Invest in Mutual Funds only after knowing the Basics

Mutual funds have become a popular investment over the last few years. Mutual funds give an investor a lot of exposure to different sectors and industries without letting him pick an individual stock. Mutual fund is an appropriate investment option for a common man as it offers a diversified and professionally managed portfolio of securities at a relatively lower cost. However, it is very important to know the basics before investing in a mutual fund, which will help you make better investment decisions.

What are the different types of mutual funds?

Mutual fund schemes vary based on their structure and investment objective. - By Structure

Open-Ended Mutual Funds

An open-ended fund is the one which is open for subscription throughout the year. An investor can buy and sell the units anytime as per the net asset value (NAV) at that time. Also, these funds do not have a fixed maturity period.

Closed-Ended Mutual Funds

A close-ended fund is the one which is not open for subscription throughout the year. An investor can invest in such funds only during the new fund offer (NFO). Thereafter, they can buy and sell the units after the fund is listed on the Bombay Stock Exchange (BSE).

- By Investment Objective

Growth Mutual Funds

Growth funds are for investors who want to invest for a longer period of time. These funds aim to provide capital appreciation over medium to long term. Majority of the corpus of such schemes is invested in equity.

Income Mutual Funds

As the name suggests, the aim of income funds is to provide a regular income to its investors. These schemes usually invest in fixed income securities like bonds and government securities. As these funds invest in fixed income securities, risk is lower than that in a growth fund.

Balanced Mutual Funds

A Balanced funds aim to provide both growth and regular income to its investors. These funds invest a part of their earning in both equity and fixed income securities. These funds are ideal for investors who are looking for a combination of regular income and growth.

What are the different plans that mutual funds offer?

Mutual funds offer two investment options - growth option and dividend option.

Growth Option in Mutual Fund

Under the growth option, all profits made by the fund are invested back into the scheme. An investor does not receive any intermediate payments in the form of bonus and dividends. An investor gets returns only on selling the units, which is determined by the net asset value (NAV) of the scheme. Under growth option, the NAV of the fund increases over a period of time which helps in capital appreciation, thereby giving you more returns.

Dividend Option in Mutual Fund

Under the dividend option, an investor receives regular income at periodic intervals in the form of a dividend. In this option, whenever the NAV of the fund reaches a certain level, the fund distributes the profit to its investors as dividend. Hence, the NAV of the fund does not change drastically at the time of selling the units. Also, the power of compounding is less in the dividend option.