What are Mutual Funds?

Mutual Funds are pools of money collected from many investors for the purpose of investing in stocksbonds, or other securities. Mutual funds are owned by a group of investors and managed by professionals. In other words, a mutual fund is a collection of securities owned by a group of investors and managed by a fund manager.

Common Types of Mutual Funds There are six common types of mutual funds:

1. Money Market Funds

Money market funds invest in short-term fixed-income securities. Examples of short-term fixed-income securities would be government bonds, Treasury bills, commercial paper, and certificates of deposit. These types of funds are generally a safer investment but with a lower potential return than other mutual funds.

 

2. Fixed Income Funds

Fixed income funds buy investments that pay a fixed rate of return. This type of mutual fund focuses on getting returns coming into the fund primarily through interest.

 

3. Equity Funds

Equity funds invest in stocks. Furthermore, there are different types of equity funds such as funds that specialize in growth stocks, value stocks, large-cap stocks, mid-cap stocks, small-cap stocks, or a combination of these stocks.

 

4. Balanced Funds

Balanced funds invest in a mix of equities and fixed-income securities – typically in a 40% equity 60% fixed income ratio. The aim of these funds is to generate higher returns but also mitigate risk through fixed-income securities.

 

5. Index Funds

Index funds aim to track the performance of a specific index. For example, the S&P, or TSX. Index funds follow the index and go up when the index goes up and goes down when the index goes down. Index funds are popular as they typically require a lower management fee compared to other funds (due to the manager not needing to do as much research).

 

6. Specialty Funds

Specialty funds focus on a very small part of a market such as energy, telecommunications, healthcare, industrials, etc.

Why Invest in Mutual Funds

Mutual funds are the most convenient mode of investment even for those who are new to investing.
The few main reasons to start investing in a mutual fund are :

  • Convenient:
    When one invests in stocks, there is a lot of research required before and one also needs to put in a lot of time and efforts. With mutual funds, there is minimal paper work and is thus convenient in a lot of ways. With online platforms these days, you can buy a mutual fund as easy as it is to purchase flight tickets! You can simply visit your broker’s website online and place your order. Furthermore, you can also easily transfer your funds from one mutual fund to another.
  • Easy diversification:
    When you invest in mutual funds your risks are diversified. How? Let’s say one of the funds that you have purchased drops low in the market. However, your overall investment is not affected because you have invested in other funds as well. Purchasing stocks of different companies diversifies the risk.
  • Provides access to inaccessible assets:
    With mutual funds, you can invest with an amount as low as Rs.100. Thus, even if you do not have the capital to purchase a single stock, mutual fund enables you to do so.
  • Well regulated and transparent:
    Mutual funds are government regulated so you need not worry about anybody taking away your money and running away. The entire process is transparent and done with legality.
  • Professional management:
    A team of professional managers and researchers manage mutual funds. These fund managers handle your investments professionally and help you take proper investment decisions.

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