Mutual funds have become increasingly popular among Indian investors in recent years, with the industry experiencing rapid growth.
According to the Association of Mutual Funds in India (AMFI), the Indian mutual fund (MF) industry’s assets under management (AUM) reached an all-time high of Rs. 37.16 lakh crore as of March 2021, indicating the growing popularity of MFsamong investors. In this blog post, we’ll discuss what MFs are and how they work.
Table of Contents
What are Mutual Funds?
Mutual funds are investment vehicles that pool money from several investors and invest in various financial instruments such as stocks, bonds, money market instruments, and other securities. A professional fund manager manages the mutual fund’s investments, who decides the investment strategy and the allocation of assets to achieve the fund’s investment objectives.
The MF units are issued to investors based on the amount of money they invest, and the units’ value changes based on the performance of the underlying assets. The investors benefit from the MF returns based on their proportionate holdings in the fund. Moreover, MFs are regulated by the Securities and Exchange Board of India (SEBI), which aims to protect the investors’ interests.
Types of Mutual Funds
Mutual funds can be classified based on several criteria, including the investment objective, asset class, structure, and investment strategy. Some of the common types of MFs in India are:
1. Equity Funds: These MFs invest primarily in equities or stocks. They aim to generate capital appreciation by investing in the stocks of companies with high growth potential.
2. Debt Funds: These MFs invest primarily in fixed-income securities such as government bonds, corporate bonds, and money market instruments. They aim to provide stable returns by investing in low-risk fixed-income securities.
3. Hybrid Funds: These MFs invest in a combination of equities and fixed-income securities. They aim to generate both capital appreciation and regular income for investors.
4. Index Funds: These Free-Float market Capitalizations invest in the same stocks and weightage as a benchmark index such as Nifty 50 or BSE Sensex. They aim to generate returns similar to the benchmark index.
5. Sector Funds: These MFs invest in a specific sector such as banking, pharma, or technology. They aim to benefit from the growth potential of a particular sector.
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How Do Mutual Funds Work?
Mutual funds work by pooling the money from several investors and investing it in various financial instruments. The fund manager manages the MF investments, who decides the investment strategy and the allocation of assets to achieve the fund’s investment objectives. The investors benefit from the MF returns based on their proportionate holdings in the fund.
The MF’s performance is reflected in its Net Asset Value (NAV), which is the MF’s total assets minus its liabilities divided by the number of units issued. The NAV is calculated daily and is a crucial factor in determining the MFs returns.
Investment modes
Investors can invest in MFs through various modes such as lump sum investment, Systematic Investment Plan (SIP), or Systematic Transfer Plan (STP). In a lump sum investment, the investor invests a one-time amount in the MF. In an SIP, the investor invests a fixed amount at regular intervals, such as monthly or quarterly. In an STP, the investor transfers a fixed amount from one MF to another.
Investors can redeem their MF units at any time, subject to the exit load and the lock-in period, if any. Moreover, MFs are subject to various expenses such as management fees, custodian fees, and marketing expenses, which are charged as a percentage of the AUM. The expenses are reflected in the MF’s expense ratio, which is a crucial factor to consider when selecting a MF.
