Reviewed by Aug 27, 2020| Updated on
Mutual funds are the type of financial vehicle made up of a pool of money from various investors. It gives small or individual investors access to the diversified, professionally managed portfolio at a lower price. Before investing in mutual funds, investors should understand the mutual fund types and their features. The mutual funds are divided on the basis of assets class, structure, investment goals and risk profile. Also, there are some specialised mutual funds which are not covered under the categories mentioned earlier. Such as sector funds, index funds, emergency funds, real estate funds, etc.
Understanding Mutual Funds
Mutual fund pools money from investors and use it to buy other securities such as stocks and bonds. The value of the mutual fund company depends on the performance of the securities it buys. Investing in a mutual fund is different from investing in shares or stocks. Unlike shares, investors do not get any voting rights when they invest in mutual funds. When you are buying a unit of a mutual fund, you are actually purchasing its portfolio or a part of the portfolios value. That's why the price of a mutual fund unit is referred to as the net asset value (NAV).
In India, mutual funds are primarily regulated by the Securities and Exchange Board of India (SEBI). Along with SEBI, mutual funds are regulated by RBI, Companies Act, Stock exchange, Indian Trust Act and Ministry of Finance.
Factors to consider before you invest
Mutual fund shares can typically be purchased or redeemed as needed at the funds current NAV, which—unlike a stock price—doesn't change during market hours, but it is settled at the end of each trading day.
One should invest in mutual funds because of the following reasons:
- Lowest lock-in period
- Expert management
- SIP option available
- Flexibility to switch funds
- Affordable investment
You can invest in mutual funds through three different ways:
- Direct investment: Visit the nearest branch of the fund house to collect an application form or download it from the web.
- Agents: The agent helps you with the application process, transactions, redemption, and cancellation. They charge a commission for their services.Online mode (distuributors/fund houses)