Every generation has a different outlook towards life which extends to the way they approach their finances as well. For instance, until the end of the 20th century, the generational outlook was one of seeking safety and security in life, which extended to the kind of jobs that the previous generation sought and the asset classes in which they parked their savings. But the current generation has their priorities cut out and they seem to look beyond traditional savings schemes like FDs and are prioritising investing in mutual funds. 

This paradigm shift in the approach towards finances and wealth creation has led to a surge in the number of people looking to invest in a variety of investment vehicles. According to estimates by brokerage firms, an average of 13 Lakh Demat accounts have been opened in India every month since April 2020. A vast majority of these new holders are first-time investors and the lack of awareness may sometimes be the reason for investors’ scepticism when investing in mutual funds. This blog helps you understand what mutual funds are, their types, how they work and alleviates your concerns about investing in mutual funds.

Investing in Mutual Funds

What Are Mutual Funds?

A mutual fund is a type of investment vehicle. In mutual funds, money from various investors who share common investment goals is pooled together. The funds accumulated are managed by a professional fund manager to invest in a variety of securities such as equities, bonds, and short-term debt. Diversification of your investment portfolio is key to handle the risks and mitigate the impact of the market’s uncertainty due to the rise and fall of the prices of the assets. Mutual funds work on the principle of diversifying the portfolio by investing in securities from different asset classes. This balancing act of spreading your investment across sectors helps you lower the risks. 

Understanding Mutual Funds

Mutual funds pool the money from several investors and invest the capital into equities, bonds, and other securities. The collection of the holdings of the mutual fund is called a portfolio. The worth of a mutual fund company is directly proportional to the performance of securities it invests in. Investing in a mutual fund makes you a part-owner of the portfolio it holds. 

Here is a simple example that will help you understand the concept of mutual funds. 

Let’s say you plan to buy a candy bar but the store owner only sells the box instead of an individual candy bar. The box has 8 candy bars and is priced at INR 80. You have only INR 20 with you so you along with your 3 other friends put INR 20 each and buy the box of candy bars. Now since the contribution made by each member was INR 20, the candy bars are divided equally and everyone gets 2 candy bars which are 2 units per investor. To check the price of one candy bar or one unit, divide the total price of the box by the number of units which is 80/8 =10. Now if you multiply the cost per unit (10) with the number of units (2), you will get the initial investment made by each investor.

So, all 4 friends are unitholders and own the box collectively which makes each of them the part-owner of the box. 

Types of Mutual Funds

Mutual funds provide investors with the opportunity of investing in a variety of products. Based on your financial goals you can choose the type of mutual fund you wish to invest in. While there are several advantages of investing in mutual funds, determining which mutual fund to invest in can be a bit challenging for new investors.

Types of mutual funds based on their structure and investment objective are listed below.

Two broad categories of mutual funds based on their structure are

  1. Open-ended funds – As the name suggests, this type of mutual provided the buyer with the flexibility of buying and selling their shares or units of the fund at any time.
  2. Closed-ended funds – As opposed to open-ended mutual funds, the units in closed-ended mutual funds can be redeemed after a fixed interval. The money from investors is raised only once.

Based on the investment objective, mutual funds are divided into three major categories. 

  1. Equity funds – These funds invest the capital in the shares of a company and are dependent on the stock market performance. These are recommended for investors with a high-risk appetite willing to invest for the long term.
  2. Debt funds- These funds invest the money into the debt instruments such as government securities, bonds, etc. These are highly recommended for investors who are looking for minimal risks and stability. 
  3. Balanced funds- These funds invest in both debt and equity funds. These are ideal for investors looking to spread the risks and reduce the exposure to market volatility. 

Conclusion: A mutual fund is an ideal choice for investors who are looking to grow their wealth but do not have huge capital for investment. Mutual funds are managed by professional fund managers who implement the objectives of the scheme hence you do not have to spend time researching the market yourself. Understanding the different types of mutual funds can help you choose the funds which are aligned with your financial goals. Trading platforms such as the Dhanush app by the Ashika group can help you start your journey of investing in mutual funds. While you can invest in a variety of securities on your own, investing in mutual funds is a better option because it provides all the benefits in a package. 

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