Mutual Fund story
Once upon a time, there was a little girl named Kareena who wanted to save up money to buy a new bike. She had heard that there was a special way to save money faster, called a mutual fund.
Kareena's mom explained that a mutual fund is a kind of investment where people put their money together and use it to buy different things, like stocks and bonds. The idea is that by investing in different things, the risk of losing money is spread out, and the chances of making more money are higher. Plus, mutual funds are managed by professionals who know how to pick the best investments, which can be especially helpful for those who don't have the time or knowledge to do it themselves.
Kareena was excited to try a mutual fund, so she asked her mom to help her open one. They went to a company called an investment company, and Kareena's mom explained that they wanted to open a mutual fund for Kareena.
The investment company gave Kareena a special account where she could put her money, and they hired a smart and experienced person to help pick the best investments for Kareenas mutual fund.
Every month, Kareena put some of her allowance money into her mutual fund account. The person in charge used Kareena's money to buy different stocks and bonds, and Kareena watched as the value of her mutual fund account grew over time.
One of the great things about mutual funds is that they are easy to buy and sell, which means that Kareena could easily adjust her investments as needed. This gave her the flexibility to change her investments in response to changing market conditions.
After a few years, Kareena had saved up enough money to buy her dream bike. She was so happy and proud of herself for being patient and saving up her money with the help of mutual funds
What are Mutual Funds?
A mutual fund is a type of investment vehicle that pools together the money of multiple investors and uses it to buy a diversified portfolio of securities, such as stocks, bonds, or other assets. The fund is managed by a professional fund manager who selects the securities in the fund's portfolio and is responsible for the overall performance of the fund. Mutual funds offer investors the benefits of professional management and diversification, making them a convenient and potentially low-risk way to invest in a variety of assets.
Types of Mutual Funds
There are various types of mutual funds available, including:
- Equity Mutual Funds: Equity mutual funds invest in stocks or equity securities of various companies. Subtypes of equity mutual funds include:
- Large Cap Funds: These funds invest in the stocks of large, well-established companies that have a market capitalization of more than INR 10,000 crore.
- Mid Cap Funds: These funds invest in the stocks of mid-sized companies that have a market capitalization of INR 500 crore to INR 10,000 crore.
- Small Cap Funds: These funds invest in the stocks of small companies that have a market capitalization of less than INR 500 crore.
- Sectoral Funds: These funds invest in the stocks of companies in a specific sector, such as technology, healthcare, or banking.
- Thematic Funds: These funds invest in the stocks of companies that are aligned with a specific theme or trend, such as renewable energy or e-commerce.
- Debt Mutual Funds: Debt mutual funds invest in fixed income securities, such as bonds, debentures, and commercial paper. Subtypes of debt mutual funds include:
- Short-Term Funds: These funds invest in debt securities with a maturity of less than 3 years.
- Medium-Term Funds: These funds invest in debt securities with a maturity of 3 to 7 years.
- Long-Term Funds: These funds invest in debt securities with a maturity of more than 7 years.
- Gilt Funds: These funds invest in government securities, such as treasury bills, bonds, and dated securities.
- Credit Risk Funds: These funds invest in lower-rated debt securities, which carry a higher risk of default but may offer higher returns.
- Hybrid Mutual Funds: Hybrid mutual funds invest in a combination of equity and debt securities, providing investors with a mix of growth and income. Subtypes of hybrid mutual funds include:
- Balanced Funds: These funds invest in a mix of equity and debt securities in a predetermined proportion, such as 60% equity and 40% debt.
- Equity Savings Funds: These funds invest in a mix of equity and debt securities, with a focus on providing tax-efficient returns.
- Monthly Income Plans (MIPs): These funds invest in a mix of equity and debt securities, with a focus on
- Money Market Mutual Funds: Money market mutual funds invest in short-term, low-risk debt securities, such as certificates of deposit, commercial paper, and treasury bills. These funds aim to provide stable returns and are suitable for investors with a low risk tolerance.
- Index Mutual Funds: Index mutual funds aim to replicate the performance of a specific stock or bond index, such as the S&P 500 or the BSE Sensex. These funds invest in the same securities as the underlying index and aim to provide returns that are aligned with the index's performance.
- International Mutual Funds: International mutual funds invest in the securities of foreign companies, providing investors with exposure to foreign markets. Subtypes of international mutual funds include:
- Global Funds: These funds invest in the securities of companies across the globe.
- Regional Funds: These funds invest in the securities of companies in a specific region, such as Asia, Europe, or Latin America.
- Single Country Funds: These funds invest in the securities of companies in a specific country.
- Fund of Funds (FoFs): Fund of Funds (FoFs) are mutual funds that invest in other mutual funds, providing investors with a diversified portfolio of mutual funds. Subtypes of FoFs include:
- Domestic FoFs: These FoFs invest in mutual funds that invest in domestic securities.
- International FoFs: These FoFs invest in mutual funds that invest in foreign securities.
How do Mutual Funds Work?
Mutual funds are created and managed by an investment company, such as BlackRock or Vanguard. The investment company creates a portfolio of securities that reflects the specific goals of the mutual fund. Investors can then buy shares in the mutual fund, either directly from the investment company or through a brokerage account.
The value of a mutual fund is determined by the value of the securities in its portfolio. When the value of the securities in the mutual fund's portfolio increases, the value of the mutual fund also increases. Conversely, when the value of the securities in the mutual fund's portfolio decreases, the value of the mutual fund also decreases.
Advantages of Mutual Funds
There are several advantages to investing in mutual funds, including:
- Diversification: Mutual funds offer investors the opportunity to diversify their portfolio, as they can invest in a basket of securities with a single purchase. This can help to reduce the risk of investment, as the performance of individual securities is less likely to have a significant impact on the overall performance of the mutual fund.
- Professional Management: Mutual funds are managed by professional portfolio managers, who have the expertise and resources to research and select securities for the mutual fund. This can be especially beneficial for investors who do not have the time or knowledge to manage their own portfolio.
- Liquidity: Mutual funds are highly liquid investments, as they can be bought and sold throughout the trading day. This allows investors to easily adjust their portfolio in response to changing market conditions.
- Affordability: Mutual funds are generally more affordable compared to other investment options, such as hedge funds or private equity funds. This is because mutual funds have lower minimum investment requirements and often have lower fees.
Top Asset Management Companies in India
Several of the top Asset Management Companies in India managing mutual funds are :
- HDFC Asset Management Company Limited
- ICICI Prudential Asset Management Company Limited
- Reliance Nippon Life Asset Management Limited
- Aditya Birla Sun Life Asset Management Company Limited
- Kotak Mahindra Asset Management Company Limited
- SBI Funds Management Private Limited
- UTI Asset Management Company Limited
- Birla Sun Life Asset Management Company Limited
- Franklin Templeton Asset Management (India) Private Limited
- DSP Investment Managers Private Limited