What are Mutual funds? How Mutual funds work?

Q: What are Mutual Funds?

Ans: Mutual fund is an investment house where the money is collected from investors, which is then invested in different types of funds by the fund managers. These funds are then invested by the money managers in different funds which in turn will give the investors profit on their invested money. (mutual funds are subjected to market risks read all scheme related documents carefully :-P)

There are three types of mutual funds:

Open Ended Scheme - In this scheme, the investor can buy and sell the units anytime and according to his own wishes.

Close Ended Scheme - In this scheme, the investor can only invest during a certain period of time. The units can be bought and sold only for a certain period of time. The number of buyers in the market for the funds in this scheme is very less.

Q: What are the different types of mutual funds?

Ans: Mainly there are three types of mutual funds :

1.Equity mutual fund.

2.Debt mutual fund.

3.Hybrid mutual fund.

Q: What is Equity mutual fund?

Ans: Equity mutual funds are directly invested in the stock market. They can be classified as follows:

Large Cap Fund - These funds are invested in big companies which are well established and have good growth in their sector. They have good wealth reserve during bad times to stabilize themselves from losses. Since these companies like Reliance Industries, L&T Co, TCS, etc have stable performance and are on top these funds are low risk and fewer return funds.

Mid & Small Cap Fund - The funds which are invested moderately succeeded or recently established companies which can go in a loss any moment are called as mid&small cap fund. This company comes with high risk and high return margins.

Sector Fund - These funds are invested in a particular company or industry. For example, Aditya Birla SL Infrastructure fund is a type of sector funds which invest in infrastructure companies.

Dividend Yield Fund - These funds are invested in big companies which are stable, less volatile and showing good profits. These funds are invested in the above-mentioned companies which will give a dividend to their investors regularly even though it is not necessary for the company.

Equity Linked Savings Scheme(ELSS) - The funds invested in this scheme are locked for a period of a minimum of three years. These funds are mainly tax saver funds. Under the rule of section 80 C, you can get tax benefits up to Rs. 1.5 lakhs.

Diversified Equity Fund - These funds are invested into different sector funds or large, small and mid-cap funds.

Thematic Fund - These funds are invested in a particular theme such as E-Commerce theme, Banking theme, etc.

Q: What are debt mutual funds?

Ans: In debt mutual funds companies or government take money from the investors and return it with interest to the investors. These funds are of low risk and low return funds. They can be classified into four different types:

Junk Bond Schemes - This scheme is highly volatile. The money invested in this scheme comes with high risks and high returns.

Liquid Schemes - These funds are taken by the companies for a shorter period of time. They are less risky and less volatile in nature. These are the best funds to invest for a shorter period of time. You can withdraw the amount anytime you wish to use the money.

Gilt Funds - These funds are invested in government securities, therefore, carry zero risks. Gilt Funds are of two types: Short term and Long term. Government security is a bond issued by a government authority with a promise of repayment upon maturity.

Fixed Maturity Plans - Fixed maturity plans are like bank FD with a pre-decided lock on the period of the funds. These funds are usually invested in government bonds, corporate schemes. Though it is similar to FD, its returns are higher than Bank FD.

Q: What are Hybrid funds?

Ans: Fund managers invest money in both Equity and Debt funds under this fund. They are of three types:

Balanced Fund - Though the name suggests balance the fund is divided in 80%-20% ratio. 80% of the amount is invested in equity and 20% in debts. This helps it to balance the returns and the risks of funds.

Arbitrage Fund - In this fund, 60-70% of the funds go in equity but here the amount invested is safe only the returns will differ from 5%-10%. Arbitrage funds come under the same taxation slab as equity funds.

Monthly Income Plan(MIP) - In this fund, the manager invests some parts of money in debt securities and some parts in Equities. Most of the money is invested in debt securities so the risk of this fund is less than an equity fund. Since some of the money is invested in equity this fund is not 100% risk-free.

How mutual funds work?

A mutual fund is an investment fund managed by Asset Management Company which collects all the money from the investors, invest it in different investment markets and distributes the profit/loss made on the investment to the investors.

     The mutual fund collects money from investors in two ways:

• SIP (Systematic Investment Plan)

• Lumpsum 

Asset Management Companies charge a small amount in the form of commission on the investment made. 13 benefits of investing in mutual fund.

#All this data is based on mutual funds past performance please be careful before you invest your hard earned money.

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