What is mutual fund? How many types are there in 2023 If you do not have a very good knowledge of the intricacies of the stock market, but want to invest in it and earn profit, then mutual funds are a better option for you. The manager of Mutual Funds invests your money in a very careful manner, in such a way that you suffer minimum losses and get good returns. In this article, we will know what is a mutual fund? How many types are there? And what are their benefits? What are mutual funds How many types of Mutual Funds?
What is Mutual Fund
What is mutual fund? How many types are there in 2023 Before explaining Mutual Fund let us know a small English definition of it. it is- A mutual fund is a pool of money managed by a professional fund manager for the purpose of better investment and higher returns.
Mutual Funds means mutual fund. In a little more simple language, shared amount. Actually in mutual funds, the money of many people is put together in the stock market or investment schemes. This is how in mutual funds, your shared money is collectively invested. Whatever profit he gets, that too is distributed according to the investment shares of everyone. What is share market and how does it work? 2023
Where and how to invest the money of the investing public is done by a team of expert people. This team works under a Fund Manager. Professionals who understand the market and stock market are kept in that team. Keeping in view the past record and future prospects of the companies and their stocks, the team invests people’s money in such a way that it can generate good returns with minimum losses. In this way, Mutual Funds provide you the convenience of getting the benefits of investment by investing less money, even in high-cost investment measures. Let us make this process more clear with a simple example Read More
Let us assume that there is a packet of 20 chocolates whose total cost is Rs.1000. There is a condition attached to this packet that he can only take the whole box. Now let’s assume that one person is not in a position to buy it completely, or is not willing to buy the whole packet at once. In such a situation, 5 people jointly plan to buy it and buy it by depositing Rs.200 each.
Here we see that each friend gets four chocolates each. Think of a mutual fund as a whole packet of chocolates and consider each chocolate as a unit. So in this way each friend gets 4 units of mutual fund. His money is invested in those 4 units and he will get only the returns from those 4 units. Now let us also understand some key terms related to Mutual Funds
mutual fund unit
A mutual fund comprises a variety of investment instruments. It can also contain many types of shares and can also contain many types of bonds. Similarly derivatives and treasury bills may also be included. This whole porridge of investment is divided into a few numbers. Out of this 1 part is called a unit or a unit of that mutual fund.
For example, there is a mutual fund ABC, in which 20% is invested in stock A, 10% is invested in stock B. 20% is in Stock C and 5% is in Stock D. 30% is invested in government bonds. 10% is invested in cash derivatives and 5% in treasury bills.
When a person gets a unit of this mutual fund, he will be entitled to get ownership in all these types of investments according to their investment ratios. Returns will also be eligible based on the combined performance of all the investments. Now let us assume that the price of one such mutual fund unit is Rs.50. And you have invested a total of Rs.1000. So you will get ownership of 20 units of that mutual fund.
asset management company
Many Mutual Fund companies are running in India. These Mutual fund companies are also called Asset Management Companies or AMC. AMC, in fact, is a company registered with SEBI, which makes mutual fund schemes and collects money from people. The same company also appoints the fund manager.
mutual fund scheme
Mutual fund companies operate many mutual fund schemes. Every scheme has a different objective of investment. For example, one scheme invests only in the shares of big companies, while the other will invest only in small companies. A third scheme can invest money only in government bonds. In this way every company starts many mutual fund schemes with different objectives.
fund manager
The responsibility of investing money in every scheme is given to a fund manager. One person can also be the fund manager of many schemes. Any one mutual fund company or asset management company has many fund managers. Apart from this, the company also has its own research team to work on the investment strategy.
What is NAV
The price of a unit of a mutual fund is called Net Asset Value (NAV). This Net Asset Value (NAV) itself tells the performance of that mutual fund scheme. Suppose you want to invest in mutual funds. You buy a unit of Mutual Fund in NFO Period for Rs.10. The NAV of this Mutual Fund will be Rs.10 during the NFO period. Now let’s also assume that like you, 9 more people have bought the unit of Mutual Fund.
In this way that mutual fund scheme has collected 100 rupees by selling a total of 10 units. Now your fund manager buys some shares in these 100 rupees. Suppose, the cost of your Rs 100 Investment becomes Rs 150 after one year. So now the cost of each unit of that Mutual Fund has become 150/10=15 rupees. That is, the net asset value (NAV) of each unit has become Rs.15.
Now suppose that 5 more people want to invest in the same mutual fund scheme. But, now the NAV of the unit of that mutual fund scheme has become Rs.15. That’s why they will now have to pay Rs 15 for its 1 unit. The company will be able to collect Rs 75 more by selling 5 units to these new five people. Now the total money with the company is 150+75=225 rupees. But, the total number of units became 15. A mutual fund company can increase its corpus for investment by issuing new units.
This does not affect the investment of old investors. Because new investors get these new units at a new price. Mutual fund companies keep announcing NAV from time to time. You can get any NAV information through the websites of AMCs or through AMFI Portal.
