what are mutual funds?
To "mutually" purchase stocks, bonds, and other investments, mutual funds allow you to pool your funds with those of other investors. They are managed by seasoned money managers who select the stocks, bonds, and other securities to buy and decide when to sell them. You are exposed to every investment in the fund as well as any income they produce. Mutual funds are categorised into various types based on their investment objectives, asset classes, and strategies.
what types of mutual funds are there?
Following are some common types of mutual funds:
- Equity Funds: These funds primarily invest in stocks or equities. They are further classified into subcategories based on market capitalization, such as large-cap, mid-cap, and small-cap funds, as well as thematic or sector-specific funds.
- Debt Funds: Debt mutual funds invest in fixed-income securities like government bonds, corporate bonds, and other debt instruments. They are relatively lower risk compared to equity funds and provide regular income through interest payments.
- Hybrid or Balanced Funds: These funds invest in a mix of both equities and debt securities, aiming to provide a balanced approach between growth and income. They can be further divided into categories like conservative, balanced, or aggressive based on their asset allocation.
- Money Market Funds: Money market mutual funds invest in short-term, low-risk instruments like Treasury bills, commercial paper, and certificates of deposit. They are suitable for investors looking for safety and liquidity.
- Index Funds: These funds aim to replicate the performance of a specific stock market index, such as the S&P 500 or the NASDAQ. They offer low fees and are considered a passive investment strategy.
- Sectoral or Thematic Funds: These funds focus on specific sectors or themes, such as technology, healthcare, or renewable energy. They allow investors to target specific industries or trends.
- Tax-Saving Funds (ELSS): Equity-Linked Savings Schemes (ELSS) are tax-saving mutual funds that offer tax benefits under Section 80C of the Income Tax Act in India. They have a lock-in period, but they provide potential for long-term capital appreciation.
- Exchange-Traded Funds (ETFs): ETFs are similar to index funds but are traded on stock exchanges like individual stocks. They provide liquidity and real-time pricing throughout the trading day.
what are the benefits of investing in mutual funds?
- Managed by experts: A great amount of research goes into the investment decisions made by skilled fund managers. Investors who might lack the time or experience to handle their investments would especially benefit from this.
- Convenience: The process of investing in mutual funds is very simple. Once you have completed your KYC on the Stack Wealth app you can start an SIP (regular monthly investment plan) or make a one-time investment in 2 minutes.
- Diversification: It pools money from several investors to invest the money in a diversified portfolio consisting of stocks, bonds, mutual funds etc. which helps spread the risk and balances the impact of a negatively performing component
- Liquidity: It can be accessed anytime and can be liquidated at any point of time which helps during emergencies. Redemption typically takes 1-3 business days. This is safer compared to direct stocks/ bonds where redemption is subject to other people selling/buying them.
- Affordability: They have a relatively low minimum investment requirements which allows people from ever income bracket to invest without hesitation. With mutual funds, investors can start with relatively small amounts of money and still gain access to a diversified portfolio of investments.
- Regulation & transparency: Mutual funds in India are stringently regulated. The Securities and Exchange Board of India (SEBI) diligently oversees the adherence of all market players, including Asset Management Companies (AMCs), to regulations that safeguard investor interests. These rules focus on ensuring liquidity, fair valuations, and effective risk management for mutual funds.