In this investor awareness series, we have spoken about the importance of asset allocation, we busted a few myths around mutual funds and also helped you understand Systematic Investment Plans. In the fourth and concluding article of the series we will highlight various types of mutual funds.
As you would now know, mutual funds are investment vehicles that pool money from many different investors for the purpose of investing in securities such as stocks, bonds and money market instruments. Broadly, mutual funds can be classified based on their maturity period and their investment objective.
Let’s understand three different types of mutual funds that are based on the maturity period.
1. Open-ended fund: An open-ended mutual fund is a fund that is available for subscription on a continuous basis and can be redeemed anytime.
2. Close-ended fund: A close-ended mutual fund is a fund that has a defined maturity period, e.g., 3-6 years. These funds are open for subscription for a specified period at the time of launch.
3. Interval funds: Interval funds combine the features of open-ended and close-ended mutual funds. These funds may trade on stock exchanges and are open for sale or redemption at predetermined intervals.
Now let’s understand various types of mutual funds that are based on the investment objective.
1. Equity funds: These mutual funds invest a major part of their corpus in stocks and the investment objective of these funds is long-term capital growth. These funds may invest in a wide range of industries. These mutual funds are suitable for investors with a long-term outlook.
2. Debt and money market funds: Debt mutual funds generally invest in securities such as bonds, corporate debentures, government securities and money market instruments. These mutual funds are likely to be less volatile than equity funds and produce regular income.
3. Balanced funds: Balanced mutual funds invest in both equities and fixed income instruments in line with the pre-determined investment objective of the scheme. These mutual funds may be ideal for investors looking for a combination of income and moderate growth
4. Equity linked savings scheme (ELSS): Tax-saving schemes offer tax rebates to investors under specific provisions of the Income Tax Act, 1961. These are growth-oriented schemes and invest primarily in equities. These funds have a lock-in period of 3 years as defined by Income Tax laws
5. Thematic funds: Thematic funds are equity schemes which invest in a set of sectors that are closely related to a particular theme like infrastructure. Unlike sector funds, thematic funds have a broader spectrum to operate in.
We hope that in this investor awareness series, we have addressed some of your doubts pertaining to mutual funds. We also hope that you will now invest in mutual funds with confidence.
How to fulfil your dreams through SIPs?
In the last article, we clarified some of the common myths associated with mutual funds. In this article, we will help you understand Systematic Investment Plans or SIPs as they are popularly called. A systematic Investment Plan (SIP) is a method of investing a fixed sum on a regularly, in a mutual fund scheme.
Let us look at the features of Systematic investment plan and analyse how it helps you fulfil your investment objectives and financial goals.
Key features of a SIP:
1. Disciplined approach to investment: SIPs help you inculcate a regular saving habit as they require you to invest a fixed sum of money on a regular basis. Investing regularly in small amounts can often lead to better results than investing in a lump sum. Disciplined approach towards investing also leads to wealth accumulation. Thus, SIPs also help you take a step ahead towards achieving your financial goals and meeting investment objectives.
2. Flexibility: SIPs offer you the flexibility to select an amount that you intend to invest. SIP is a simple, convenient and affordable way to invest for your future with as little as Rs 500 every month. Also, there is no penalty for missing out on any investment in a particular month. Moreover, easy modifications are allowed in a SIP as and when you desire.
3. No need to time the market: Investors aiming to time the market have failed time and again in the past. Trying to time the market is a time consuming and a risky task. Through a SIP, you have the option to invest regularly in equity markets irrespective of the bull and bear phases.
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