◆ Understanding Mutual Funds

Understanding Investment Funds: Mapping of Similarities and Differences

An investment fund can be described as an organized pool of money from various investors, professionally managed with the intention of purchasing a variety of securities such as shares, bonds, and other financial instruments. This concept is fundamental and can be easily understood even by beginners in the field. While fixed deposits operate conservatively, offering better returns compared to savings accounts, mutual funds offer the potential for higher yields by diversifying across a wider portfolio of securities, managing risks inherent in direct stock investments for better long-term returns.

When choosing between mutual funds and index funds, there's another layer to consider. To delve deeper into this discussion, let's define both mutual and index funds. What exactly are mutual funds, who holds them, what are their characteristics, and how does one invest in them?

Here, you will find information about investment funds, their history, types, advantages, disadvantages, as well as conclusions and recommendations.

Mutual funds bring together several investors who contribute their money, which the fund manager uses to buy various securities. Investors own shares in the fund, which is part of the fund's portfolio. Importantly, mutual fund investments provide high liquidity to investors; they can redeem their shares at their convenience.

Types of Investment Funds

  • Equity Funds: These funds are aggressive investment vehicles mainly targeting stocks and related products, with over 65% of the investment in equities and derivatives.
  • Debt Funds: These funds primarily invest in bonds and bills, with over 65% of holdings in debt securities including treasury bills and other fixed income instruments.
  • Hybrid Funds: Balancing between equity and debt funds to target a specific return with a balanced risk profile.
  • Special Category (ELSS Mutual Funds): ELSS funds have a lock-in period of three years, and investors cannot redeem their investment during this period even if the market dips. Early redemption is subject to penalties.

Investment Strategies

  • Lump-Sum Investment: This involves investing a large amount of money into a mutual fund, with returns dependent on the fund's performance. While it offers potential for high returns, it also carries higher risks.
  • Systematic Investment Plan (SIP): SIP involves making regular, small investments, helping investors diversify risks and potentially improve long-term returns.

Authorized Documents Necessary for Mutual Fund Investment

Currently, there is a need to comply with KYC (Know Your Customer) rules which regulate relations between investors. Required documents include:

Identity Proof:

  • Photo identity (if having PAN card) with recent photograph
  • Photo identity card like Aadhaar card, passport, voter ID card, or Driving License

Residence Proof:

  • Passport
  • Ration Card
  • Utility Bill
  • Aadhaar (UID)
  • Driving License
  • Voter's Identity Card

However, there is limited comprehensive information about different forms of investment funds and steps in the investment process to enable investors to make informed decisions.