What are mutual funds?
When you buy a mutual fund, your money is combined with the money from other investors, and allows you to buy part of a pool of investments. A mutual fund holds a variety of investments which can make it easier for investors to diversify than through ownership of individual stocks or bonds.
To many people, Mutual Funds can seem complicated or intimidating. We are going to try and simplify it for you at its very basic level. Essentially, the money pooled in by a large number of people (or investors) is what makes up a Mutual Fund. This fund is managed by a professional fund manager.
It is a trust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities. Each investor owns units, which represent a portion of the holdings of the fund. The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s Net asset value or NAV Simply put, a Mutual Fund is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
What are the different types of mutual funds?
Mutual funds are the safest and the most convenient way of investing in the markets when you do not have the time and expertise.
The equity mutual funds have generated consistently higher returns. The investment in mutual funds can be a lump sum or monthly SIP for an amount as low as Rs. 500.
- High-Risk factor
- Affected by movements in NSE/ BSE
- Fund houses charge expense ratio (1.05%).
Liquid Mutual Fund
The option carries the least amount of risk and is for persons who have idle money for short period of time.
The mutual fund invests your money in the highly liquid short term instruments like the bank’s CD, T-bills and commercial papers generally with a maturity period of less than 91 days.
- Lower returns when compared to FD
- High risk factor.
Ultra Short Term Debt MF Plans
Unlike, liquid MF the money is invested in bonds and other instruments with maturity more than 91 days and less than 1 year.
Ultra ST debt MF does carry interest rate risk, are not so liquid and hence gives you higher returns.
Are there any tax benefits for investing in mutual funds?
Investments in mutual funds do classify for tax benefits. For specific provisions please refer to the respective offer documents.