All Investments are aimed at making your money grow to satisfy long term or short term financial goals. A mutual fund investment could prove to be a profitable proposition in achieving these goals. A mutual fund is an investment vehicle that pools money from various investors with similar financial goals. The money pooled is utilized by the fund manager to purchase and trade, stocks (equity), bonds (debt) and other securities. The gains or losses realized, along with any interest or dividend earned, is passed on to the investors. Mutual funds use the Net Asset Value or the NAV to measure the price per share of the fund.
With a small amount of money, investors can enter the equity market, through mutual funds. The funds invest in diversified securities, reducing the risk in an investor portfolio. Professionally managed mutual funds use expert research and investment analysis in their decisions thus helping investors, who lack the time and experience, to generate profit for their portfolio. Certain mutual funds also provide various tax advantages to investors under Section 80 C of the Income Tax Act.
Mutual funds basically invest in stocks, bonds and other securities such as commercial paper, treasury bills and call money. Based on the asset mix, funds are categorized into equity, debt and hybrid schemes. Equity schemes invest 85 percent to 95 percent in equity shares and the balance in government or debt instruments. A hybrid scheme, also called a balanced scheme, invests in a healthy mix of both debt and equity. A debt scheme invests primarily in government instruments and bonds.
Funds are also available as either open ended or closed ended. In an open ended fund, entry or exit into the fund is on a continuous basis, whereas a closed ended fund ensures investors are locked in the scheme for a specified period, after which the units could be withdrawn. Closed ended equity schemes like Equity Linked Savings Scheme or ELSS offer tax advantages under section 80C of the income tax act.
Units in a mutual fund can be purchased, by filling up forms available through, brokers, banks, agents, financial planners or directly from the fund. While choosing a fund care must be taken to consider the fees and expenses of the scheme. Another attractive means of entering a mutual fund is through a systematic investment plan or SIP. Under this, the investor pays regular installments to the fund and receives units of the scheme according to the NAV of the fund at that particular time. Once the minimum number of installments is complete, the units may be redeemed or retained like any other mutual fund.
- A mutual fund is a flexible and transparent investment vehicle with advantages like diversification and liquidity.
- As per his financial goals, an investor could choose between an equity, debt or balanced fund.
- Investors may enter mutual funds by depositing a lumpsum or using the SIP option. Various sources are available through which investors could invest in a scheme.