Different Types of Mutual Funds
For the newbie earners, investment into the share market will be a complicated subject, but to start with, mutual funds will be an easy option.
A mutual fund is a professionally managed investment instrument that pools money from investors to purchase securities, bonds, and other assets. Retail investors or institutional investors can invest in mutual funds with easy monthly payments. The combined holdings of financial instruments like securities, bonds, etc in a mutual fund are known as portfolios of the mutual funds. Investors can invest in mutual funds by purchasing the units of this portfolio either in SIP mode or in Lump sum mode.
Mutual funds are managed by professional fund managers, who pool money from different investors, prepare the portfolio by selecting suitable investment instruments, and manages the portfolio on the basis of the performance. The performance of the Mutual Fund is denoted by NAV ( Net Asset Value ). The NAV is calculated by dividing the market value of the overall securities in the portfolio by the total number of units on any particular date.
Are mutual funds are a safe investment?
Mutual funds are a safe investment if choose the right mutual fund from an established fund managing company. Mutual funds investments should be for the long term like a minimum of 5 years, should not be worried about the short-term fluctuations in market movements. Before investing, the investor needs to select suitable funds that sync with investment goals and should have a performance history.
What is the minimum period for mutual funds?
A Mutual fund investment can do even for a day. Most of the mutual fund investments will set a fixed lock-in period, however, funds can be broken any time by paying a small additional penalty charge, for some funds it will be free. The maximum tenure of a Mutual fund is perpetual. It is ideal to continue a Mutual fund for a minimum period of 5 years to get suitable growth and returns.
How to open a Mutual fund Account?
The mutual fund account opening process is very easy if the investor is aware of the process involved. A newbie earner can invest in a Mutual fund mainly in 3 ways.
- Register with an AMC (Asset management company).
- Through Demat account.
- Register with Independent Fund Managers.
A newbie investor can open the account through the online or offline method, both the process is simple. Before investing, first thing is to understand the different Asset management company and independent fund managers and their charges and annual performance in the last few years. Once selected the asset management company, an investor need to select a suitable fund with which to invest as per our investment goals.
Mutual fund investment through AMC (Asset Management Company):
Through the AMC- Asset Management Company, a newbie investor can invest online or offline, most of the AMC encourages the online process and their websites usually highly user-friendly and also they will provide clear steps by step process involved in the investments.
Step 1: Open the AMC website & select suitable Mutual funds.
Step 2: Fill in the personal and investment details like total amount, SIP or Lump-sum, tenure, etc.
Step 3: Complete the Bank Details, KYC details and upload the required documents.
Step 4: Make a payment or Standing instruction if SIP.
Step 5: Account will be ready in few hours, based on their standard operating time.
Mutual funds investment through a Demat account
A Demat account helps to hold all your investments in one place, In India, either with NSDL and CDSL a newbie earner can open the Demat account through a broker. Investing through a Demat account is more secure and easy than any other form of investment. The process of Demat account opening is very simple and we can complete it in a day and now most of the reliable depository participants ( Brokers like Angel broking, Upstocx…) made the process simple and free. As we are getting a trading account from brokers along with the Demat Account, Mutual fund investment can do in few clicks in the portal.
Step 1: If you don’t have a Demat account, open it with any reliable brokers.
Step 2: Once the Demat account is opened, select one among the mutual funds they support as per our investment goal.
Step 3: Make a payment or provide the standing instruction if SIP.
Step 4: Mutual fund investment will ready in few minutes, based on their standard operating time.
Mutual fund investment with independent players
Most of the independent mutual fund managers have long-term investment knowledge and they will provide a sophisticated and easy to use type online platform for the users and also provides in-depth analysis, and comparison data among the different mutual fund schemes. Now, most of the independent players are ready to waive off the transaction charges to get an upfront market positioning.
Step 1: Go to the website of the service provider & create an account with them.
Step 2: Fill in the personal details like KYC and upload the required documents like PAN and get login portal details, where we can select the suitable investments and monitor the performance daily.
