Mutual fund is a collective pool of investible surplus funds of individual investors managed by expert fund managers to meet the common investment objective.
When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the corpus (the total amount of the fund).
Advantages of Investing in Mutual Funds:
Classifications of Mutual Funds:
Based on Tenure:
1) Open Ended Schemes: They can be bought or sold at any time at the prevailing NAV and do not have any fixed tenure.
2) Close Ended Schemes: They have a fixed tenure with a fixed corpus available during a specified period of time with a defined maturity date.
Based on Asset Class:
1) Equity Funds: They are invested in stocks.
The Equity Funds are sub-classified depending upon their investment objective, as follows:
Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.
2) Debt Funds: A debt fund may invest in short-term or long-term bonds, securitized products, money market instruments or floating rate debt.
3) Hybrid Funds: They are invested partially in stocks and partially in money market
4) Real Funds: They are invested in commodities
Based on Investment Philosophy:
1) Diversified Equity Funds: The funds are diversified across sectors to reduce the overall portfolio risk.
2) Sector Funds: They are invested in a particular sector, like Manufacturing
3) Index Funds: track the components of a market index, such as the Standard & Poors 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.
4) Exchange Traded Funds: Exchange Traded Funds (ETFs) are open ended mutual funds that are passively managed and most of them seek to mirror the return of an index, a commodity or a basket of assets.
5. Fixed Maturity Plans: They invest in fixed income instruments, like bonds, government securities, money market instruments having a fixed maturity date. It could be 15 days, 30, 90, 141, 180 or even 365 days.
Mutual Funds are great methods to save tax and plan retirement. One can start SIPs early in tax saving funds so that when financial year ends you are in no hurry and at the same time your tax savings are properly planned. Similarly, investing through SIPs in mutual funds is a perfect planning to retire rich. Start early and even a monthly investment of Rs 2000 - 5000/- can make you crorepati when you retire - Start your retirement planning now!
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