What is Mutual Funds, All About Mutual Funds in Simple Words?

What are mutual funds?

Simply put, mutual funds are nothing but a savings tool, just like a lot others, FD, RD, LIC etc, that help you grow your investment much better than savings in a bank.

In a more defined manner, as stocks are traded in the stock market. Mutual funds are a collection of certain stocks, so instead of picking stocks yourself, there’s a dedicated team of people who do the hard work for you, and create a portfolio of certain stocks, so you can then invest a certain capital and based on the NAV a certain number of units are allocated to your account, to understand better about nav and how units are allocated, do check out our article about nav.

These were just simple definitions, let’s look at some of the more official definitions.

Investopedia: “A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.”

Wikipedia: “A mutual fund is an open-end professionally managed investment fund that pools money from many investors to purchase securities.”

Not so intuitive, right? So, for now, let’s just stick to our definition of the mutual fund, and in the upcoming section we’ll get a much clearer picture of what they are and how they differ from other saving options.

Why to invest in mutual funds?

Now this is an important question and it will also help us understand what mutual fund are more clearly. What should you invest in mutual funds? As we have already seen there are multiple reasons not to keep your money sittle idle in your bank account. Mutual funds are one of the ways to diversify your portfolio, allowing you to get much better returns than you would ever have in your savings account.

So, that’s it! To get more returns, and two diversify your portfolio.

The first reason is pretty simple, everyone wants more return on their investment, so no need to explain that. But the second point about diversification, that is covered in more detail in our article, diversifying your portfolio. But even if you focus on the first point, without worrying too much about the second point for now, read on to what are the pros and cons of investing in mutual fund.

Advantages and Disadvantages of Mutual Funds in India?

Just like every coin has two sides, so there are pros and cons of mutual funds. We have covered the benefits already in the second point. But there are also certain things we need to be careful of when investing money in mutual funds. The biggest downside is that since most of the mutual funds are market based, if due to any reason, the market is falling down, and the mutual fund that you’ve purchased has some allocation in the shares which are decreasing, then it may impact the nav and you may result in loss. Then? What’s the solution? Well the solution is that mutual funds are more of a long term investment, so in the long run, (about 5 to 10+ years) mutual funds will give you more and better results in almost all of the cases. Again, we are not saying in all the cases, because anything that is related to the market can’t ever be 100% certain. But the probability of that worse case scenario is very minimal, and is extremely unlikely to happen. How unlikely? Click here to find out the times when markets had the most fall in history. But as is evident from today’s market, eventually the markets will rise up in the long term.

Types of Mutual Funds:

Mutual funds can be categorized based on many things, the lock in period, the type of area where money is invested.

Based on structure:

Open Ended -> No lock in period
Closed Ended -> Units are locked for some time
Interval funds -> A cross between open-ended and closed-ended funds

Based on asset class:

Equity funds -> Major investment is done in equity
Debt funds -> Major investment is done in the debt sector, such as government bonds.
Hybrid funds -> This is a hybrid approach where some of the investment is made in equity and some is invested in the debt market.

Based on investment goals:

Growth Funds -> Funds that invest primarily in high-performing stocks with the aim of capital appreciation are considered growth funds
ELSS (Tax saving) -> Funds that invest primarily in high-performing stocks with the aim of capital appreciation are considered growth funds
Liquidity-based funds -> Funds that are targeted towards maintaining liquidity so that there is no lock in period and units can be sold whenever cash is needed.

How To Invest In Mutual Funds In India?

There are various options to invest in mutual funds in India, from banks to brokerage houses. These days most of the banks have the option to directly invest in mutual funds. You can also open an account in zerodha, and start a SIP, or in any of the top brokers. Zerodha actually has a completely separate app for managing mutual funds, and that is coin, so is with many other brokers as well.They all may differ slightly in UI design, but the basic set of operations is the same. You open the app, search and select the mutual fund in which you want to invest, and place an order, that’s it! To check out a graphical tutorial of purchasing mutual funds or placing a SIP in zerodha and upstocks, check out our article here. 

Best Mutual Funds To Invest In 2022 India.

Best mutual funds in India, as per value research online:
– SBI BLUE CHIP Fund (one of the best in growth, long term)
– Axis Liquid Fund (one of the best in liquid funds)
– Axis Long Term Equity (one of the best in ELSS/tax-saving)
– Axis Gilt Fund (one of the best in debt fund)