Meaning of investment
Investing is the process of allocating funds to an asset or committing capital. An investment is the acquired amount which is required for generating daily living. Investment refers to mechanism used for generating future income. It includes the purchase of bonds, stocks or property.
There are lot of options, for investment some are as following:
- Mutual Funds
- Exchange-Traded Funds
- Certificates of Deposit
- Retirement Plans
What is Mutual Fund?
A mutual fund is a type of financial instrument that collects a pool of money from many investors to invest in securities like stocks, bonds, money market instruments, and other assets and offer them returns on their capital. Mutual funds are managed by fund managers, who allocate the fund’s to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus. There is a charge of a small fee for managing the money. Mutual funds are an ideal option with regular investors who do not know much about investing. Investors can be chosen as per their financial goal to achieve from the investment. It is regulated by Securities Exchange and Board of India (SEBI) and managed by the professionals.
What are different types of mutual funds?
There are different types of mutual funds options available based on different specific goals. There are different types of mutual funds:
Types of funds based on asset class:
- Debt funds : Debt funds are the investment in assets like government securities and corporate bonds. These funds offer reasonable returns to the investor and are relatively less risky. These funds are ideal for the people who look for the steady income and do not want any risk.
- Equity funds : Equity funds are the options in which the investment of money in stocks. Capital appreciation is an important objective of this fund. Equity funds are linked to market so these funds have higher risk.
- Hybrid funds : Hybrid funds are the mix of investment in both equity and fixed income securities. It is based on the balancing the allocation between equity and debt.
Types of funds based on investment objective:
Mutual funds can also be classified basis investment objectives.
- Growth funds
The main objective of growth funds is capital appreciation. These funds have significant portion of the money in stocks. These funds can be more risky due to high exposure to equity so it is good to investment option in them for the long-term.
- Income funds
Income funds provide the investors with a stable income. These are debt funds that invest in bonds, government securities and certificate of deposits, etc. They are suitable for different -term goals and for investors who take low risk.
- Liquid funds
Liquid funds invest money in short-term money market instruments like treasury bills, Certificate of Deposits (CDs), term deposits, commercial papers etc. Liquid funds help to save the surplus money.
- Tax saving funds
Tax saving funds are the kind of funds which offer the tax benefits under Section 80C of the Income Tax Act. One who invest in these funds, get deductions up to Rs 1.5 lakh each year. Equity Linked Saving Scheme (ELSS) are an example of tax saving funds.
Types funds based on structure:
- Open-ended mutual funds
Open-ended funds are those where an investor can invest at any point of time. These funds are bought and sold at their Net Asset Value (NAV). Open-ended funds are liquid so you can redeem your units from the fund at your convenience and needs.
- Close-ended mutual funds
Close-ended funds have pre-defined maturity period. Investors can invest in the funds only when it is new launched and can withdraw the money from the fund only at the time of maturity. These funds are not liquid because trading volumes are very less.
What are investment goals?
Mutual funds are designed to achieve specific financial goals which vary from investor to investors in the best possible way.
Investment goals can be:
- Short-term goals (1-3 years)
- Medium-term goals (3-5 years)
- Long-term goals (5 years or more)
How to invest in mutual funds
Investing in mutual funds is not a big deal at all, you can invest right from your home. Some steps to be followed for investment in mutual funds are:
- Sign up for a mutual fund account
- Complete your KYC formalities
- Enter the necessary details as required
- Identify the funds you like to invest based on the financial goals
- Select the fund and transfer the required amount
- Instructions can be passed to the bank in case you invest in a SIP each month.
Advantages of Mutual Funds
- Mutual funds are systematic investment options available.
- It offers better Liquidity of funds for the investors.
- The investors have the option for diversified investment in different funds according to the need of person.
- It is very convenient and quick option to invest.
- Mutual funds are managed by the professionals called Fund Managers.
- There are funds available which are safe to invest.
Mutual funds are easy to understand and a smart investment choice for every type of savers and investors under the IRDAs. Mutual funds are simple to use and these are for everyone who wants to invest but one needs to be careful to select the best funds according to their goals.