A mutual fund is a pool of money created by collecting funds from various investors having a common financial objective. This financial vehicle offers investment in securities such as stocks, money market instruments, bonds, and other assets. The mutual fund investment are managed by professionals who allocate the assets to get capital gains or income for the fund’s investors. The mutual fund portfolio is maintained to meet the investment objective stated in its prospectus.
Not every individual entering the market has a knack for investing. However, mutual funds give a chance to individual investors to get aid from professionally managed portfolios of bonds, equities and other securities. Every shareholder is therefore subject to the gains or losses made by the particular fund. Mutual funds investment is made in various securities and their performances are tracked as a change in the total market cap of the chosen fund. A share of mutual funds represents investments in various stocks or securities and not just a single holding, which is why the price of mutual funds is also referred to as Net Asset Value (NAV). The NAV of the fund is calculated by dividing the total security value in the portfolio by the total amount of outstanding shares.
How are mutual funds classified based on asset class?
- Equity Funds – Equity funds are primarily invested in stocks, therefore, are also known as stock funds. These funds invest the money pooled in from various investors in shares/stocks of various companies. The performance of the invested shares is the driving factor for the gains and losses made. Equity funds are trusted to generate a huge return on investments over the long term and thus, the risk associated with it is also higher.
- Debt Funds – Debt funds are invested in fixed-income securities such as bonds and treasury bills. Some of the fixed income instruments are Fixed maturity plans (FMPs), short term plans, liquid funds, and monthly income plans. Such funds can bring significant returns for passive investors aiming at regular income as it comes with fixed interest rate and maturity date.
- Hybrid Funds – Hybrid funds, also known as balance funds, are a mix of bonds and stocks. These funds bridge the gap between equity and debt funds. The ratio can be fixed or variable. To make it simple, it takes the best of both the funds and allocates assets in stocks and bonds to achieve the set goal. Hybrid funds make a great choice for investors looking to take more risks for debt plus returns benefit.
- Money Market Funds– Just the way investment is made in the stock market, investment is also made in the money market that is cash or capital market. These funds are operated by the government in association with banks and other financial institutions by issuing securities such as bonds, treasury bills, dated securities and certificates of deposits. In these funds, your money gets invested and disbursed in regular dividends by the fund manager. Opting for a short-term plan can reduce the risk of investment on such funds.
Mutual funds investment is of dual nature as it is an investment as well as a share in a company, which means that the investor has partial ownership of the mutual fund company as well as its assets.