What Are Mutual Funds?
Mutual Funds are pools of money collected from many investors for the purpose of
investing in stocks, bonds, 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.
There Are Six Common Types Of Mutual
Why Invest In Mutual Funds
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
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
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.
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.
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).
Specialty funds focus on a very small part of a market such as energy,
telecommunications, healthcare, industrials, etc.
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.
A team of professional managers and researchers manage mutual funds. These
fund managers handle your investments professionally and help you take proper