MUTUAL FUNDS - INTRO !!!

A mutual fund is an investment vehicle in which a pool of investors collectively put forward funds to an investment manager to make investments on their behalf. The fund is regulated by the authority SEBI in India. mutual funds enable investors to diversify a portfolio across industries, low fees, and availability of professional expertise in the guise of fund managers.

A mutual fund is formed when an asset management company (AMC) pools money from several individual and institutional investors to purchase securities such as stocks, debentures and other similar assets. The AMCs have fund managers to manage the pooled investment. Fund units assigned to Mutual fund investors corresponding to their quantum of investment. Investors are allowed to purchase or redeem fund units only at the prevailing net asset value (NAV).The NAV of mutual funds varies daily depending on the performance of the underlying assets.

 
Investors invest money with the fund house and the designated fund manager invests the money into the listed securities in attempt to generate the desired higher returns. This helps retail investors to part away with studying the different types of the securities and diversify the portfolio as per the study/research of professionals. 

There are four broad types of mutual funds:

• Equity funds:  As the name suggests, Equity Funds invest in the shares of different companies. The fund manager tries to offer great returns by spreading his investment across companies from different sectors or with varying market capitalizations. Typically, these funds are known to generate better returns than term deposits or debt-based funds. There is an amount of risk associated with these funds since their performance depends on various market conditions.              
• Fixed-income/ Debt funds: A debt fund invests in fixed-interest generating securities such as corporate bonds, government securities, treasury bills, commercial paper, and other money market instruments. The fundamental reason for investing in debt funds is to earn a steady interest income and capital appreciation. The issuers of debt instruments pre-decide the interest rate you will receive as well as the maturity period. Hence, they are also known as ‘fixed income’ securities.                                                                                                                                                
• Money market funds: Money market mutual funds (MMF) invest in short-term debt instruments, cash, and cash equivalents that are rated high quality. It is for this reason that money market mutual funds are considered safe or investment with minimal to low risk. As these funds invest in high-quality instruments, they offer a predictable risk-free return rate.                                              
• Balanced or hybrid funds: Balanced funds invest in a mixture of both debt and equity segments in specific ratio. These funds enable investors to diversify their mutual fund portfolios. These funds try to maintain a balance between both debt and equity segments, they aim to provide the better risk-reward and thrive to maximize the returns on investment. Balanced mutual funds are mostly equity-oriented and take up about 40-60% of the fund's portfolio. The biggest advantage of investing in these funds is that they ensure capital appreciation and provide a safety net against potential risks.

The terms related to the post are described in brief below.

Expense ratio: This is an annual fee that covers the fund's operating expenses, including management fees, administrative costs, and marketing expenses. The expense ratio is expressed as a percentage of the fund's average net assets and is deducted from the fund's returns.

Loads: Some mutual funds charge sales fees, known as "loads," when you buy or sell shares. Front load schemes charge you at the entry level and exit loads are assessed if you sell your shares before a certain date. Generally, exit load of 1% is charged for exiting a scheme before one year.

AUM: assets under management is the amount invested by the mutual fund in a particular fund. 

SEBI: Securities and Exchanges Board of India is the regulatory body that regulates Indian capital markets.

We will cover "What scheme to invest", "should you invest in mutual funds" etc details in our next post: Mutual Funds Sahi Hai!!! Itna Easy bhi Nahi hai (financethatmatters.blogspot.com)

As usual, kindly make sure you consult your financial advisor before taking any decision about finances as FINANCE MATTERS and it matters for everyone😇.

-- SACHIN GOSWAMI.