Mutual Funds


What is Mutual Funds?

In the financial industry, there are two concepts that form the basis of most transactional activities. One is savings and the other is investments. There is a huge difference between the two concepts when it comes to execution.


Mutual Funds in terms of financial context, means any money that is spent today in the hope of financial benefits that may be reaped in a future time frame. Any mutual funds is the act of buying or creating assets with an expectation that the same would yield interest earnings or dividend or capital appreciation or any other return that is profitable as compared to the money put in initially. Almost all investments are differentiated from other kinds of transactions based on the aim of the money spent. Money spent on making investments is primarily with the aim of obtaining some sort of return in a specific period of time.


A lot of times people confuse savings with investments. Savings and investment are different from each other in their approach of utilizing the money involved. While saving may be understood as a passive way of accumulating wealth, investment can be seen as a more aggressive way of securing returns. Mostly, under savings, customers avail a savings account and stash away cash in that account. This cash can be used as and when required by the account holder.



Types of Mutual Funds

Bonds

A Bond can be understood as an IOU which is issued by an issuer (borrower) and to a lender. Generally, bonds are instruments used by public and private sector enterprises to raise huge sums of money which any bank is incapable of lending. These bonds are then issued in the public market by the borrowing entity and are bought by lenders for specific amounts of money. Thousands of lenders then come together to lend the required amount and the borrowing organization is able to raise capital for its operational or growth purposes.


However, since money is being lent to the issuer of bonds, there is also an interest component involved that is paid back to the investor in turn for his/her money. This interest is paid at a predetermined rate and for a specific period of time. Bonds fall under the category of fixed income securities since the interest on these can be exactly calculated for the time for which the bond is held. Bonds fall under the debt category and are therefore, comparatively safer financial instruments to invest in. However, with all financial tools risk is inversely proportional to returns and as such the low-risk attribute of this tool makes it a low return instrument as well.


Stocks

Stocks or equity are shares that are issued by companies and are bought by the general public. This offers an avenue to companies to raise funds. Stocks entitle a customer ownership of a company. Shares, stocks and equity all imply the same thing. Shares are one of the most popular investment avenues in the world. This is because the returns offered by stocks is generally higher than any other financial instrument. However, to balance out the high return associated with stocks, the risk associated with these products is also quite high.


Any business may issues different types of shares based on the financial urgency and need. In exchange for the money, shareholders are issued Stock certificates.


Small saving schemes

Small savings is another popular savings tool in the Indian financial market. The name itself suggests that these tools are meant for saving money in small amounts. The idea behind this financial tool is to enable the habit of saving in people from almost all economic sections. Some of the most common small savings tools are Sukanya Samriddhi Scheme, EPF (Employees Provident Fund), NPS (National Pension Scheme, Kisan Vikas Patra, Personal Provident Fund (PPF) etc. Almost all small savings schemes are initiated and facilitated by the government so as to enhance the spread and penetration of savings schemes in the country. Let us look into some of the most prominent schemes out of these.


Employees Provident Fund

Employees Provident Fund is another small savings scheme that is primarily offered by your employer. This includes salaried individuals of both private and public organizations. Any company with a workforce of more than 20 employees is mandated to register for the EPF scheme. Around 12% each month is deducted from the salary and contributed towards the EPF account of an employee. This EPF account is maintained by the Employees Provident Fund Organization, commonly known as the EPFO. The amount deposited towards EPF is eligible for tax exemption under section 80C of the Income Tax Act.


Sukanya Samriddhi Scheme

Sukanya Samriddhi Yojana is a special scheme which has been launched by the central government to facilitate the financial wellbeing of girl child in the country. This scheme can be availed by parents or legal guardian of a girl child and an amount as low as Rs.1000 per annum can be deposited under the scheme. The account matures only after the girl child reaches the age of 21. Premature withdrawal is allowed only after the girl reaches the age of 18 years and has financial need pertaining to wedding or education.


Fixed Deposits

As the name itself indicates, fixed deposits are financial instruments that are one of the oldest and safest ways to save money. These are not necessarily active investment tools, but are rather a passive way to save and earn returns. A fixed amount of money is kept aside with a financial institution for a fixed number of days or months or years. In turn, interest is earned on this money. The rate of interest differs with the deposit tenure and also with the banking entity.


Similar to fixed deposit is the concept of recurring deposit. However, the only point of difference in the two investment tools is that while a lump-sum amount needs to be fixed in case of fixed deposit, a smaller amount needs to be deposited at regular intervals in case of a recurring deposit. Hence, customers who do not have a large chunk of money to fix in a single go can opt for a recurring deposit wherein money is usually deposited monthly for a specific deposit tenure. The rate of interest earned on recurring deposit is similar and comparable to that earned on fixed deposit.


Hedge Funds

These can be understood as a professionally managed private investment company or partnership structure. Techniques to manage the fund can be those that are not commonly allowed for SEC regulated companies. Hedge funds invest in both financial derivatives and/or publicly traded securities. These are popular as an alternative investment tool owing to their high leverage and high returns. However, they are characterized by high fees as well as low liquidity. It is seen that managers of hedge funds generally have a personal stake in the fund.


Private Equity

Private equity is trading in shares of an operating company that is not publicly listed and whose shares are not available on the stock market. Institutional investors employ various strategies to indulge in private equity trading. Private equity is popular since it offers diversification of financial portfolio by allowing investment in avenues that are not tightly coupled to normal investments.


Why is Mutual Fund important

Mutual is one of the most important aspects of financial planning. The aim is to make sure that the money earned by you does not lie around being unproductive. It is a good and profitable idea to make money from any extra cash that a person might have. Investing in various financial products lends growth to any financial portfolio. One thing that is absolutely clear is that any amount of money is sure to appear less with each passing day. This is because the value of say Rs.1000 will not be the same 5 years down the line as it is today. Same holds true for the value of Rs.100 10 years ago as compared to its value today. Hence, it is important to understand that saving alone is not enough for future financial goals. Any investor or common man needs to ensure that his or her money grows as well. Investment can be defined as any activity that involves using money in a way which offers returns in future. Mentioned below are some of the most important reasons for investing money.



Investing money in various financial avenues ensures that your money grows instead of just lying there in your bank account.


Investments yield returns which take care of emergency expenses such as medical expenditure etc.


Investments are a good way to earn income from your accumulated wealth. For example, earning rent from a real estate investment or earning dividends from stock market investment