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A fund is a pool of money set aside for specific purposes. For example, retirement fund, pension fund, emergency fund or college fund. Both institutions and individuals set aside money. Most people take the help of professionals to manage their funds. These professionals are fund managers, and they charge a certain fee for the same. Mutual funds are funds that pool money from various investors. Professionals manage these funds. They are the most popular investment avenues for investors to fulfil their financial goals.

fund
fund

What is a fund?

A fund is formed by pooling money from multiple investors. The fund is a pool of money set aside for a specific purpose. Professionals manage funds and invest the money in financial securities. A fund manager manages the fund and uses multiple strategies to invest the money effectively. Few examples of funds are mutual funds, hedge funds, pension funds, scholarship funds and endowment funds.

Both individuals and institutions set aside money for specific goals. For example, an emergency fund, or savings fund for a vacation. Alternatively, individuals invest in mutual funds or hedge funds to earn enough to achieve their goals.

How do funds work?

Funds are collective investments from multiple investors. The money collected is invested across various assets spreading the risk. A fund manager is a person who manages the fund’s money. Fund managers buy and sell securities on behalf of all the investors. Fund managers formulate strategies with their knowledge. They perform extensive market research and invest in securities for maximizing returns.

A fund can either be one single asset or multi-asset fund. The most common asset for investing in equities, followed by debt securities. There are also funds with alternative investments like real estate, gold, commodities etc. Multi-asset funds invest in various assets to diversify a portfolio.

One of the primary advantages of a fund is that with a minimum investment, an investor can invest in a diversified portfolio of securities.

What are the types of funds?

There are three broad categories of funds, namely Equity Funds, Debt Funds, and Hybrid Funds.

Equity Mutual Funds

Equity Funds invest in stocks or shares of listed companies. Therefore, returns from these funds are related to the stock market. Hence equity mutual funds have a higher risk associated with them when compared to other types. However, these have higher growth potential. Also, equity funds objective is capital appreciation in the long term. The different types of equity funds are large-cap, mid-cap, small-cap, multi-cap, value funds, tax-saving funds (ELSS), and thematic or sectoral funds. Moreover, Equity funds are ideal for long term investments.

Debt Mutual Funds

Debt Mutual Funds invest in fixed income instruments or debt securities. These securities are State, and Central government-issued instruments, money market securities, corporate bonds, debentures, and commercial papers. The risk with these types of funds is lesser in comparison to equity funds. Therefore, debt mutual funds are suitable for short term investments.

Hybrid Mutual Funds

Hybrid Mutual Funds invest in both debt and equity instruments. Therefore, these are suitable for moderate risk-takers who are willing to undertake some risk from equity investments.

Which mutual fund is best for beginners?

Investing in mutual funds is an easy way to gain exposure to the equity and debt market. Entering the market with low-risk investments is the best way to begin mutual fund investing.

However, it is always best to take the advice of professionals to understand what types of investment options are available and what best suits them. A professional will also help an investor in understanding how much risk they can absorb.

Also, beginners can invest in mutual funds through the SIP route. This will help them to bring down the average cost of investing over a period of time and boost SIP returns. Beginners need to understand that what is considered best by the market might not be suitable for them. Hence it is always better to pick funds based on one’s financial goals, investment tenure and  cash flow.

What is the best investment?

What is best for one investor may not be best for the other. Therefore, the best investment plan is always based on the investor’s investment goal, tenure, financial and family position, risk-taking capacity and other factors. Primarily, investments can be bifurcated as market-linked and fixed-income. The top 10 investment avenues are:

  • Direct Equity
  • Equity Mutual Funds
  • Debt Mutual Funds
  • Bank Fixed Deposits
  • Public Provident Fund
  • National Pension Scheme
  • Senior Citizens Savings Scheme
  • Gold
  • Real Estate
  • Post Office Schemes

How do debt funds work?

Debt funds primarily invest in debt and fixed income securities. Debt mutual funds invest across various bonds that an individual investor may not be able to invest otherwise. Government, large and mid companies issue these bonds.

Also, debt funds invest in instruments with high credit ratings. High or good credit rating implies that the default risk associated with the instrument is low. Therefore, the debt fund manager carefully picks instruments with high credit ratings. Also, funds that invest in high rated instruments are less volatile when compared to low rated instruments.

The bonds in which debt mutual funds invest in are tradable just like shares. Therefore, the bond prices witness rise and fall in prices. The rise or fall in bond prices is primarily due to the change in interest rates. Also, the maturity of the fund depends on the fund manager’s investment strategy and the prevailing interest rate scenario. In a falling interest rate scenario, the fund manager invests in long term securities. On the other hand, in a rising interest rate scenario, the manager invests in short term securities.

Published on August 4, 2020