Step 3: Select the fund and provide the investment details like total amount, SIP or Lump-sum, tenure, etc.
Step 4: Make a payment online or Standing instruction if SIP.
Step 5: Account will be ready in few seconds, based on their standard operating time.
What are the different types of mutual funds?
There are fundamentally four types of mutual funds available on the basis of asset investment, in addition, there are other 4 types usually available for the investors which are derived from the fundamental types.
- Equity (stocks)funds,
- Fixed-income (bonds)
- Money market funds ( Short term low-risk investment instruments)
- Balanced or hybrid funds(both stocks and bonds).
Currently, considering 4 fundamental and 4 derived funds total of 8 common types of mutual funds are available to the investors, which are mentioned below.
1. Equity Funds
The performance of these funds is fully based on the performance of the equities in the portfolio of the mutual funds. The full amount is invested directly in good performing equities by the fund managers. There are different types of equity funds that specialize in different sectors and performance like value stocks, large-cap stocks, mid-cap stocks, small-cap stocks, etc.
2. Fixed income funds
These funds are invested in financial instruments like bonds and so it provides fixed returns. Financial Instruments like government and corporate bonds provide high-yield than fixed deposits and they guaranteed regular fixed growth.
3. Money market funds
These funds are invested in short-term, low-risk financial instruments like securities, bonds, treasury bills, commercial paper, certificates, etc. These funds guaranteed a fixed income within a short period of time. Money Maker mutual funds are generally a safer investment, but with a lower potential growth instrument.
4. Balanced funds
In Balance funds, total capital will split among the different types of investment instruments. A portion of these funds will invest in equities and other portions in fixed income securities. These funds balance the aim of achieving higher returns with lower risk than pure equity funds. On the basis of the aggressiveness of the fund managers, they decide the percentage of investment in equities and bonds.
5. Index funds
These funds are basically invested on the stock holdings of a specific index like NIFTY, SENSEX, Bank NIFTY, etc. The performance of these funds based on the performance of the INDEX, I.e the value will go up or down as the index moves. The overhead cost of the Index funds is typically lower. The portfolio manager doesn’t need to do much research in selecting the equities, they will pick the stock from the INDEX and invest.
These funds invest in other mutual funds that are performing well. Fund of Funds make asset allocation and diversification like balanced funds and it makes it easier for the investor. The returns of the fund-of-funds tend to be higher than normal mutual funds.
7. Specialty funds
The Specialty funds will invest in specialized mandates such as commodities and real estate. Mostly these funds also select the stocks which are socially responsible. I.e. companies that support environmental stewardship and human rights. Socially responsible funds avoid companies involved in the business of alcohol, tobacco, etc.
8. ELSS Fund-Equity Linked Savings Scheme
ELSS funds are equity funds I.e. about 80% of the corpus of these funds are invested into equity or equity-related instruments. ELSS funds are called tax saving schemes since they offer tax exemption under Section 80C of income tax act up to Rs. 150,000 in a Financial year. ELSS fund has a mandatory lock-in period of three years and taxpayers can avail of tax benefits in this time frame. The income that an investor earns under ELSS at the end of the maturity tenure will be considered as Long Term Capital Gain (LTCG).
A mutual fund is a fund managed by a company that pools money from investors and invests it in securities such as stocks, bonds, etc. The holdings of the mutual fund are called the portfolio. The performance of the mutual fund is fully based on the overall performance of the holdings in the portfolio. Each investor in a Mutual fund owns shares of the overall funds, which represent a part of holdings.
For newbie earners before investing in a mutual fund, it is necessary to understand the different funds and select a fund on the basis of investment goals. It is always advisable to discuss with financial advisors to make a better choice of the funds.
As Mutual funds are subjected to market risk, it is ideal to go for 10-15% of yearly earnings into the mutual funds. To start investing in mutual funds a newbie earner can select either the option of a Lump sum or the SIP as per convenience.
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