fixed income.
The risk is generally low with a good gaining ratio. These funds generally yield capital appreciation in long term and are beneficial when held longer.
Fixed interest with capital appreciation gives an upper hand in being compatible for investors who are reluctant to high risks. The investment in debt funds gives a sense of security.
Hybrid funds
Hybrid funds are used to hedge against inflation and risk. These funds are a mixer of a combination of equity and debt instruments.
They give portfolio diversification opportunities ad facilitate fixed income with higher capital appreciation from both categories.
Hybrid funds perform well with no strict rules of ratio to be followed while diversification. The fund is obligated to pay you interest on a debt instrument and capital appreciation on both.
Money market funds
These funds invest in highly liquid money market instruments and provide easy liquidity. These funds are short term and ideal for institutional investors and business houses.
The assets are cash equivalents and therefore the fund is also known as the cash market. The risk is low in contrast the returns are also not much high.
Investment instruments include bonds, T-bills, dated securities and certificates of deposits and corporate commercial papers etc.
For example, Nippon India Money Market Fund is a Debt-Money Market fund with a Return for 2021 was 3.8%, 2020 was 6% and 2019 was 8.1%.
Based on structure
Based on structure the funds are categorised as:-
Open-ended funds
Open-ended funds are widely used to invest in mutual funds as they do not have any fixed date to mature and are highly liquid with some exit load criteria.
You can enter the funds whenever you want and exit as per your requirements.
The unit capital of these funds is therefore dynamic.
The funds can be related to the benefits of a savings account with higher returns and diversification.
Close-ended funds
These schemes are generally time-bounded. The entry and exit are allowed at a specific time and therefore is more like Fixed deposits with higher actual returns and diversification.
These schemes are for investors with long term gains vision and have a lump sum investment amount in hand.
The funds generally allocate more returns than the open-ended funds as the AUM remains the same therefore efficiency increases in management.
The best performing close-ended fund is SBI Tax Advantage Fund – Series III – Regular Plan with a return record of 2.61% in a year.
Interval funds
As the name describes, these funds combine the features of both open-ended and closed-ended funds.
These funds are open for purchase or redemption only during specific intervals and closed the rest of the time.
The funds are suitable for investors with short term goals with a lumpsum amount for investment in hand.
Advantages of mutual fund investment
Mutual funds possess good qualities to attract individuals to pool and invest and gain returns collectively. some of these good qualities are:-
Diversification
One rule of investing, for both large and small investors, is asset diversification. Asset diversification does not keep all your eggs in one basket to hedge the risk.
Similarly, mutual fund schemes are generally a mix of two or more instruments of investments that diversify your funds in the best possible suitable baskets.
Divisibility
You can buy a mutual fund unit as lower as 100Rs, smaller denominations of mutual funds provide investors with the ability to make profits via small investments as well.
For that fact they are given the choice to invest all in one time or can hold monthly plans with small amounts providing greater autonomy for entry.
Professional management
You don’t have to look up to 5-6 instruments and assess their performance daily, this can be time-consuming. Therefore mutual fund solves this problem with professional management.
The fund companies hire professionals with good industry knowledge who ensure the best possible gains on your pooled investments.
Bottom line
Mutual funds are becoming popular among investors to lower the burden of risk and increase gains. Mutual performance has been relatively better during the 2 years of the pandemic in India.
Large-cap mutual funds offered an average return of around 30% in 2021. To be precise, the large-cap category has offered around 26% in the year till date.
Average Assets Under Management (AAUM) of the Indian Mutual Fund Industry for November 2021 stood at ₹ 38,45,378 crore.
These statistics speak for themselves, how the mutual fund industry is emerging and continues to be compatible for all scale investors for safe investments.
