Mutual Funds Basics
A mutual fund is a pool of money from numerous investors who wish to save or make money. Investing in a mutual fund can be a lot easier than buying and selling individual stocks and bonds on your own. Owing to the secure nature of mutual funds, their market in India is constantly evolving. In fact, mutual funds are considered as the most safe, secure and flexible modes of investment available in the financial world. There are different kinds of mutual funds that are available to suit the varied needs of investors. They are categorised based on the risk an investor is willing to take, the amount to be invested, financial goals of the investor, etc.
Mutual Funds are divided into three categories.
Open-Ended
These schemes allow investors to buy and sell units at any point of time. They do not have a fixed maturity date.
1) Debt/Income
In this scheme, a major chunk of the invested money is directed towards government securities, debentures and other debt instruments. Although the capital appreciation in this scheme is lesser than other mutual fund types, it is chosen by many due to its low-risk nature. Debt/Income scheme is ideal for people seeking steady income.
2) Money Market
This scheme is perfect for investors who want to invest their surplus income for short-term gains while waiting for better options in the market. The Money Market scheme invests in short-term debt instruments and provides reasonable returns to the investors.
3) Equity/Growth
Equities are a popular investment category among most investors today. In spite of being a high-risk category in the short term, equities are known to provide significant returns in the long term. This scheme is ideal for people who are at their prime earning stage, and are looking for long-term benefits.
4) Balanced
In this scheme, the investors get equal growth and income at regular intervals. Funds are invested in both fixed income securities and equities; the proportion depends on the scheme, and is disclosed in the offer document. This scheme is ideal for investors who are cautiously aggressive.
Close-Ended
These schemes have a fixed maturity period, and investors can only invest during the schemes’ initial launch period, also known as the New Fund Offer (NFO) period.
1) Capital Protection
The prime objective of this scheme is to secure the principal amount invested, while also trying to deliver good returns on the investment. The scheme invests in high-quality fixed income securities with partial exposure to equities that mature along with the maturity period of the scheme.
2) Fixed Maturity Plans (FMPs)
As the name says, this scheme has a defined maturity period. The scheme invests in debt instruments which mature along with the maturity of the scheme, thereby earning through the interest component. FMPs are mostly managed passively, since there is no active trading of debt instruments.
Interval
These schemes are a mixture of open-ended and close-ended schemes. They allow investors to trade at pre-defined intervals.
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