What is NFO or New Fund Offer?
These mutual fund companies launch new mutual fund schemes from time to time. The launch of a new mutual fund scheme in the market is called a new fund offer (NFO). Every new fund is given a name and is advertised. Mutual Fund companies also issue prospectus of NFO. This prospectus gives information about the objective, details and fund management team of that scheme.
Initially you can buy a unit of any mutual fund scheme for Rs.10. For the initial period of investment, the price of this unit remains Rs 10 only. This period without change in price is called NFO period (new fund offer period). During this period, the Mutual Fund Company does not invest your money, that is, it does not invest in any stock. After the NFO period is over, your fund manager starts investing out of the pooled money. From here, whatever increase or decrease in the value of this total investment, accordingly the price of your unit also increases or decreases.
Category of Mutual Fund
Mutual funds are of two types according to the flexibility of investment and redemption.
- Open-Ended Mutual Fund Scheme
- Close-Ended Mutual Fund Scheme
Open Ended Mutual Fund scheme
Open Ended Mutual Fund scheme is such a scheme, in which the investor can invest and withdraw money at any time. Since money keeps coming in and out of such a scheme, there is no fixed amount with such a scheme. The fund manager has to take investment decisions based on the circumstances.
Close Ended Mutual Fund Scheme
In close ended mutual fund scheme, you can invest money only at the time of NFO. After this, you can withdraw your money only on maturity. However, units of close ended mutual fund schemes can be bought and sold in the secondary market. The mutual fund company has nothing to do with such transactions, nor does it affect the deposits of that mutual fund scheme. Before the NFO of a Mutual Fund scheme, the AMC has to decide whether it is launching an Open-Ended Mutual Fund Scheme or a Close-Ended Mutual Fund Scheme.
Types of Mutual Funds
There are several types of mutual funds depending on their investment portfolio. SEBI has categorized mutual funds into 5 types. We are giving their brief introduction below.
Equity Fund | equity fund
Most of the money of equity mutual funds is invested in shares. The fund manager of such schemes has to invest at least 65% of the amount in shares only. He can keep the rest of the money in bonds or in the bank. Now since equity mutual funds are invested in shares. So their return is also available according to the share market. That is, there is the highest possibility of earning but the risk is also high in it.
Long term capital gains tax is not levied on income from equity funds, while short-term capital gains are included in tax calculation by adding them to your income.
Debt Fund
The amount of this type of mutual fund is mainly invested in bonds and corporate fixed deposits. With a debt mutual fund, it is a mandatory condition that at least 65 percent of its money should be invested in bonds or bank deposits. For example government bonds, company bonds, corporate fixed deposits and bank deposits etc. The remaining amount can be invested in equity ie shares.
Now since debt funds are invested in bonds that give fixed returns, the risk involved is comparatively less. But you should not expect tremendous benefits from them. By the way, good debt funds can give you better returns than bank fixed deposits. If you redeem your debt fund after 3 years, then you have to pay long term capital gains tax on it. The rate of this long term capital gains tax will be 10 percent without indexation and 20 percent with indexation.
If you sell your debt mutual fund units before 3 years, then you will have to pay short-term capital gains tax on the income from this. This short-term capital gain will be added to your total income and then tax will be calculated according to your tax slab.
Balanced Mutual Fund
Balanced Mutual Fund invests your money in both stocks and bonds. As you know that the return is more in the stock but they are risky while the bond is safe but the return is less in it. Therefore, by investing money in these two, this mutual fund tries to give good returns along with safety.
However, these mutual funds offer lower returns than equity mutual funds that invest in pure stocks and are less safe than debt funds that invest in pure bonds. In good times of the market, these funds neither give very high returns like Equity Funds, nor do they give you very poor returns like Equity Funds in bad times of the market. These funds adopt a balanced approach in investment and invest in stocks and bonds depending on the market condition.
The inclination of ‘balanced’ funds in India is also seen more towards investment in equity ie shares. Most invest at least 65 percent of their portfolio in stocks. They do this so that they can get maximum help in saving tax. Since, such funds, which invest more than 65 percent in stocks, are considered as equity mutual funds. In this case, long term capital gains tax will not be applicable on them and they can avail more tax benefits.
There are other funds that can technically be called balanced or hybrid funds, but mutual fund companies do not add the word ‘balanced’ to their name.
These funds invest less than 65 percent of their portfolio in stocks. Their investment in shares can be 20 to 30 percent. Long term capital gains tax is also applicable on the income from such funds. In India, such funds are in the form of monthly income plans. These provide you a fixed income every month. Such funds lay more emphasis on the safety of your capital and give almost fixed returns.
Tax Saving Mutual Fund (ELSS)
Tax Saving Mutual Funds are also called Equity linked saving scheme or ELSS. Since the government gives tax exemption on the money invested in Equity linked saving scheme or ELSS, hence they are called Tax Saving Mutual Funds. This is one of the best ways to save tax. The money invested in ELSS gets locked in for at least 3 years. That is, you cannot withdraw the money invested in them before 3 years.
