Basics of Mutual Funds

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A Mutual Fund is a registered corporate body that collects money from individuals/corporate investors and invests the same in variety of different financial instruments or securities such as equity shares, Government Securities, Bonds, Debentures, Gold, etc. Mutual Funds can thus be considered as financial intermediaries in the investment business that collect funds from the public and invest on behalf of the investors. Mutual Funds issue units to investors. The appreciation the portfolio or securities in which the Mutual Fund has invested the money leads to an appreciation in the value of the units held by investors. The investment objectives outlined by a Mutual Fund in its prospectus are binding on the Mutual Fund Scheme. The investment objectives specify the class of securities a Mutual Fund can invest in.

The Schemes offered by Mutual Funds can vary from fund to fund. Some are pure equity schemes; others are mix of equity and bonds. Investors are also given the option of getting dividends, which are declared periodically by the mutual fund, or to participate only in the capital appreciation of the scheme. Most Mutual Funds also offer features such as Systematic Investment Plans (SIPs), Systematic Withdrawal Plans (SWPs), monthly income options and dividend reinvestment options.

Types of Mutual Funds: There are three basic types of mutual funds. They are Money Market Funds, Bond Funds and Stock or Equity Funds

  1. Money Market Funds: Money market funds have relatively low risks, compared to other mutual funds and most other investments. The money market consists of short-term debt instruments. This is a safe place to park your money. You may not get great returns, but you don’t have to worry about losing your principal.
  2. Bond Funds: Bond funds, also known as income funds, invest in corporate and government debt with the purpose of providing income through dividend payments.The primary objective of these funds is to provide a steady cash flow to the investors.
  3. Equity Funds: Equity funds, also called Stock funds, are the funds that invest primarily in stocks, usually common stocks. They are the most volatile of the three, with their value sometimes rising and falling sharply over a short period. But historically equity funds have performed better over the long term than other types of investments. One of the greatest advantages of equity funds is instant diversification. Also, it is usually easier and less expensive to invest in equity funds than to buy each and every stock in a fund’s portfolio. The equity funds are further broadly classified as aggressive growth funds, growth funds, equity income funds, diversified equity funds, equity index funds, value funds and specialty funds.
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