Mutual Funds: Meaning & Types

This post is a  Mutual fund wiki to help you with key resources and tools you require to understand mutual funds. In other words, you shall become familiar to the different types of mutual funds in India.

Mutual Funds: Meaning

Mutual Funds as the name suggests are the collection of funds from numerous small investors. As an individual, it is very difficult for an investor to buy a variety of stocks and bonds because of the limited investment. Since individual investment in stocks lacks diversity, it is a high risk or unstable investment.

So, mutual funds offer the benefit of diversity. This means, the investment of the individuals is divided into different types of stocks and bonds from different sectors. As a result, loss in any particular bond is easily compensated by other bonds. This is how mutual funds offer a safer option for the small investors. Mostly, for those who cannot afford to invest in a variety of bonds.

Mutual fund Wiki: Types of Mutual Funds

1. Equity Funds:

This type of mutual fund involves investment in stocks or equity. This category of mutual funds has a potential of significantly higher returns. But, these also carry a very high risk with them. It is not ideally suited for a short term investment. So, any downfall in the market can result in loss of investment. However, the prospects are better with a longer term of the investment.

2. Money Market Funds:

This type of mutual fund looks for short-term fixed-income investment options that can offer stable returns. The money is invested in secure bonds such as government bonds. The returns in this type of mutual fund are not great. But, this involves a lower risk. It is ideally suited for those investors who are looking for a safer investment option without significant returns.

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3. Fixed Income Funds:

This type of mutual fund ensures a reasonably fixed rate of returns by investing in funds that offer fixed returns. The money in this category of funds is invested in high-yield corporate bonds and government bonds. The amount of risk in Fixed Income Funds mainly depends on the share of corporate bonds.

Government bonds provide guaranteed returns in the form of interest earned. But, the returns from corporate bonds are largely dependent on market growth.

4. Balanced Funds:

This category of mutual funds try to provide a balance between equity funds and fixed income funds. Hence, the investment is carefully divided between equity funds and fixed income funds according to the requirements of the investor.

In fact, balanced funds are the most popular types of mutual funds. Since they offer some level of protection to the investors during volatile market conditions. Equity funds ensure that the investor is able to take advantage of the market during growing periods. While fixed income funds minimize the risk during tough market conditions.

Now, these are the four main types of mutual funds. Some other types of mutual funds are speciality funds, index funds, fund-of- funds etc. The amount or risk may vary from one type of mutual fund to another. But, all types of mutual funds are regulated by standard government authorities in different countries.

In India, Security and Exchange Board of India (SEBI) formulates the rules and regulations that govern investment in mutual funds.

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Mutual Funds: Managed by Experts

Mutual funds meaning, Mutual funds typesAll types of mutual funds are managed by financial experts and professionals. This is indeed one of the main factors that make mutual funds an ideal option for inexperienced or initial investors. An individual does not need to have any idea about choosing and investing in stocks and bonds to take advantage of the growing market.

Moreover, the Mutual Funds Regulations by SEBI provide complete transparency about the different bonds and stocks.

So, you can easily know where your money is invested in a mutual fund along with the complete profile of the experts that manage the funds.

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Investing in Mutual Funds: Benefits

Here are the key benefits of investing in mutual funds in India

1. Diverse Portfolio: Mutual funds distribute the investments of the individuals into numerous funds. So, you are offered a diversified portfolio as an individual investor.

2. Complete Transparency of Investment: The rules and regulations by the government authorities allow every investor to monitor his or her investment. You can get details on the names and the amount invested in each fund. Thus, an individual enjoys complete transparency while investing in mutual funds.

3. Well regulated: There are very little chances of frauds while investing in Mutual Funds. Since all types of mutual funds are regulated by government bodies in each country such as SEBI in India.

4. High Liquidity: Mutual Funds can be easily sold or bought at any point of time. So, basically there’s no lock-in period unlike some of the other investment options such as fixed deposits.

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5. Professional Management: These are professionally managed funds handled by a team of experienced individuals.

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 Investing in Mutual Funds: Drawbacks

1. Lack of Control over Investment: You do not decide which stock or security to purchase. You have to rely on your fund manager.

2. Returns are Unpredictable: The returns in mutual funds are market dependent. You can’t get assured or fixed income. It varies as per fluctuations in the volatile markets.

3.  Fees: All types of mutual funds involve small fees that need to be paid for managing funds irrespective of your gains or losses.

So, now you clearly know the meaning of mutual funds. You have also become aware of various kinds of mutual funds available in India. This shall surely guide you to select the right mutual funds as per your financial priorities.

Do you like investing in mutual funds? Or you are satisfied with investment in fixed deposits only? Mutual fund or fixed deposit: which of these is better investment? Do share your feedback on it.

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