What Are Mutual Funds?
Mutual funds is kind of an investment option available in the market where the amount invested by the investors is pooled in so as to earn returns on their capital over a period of time.
Mutual fund is a special kind of investment through which you can invest in various types of investments together, i.e. you can do diversified investment by investing at one place.
The company which opens mutual funds is known as the Asset Management company. So basically what happens is , the prospective investors give their money to asset management company and that company invest all the money collectively at different places like bonds , cryptocurrency, bitcoins, etc. under the guidance of the experts appointed by them and they collectively get a return rate from these different places out of which a small percent of around 1% to 2% is kept as a profit by the asset management company and the rest is given back to the investors as per the return rate.
HDFC, HSBC, ICICI , Aditya Birla, Reliance, TATA , these are the few examples of the companies and Banks who have started their own asset management company.
All the companies start different kind of mutual funds in large numbers. For example ICICI has started more than 1200 mutual funds.
So how risky is your mutual fund and how much return you’ll get out of that depends on the mutual fund that you have invested in. Mutual funds can give the return of 4% and can give more than 30% too and it can be available at both zero risk as well as high risk because all of this depends on where the asset management company is investing your money. If that company is investing your money in stocks then it will be more risky but you can expect higher returns but if the company is investing your money in government bonds then it will be less risky.
Types of Mutual Funds
- Equity mutual funds:
In equity mutual funds your money will be invested in the stock market. So naturally in this category of mutual funds both risk and return are high. Now in which type of a company you are investing in the stock market , if it’s a big company then it’s called Large Cap Equity Funds, if it’s a small company then it is called as Small Cap and in the same way Mid Cap Equity fund.
Big company doesn’t have much risk as compared to the smaller ones but big companies won’t have growth rate as high as it can be for the smaller companies. So both risk and return are less in big companies.
ICICI prudential blue chip fund is an example of a large cap equity fund. If you invest here for a year after a year your expected return is of 11.7% but if invest for 5 years then your expected return can be of 19.7%
Diversified Equity Fund:
Here the investment is done in large , medium and small cap or it is done in different companies.
Equity Linked Savings Scheme :
ELSS is a special type of equity fund where you can save the tax on it’s profit. In this case , the fund manager purposely invest in those options where there is a high return as well as high risk.
IDFC tax advantage is the an example of ELSS funds with the expected return of 11.3% in a year.
Sector Mutual Fund:
Here the investment is made specifically in such companies which belongs to a big sector like Agriculture sector or for say Logistics or Transport sector.
One of the example for this is UTI transportation and Logistics funds.
Since all the investment is done in one sector , these funds are more risky because if the sector goes down everything depends on that.
Index Funds :
These are passively managed funds that is no agent of AMC is looking at where to invest money. They are passively managed according to the fluctuation in the market rate. These are completely dependent on SENSEX / NIFTY.
- Debt Mutual Funds:
These are those mutual funds that are invested in the debt investment. Debt instruments are bonds, debentures, certificates of deposits.
Liquid funds are those funds that can be easily converted into cash. it has a very low risk and can also be considered as an alternative for a savings account.
Asset liquid fund is one of the examples here where you will get the return of approx. 7.1% in a year.
These are those funds where investment is done on the government-issued bonds. Since the government borrows money in this case, so there is a zero risk.
Fixed Maturity Plan:
This can also be considered as fixed deposits because it has very low risk similar to FD and it is done for a fixed period of time.
- Hybrid Mutual Funds:
Basically it is a mixture of Debt and equity mutual funds. Some people want to invest in stock market and at the same time want to invest some amount in the Debt instruments so in that case they can invest in Hybrid Mutual funds.
Balanced Savings Fund:
If most of the money is invested in a debt fund then it will be called balanced savings funds. The approximate ratio is 70:30, i.e., 70% of your money is invested in a low-risk debt fund and 30% is in the equity funds.