INSUBCONTINENT EXCLUSIVE:
Even a sum as small as Rs 500 invested regularly over a period can build a good corpus through the power of compounding
ET explains what mutual funds are and how it can help in meeting your financial goals.
What is a mutual fund?A mutual fund is an investment
vehicle in which investors pool money to earn returns over a period of time
The money collected is managed by a fund manager who is an investment professional
The money is invested in different securities such as bonds, stocks, gold and other assets and seek to provide potential returns
Any gains or losses that come in from these investments are shared by investors in proportion to their contribution to the fund.
What are
the different types of mutual funds?There are broadly three kinds of funds: debt funds, equity oriented funds and hybrid funds
Debt funds invest in assets like government securities and corporate bonds
These funds aim to offer reasonable returns to the investor and are considered relatively less risky
Equity funds invest in stocks and look to give investors capital appreciation
Since the returns on equity funds are linked to market movements of stocks, these funds have a higher degree of risk
Hybrid funds invest in a mix of both equity and fixed income securities
The proportion of equity could vary between 0-100%.
What are the benefits of investing in a mutual fund scheme?It is very difficult for many
individuals to manage their own money
A mutual fund gives you professional fund manager for a small fee
This fund manager buys or sells companies, analyses them and tracks them regularly.
Secondly, mutual funds help you diversify your
When you invest only in a single security, you could risk a loss if the market crashes
However, you can avoid this problem by investing in different asset classes and diversifying your portfolio
If you were investing in stocks and had to diversify, you would have to select at least 10 stocks carefully from different sectors
This can be a lengthy, time consuming process
For instance, if you invest in a mutual fund that tracks the NSE Nifty you would get access to as many as 50 stocks across sectors in a
This could reduce your risk to a large extent.
Are returns from mutual funds assured?Mutual funds cannot guarantee returns to investors as
they are linked to market performance
So, if the market is on a bull run and it does exceedingly well, this is reflected in the value of your fund
However, a poor performance in the market could negatively impact your investments
Unlike traditional investments ,mutual funds do not assure capital protection
Hence investors should do their research and invest in funds that can help you meet your financial goals.