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Basics Of Mutual Funds

By Author: Tanvi Sherzade
Total Articles: 3

How mutual funds work is by collecting money from lots of investors and then investing that money in stocks and bonds. The idea behind the mutual fund is to invest in a balanced way so as to mitigate the risk associated with investments as much as possible. Being an investment that is made in the markets, there is an inherent risk that comes with this investment and investors must be prepared for the possibility of a loss.

Types of mutual funds
There are two broad types of mutual funds available in India. They are the open ended and closed ended mutual funds.

Open-Ended

Open ended mutual funds are those where investors can indulge in the buying and seeling of units at any time. There are no maturity periods or investment periods for these funds. They can also be further classified in 4 types, which are:

Debt/ Income

Debt or income mutual funds are those where investments are made in bonds and treasury bills. Money invested in such a fund can be put into monthly income plans, short term plans, flexible maturity plans, etc. These investments offer a very low risk factor and low returns and are ideal for those who are looking for a safer environment for their money to grow in.

Money Market/ Liquid

Money market or liquid mutual funds are those where investments are made in treasury bills and fixed income securities among other instruments like short term bank certificates of deposits. The purpose of these funds is to provide investors with liquidity hence they come with short maturity periods of about 90 days.

Equity/ Growth

Equity or growth mutual funds are those where the investors money is invested in equity stocks with the idea of either generating an income or capital gains. Sometimes they can be investments made with the purpose of generating both gains and income.

Balanced

Balance funds, as the name suggests, invest the money in a balanced way between fixed income securities and equity funds so as to provide investors with the opportunity to invest aggressively but with caution.

Closed ended mutual funds

Closed ended mutual funds are those where the fund comes with a fixed maturity period and also alows for investments to take place only in the innitial stages of the fund. It has two types, the capital protection fund and the fixed maturity plans fund.

Capital Protection

The capital protection mutual fund invest in both fixed income securities and equity plans but the investment in equity is marginal since the aim of the scheme is to safeguard the principal while still getting returns.

Fixed Maturity Plans

These plans, unlike most other plans, may come with the lowest charges for the scheme because they are not managed actively like other funds. In a fixed maturity plan, the investment is made mostly in debt instruments that mature along the same timeline as this fund since it comes with a fixed maturity period.

Interval

Sometimes you will notice that a mutual fund will only allow investment at specific periods. It does not allow investment at any time but it still allows investments to happen much later into the schemes duration too. This is so because the interval mutual funds operate as a combination of both open and close ended funds where investments can be made at specific intervals.

To know more about basics and advantages of mutual funds, visit : https://www.bankbazaar.com/mutual-fund/mutual-funds-basics.html

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