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Mutual Funds- Meaning, Types, and Benefits

  • Aug 18, 2023
  • 6:31 pm
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A mutual fund is a type of investment vehicle that pools money from multiple investors to purchase securities, typically stocks, bonds, or a mix of both. The value of a mutual fund's holdings is known as its net asset value (NAV). Investors buy shares in the mutual fund, and the price per share is based on the NAV. The fund is managed by a professional money manager, who makes investment decisions on behalf of the fund's shareholders. Mutual funds offer investors the benefits of diversification and professional management, with considerable amount of fees. The different types of mutual funds are:-

1) Equity Funds-  
These funds generally invest in equities with the goal of generating capital growth over the long term. Additionally, they are divided up into other groups including large-cap, mid-cap, and small-cap funds.

2) Debt Funds- 
These funds invest mainly in government securities, bonds, and other fixed-income instruments. They seek to preserve capital while generating a steady income.

3) Balanced Funds- 
These funds make proportionate investments in fixed-income and equity securities. They are also known as hybrid funds and seek to offer both growth and income.

4) Index Funds- 
These funds follow a particular index, such as the Sensex or the Nifty. With the objective of duplicating the index's performance, they make the same number of investments in the same securities as the index.

5) Gold Funds-
These funds make investments in gold-related securities such as physical gold, gold exchange-traded funds, or gold mining firms. They are designed to act as a hedge against inflation and exchange rate changes.

6) International Funds- 
These funds make investments in international assets in an effort to diversify their portfolios and expose investors to various markets.
The benefits of the mutual funds are:-

  • Diversification- The portfolio will have exposure to diverse securities from various industries and won't be centred on any one industry. 
  • Flexibility- If a mutual fund is an open-ended fund, there are no restrictions on where or when one can invest and enter or exit the mutual fund.
  • Low Cost- The low cost of mutual funds is a significant benefit. The low expense ratio of mutual fund schemes is because of major economies of scale.

 

"Content shared is for information and education purposes only and should not be treated as investment or trading advice. Please do your own analysis or take independent professional financial advice before making any investments based on your own personal circumstances."

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