BASICS OF MUTUAL FUND

Basics of mutual fund

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A mutual fund is a professionally managed investment vehicle made up of a pool of money collected from many individual and institutional investors to invest in various securities like stocks, bonds, and other assets. Mutual funds allow individual investors to participate in broadly diversified, professionally managed portfolios by purchasing shares in the fund rather than having to select individual securities on their own. Most mutual funds focus on specific asset classes like stocks, bonds, cash equivalents, or other specialty assets based on the fund's goals and risk parameters.

When an investor buys shares of a mutual fund, they are acquiring fractional ownership in the fund's underlying portfolio of assets. The investor's returns are dependent on the performance of the fund's holdings. The price per share of the fund, known as the net asset value (NAV), fluctuates daily based on the changing market value of the fund's investments.

Mutual funds have a wide variety of investment objectives spanning various asset classes, risk profiles, and strategies. Some common types of mutual funds include:

  • Equity funds -

    Focus on investments in stocks across various market capitalizations, sectors, industries, and geographies. Growth stock funds and value stock funds are common examples.
  • Fixed income funds -

    Invest primarily in bonds, debt securities, and other fixed income instruments. May include funds focused on government, corporate, municipal, high-yield, and international bonds.
  • Money market funds -

    Invest in short-term debt instruments like cash equivalents, commercial paper, Treasurys, and certificates of deposit. They offer stability of principal and liquidity.
  • Balanced funds -

    Hold a mix of stocks and bonds in an effort to balance risk, return, growth and income objectives. The allocation across asset classes depends on the fund's specific objectives.
  • Index funds -

    Aim to match the performance of a specific market index like the S&P 500 by replicating the index's portfolio of holdings. Offer low-cost passive exposure.
  • Sector funds -

    Invest solely in securities from a single sector such as technology, healthcare, real estate, precious metals, or a particular industry. Allow tactical sector bets.
  • International/global funds -

    Invest in securities from companies located anywhere in the world, including both developed and emerging markets. Provide geographic diversification.
  • Alternative funds -

    Hold more complex specialized investments like commodities, currencies, derivatives, hedge funds, private equity, and complex trading strategies.

Key advantages of mutual funds include professional security selection and money management, diversification across a range of assets, daily pricing and liquidity, variety of investment strategies and asset classes, affordability even with smaller investment amounts, and overall convenience. Investors can purchase mutual funds directly from fund companies or through brokerages, banks, insurance companies, and other financial institutions. Many employer-sponsored retirement plans like 401ks also offer mutual funds.

There are risks associated with mutual funds depending on the underlying assets held. Equity funds come with general stock market risk and potentially lower returns during bear markets. Bond funds face interest rate risk, credit risk, and inflation risk. International and emerging market funds carry political risk, currency risk and exposure to more volatility. Actively managed funds run the risk of underperforming their benchmark index.

When evaluating mutual funds, key factors to consider include the fund's historical returns compared to peers and benchmarks, risk metrics like standard deviation and Sharpe ratio, fees and expenses, manager tenure, fund company reputation, investment objectives, and overall portfolio fit. Monitoring a fund's holdings, strategies, costs, and performance relative to objectives helps determine if it remains an appropriate investment option over time. Investing in mutual funds should align with one's risk tolerance, time horizon, tax considerations, and asset allocation needs.

With thousands of mutual funds spanning every asset class, sector, and strategy, investors have an enormous selection to choose from. Working with a financial advisor can help identify appropriate funds that fit within a coordinated portfolio based on customized investment goals. Utilizing mutual funds as core portfolio building blocks provides helpful professional management and diversification.

 


An investor education initiative by Edelweiss Mutual Fund


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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME-RELATED DOCUMENTS CAREFULLY

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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.