Before investing in any instrument, it is very important for you to understand how a particular instrument works. Similarly, just so that you do not find investing in mutual funds misleading, let us find out more about how they work.
What are Mutual Funds?
A mutual fund is a collection of fund where money is pooled from small and large investors. Every fund is created with certain investment objectives; investors agreeing to these objectives invest in these funds. Mutual fund is managed by the fund manager with an objective ensuring the growth of the funds.
Types of Mutual Funds
Mutual funds can be Open-ended or Close-ended in type. Open-ended mutual funds do not have a maturity period; funds can be withdrawn at any point of time. Close-ended mutual funds have fixed maturity period, no withdrawals can be made before the end of the maturity period of the mutual fund investment.
Mutual funds are broadly classified based on their characteristics and types. SEBI released a circular regarding categorisation and rationalisation of Mutual Fund Schemes and as per the circular; the mutual funds are classified into the following categories:
- Equity Schemes
An equity mutual fund invests principally in stocks. They are also known as the stock mutual funds. This scheme is best suited for investors with long-term investment goal. They are either Active or Passive Equity Funds. In Active fund, a fund manager scans the market, conducts research on companies, examines performance and lists down the stocks to invest in. In Passive fund, portfolio is build based on the well-known market index – Nifty or Sensex.
- Debt Schemes
Debt mutual funds investment happens in a mix of debt or fixed income securities – Government securities, corporate bonds and other debt securities. Investors seeking for low risk investments with fixed income prefer Debt mutual funds. Generally, they have a fixed maturity date and a fixed rate of income. This scheme aims to generate regular income for the investors
- Hybrid Schemes
A hybrid mutual fund invests in both equity and debt funds; standard asset allocation is 60/40. They are also known as balanced mutual funds. These funds give an option for investing in multiple assets through a single fund. New mutual fund investors prefer hybrid mutual fund schemes over equity mutual fund schemes.
- Solution Oriented Schemes
Solution oriented schemes are the investment schemes based on the investors long-term goals. Goals like Child’s Education or Retirement are included in Solution oriented schemes.
- Other Schemes
The remaining mutual fund schemes fall under the category of the other schemes.
How mutual fund works?
Mutual funds investment is subject to market risk. Following are the points, based on which the mutual funds work.
Above are the ways how the mutual fund works. You can learn much more about mutual funds from ‘Investology’ from Edelweiss.