What are Mutual Funds? Types of Mutual Funds?

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What are Mutual Funds?

Mutual Funds is a special kind of investment through which you can invest in different types of investment together by investing in one place. Asset Management company(AMC) starts Mutual Funds.
They collect money from investors and the company invests all that money at different places with their appointed expert suggestion. and the return rate they get from these different places. Out of the return rate they get collectively from different places, some small percent is kept as a profit by the Asset Company and the rest investors get back as per that return rate.

What are Mutual funds
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Basically, Mutual funds can give the return rate of a minimum of 4% and a maximum of 30%+. It can be of zero risks and also high risk too. Because all this depends on where the asset management company is investing money. If that company investing in stocks then it will be riskier and you will get more returns and if it is investing in the government bonds then it will be less risky.
The word Mutual implies a group of people coming together and Funds mean the polling of money. Therefore the term Mutual Funds suggests a group of people putting their money together to buy stocks and bonds or both in some cases.

In other words, we can say that Mutual Funds is a professionally managed investment that pools money from many investors to purchase securities.

Types of Mutual Funds

There are different types of  Mutual Funds depends on the basis of the investment done by the Asset Management Company(AMC). There are three types of Mutual Funds.
  • Equity Mutual Funds.
  • Debt Mutual Funds.
  • Hybrid Mutual Funds.

Equity Mutual Fund

Equity Mutual Fund is the funds in which investors money will be mainly invested in the stock market. So, basically in this type of Mutual Funds, the risk is more and also the return is high. Equity funds are also known as Stock funds. Some Common types of Equity Mutual Funds are:

  1. Large/Mid/Small Cap Equity Fund.
  2. Diversified Equity Fund.
  3. Equity Linked Saving Scheme(ELSS).
  4. Sector Mutual Funds.
  5. Index Funds.

Debt Mutual Fund

Debt Mutual fund is the funds that are invested in the debt instruments (like bonds, debenture, certificates of deposits, etc.). In this type of Mutual Funds, the risk and also the return rate is low.
There are some common types of Debt Mutual Funds. They are:

  1. Liquid Funds.
  2. Gilt Funds.
  3. Fixed Maturity Plan.
  4. Junk Bond Scheme.

Hybrid Mutual Fund

A hybrid mutual fund is basically a mixture of debt mutual fund and equity mutual fund. There are some common types of Hybrid Mutual Funds. They are:

  1. Balanced Saving Fund(Equity Saving).
  2. Balanced Advantage Funds(Aggressive Fund).
  3. Conservative Hybrid Funds.

Are Mutual Funds safe?

It basically depends on how you invest in them. But the short answer to this question is relative yes. Mutual Funds are subject to various kinds of market risks. However, they are also in most cases safe.

Reasons you should invest in Mutual funds?

  • Low Minimum Investment: In Mutual Fund you can start at a very low and affordable cost per month.
  • Diversification:.there are many different investments for which you get diversification. In mutual funds, there can be shares and bonds of different Companies. These bonds and shares are selected that these value increases and for this, you get diversification in a single investment. This diversification decreases risk.
  • Liquidity: Shareholders of the open-end fund and unit investment trusts may sell their holdings back to the fund at regular intervals at a price equal to the net asset value of the fund’s holding. Most funds allow investors to redeem in this way at the close of every trading day.
  • Professional Investment Management: Mutual fund hire a professional manager to supervise the fund’s investments that are why when you invest in a mutual fund then you don’t need to have a professional.
  • Almost Complete Freedom: In a mutual fund, you have complete freedom to invest as like I said earlier you can start with low to maximum any money its’ all your choice and also you have the freedom for how much time you want to invest. You can choose funds as per your choice.
  • Easy To Invest:  with the help of some research on the net you can invest in a mutual fund and with some research, you can choose a good fund.
  • Transparency: Mutual funds are required to report the same information to investors, which makes it easier to compare to each other.
  • Government Oversight: Mutual Funds are regulated by a government body.

Risks of Mutual Funds

Although mutual funds are relatively safe they carry various types of risks as well:

  • Market Risk: The Market as a whole may go down sharply. In this case, your equity mutual funds or hybrid mutual funds will also go down in the value.
  • Credit Risk: Debt Mutual Funds invest in the bonds and debentures of different companies. These companies may default on these borrowing. To mitigate this risk, mutual funds usually buy on highly rated bonds.
  • Fund Manager Risk: The fund manager may not be able to outperform the market. As a result, your fund may give you low or even negative returns.
  • Interest Rate Risk: The value of bonds usually falls when the interest rate rises. in such conditions, your mutual funds that hold bonds can also lose value.
  • Customization: No opportunity to customize. 

Types of Mutual Funds

Regulation of Mutual in different countries

European Union

In the European Union, mutual Funds are governed by UCITS (Undertaking for Collective Investment in Transferable Securities), established a mutual recognition regime that allows funds regulated in one country to be sold in all other European Union countries, but only if they comply with certain requirements.

Hong Kong

In Hong Kong, Mutual Funds are regulated by two authorities.
  • The Securities and Futures Commission(SFC).
  • The Mandatory Provident Funds Schemes Authority(MPFA).
The SFC  rules apply to all mutual funds marketed in Hong Kong but the MPFA rules apply only to the mutual funds that are marketed for use in the retirement accounts of Hong Kong residents.
MPFA rules are generally more restrictive than the SFC rules.

USA

In the USA, mutual funds are governed by the SEC(Securities and Exchange Commission) and must abide by the rules set forth under the Investment Company Act.

Canda 

In Canda, the regulation of mutual funds is primarily governed by National Instrument 81-102 and provincial securities laws.

India

SEBI(Securities and Exchange Board of India) regulates the Stock exchange in India and also regulates the Mutual Funds Industry. Like SEBI regulates the equity market same-like Money market of Mutual funds regulated by RBI (Reserve Bank of India) and RBI is also a government company means any Mutual funds Scheme or Company can’t do anything without the permission of SEBI or RBI.

Taiwan

In Taiwan, the mutual fund is regulated by the FSC(Financial Supervisory Committee). There are only about 20 rules specific to mutual funds marketed in Taiwan, but still, it is an evolving market.

Other Countries

Other Countries that are not mentioned above, have their own regulations.

I hope you understand about Mutual funds. So, if you have any questions or suggestions regarding Mutual Funds, let me know in the comments.

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