An investment programme funded by shareholders that trades in diversified holdings and is professionally managed.
Mutual Funds are investment options wherein the money from several investors is pooled in by an Asset Management Company (AMC) and invested in different instruments such as debt, equity, securities and money market. The resulting profit, after deductions by the AMC, are divided among the investors as per their portfolios. Mutual funds are regulated by the Association of Mutual Funds in India (AMFI).
Mutual funds allow you to diversify your investment across assets and asset classes, something that is very difficult to do on your own.
You are given options to pick any type of funds with any type of risk profile associated with them, and bundle all of them into a single package. You can cover yourself up for eventualities and needs quite easily with all the data and options available to you from AMCs.
The fund managers are usually very experienced people who have years of experience handling different types of assets. And what’s more, you will be given detailed profile of your fund managers so that you know who’s actually handling your hard-earned money.
There’s nothing more convenient than a central database providing you all information and even highlighting what’s best for you. This is possible through mutual funds.
• Money Market Funds: These funds invest in short-term fixed income securities such as government bonds, treasury bills, bankers’ acceptances, commercial paper and certificates of deposit. They are generally a safer investment, but with a lower potential return then other types of mutual funds. Canadian money market funds try to keep their net asset value (NAV) stable at $10 per security.
• Fixed Income Funds: These funds buy investments that pay a fixed rate of return like government bonds, investment-grade corporate bonds and high-yield corporate bonds. They aim to have money coming into the fund on a regular basis, mostly through interest that the fund earns. High-yield corporate bond funds are generally riskier than funds that hold government and investment-grade bonds.
• Equity Funds: These funds invest in stocks. These funds aim to grow faster than money market or fixed income funds, so there is usually a higher risk that you could lose money. You can choose from different types of equity funds including those that specialize in growth stocks (which don’t usually pay dividends), income funds (which hold stocks that pay large dividends), value stocks, large-cap stocks, mid-cap stocks, small-cap stocks, or combinations of these.
• Balanced Funds: These funds invest in a mix of equities and fixed income securities. They try to balance the aim of achieving higher returns against the risk of losing money. Most of these funds follow a formula to split money among the different types of investments. They tend to have more risk than fixed income funds, but less risk than pure equity funds. Aggressive funds hold more equities and fewer bonds, while conservative funds hold fewer equities relative to bonds.
Qualified professionals manage your money, but they are not alone. They have a research team that continuously analyses the performance and prospects of companies. They also select suitable investments to achieve the objectives of the scheme. It is a continuous process that takes time and expertise which will add value to your investment. Fund managers are in a better position to manage your investments and get higher returns.
The cliché, "don't put all your eggs in one basket" really applies to the concept of intelligent investing. Diversification lowers your risk of loss by spreading your money across various industries and geographic regions. It is a rare occasion when all stocks decline at the same time and in the same proportion. Sector funds spread your investment across only one industry so they are less diversified and therefore generally more volatile.
Mutual funds offer a variety of schemes that will suit your needs over a lifetime. When you enter a new stage in your life, all you need to do is sit down with your financial advisor who will help you to rearrange your portfolio to suit your altered lifestyle.
As a small investor, you may find that it is not possible to buy shares of larger corporations. Mutual funds generally buy and sell securities in large volumes which allow investors to benefit from lower trading costs. The smallest investor can get started on mutual funds because of the minimal investment requirements. You can invest with a minimum of Rs.500 in a Systematic Investment Plan on a regular basis.