A mutual fund scheme collects money from investors and buys and sell stocks collectively.
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. These investors may be retail or institutional in nature.
Mutual funds have advantages and disadvantages compared to direct investing in individual securities. The primary advantages of mutual funds are that they provide economies of scale, a higher level of diversification, they provide liquidity, and they are managed by professional investors. On the negative side, investors in a mutual fund must pay various fees and expenses.
Types of mutual funds in India Again, we are trying to make it as simple as possible in explaining to you the different types of mutual funds.
- Equity Funds: Equity funds invest most of the money that they gather from investors into equity shares. These are high risk schemes and investors can also make losses, since most of the money is parked into shares. These types of schemes are suitable for investors with an appetite for risk
- Debt Funds: Debt funds invest most of their money into debt schemes including corporate debt, debt issued by banks, gilts and government securities. These types of funds are suitable for investors who are not willing to take risks. Returns are almost assured in these types of schemes
- Balanced funds: Balanced funds invest their money in equity as well as debt. They generally tend to skew the money more into equity then debt. The objective in the end is again to earn superior returns. Of course, they might alter their investment pattern based on market conditions.
- Money Market Mutual Funds: Money market mutual funds are also called Liquid funds. They invest a bulk of their money in safer short-term instruments like Certificates of Deposit, Treasury and Commercial Paper. Most of the investment is for a smaller duration.
- Gilt Funds: Gilt Funds are perhaps the most secure instruments that are around. They invest bulk of their money in government securities. Since they have backing of the government they are considered the safest mutual fund units around.
Role in capital Market Development
Investing in mutual funds have become hugely popular since 2003. To add to it and bring awareness among investors and non-investors alike, AMFI (Association of Mutual Funds in India) has started ‘Mutual Funds Sahi Hai’ campaign. It is interesting to see that majority of the salaried population of India tends to invest in Mutual Funds. One of the major reason behind it is the diversification of the fund schemes that allows more investors to come in and invest. Also, investing Mutual funds provide tax exemption for the salaried class and thus, they opt towards investing in Mutual funds.