Understanding Mutual Funds: Exploring Their Similarities and Differences
Mutual funds, commonly known as open-ended investment schemes, are funds collected from a number of investors and managed by professional fund managers. Unlike fixed deposit (FD) accounts, mutual funds can invest in various types of securities such as shares and debentures. Like any investment, mutual funds carry some risks, but these risks also offer greater and more consistent opportunities in the long run.
What is a Mutual Fund?
Mutual funds work by collecting money from the public and investing it in stocks. When investors buy shares of a mutual fund, they become owners of a portion of the fund’s holdings, which can include stocks of various companies. One of the main advantages of mutual funds is liquidity, which allows investors to withdraw their shares at any time.
Different Types of Mutual Funds
Equity Funds
These funds mainly invest in stocks and index futures, allocating at least 65% of their portfolio to equities. They specialize in specific areas such as technology, telecommunications, and blue-chip stocks.
Debt Funds
Primarily focused on bonds and Treasury bills, debt funds invest more than two-thirds of their portfolio in fixed income securities.
Blended Funds
By combining elements of equity and debt, blended funds aim to balance risk and reward, providing a mix of growth and stability.
Special Category - Equity Linked Savings Schemes (ELSS)
ELSS funds come with a mandatory lock-in period of a minimum of three years. These funds are very risky because of the potential for significant losses, especially if withdrawn early.
Methods of Investment
One-Time Deposit
This method requires a one-time payment into a mutual fund scheme. While it can be very profitable, it also comes with a lot of risk.
Systematic Investment Plan (SIP)
SIPs involve making regular investments in mutual funds. This disciplined approach is less risky than a one-time investment and tends to provide better returns over the long term.
Documents Required for Investment
Proof of Identity:
- Recent photograph
- PAN Card
Proof of Identity:
- Aadhaar Card
- Passport
- Voter Photo ID
- Driving License
Proof of Residence:
- Passport
- Ration Card
- Utility Bill
- Aadhaar (UID)
- Driving License
- Voter ID Card
This overview provides comprehensive information on mutual funds and important investment strategies, aimed at helping investors make informed decisions.