What are Mutual Funds?

What are Mutual Funds?

Mutual Funds are pooled investments made by different investors across the capital market and is managed by financial professionals collectively in exchange for monetary fees. Professional money managers allocate the funds' investments in a way that provides capital gains. The prerequisite need for an investor to attain an effective mutual fund's portfolio is to strengthen its structure so that it matches the stated investment objectives.

The most adept thing about mutual funds is that it offers individual investor access to professionally created portfolios consisting of equities, bonds, and other securities. It also allows the shareholders to willingly participate in the gains and losses of the funds. These funds can be easily redeemed as per the requirement of Net Asset Value (NAV). For deriving the NAV of any fund, the financial analysts divide the total value of the securities given in the portfolio by the total number of exceeding shares.

As the name suggests, mutual funds are pooled investments that are mutually agreed and managed by multiple professionals. With mutual funds, the investor gets an option to invest money with a qualified portfolio manager or an institution whose main aim is to fetch the maximum possible returns on the money invested.

When an individual invests in a mutual fund, they are also investing in the companies that are part of that particular fund and hence they also hold ownership in those companies. The real value of mutual funds of any company is dependent on its securities and its ability to attract external shareholders. Even an ordinary mutual fund consists of hundreds of different securities which imply that the shareholders of these funds can gain a significant proportion of diversification at a very low price. To sum up, mutual funds are the best investment vehicle for beginners or individuals who are not well-versed with investments and trends in the market.

Investment and an actual company are the constituents of a mutual fund. It seems quite strange but an example can support this statement. For an assumption, when a shareholder buys the share of Apple Inc. then he is also entitled to be a part of the company and a constituent member of its assets. In a very similar manner, a mutual fund investor not only invests in the company but also a partner is ownership and shares. The real value of mutual funds of any company is dependent upon its securities and in its ability to get fetch by external shareholders.

Even an average mutual fund consists of hundreds of different securities which imply that the shareholders of these funds can gain a significant proportion of diversification at a very low price.

*Mutual funds are subject to market risk, please read the offer letter and documents.*

Types Of Mutual Funds

The Security Exchange Board of India (SEBI) has categorized mutual funds in India under four broad categories:

Equity Based Scheme- This scheme is more inclined towards investment in equities and is best for long term goals. The funds are invested in the stocks of big and small companies, which bears risk at times but also gives higher returns.

Based Scheme-Debt This scheme is debt-oriented and the funds are invested in the debts and other instruments that give fixed returns to meet the short-term needs of the investors. This scheme is more favorable for short term gains.

Hybrid Based Scheme- Hybrid scheme is the best of both worlds- equity and debt. This scheme combines the best paying securities of both equity and debt, making it a great basket of mixed financial instruments.

Solution Oriented Scheme- This scheme is more focused on the results to a particular long term or short term problem like retirement goals or children’s education fund.

In any mutual fund company, an investment advisor or fund manager hire some analyst which help the shareholder in investing the money in right type of shares and also perform market research. The role of fund accountant is to calculate the fund’s net asset value.

Mutual funds are classified into different types like money market funds, fixed income funds, equity funds, balanced funds, index funds and specialty funds. Moreover, the risks associated with all these funds remain constan

In the field of financial securities there is a common statement that mutual funds are subject to market risks. Before allotting the funds to the people these financial institutes inform shareholders about the certain types of mutual funds who might carry less risk with nominal profits or high risks with high profits.

Money Market Funds

Money market funds are generally considered to be safer investments as compared to other mutual funds. This may be due to the lower potential return on investment which implies that the investors do not need to take higher risks. These funds are often called short term fixed income securities such as government bonds, treasury bills (T-bills), commercial paper and certificates of deposit (CDs). The Canadian money market funds’ net asset value is stabilised at $10.

Fixed Income Funds

Fixed income funds are most suitable for individuals looking for fixed return on investment. These funds are classified as government bonds, investment-grade corporate bonds and high yield corporate bonds. By investing the money in these bonds one can remain hopeful of getting funds on a regular basis. Moreover high yield corporate funds are considered to be more risky than holding government or investment-grade bonds.

Equity Funds

If someone is aiming to invest in those set of specific bonds which grow at a faster rate as compared to other money market funds or fixed income funds, equity funds are most favourable. Due to this reason equity funds are associated with greater risks. Equity funds invest in stocks and many of them differ according to their specialisation.These funds consist of value stocks, large- cap stocks, mid- cap stocks and small- cap stocks and are known for paying exceptional dividends.

Balanced Funds

For those set of shareholders who aim to gain a fixed amount of income from securities and also fall under the category of aggressive investors who are ready to invest in equity bonds, then investing in balanced funds is the right choice for them. Splitting money among the different kinds of investments is the method which is adhered by these set of balanced funds. The foremost feature of these funds is that they carry more risks than fixed income funds and are accounted to be less risky than pure equity bonds.

Index funds

These are those set of categorised mutual funds which have lower costs as portfolio managers do not need to do much research while convincing the shareholder to invest in these shares. Just like the value of mutual funds inclines and declines with time, the value of index funds can go up or down in a similar manner. The main objective of these funds is to record the performance of definite index like S and P/TSX Composite Index.

Speciality Funds

People who are longing to become real-estate giants for a very long time, their dream can come true by investing in specialty funds. These funds are specially focused on real estate, commodities or other socially responsible investment. It is said that a socially responsible investor may invest in those set of companies which support environmental stewardship, human rights and diversity. These shareholders are generally known for avoiding the companies that are into manufacturing of alcohol, tobacco, weapons or are into gambling.

The predominated investment objectives of all these mutual funds is to modify the fund’s assets and investment strategies. Those set of people who invest in stocks are known to be equity shareholders. Whereas those set of people who invest in both stocks and bonds are known for investing in balanced funds.

In the field of financial securities there is a common statement that mutual funds are subject to market risks. Before allocating the funds to the people these financial institutes inform shareholders about the certain types of mutual funds which might carry less risk with nominal profits or high risks with high profits.

Direct Investing v/s Mutual Fund Investing

Direct Investing: When you invest in stocks on your own on the basis of your personally compiled research rather then taking the assistance of a fund manager operating a mutual fund.

Mutual Fund Investing: When you invest through a mutual fund in which you just have to choose a mutual fund of your liking and invest money into it. From there the mutual fund manager will take over. He will do the research, investing and all the other tasks and is likely to take some sort of a monetary incentive for it.

Direct Share Trading VS Equity Mutual Funds

Direct Share Trading Equity Mutual Funds
High Investment Amount Needed Low Investment Amount Is Needed
Lack Of Expertise (Investor) Professional Expertise (Fund Manager)
Inadequate Information On Time High Quality & Timely Information
Low Diversification High Diversification
High Risk Low Risk
Low Flexibility High Flexibility
High Transaction Costs Low Transaction Costs (Exit Load)
Low Transaction From Broker High Transaction (Fund House)
Lack Of Management By Invester Full Time Fund Management Team
Investor Engagement Is Required Investor Engagement Is Not Required