A mutual fund is an efficiently managed investment fund that pools money from many investors to purchase securities and also we can say which is further invested by a professional fund manager. The fund manager can invest this pooled money to purchase securities like stocks, bonds, gold, or any combination of these. Every mutual fund works around certain investment objectives and attempts to achieve the same. The fund manager plans the investment accordingly and allocates the asset between stocks and bonds. Combining all, these securities form the portfolio composition of the selected scheme.
All investments carry some risk, but mutual funds are typically considered a safer investment than purchasing individual stocks. Since they hold many company stocks within one investment, they offer more diversification than owning one or two individual stocks.
There are four broad types of mutual funds: Equity (stocks), fixed-income (bonds), money market funds (short-term debt), or both stocks and bonds (balanced or hybrid funds)
When it comes to mutual funds, you can make money in three possible ways: Income earned from dividends on stocks and interest on bonds. A mutual fund pays out nearly all of the net income it receives over the year (in the form of a distribution). … Most funds also pass these gains on to their investors.
FDs give guaranteed returns while mutual funds are subject to market risks. However, if you understand your risk appetite and invest accordingly, mutual funds can be good investment options in a declining interest rate environment.
If you are wondering can mutual funds lose money, then the answer is yes as some mutual fund categories are more volatile. This means, while they might offer great returns, they can also offer higher risk. If you feel you are not up for the risk, you should look at the performance of mutual funds from other categories
If you’re concerned that mutual funds are a type of dodgy investment, rest assured that they’re completely safe. No mutual fund house can steal your money because it is regulated and supervised by the SEBI (i.e. Securities and Exchange Board of India) and the AMFI (Association of Mutual Funds in India).
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Bond funds are generally considered safer than equities, which also means they often have generally lower returns. But they often earn a higher return than money market funds, which also invest in debt securities.
The majority of mutual funds are liquid investments, which means they can be withdrawn at any time. Some funds, on the other hand, have a lock-in term. The Equity Linked Savings Scheme (ELSS), which has a 3-year maturity period, is one such scheme.
By buying mutual funds you can get the benefit of diversification with the same investment and thus reduce your risk. … The SIP, on the other hand, is just a method of investing in a mutual fund. You can either reinvest in a mutual fund as a lump sum or as a SIP. The SIP stands for Systematic Investment Planning.
However, mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high expense ratios charged by the fund, various hidden front-end, and back-end load charges, lack of control over investment decisions, and diluted returns.
Long-term capital gains tax in equity funds is 10% + 4% cess provided the gain in a financial year is over Rs 1 Lakh. Long-term capital gains up to Rs 1 Lakh are totally tax-free.