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How do mutual funds work?

A mutual fund is essentially a trust that collects money from several like-minded investors.

Asset Management Companies (AMCs) manage and operate many mutual fund schemes. Each scheme has a specific investment objective catering to distinct investment needs.

Based on the fund’s objective, the money collected from investors is placed in various avenues such as stocks, gold, bonds and other securities. A finance professional known as a fund manager whose goal is to earn optimum returns on the fund’s investments oversees each fund. The income generated by the fund is divided and distributed among the investors proportionately.

Benefits of investing in mutual funds

• Professional expertise
  
  When you invest in a mutual fund, a professional fund manager handles your investments. A team of researchers who track the market on a real-time basis supports every fund manager. Based on their inputs, fund managers make necessary changes to your mutual fund portfolio to maximize returns. This option can become a suitable option for salaried people (and business owners) who do not have the time to track markets or make timely investments.



• Convenience
  
  Investing in mutual funds can be a hassle-free and straightforward exercise. The entire process is paperless, and you can complete it from the comfort of your home. And once you begin your investment journey, you can follow your holdings and make necessary adjustments, if needed, through your computer or Smartphone.



• Begin with small investments
  
  Many people assume you can only invest in mutual funds if you have a large sum of money. In reality, you can begin investing with just Rs. 500 per month. A Systematic Investment Plan (SIP) can help you invest small amounts regularly. And if your income rises over time, you can also increase your SIP allocation. This way, you not only lower your investment costs but also benefit from the power of compounding.



• Diversification
  
  Diversifying your portfolio is vital if you are looking to minimize your exposure to risk and loss. An adequately diversified portfolio can weather the poor performance of a single stock or sector, thus cushioning your total investments. Mutual funds are designed in a way to provide adequate diversification.



• Tax benefits
  
  Section 80C of the Income Tax Act provides tax deductions on investments made in specific financial instruments. This includes mutual funds too.
  
  Currently, you can claim a tax benefit of up to Rs. 1.5 lakh per year in Equity Linked Saving Scheme (ELSS) that offer one of the shortest lock-in period. These reasons make ELSS funds a popular tax-saving option among investors.

Types of Mutual Funds in India:

• Equity Funds: Multicap, Large & Midcap, Large cap funds, Midcap, Smallcap, Value/Contra, Thematic, Sectoral funds. Tax saving Mutual funds also called ELSS (Equity Linked Savings Scheme) also form part of equity funds.


• Debt Funds: Overnight Funds, Liquid, Money Market, Ultra Short term, Low Duration, Short/Medium/Medium to Long/ Long Term Funds, Dynamic Funds, Corporate Bond Funds, Credit Risk, Banking & PSU Debt funds, Gilt Funds are a part of Debt Mutual Fund category.


• Hybrid Funds: Multi-asset funds, Dynamic Asset allocation funds, Conseravative/Aggressive Hybrid Funds, Equity Savings fund are part of this category.


• Solution Oriented Funds: Children funds & Retirement funds are solution oriented funds.