What is a mutual fund? Complete information in brief

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In a layman terms, Mutual Funds (MF) are run by an Asset Management Company (also called Fund Houses/Fund Managers) that collects money from the individual investors and then invests on their behalf on several financial instruments (equity & debt instruments) and distribute the earned profit (dividend) among the investors in proportion to their investment. For all this service, an agreed commission (Entry/Exit Load) is levied on the investor

The Tax Saving Mutual Fund is called ELSS (Equity Linked Saving Scheme) and it comes with a fixed 3-year lock-in period

The MF which requires you to invest the total amount of money (that you want to invest) at a time is known as Lump-sum Mutual Fund. On the other hand, the MF in which you can make investment at regular intervals of time (monthly/quarterly etc., just like an RD) is known as SIP (Systematic Investment Plan)

As an investor, your task is simple;

1. Visit the respective MF website/approach an authorized branch

2. Register yourself online/offline by submitting the relevant details & documents

3. Select an available MF scheme according to your requirements and then purchase

4. That is all! Sit & Relax!! All other things are taken care by the Fund Managers

5. The MF, along with its returns, however, can be redeemed (withdrawn) as per the terms and conditions of the scheme agreed at the time of purchase

General Mutual Funds/Schemes;

  • Direct Plan Schemes-Allows investment into an MF scheme directly without a Broker
  • Regular Plan Schemes-Investment into an MF scheme is made through an Advisor/Broker
  • Growth Funds-Allows the investment to grow until it is redeemed
  • Dividend Funds-Allows to pay back the grown value (dividend) of the fund
  • Dividend Reinvestment Plan-The dividend to be paid is invested on extra units of the MF
  • Debt Funds-Major portion of the money is invested on debt instruments for fixed returns
  • Equity Funds-Major portion of the money is invested on equities for high returns
  • Balanced Funds-Money is invested on multiple financial instruments
  • Open Ended Funds-Units of the MF can be bought/sold at any time (no fixed maturity date)
  • Closed Ended Funds-Units can be bought at initial time only and have specific maturity date

 Advantages; 

Possibility of High Returns, Professional Management of Investment, Diversification, Affordability

Disadvantages;

High Risk, Returns Depends on Market Conditions, Taxes (except ELSS), Entry/Exit Load, Low Liquidity

More : Step of investing in Mutual Funds

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