Investing in market linked avenues is always popular among investors as it offers them the opportunity to earn attractive returns. Mutual funds are one such avenue which are market-linked and popular among investors. So what exactly are mutual funds? Let us understand
In simple terms, mutual funds are professionally managed portfolios which invest in different types of securities based on a particular investment objective. Mutual funds collect investments from different investors and pool them in a fund. Thereafter, the pooled fund of money in invested in different types of stocks and securities. As the value of the invested securities increase, the value of the fund increases and investors earn.
Let’s understand with an example
- Say 10 investors invest Rs.100 each in a mutual fund accumulating a corpus of Rs.1000.
- Now, let’s say this collective corpus is invested in 10 units of three different stocks each worth Rs.35, Rs.25 and 40 respectively.
- Total investment is Rs.1000 and the total units bought is 30
- Each investor gets 3 units each at a Net Asset Value of Rs.33.33
- Suppose the price of the first stock increases to Rs.40. Now, the total value of portfolio becomes Rs.1050
- The per unit price would become Rs.35
- Thus, every investor would earn a profit as the per unit value of the portfolio increases
Mutual funds are broadly categorized into three types of funds which are as follows:
| Equity mutual funds | Debt mutual funds | Balanced mutual funds |
| 65% of the portfolio is invested in equity | A major portion of the portfolio is invested in debt | The portfolio is invested in a mix of equity and debt investments |
| High risk high return profile | Low risk low return profile | Moderate risk moderate return profile |
Mutual fund investments are beneficial for investors in many ways. These include the following:
- Mutual funds allow small investors to invest in financial markets and earn market-linked returns
- Mutual funds are professionally managed thereby ensuring expertise in handling your investments
- Risks under mutual fund investments are diversified. Even equity mutual funds, which are risky, diversify the risks across stocks of different companies
- The returns offered by mutual funds are inflation adjusted
- Returns earned from equity mutual funds enjoy tax benefits. Long term capital gains up to Rs.1 lakh are tax-free
- Investment in Equity Linked Saving Scheme qualify as deduction under Section 80C up to Rs.1.5 lakhs
Mutual funds are, therefore, a beneficial investment avenue which you can choose if you have a healthy risk appetite and want to earn market-linked returns.