The First-Time Investor’s Simple Guide To Investing in Mutual Funds

Investing in Mutual Funds is becoming an increasingly popular investment option in India. With interest rates on fixed deposits steadily decreasing, many people are trying to find investment options that will give them an increased chance of getting good returns for their money.

What is Mutual Fund?

Mutual Funds are investment vehicles where a collective pool of funds is utilised for market investments.

Money invested by a large number of people is gathered together in a common pool. A fund manager then uses the money in this pool to create a diversified portfolio of investment options that suits the specified goals of the Mutual Funds scheme .

Beginner's Guide to Investing in Mutual Funds

So, you are considering investing in Mutual Funds. However, you are new to the game and do not understand the jargon or the way these investments work. So, let us focus on Understanding Mutual Funds, so that you can have a stepping stone to a diverse investment portfolio.  

Mutual Funds- Basics of Investments

Mutual fund schemes are broadly divided into two main categories - open-end and close-end Mutual Funds.

Mutual Fund Categories

All mutual fund schemes invite investors through a New Fund Offer (NFO). Investors can buy units in that fund during this period of NFO. After the NFO period ends, open ended and close ended funds operate in different ways

Open Ended Funds

In these types of Mutual Funds, investors can sell and buy units whenever they want. The mutual fund company itself buys and sells the units and the corpus of the scheme can change accordingly. The scheme can offer new units for sale or buy back units from investors. Open Ended MF schemes also have no definite maturity dates.

Close Ended Funds

Investors can buy units directly from these funds only during the NFO period. After this, no one can enter or exit the funds. However, close ended funds are listed on the stock exchange and you can buy or sell units in the secondary market. The corpus of the close ended funds never varies. Only existing units can be offered for sale in the secondary market.

Types of Schemes

Mutual Fund schemes are designed with specific goals in mind, and these goals have to be defined in the offer document of these schemes. The three main types of MF schemes are:

Equity Funds

These funds invest all or at least 65% of the fund pool in equity and related instruments. Generally, all MF schemes invest in several stocks across different sectors. This diversified portfolio gives increased chance for growth and also mitigates risk. Equity funds invest mainly in shares. So, the returns can be unpredictable. But if the fund performs well, investors can realise optimal capital growth.

Debt Funds

These invest mainly in debt instruments like corporate FDs, government or company bonds and other such securities. Here, there is less risk than involved in equity investments, but also less potential for large capital growth.

Balanced Funds

These have a mixture of equity and debt investments, to balance risks and returns.

There are other variations in MF schemes, but the ones we’ve discussed are the main divisions. We hope this guide for mutual fund has helped you understand the basics of Mutual Fund investments.