What are Mutual Funds
If it is a common man or a beginner investor or planning investments and more about what are mutual funds and how do they work? all the information you will get in this Article, every month when your salary is credited then you keep some part of that salary as savings. You keep some money for your later use, maybe for an emergency or if you want to be the house or car and you save for that. One simple way is that you keep your salary as it is in the bank and it gets collected. It’s a very bad way because such money loses their value Inflation is increasing in our country and due to that the price of the commodities is increasing too. So, the value of your money keeps decreasing every year by 4-5% according to the inflation rate.
Mutual Funds Basics
Mutual funds are a special kind of investment through which you can invest in different types together. you can do a diversifies investment by investing in one place. Asset Management Company starts mutual funds. Basically, you give your money to Asset Management Company and many people like you do so. that the company invests all the money collectively in different places. They have appointed experts and with their suggestion, they invest the money. They invest money at different places and the return rate they get collectively from these different places out of that some small percent of 1-2% is kept as a profit by the Asset company and the rest you get back as per that return rate. HDFC, HSBC, ICICI, Aditya Birla, Reliance, TATA, these are the few examples of companies and banks who have started their own asset management company.
All companies start different kinds of mutual funds in large numbers. For example, ICICI has started more than 1200 mutual funds. So how risky is your mutual funds and what is the return depends on the mutual funds that you are investing in. mutual funds can give a return rate of 4% and also of more than 30% too. It can be of zero risks and also of high risk too. Because all this depends on where the asset management company is investing your money. If that company is investing in stocks then it will be riskier and you will get more returns and if it’s investing in the government bonds then it will be less risky.
What are different types of Mutual Funds and how do they work
Different types of Mutual funds depend on the basis of the investment. We can divide this into the 3 categories following are the types of mutual funds with examples
- Equity mutual funds
- Debt Mutual Funds
- Hybrid Mutual funds
Equity Mutual Funds
In Equity Mutual Funds, your money will be invested in the stock market. So naturally in this type of Mutual funds generally the risk is more and also the return. In the stock market on which kind of company are you investing, if it’s a big company then it’s called Large Cap Equity Funds If it’s a small company then it’s called Small-cap and in the same way Mid Cap equity Funds. Big company doesn’t have many risks as compared to the smaller ones but big companies won’t have growth rate as high as it can be for the smaller companies. So, risk and return b0th are less in big companies. ICICI prudential blue-chip fund is an example of a large-cap equity fund. If you invest here for a year then after a year your expected return is 11.3% but if you invest for 5 years then your expected return can be of 19.7% if the more time you invest in, the more return you can expect.
Debt Mutual Funds
Debt mutual funds are of various kinds, let’s first talk about liquid funds Liquid funds are those mutual funds which can be easily and quickly converted into cash. Liquid means that actually, It’s not the liquid to drink. In economics, the liquid is something that can be easily converted into cash. So, this thing can be converted into cash within a day or two. But it has a very low risk, such low that you can basically consider this as an alternative to the savings account. Asset liquid fund is one such example where you will get a return of 7.1% in a year. The next type is Gilt Funds, these are those funds where Investments are done on the Government issued bonds. So technically it has zero risks because it’s never possible for the Government to not return your money. Mostly the interest rate can fluctuate. The next type is Fixed Maturity plans and this can be considered as an alternative to Fixed deposits because it has very low risk just like FD and it is done for a fixed time. For a specific time, investment is done here and you can’t take the money before that. So, these are the few main types of Debt funds there are more like the Junk Bond scheme.
Hybrid Mutual Funds
Basically it’s a mixture of debt and equity mutual funds. Some people want to invest in the stock market but don’t want to invest all the money there and also invest some amount in the Debt instruments, so hybrid mutual funds are for them If most of the money is invested in a Debt fund then it will be called as the Balanced savings Funds Approximately the ratio is 70:30 that means 70% of your money is at the low-risk debt funds and 30% is in the equity funds. and if it’s the other way, 70% is in the equity funds at a higher risk, then it is called a balanced advantage fund and Hybrid mutual funds to have different types like arbitrage funds and so on so, research yourself on further kinds of mutual funds and which one is better for you. The biggest advantage of mutual funds in comparison to other investments is that it is already diversified.
Your risk gets very low due to diversification because you are not investing in one place so if one thing crashes so it won’t affect your money. So, in comparison to the stock market, gold, real estate, mutual funds are less risky however the exact risk depends on the mutual fund that you are investing in. One more good advantage is that it is affordable, you don’t have to invest a big amount together You can use SIP and invest a small amount every month and all the investment of the mutual funds, and done by a professional expert or a fund manager who decided where to invest and where to not.
Types of Investment
There are different places or investment types to invest, mainly in 4 places for investment.
- Savings Account
- FD or Fixed Deposit
- Gold or Jewelry
- Real estate
Some people who want to take more risks also invest in the stock market which is another way to invest your money. Every Investment has 3 things, Return, Risk and Time. Relationship between Risk and Return means how much percent of profit are you earning through the investment, this is normally seen in percentage. if our inflation rate is 4% then you should see that your profit return is more than at least 4 % Otherwise there is no point of investment if you have put your money and the value didn’t increase. because the inflation rate is also increasing Risk means how risky it is to invest, what is the chance of losing all your money in that investment. What is the chance of going into loss after investing there?
Time means for how long are you investing, the basic risk here is that if the time is more, the risk is more than the returns will also be more i.e Investment risk. If you want more return percentage on your investment then you will have to take more risk and should invest for a longer period Saving accounts has the minimum risk and there is no restriction called the relationship between risk and return. You can save or take the money out at any time. But the return we get here is also very less, only 4% whereas our inflation rate in the last few years has been 4-5% Fixed deposit is also a less risky option but it has a time limit before that we can’t take the money out. hence the return is also a bit more, somewhat 7-8% Gold and jewelry these days have a significant risk, their prices fluctuate a lot If you are going to see this history then you will know that until 2012 the prices were consistently increasing If you would have invested prior to 2012 then you would have got a good return here.
But after 2012 there have been a lot of ups and down but they have maintained a level, hence there’s not a much profit. Investment in the properties and real investment has low to moderate risk if you can see India’s housing prices in the last few years. It has come up and down a lot. In the quarter or March 2011, it has touched the return rates of 30%and in March 2018 the latest quarter then it gives just 5% return rates. One of the disadvantages of investing in housing is that it needs a lot of capital, you need to have lacs and crores of rupees to invest. You might have heard about the stock market you can get a lot of returns here but also loss.
The risk of investing in the stock market depends on the stock where you are investing. You need to have a good knowledge of the performances of the stock and how does the stock market work basically. you shouldn’t be investing here if you don’t have this knowledge. So, these are a few main types of investments and types of investment returns, like Government bonds, corporate bonds, we have cryptocurrency to these days, people also invest in bitcoins A general well-known advice is that you should never invest your money only at one place. You should invest in different places so that if there’s any crash then you will not have to bear the overall loss. It’s a very less chance of everything crashing altogether like, gold, properties and even stock market as this happens were rarely Chances are that if one thing crashes then you can get profit from the other. This is called diversification; you have to invest in different places.