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What is a Mutual Fund?

In This Article You Will Learn:

  1. What is a Mutual Fund?
  2. Advantages of Mutual Fund.
  3. Types of Mutual Fund?
  4. Cut-off time.

1. What is a Mutual Fund?

Mutual Fund is a pool of money collected from a large number of investors. The money collected is invested in multiple securities like equities, bonds, or a combination of these assets with a certain investment objective. The investors share is known as “unit” and the value of the unit is known as Net Asset Value (NAV).

Investing the money in multiple securities is done by professional fund managers to achieve the highest possible returns with due diligence. Not to forget, the investment portfolio is created keeping in mind the investment objective of the fund. So before investing in Mutual Funds, one has to consider the investment objective of that mutual fund.

2. Advantages of Mutual Funds:

  • Highly regulated by SEBI
  • Less risk.
  • Access to diversified large portfolios.
  • Managed by professionals.
  • Invest as low as Rs.500.
  • Suitable for beginners as extensive knowledge of stocks is not needed.
  • Much higher returns compared to fixed deposits.
  • Highly liquid as you can withdraw your money as and when required on that particular day's NAV (Price of Mutal fund).

3. Three Most Common Types Of Mutual Funds:

  1. Equity or Growth Funds:In this fund, the money is mainly invested in stocks of multiple companies. The returns or losses are directly proportional to how these companies grow or fall in the stock markets. These funds go by the rule, higher the risk, higher the reward. Types of Equity or Growth Funds:
    • Small-cap funds:The money is invested in small-cap companies (small-sized companies). Meaning, companies with a market capitalization (value) between $300 million to $2 billion.
    • Mid-cap funds:The money is invested in Midcap companies (mid-sized companies). Meaning, companies with market capitalization (value) between $2 to $10 billion.
    • Large-cap funds:The money is invested in Large-cap companies (large-sized companies). Meaning, companies with market capitalization (value) more than $10 billion.
    • Sector funds:Here, the money will be invested in a particular sector like manufacturing sector etc.
    • Multi-cap funds:The money will be invested in a combination of small, mid and large-cap companies.
    • Equity-linked saving scheme (tax-saving fund):Equity-linked saving scheme also known as ELSS, are the funds that invest a minimum of 90% in equities with a lock-in period of 3 years. They offer tax benefits under section 80C of the Income Tax, benefits of long term capital gain tax, tax-free dividend.
  2. Debt Fund: In this fund, the money is invested in fixed income securities like bonds, debentures, treasury bills, money market instruments, and other debt securities. Usually, these funds have a fixed rate of interest and fixed maturity date.
    • TYPE OF DEBT FUNDS:

    • Gilt Funds:In this fund, the money will be invested only in securities that are issued by the Government and therefore do not carry any credit risks. The investment is made both in short-term and long-term instruments.
    • Corporate bonds: A corporate bond is issued by corporates to raise funds for their ongoing projects or to scale/expand their business. These are long-term instruments with a maturity of more than a year.
    • Commercial papers: A commercial paper is an instrument issued by corporates to meet their short-term debt obligations. The maturity of these instruments will not be more than 270 days.
  3. Liquid fundsIn this fund, the money is invested in debt fund instruments that mature in less than a year. The investment portfolio is very liquid enabling investors to hold their investments for very short horizons, even for a single day.

Note before investing:-

Cut-off time:The cut-off time is a tool used to determine the NAV/Price of the mutual fund you, get when you buy or sell a mutual fund. There are different cut-off timings for equity, liquid and debt mutual funds. The cut-off time for Liquid fund is 2pm and the cut-off time for Debt & Equity fund is 3pm.

Sounds complex right? Let me simplify it for you with an example:

If Mr. Prateek buys an equity mutual at 2 pm, he will allotted the NAV of the same day. Had he bought it after 3 pm, he would be allotted the next days NAV. If Mr. Prateek is investing more than 2 lakhs, and wants to get the same days NAV, he has to make sure he submits the application and money is deposited to the broker or mutual fund house before the cut-off time.

In case if Mr. Prateek buys a liquid find at 1 pm, he will be allotted the NAV of the previous day. Had he bought it after 2 pm, he would be allotted the NAV of the same day. In case of liquid funds, he has to submit the application and deposit the money to the broker or mutual fund house before the cut-off time regardless of how much he is investing.





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