What is Mutual Funds and how to invest in it

Mutual Funds are increasingly becoming popular, thanks to the series of ‘Mutual Funds Sahi Hai’ advertisements on television that have made more and more people aware of its benefits. However, a lot of people still don’t know about mutual funds and how do they work. As a beginner investor, it might be a great move to initially start investing in mutual funds, as it does not involve much work. So, the agenda of this post is to tell you ‘what is Mutual Funds and How to invest in it.’

What is Mutual Funds?

what is mutual funds

A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.

Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the total market cap of the fund—derived by the aggregating performance of the underlying investments.

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Types of Mutual Funds

Types of Mutual Funds

Mutual Funds can be classified on the basis of:

Based on Asset classes

  • Equity Funds: These funds primarily invest in stocks and can be actively or passively managed. The highs and lows are determined by the performance of the market. While they offer potentially high returns, they also come with relatively higher risks.
  • Debt Funds: These funds invest in fixed-income securities, including bonds, securities, and treasury bills, among others – these have a fixed interest rate and maturity period. These offer regular income and growth. The growth might not be at par with equity funds, but there’s a steady income flow.
  • Hybrid Funds: These invest in a mix of bonds and stocks and offer the best of both worlds – equity and debt. The ratio can differ; it can be variable or fixed. This works well for investors who want to earn good returns but also want a safety net (that the debt component provides).

Based on Structure

  • Open-Ended Funds: These funds can issue an unlimited number of units to the investor. Also, there’s no restriction on the time period – an investor can thus invest based on their convenience and exit when they like the current NAV.
  • Closed-Ended Funds: The unit capital of closed-ended funds is fixed, and they sell a specific number of units. Unlike in open-ended funds, investors cannot buy the units of a closed-ended fund after its NFO period is over. These funds have a certain maturity tenure. Like any other mutual fund, a closed-ended fund has a professional manager overseeing the portfolio and actively buying and selling holding assets.
  • Interval Funds: These funds take in traits of both open-ended and closed-ended funds. They can only be exited at certain intervals decided by the fund house; they remain closed for the remaining period. No transactions are allowed for a fixed period of time – your money is not locked-in for longer periods unlike in the case of closed-ended funds.

Based on Specialization

  • Sector Funds: These invest in one particular sector. The risk is highest since these funds invest only in specific sectors, but they also potentially deliver great returns. In this case, it is important to stay aware of sector-related trends.
  • Funds of Funds: A Fund of funds is a type of mutual fund which invests in other mutual funds or investment avenues. It is basically an investment strategy that pools in money and invests in other investment funds instead of investing directly in stocks or bonds or other assets.

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Advantages of Investing in Mutual Funds

Here’s why investing in mutual funds is a good idea:

  • LiquidityLiquidity: Except for the case when you decide to go for close-ended mutual funds, it is easy and hassle-free to buy and exit a mutual fund scheme. Close-ended funds issue a fixed number of units – this means that new investors cannot enter, nor can the existing investors exit until the term of the scheme ends.In the case of ELSS Mutual Funds, although they are open-ended funds, they have a lock-in period of three years.
  • DiversificationDiversification: Mutual funds do come with their set of risks since they are impacted by the performance of the market. Funds invest in asset classes – be it equity, debt, and others and, within asset classes in different sectors and company sizes.For instance, equities will buy stocks from different sectors. If one asset class does not perform well, the other can help with better returns, so that the investor faces minimum loss.
  • Expert managementExpert management: This is another reason why mutual funds are preferred – it does not require investors to do any research – it is the fund manager who takes care of it and makes decisions on what needs to be done with your investment. He also decides on whether you should hold certain stocks or not, and for how long.This makes it critical to have an experienced fund manager, and one of the biggest prerequisites before you zero in a mutual fund house.
  • Financial goalsFits all financial goals: There are multiple mutual fund schemes available today that cater to specific life goals, such as children’s education or marriage, retirement, or buying a house. To begin with, you must identify the time frame of your goals.For instance, you want to save up for a vacation in the next year or buy a gadget, these are considered short-term goals. To achieve these goals, you can invest in Liquid Funds or Ultra Short Term Funds…. read more
  • Cost efficiencyCost efficiency: An investor also has the option to go for mutual funds that have low expense ratios. You can check the expense ratios of a range of mutual funds and then decide on the one that fulfills your financial goals.The expense ratio is the fee that is charged by the mutual fund house to manage your funds.

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How to Invest in Mutual Funds

How to invest in mutual funds

Investing in Mutual Funds is extremely easy nowadays. You can either contact your bank or a portfolio manager who can then guide you about the right kind of mutual funds.

The other way is to invest directly in Mutual Funds through online platforms and brokers. For this, you must first do a proper research about the Mutual Funds. Each fund varies in performance and objectives and hence you must choose the one one which aligns best with your financial goals.

The advantage of investing directly is that you don’t have to pay the fees and hence your profits are large but in case you aren’t sure about how to go about investing in mutual funds then you can surely approach a portfolio manager.

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Best Mutual Funds to Invest

  • Axis Bluechip Fund
  • Mirae Asset Large Cap Fund
  • Parag Parikh Long Term Equity Fund
  • Kotak Standard Multicap Fund
  • Axis Midcap Fund
  • DSP Midcap Fund
  • Axis Small Cap Fund
  • SBI Small Cap Fund
  • SBI Equity Hybrid Fund

These are some of the best overall performers which you can trust and start investing in.

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What is Mutual Funds and How to Invest in It

Prashant Tiwari

Hi Peeps!! I am Prashant, a blogger by passion and an entrepreneurial enthusiast. I have written more than hundreds of articles and on a variety of issues and have fallen in love with helping people by means of meaningful blogging and articles. My aim is to add value to all my reader's life. If you feel that this post has benefitted you in any way then do share it with others to help them. Happy Reading!!

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