What is a Mutual Fund?
It is a trust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities. Each investor owns units, which represent a portion of the holdings of the fund. The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value or NAV.
What are the various types of mutual funds?
Various types of Mutual Fund schemes exist to cater to different needs of different people. Largely there are three types mutual funds.
1. Equity or Growth Funds
These invest predominantly in equities i.e. shares of companies
The primary objective is wealth creation or capital appreciation.
They have the potential to generate higher return and are best for long term investments.
Examples would be
“Large Cap” funds which invest predominantly in companies that run large established business
“Mid Cap funds” which invest in mid-sized companies. funds which invest in mid-sized companies.
“Small Cap” funds that invest in small sized companies
“Multi Cap” funds that invest in a mix of large, mid and small sized companies.
“Sector” funds that invest in companies that are related to one type of business. For e.g. Technology funds that invest only in technology companies
“Thematic” funds that invest in a common theme. For e.g. Infrastructure funds that invest in companies that will benefit from the growth in the infrastructure segment
Tax-Saving Funds
2. Income or Bond or Fixed Income Funds
These invest in Fixed Income Securities, like Government Securities or Bonds, Commercial Papers and Debentures, Bank Certificates of Deposits and Money Market instruments like Treasury Bills, Commercial Paper, etc.
These are relatively safer investments and are suitable for Income Generation.
Examples would be Liquid Funds, Short Term, Floating Rate, Corporate Debt, Dynamic Bond, Gilt Funds, etc.
3. Hybrid Funds
These invest in both Equities and Fixed Income, thus offering the best of both, Growth Potential as well as Income Generation.
Examples would be Aggressive Balanced Funds, Conservative Balanced Funds, Pension Plans, Child Plans and Monthly Income Plans, etc.
What is Systematic Investment Plan (SIP)?
Systematic Investment Plan (SIP) is an investment route offered by Mutual Funds wherein one can invest a fixed amount in a Mutual Fund scheme at regular intervals– say once a month or once a quarter, instead of making a lump-sum investment. The installment amount could be as little as INR 500 a month and is similar to a recurring deposit. It’s convenient as you can give your bank standing instructions to debit the amount every month.
SIP has been gaining popularity among Indian MF investors, as it helps in investing in a disciplined manner without worrying about market volatility and timing the market. Systematic Investment Plans offered by Mutual Funds are easily the best way to enter the world of investments for the long term. It is very important to invest for the long-term, which means that you should start investing early, in order to maximize the end returns. So your mantra should be - Start Early, Invest Regularly to get the best out of your investments.
