Mutual Funds (MF) are a mechanism to pool money from investors who wish to save and invest in securities through professional management, in accordance with achieving financial goals. The money collected is invested in capital market instruments such as shares, debentures, and other securities.
The income earned through these investments is shared by its unit holders in proportion to the number of units owned by them. Thus, a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
Basically, there are three major types of Mutual Funds:
Equity Funds invest in stocks of public limited companies in accordance with their objectives. Generally, the investment objective is to attain long-term capital growth. Equity Funds can be further divided into Large Cap, Midcap, Multicap, Flexicap, Balanced, etc.
Fixed Income Funds invest in bonds or debt securities. Their purpose is to provide safety and regular returns. They are primarily invested in government or corporate debt papers.
Money Market Funds consist of short-term debt instruments, mostly Treasury Bills. This is a safe place to park money, typically earning returns similar to a regular savings account, and slightly less than the average Certificate of Deposits.
Earning - Inflation = Real Return
To invest in a scheme where one gets an 8% return on the investment. Now, if we consider 6% inflation, the real rate of return would be only 2% (8% - 6% inflation). Is it enough to achieve our various goals in life?
Who does not wish to purchase stocks at a lower price and sell them at a higher price? No one knows whether any given time is the right time to buy or sell. A more successful strategy is 'Rupee Cost Averaging,' wherein one invests a fixed amount regularly (preferably monthly). Thus, we purchase more when the prices are low, and purchase less when the prices are high.
For instance, if we invest Rs. 10,000 per month in a Postal Scheme for 30 years, we will get Rs. 1.5 Cr at the rate of 8%, whereas a Mutual Fund Equity scheme can give us a return of Rs. 23 Cr (calculated at 15% CAGR).
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