A Mutual Fund is an Investment instrument which pools the savings of Investors and invests it in Equity Shares and Debt Instruments. The Equity shares are of companies listed on a Stock Exchange. The Debt Instruments include Bonds issued by Government of India, State and Local Government bodies, Public sector companies as well as the Private sector Organizations. Short Term Debt instruments of less than one year maturity include Treasury bills issued by the government of India, Certificate of deposits issued by banks and commercial paper issued by private sector companies.
Mutual Fund Schemes can be broadly classified as Equity Based, Debt Based and Hybrid. Further classification is possible in each of these categories. Further Mutual Fund schemes can be open ended, close ended or Interval schemes.
Mutual Funds are ideal Investment Instruments. The type of Mutual Fund schemes you invest in, depends on your objective of Investment, tenure of investment and your risk appetite.
As a general rule for Investments in Mutual Funds it is better to invest in Open Ended schemes. You should avoid Close Ended schemes or FMPs (Fixed Maturity Plans) as, before the maturity period, FMPs can only be traded at a stock exchange.
Mutual Funds offer several benefits to investors:
• You can invest a small amount every Month. Even Rs.1000/- per month.
• Facilitates the habit of investing regularly.
• Gives better returns than fixed deposits, bonds, debentures, and insurance plans of similar tenure.
• You can withdraw money whenever you want, in case of open ended schemes.
• See your money multiply, as the years go by, because of the power of compounding.
• Very little documentation.
• Schemes are managed by professional fund managers. Hence it’s better than, directly investing in Equity shares or Debt instruments like Bonds, and Debentures.
Detailed information about Mutual Funds industry in India is available on the AMFI (Association of Mutual Funds of India) website at https://www.amfiindia.com.
Related reading: types of mutual funds explained, and financial planning: getting started.
