My interest in mutual funds started right from my college days. I could never participate in d discussions wid my friends when ths topic came..this led me to learn about mutual funds.
What is mutual funds?
Its an investment collected from a pool of investors. The money collected from investors are invested in diversified tradings to minimize 'risk'. It is a financial intercessor that allows investors to pool their money for a predetermined investment objective.
How does it help?
Generally the middle class is very risk averse when it comes to investing in stocks. This is due to the inherent fear of markets crashing and therefore loosing out all the money. Its very obvious that every boom is followed by a 'crash'. When 'overpriced' stocks in market 'correct' their value it leads to fall.therefore people may lose their investment.
this is where mutual funds come into play. An AMC (Asset Management Company) pools money from investors and invests them on behalf of the investors..This money is invested in various asset classes like equity, bonds, debentures, government securities etc.
Key aspects of Mutual Funds
The most important aspect of safety in mutual funds is 'diversification'. The money invested by investors in invested across different types of investment. When one investment goes down, another might come up. This reduces risk considerably..
The advantage here for the investor is that he/she need not invest a large amount of money. They also can invest on a monthly basis. Even a small amount that is invested is diversified in various forms of investment and as a result, there is more safety.
Types of mutual funds and risks associated with it.
Equity fund: Since the returns are directly related to the performance of the company it is a 'high risk' mutual fund investment. But again if we invest in trusted firms like TCS, Hindustan motors etc, the risk is much lower.
Diversified funds: Invests in companies spread across sectors. Risk is less as if one sector fails others are still productive.
Tax Saver fund: Offers tax benefits.
Gilt fund: safety is my priority if i were to invest here. Primarily government funds.
Sector fund: Investing in equity shares in a particular industry.
Hedge fund: very high risk funds that adopts highly speculative trading strategies. Though very risky, if the company performs well you will hit the jackpot! :)
Debt/Income fund: Investment in bonds, debentures, government secutities etc. Provides regular income. Less risky.
Balanced fund: a balance in both equities as well as fixed income based investments. main aim here is to have a stable income as well as capatilizing on high returs (but risky) equities.
Liquid fund: as the name suggests, it aims to provide easy liquidity. investment is generally done short term.
Nowdays all banks have mutual funds departmnet, therefore it would be a good idea to split your savings between mutual funds and recurring deposits. This will ensure higher value for your savings.. :)