ELSS money is mainly invested in shares, so they can often give you handsome returns. However, like other equity mutual funds, they are also risky.
ELSS leads to tax saving under section 80C. As such investments have been kept in section 80C of income tax, in which your tax liability is reduced by investing money. The more money you invest in them, the more money is deducted from your taxable income. PPF investment, Home loan principal, NSC, tax saving FD, insurance, tuition fees and EPF contribution etc. are also entitled to tax exemption facility under section 80C.
ELSS has the least lock in period among all these tax saving investments. That is, if you are thinking of saving more tax by jamming your money for a short period of time, then Tax Saving Mutual Funds ie ELSS can be the best option.
Index Fund
Index funds also invest money in stocks like other equity funds. But it is different from equity fund in the sense that it does not invest money in stocks chosen by itself. Rather, he invests money by copying the structure of the market indices. Sensex, Nifty, CNX-200, CNX 500 etc. are market indices.
Shares of certain companies are included in these indices only. Each stock has a fixed weight-age in that index. The index that an index fund follows, it invests money in all the stocks included in it. Money is also invested in stocks in the same proportion as those stocks are given weight in the index.
For example if there is an index fund which replicates sensex. So, like sensex, he will also invest in those 30 shares only. He will also give weightage to each share like sensex. That is, for such index fund also, like Sensex, reliance, TCS, ITC etc. will be the highest weightage shares.
Due to exact copying of Sensex’s portfolio, this index fund will also give returns like Sensex. However, you should not expect the exact same returns from index funds. Because copying may take some time. This is called tracking error in investment parlance. Since the role of the fund manager ie mutual fund company is very less in this copycat fund. Therefore, the fund management charge in index funds is also very less. You can buy index funds from mutual fund companies through mutual fund distributors.
Exchange Traded Fund or ETF
Exchange Traded Funds (ETFs) are basically Index Funds. But these index funds can be bought and sold directly on the stock exchange. Like stocks, the price of exchange-traded funds also changes continuously during market hours. You can buy exchange traded funds from a stock broker. You do not need a mutual fund distributor to buy them, that is, to invest money in them.
hedge fund
Hedge funds are somewhat liberal funds. They are not bound under any regulation. Nor can retail investors invest in them. Only a select group of high net worth individuals collectively invest in hedge funds. The fund manager of hedge funds also invests money in stocks with an aggressive strategy. The fund manager of hedge funds can invest money anywhere in the world.
He can invest money anywhere in equity, bond, gold or commodity as he wants. The fund manager of the hedge fund works only for profit. In this, the investor cannot withdraw his money easily. Investors are asked to keep the money for at least 1 year.
How to choose the best mutual fund
I think now you must have become familiar with the basic information of Mutual Fund. Now if you make up your mind to invest in them, then you will also have a desire to know which are the best or Top 10 Mutual Funds in a particular category. But, this task is not very easy. It is not possible anyway to give exact information about the future of any Investment Plan. However, we give you brief information about some such tools which will help you in taking a better decision for investing in Mutual Funds.
Choose a good fund manager to invest
The fund manager is actually in the form of a driver of a mutual fund scheme. He provides the right vision to the team managing the entire investment. He takes the final decision on your investment. So first of all it is important that you choose a better and reliable fund manager.
View the average of the last total years and see the average performance of each year
Another better way to know the performance of any mutual fund scheme is to check its performance for the last few years. Keep in mind here that do not take investment decision only on the basis of records of any one or only certain years. This can mislead you. In the short term, the performance of a sluggish scheme can also appear on top. It can give poor performance again and again.
The best would be to look at its average performance over a long period of time as well as year by year (Year by Year) performance. If it looks great both ways, then only decide to invest in it.
Here we are telling an easy method for this. Choose any date of the year. Let’s say it’s 30th November. Now see the NAV of that mutual fund scheme on 30th November of last year. Now calculate how his NAV is increasing every year. Compare this increase with the benchmark index. If it is better than the benchmark index then investment can be made in this scheme.
Also check the category of risk
You should also be familiar with the Risk Category of mutual funds. Your mutual fund should not be very fast reacting to any ups or downs of the market. To know the Risk Category of a scheme, you should look at that time period, when there have been rapid changes in the market. See how the NAV of that mutual fund scheme has changed along with the market. Is it showing more ups and downs than the ups and downs of the market? If yes, then it is better for you to stay away from it.
Choose a professional fund house only
It is also wise to invest money in Mutual Fund through a Professional Fund house. A good and professional fund house also has a good research team of its own. This team selects good stocks based on some best standards. The advantage of this is that the performance of your investment does not depend on whether a single person is in the company or not. Even if the fund manager of such a fund house leaves him midway, the team of the fund house is ready to handle the situation.
conclusion
So friends, this was the information about Mutual Funds For other useful information related to money, see our article
