What are Mutual Funds? Meaning with Examples of Mutual Funds

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Investment vehicles like mutual funds pool money from many different investors and use it to make investments in stocks, bonds, and other types of securities. Let us understand what is mutual funds meaning, definitions, examples of mutual funds in this topic.

Investing in mutual funds is one of the most popular ways for beginners and passive investors to increase their money today, largely because they are simple to grasp. According to the most basic definition, a mutual fund is a collection of investments that may include stocks, bonds, short-term loans, or a combination thereof. These funds are generally picked, invested in, and managed by one or more investing experts.

Mutual Funds Definition

A mutual fund is a type of investment strategy that collects money from investors and then invests that money in a variety of different assets. The money raised from diverse investors is typically invest in financial assets such as stocks and bonds, as well as money-market instruments such as certificates of deposit and money market funds. Asset classes can be divided into three basic categories: equity, debt, and money-market instruments. These investments can be made for a variety of time periods, including the short term, medium term, and long term. The risk factor of the funds is also determine by the type of asset in which they are invested.

In simple words, mutual funds are the funds created with the mutual requirement needs of the Investor. It is a basket created with varieties of investment options. similar to basket of shares, bonds, money market or a mixture of all instruments or a basket of shares based on sectors like Bank, IT, Infrastructure, FMCG, etc or basket of diversified shares.

In other words, you have a rough idea where you want to invest your money (for example: shares, sector shares, bonds, money market, etc) but you are not aware of the markets, trend, entry exit criteria, stop loss much and what companies to invest; then mutual funds fit to your requirement. It is much likely as you go to real estate consultant to assist you in your real estate investment needs. Here every funds are manage by financial expert knows as Fund Manager which handles your investment based on your selected mutual funds.

Who Regulates Mutual Funds in India?

Mutual funds are regulated by Securities and Exchange Board of India (SEBI) and also ensure polices and norms to be followed by fund managers, ensuring that the money which investor invests are safe and health and it doesn’t contain any type of fraudulent activities. SEBI does not guarantee returns on fund for investor, However returns on fund correspond to the market performance. Asset Management Company (AMC) is the one which launches mutual funds, however company can handle investor’s money or they can heir expertise third party as a Asset Management Company to handle investor’s money to get best returns.

What is NAV in Mutual Funds?

Fluctuations of shares are refer by price (Stock Price) whereas in case of mutual funds. They are recognize as a Net Asset Value (NAV) which is use to track your fund’s performance (Mutual Fund NAV or Mutual Fund Prices).

Example of Mutual Funds (Portfolio Scenario-1)

Let us understand with examples of mutual funds how does a mutual fund work. Assume that we wish to buy SBI Pharma Fund – Growth which belongs from sectorial based growth stock funds. Asset allocation consists of investing 90 to 95 percent into Pharmaceutical stocks and remaining 5 to 10 percent into Cash or Money Market. Let us evaluate on the note when we say Pharmaceutical sector are best in investment returns based on past performance.

Fund Name: SBI Pharma Fund (G)
Fund Family: SBI Mutual Fund
Fund Class: Sector – Pharma & Healthcare
Asset Allocation: 90 – 95% Investment in Pharma Shares
NAV (As on 01-Jun-2009) :26.00
NAV (As on 01-Jun-2015) :134.00
Returns after 6 years :515%
Recommendable Sector :Best performing mutual funds

This Example Means

Looking at the above table, It is fairly clear that if you invest around Rs.10,00,000/- you can accomplish to get Rs.51,50,000/- after 6 years which can be classified as high yield mutual fund. Equity or Sector based funds are classified as best funds to buy in long run. These type of investments are also categorize as one of the equity investment strategies or retirement investment strategies.

Example of Mutual Funds (Portfolio Scenario-2)

Assume that we wish to buy ICICI Prudential Long Term Plan – Retail Plan (G) which belongs from Debt Funds or Bond Funds. Asset allocation consists of investing 90 to 95 percent into Government Securities Bond and remaining 5 to 10 percent into Cash or Money Market instruments. Let us check the performance of the Bond Mutual Funds based on past returns.

Fund Name: ICICI Prudential Long Term Plan – Retail Plan (G)
Fund Family: ICICI Prudential Mutual Fund
Fund Class: Debt Long Term
Asset Allocation: 90 – 95% Investment in Government Debts
NAV (As on 01-Jun-2009) :19.00
NAV (As on 01-Jun-2015) :32.00
Returns after 6 years :168%
Recommendable Sector :Top last mutual funds to buy

This Example Means

Looking at the bond past performance returns, It is understandable that investing in bonds around Rs.10,00,000/- can achieve you to take home Rs.16,80,000/- after 6 years which cannot be recommend for long term investing strategies. Since bond funds / fixed income funds are best short term investments for risk free returns. You can additional investigate on online shares investment types of mutual fund websites which can best fit to your requirement needs.

