How Does Money Grow In Mutual Funds?

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Have you often come across mutual funds advertisements and wondered what they are? Do you want to learn more about mutual funds but don't know where to start? Are you frustrated with the lower dividend rates of traditional investment options? Do you want to invest your money in mutual funds but are apprehensive of the risks? mymoneykarma is here at your rescue.

mymoneykarma breaks down the seemingly difficult concept of mutual funds for you and lets you embrace investing in mutual funds. Let's get started.

What are Mutual Funds?

A mutual fund is built by collecting capital from different investors and invested in company shares, stocks, or bonds. A mutual fund is handled collectively to earn the highest returns.

Is It Risky to Invest in Mutual Funds?

Contrary to popular belief, investing in mutual funds is not similar to giving away your savings to a thief. Mutual funds provide you choices with different levels of risk and returns. You can choose the fund depending on your investment objective and goals. If you want capital appreciation, you can opt for equity mutual funds from a long-term horizon. But if your aim is a low-risk investment and returns that are higher than bank deposits, you can look at debt funds.  You must consult an advisor who can help you understand your risk appetite.

Benefits of Mutual Funds

Mutual funds can provide you schemes that can meet your different financial goals. The key benefits of investing in mutual funds are given below.

  1. Safety: Mutual funds offer you a wide choice of schemes that suit your financial objectives and risk appetite.

  2. Liquidity: Mutual funds are almost as liquid as your bank deposits. You can withdraw and get the money from your account in only a few days.

  3. Returns: There are many types of mutual funds schemes in which you can invest. These have characteristically higher returns than other investment options of their league.

  4. Diversification: Mutual funds allow you to participate in schemes across investment class and also across various companies and institutions. This spreads the risk, and you can enjoy the benefits of diversifying.

  5. Convenience: On opening an account, that account becomes synonymous with your identity in the mutual funds market. They also allow you to invest at your convenience, withdraw, or make payments directly through your bank.

  6. Outsourcing of fund management: By investing in mutual funds, you can outsource fund management expertise at a very nominal expense ratio of 2.25% to 1.05% for equity funds and 2.00% to 0.80% for debt funds.

Types of Mutual Funds Schemes

There are many types of mutual funds schemes in which you can invest. We have described them in brief below. 

Open-ended Schemes

An open-ended fund or scheme is continuously available for subscription and repurchase. Such schemes do not have a fixed maturity period. You can conveniently buy and sell units at the Net Asset Value (NAV)  prices, which are declared daily. The essential feature of the open-end schemes is liquidity.

Close-ended Fund / Schemes

Close-ended funds or schemes have fixed maturity periods. They are open for subscription only for a specific period at the time of launch of the scheme. You can invest in the scheme at the time of the initial public issue and either purchase or sell units of the scheme on the stock exchanges where the schemes are listed. Some schemes also provide an option of selling back the units to the mutual fund via regular repurchase at NAV-related prices to provide an exit route.

Growth / Equity Oriented Schemes

Growth funds aim to provide capital appreciation over the medium to long- term. Such schemes usually invest a significant part of their funds in equities. Equity-oriented funds have higher risks as compared to other funds. Such schemes provide varied options to investors such as dividend option and capital appreciation, and the investors may choose an option according to their preferences.

Income / Debt Oriented Schemes

Income funds aim to provide a steady income to investors. These schemes usually invest in fixed income securities such as bonds, government securities, corporate debentures, and money market instruments. These funds are less risky compared to other equity schemes. Such funds are not affected because of fluctuations in equity markets. Opportunities for capital appreciation are also limited in debt-oriented funds. The NAVs of these funds are affected by changes in interest rates.

Balanced Funds

Balanced funds aim to provide both growth and regular source of income as these schemes invest in both equities and fixed income securities. The proportion of investment is indicated in the offer documents. These funds are suitable for people seeking moderate growth. These people usually invest 40-60% in equity and debt instruments. Balanced funds are affected by fluctuations in share prices.

Money Market or Liquid Funds

These funds are also income funds, and they aim to provide fund liquidity,  capital preservation, and moderate income. Liquid funds invest exclusively in safer shorter investment instruments like treasury bills, commercial paper, and inter-bank call money, certificates of deposit, government securities, etc. Returns on these schemes tend to fluctuate much less as compared to other funds. These funds are suitable for corporate and individual investors as a means of investing their surplus money for short periods.

Gilt Funds

Gilt funds exclusively invest in government securities. Government securities usually don't have any default risks. The NAVs of these schemes tend to fluctuate with changes in interest rates and other economic factors similar to the income or debt oriented schemes.

Index Funds

Index funds mimic the portfolio of particular indexes such as the BSE Sensitive index and S&P NSE 50 index (Nifty). The schemes invest in the securities in the same weight comprising of an index. NAVs of such plans would rise or fall with the rise or fall in the index. Essential disclosures in this regard are hence made in the offer document of the mutual fund scheme. There are also exchange-traded index funds launched by the mutual funds which are traded on the stock exchanges.

In The End

Mutual funds can diversify your investment portfolio. They provide exciting returns and might make you a seasoned investor. The risks are worth the returns. In case you have doubts, you should read the mutual funds' scheme documents very carefully and consult with a financial advisor before investing.


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