A mutual fund is created when a fund manager collects money from investors with a common investment purpose. The objective of the fund manager in creating this pool is to generate high revenue by investing in different financial instruments. Unlike traditional methods of investment, mutual funds earn higher returns. However, a mutual fund investor must have a high-risk appetite.
What is a mutual fund–
A mutual fund is an instrument that invests in stocks, bonds, money market instruments, etc. Fund managers operate a mutual fund pool. They are responsible for collecting money, allocating assets, and generating capital gains.
Profits and losses made by a fund are divided proportionately between the shareholders. Mostly, a mutual fund’s performance is tracked based on the movements of the total market cap of the fund. The value of a fund is determined by the purchased securities’ performance.
Investing in mutual funds and investing in stocks are different. A mutual fund’s investor doesn’t get the voting rights compared to a stock investor. It is because a mutual fund’s shares stand for investments in different securities or stocks. However, a share of stock signifies one holding.
A mutual fund’s share price is known as Net Asset Value per share. The Net Asset Value (NAV) is determined by dividing the total securities’ value by the total amount of outstanding shares. An investor can purchase or redeem a mutual fund’s share based on its current NAV.
Types of Mutual Funds-
Mutual funds are classified in different types based on their returns and risk. Here are some categories of mutual funds-
- Equity Funds
An equity fund is a fund that has an equity exposure of 65% or more. It is a mutual fund that invests mostly in stocks. Equity funds generate high returns, but the intake of risk is high too.
- Debt Funds
Unlike equity funds, debt funds provide stability to a portfolio and are less risky. Investments in debt mutual funds are made in government securities such as bonds and treasury bills. However, the returns with debt funds are lower than equity funds.
Equity Linked Savings Scheme is one of the best mutual funds for increasing tax-efficiency. It helps an investor claim up to Rs. 1.5 Lakh in tax deduction under Section 80C. ELSS is a great instrument for long-term capital appreciation.
When to Invest in Mutual Funds
Mutual funds have entered many investors’ portfolio as they are highly flexible and are available in various options. Whether an investor has a low-risk or high-risk appetite, there is a mutual fund category for every investor type. Hence, many are becoming accustomed to investing in mutual funds.
People who aspire to invest in mutual funds not only wonder about which fund to invest but also about when to invest. There is no ‘Right’ time to enter the world of mutual funds. However, investing from an early age has its advantages. It is because mutual funds earn returns based on a compound rate of interest. Hence, a person who invests for a longer term can generate higher profits.
There are many factors at play that determine the performance of a mutual fund and predicting the right time might even cost you valuable time. Hence, you should not procrastinate investing in mutual funds.