Different Types of Mutual Funds

Well in India, Mutual Funds are categorized based on various fundamentals. Funds to be fond of like:

  • Debt Fund
  • Sectorial Funds
  • Equity Mutual Fund
  • Balanced Fund
  • ELSS or Equity Linked Savings Schemes
  • Open Ended Fund
  • Close ended Fund

Apart from these there are many more. You can read the types of mutual funds in detail based on the classification in our another topic.

Pros / Advantages of Mutual Funds

MFs are then subdivided into subcategories based on the investment objective that the fund is attempting to achieve. Whereas some investors are looking for capital preservation and predictable returns, others have a high risk tolerance and are looking for huge profits. Here are some of the advantages and pros of mutual funds that we should be aware of:

Diversification

Beginners and experienced investors alike should be aware that placing all of their eggs in one basket (i.e., putting all of their money into a single form of investment) is a bad idea. That old adage makes the argument for investing in a variety of funds to diversify one’s portfolio.

An investor who wants to diversify his or her portfolio with individual stocks may need to purchase a large number of assets. However, a few or even a single mutual fund with a broad subject might provide a significant amount of diversification. An index fund, for example, can provide exposure to all of the equities in a key market benchmark, which can be beneficial.

Simplicity

Individual stocks and bonds are difficult to construct from scratch for the majority of investors, who lack the necessary knowledge, time, and finances. Mutual fund investments, on the other hand, allow investors to benefit from a professionally managed, broad investment portfolio even if they have little or no previous experience with investment concepts or tactics.

Accessibility

Mutual funds can be purchased in a variety of ways, including indirectly through an online brokerage account or directly from the investing company that provides the funds. Despite the fact that many mutual fund companies need a minimum investment, you can begin purchasing mutual fund shares with a low or even no minimum investment in some situations.

When it comes to index mutual funds, for example, Fidelity does not require a minimum initial investment, and TIAA waives its typical $2,500 minimum investment requirement if you set up an automatic share purchase plan, in which money is deducted from your bank account once or twice a month.

Versatility

The numerous types of mutual funds available allow investors to acquire exposure to virtually any section of the market that can be imagined. To give an example, sector funds enable investors to make investments in certain sections of the stock market using mutual funds.

An alternative way for investors to gain exposure to commodities such as gold or other precious metals, oil or natural gas is to put their money into an investment vehicle that buys shares in firms that produce the commodities in question. Because of their adaptability, mutual funds can be utilised to provide further diversification as an investor’s portfolio of funds expands.

Cons / Disadvantages of Mutual Funds

Mutual Fund schemes are divided into several categories, which are generally class base on how they invest their assets. Here are some of the downsides or disadvantages of mutual funds:

Fees

With sales commissions and management fees added on, investing in mutual funds can quickly become a costly prospect if you are not careful about the one you choose. Sales charges and transaction fees can eat away at your investment returns, so look for funds that have no sales charges or transaction fees, as well as an expense ratio (operational expenses divided by average net assets) that is at or below the average (0.45 percent), in order to maximise your returns.

Risk Associated with an Investment

A element of risk exists in all investments, including stocks, bonds, and the mutual funds that invest in them. This risk includes the chance of a fall in value or, in the worst-case situation, the complete loss of your principal investment. Different sorts of risk are associated with different funds.

Stock funds, for example, are riskier in general than bond funds, and they come with a high degree of market risk in particular, which refers to the possibility of significant swings in stock prices up and down from their initial investment. Determine your risk tolerance before you begin investing and make your investments in accordance with your risk tolerance.

Inefficiency in the Tax System

If you keep funds in a taxable investment account, such as a brokerage account, you may be liable for paying taxes on the income generated by the investments you make (for example, dividends from an income fund). One simple solution to this problem is to store mutual funds in tax-advantaged accounts such as IRAs.

Having Less Control

A mutual fund does not provide investors with the same level of control over the underlying securities that they would have if they were to purchase the securities on their own.

Conclusion

MF is a pool of money that has been invest in a variety of different securities throughout time. These funds can be purchase either directly from the investment fund or through a broker, depending on the investment fund. Stock, bond, money-market and target-date funds are the four most common forms of MFs to invest in. Hope you have learned about what is mutual funds meaning, examples of mutual funds in this topic.

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