What are Mutual Funds? How does it work?
A Mutual Fund is a trust that pools the money of a number of investors who share the same financial goals. The money collected by the fund management company is invested in a combination of investments such as Equities’ Bonds and money markets, depending upon the investment objective. The income earned through these investments and the capital appreciation realized by the scheme is shared by its unit holders in proportion to the number of units owned by them.
What are Equity, Hybrid and Debt Funds?
Equity, Hybrid and Debt are three different types of investments.
Equity funds invests mainly in the Stock market. Each fund states its investment objective and invests the money pooled by the investors in stocks of companies that meet the stated objective. For e.g.- Sundaram Capex Opportunities Fund invests in companies that benefit from the infrastructure development and capital expenditure that is taking place in the Indian economy. So majority of the assets will be invested in companies that benefit from the above-mentioned objectives.
The advantages of owning Equity funds is that they give substantially higher returns for your money compared to other investment options.
The disadvantage is that these high returns come with a certain amount of risk and there is a chance that you may lose the invested money.
Debt funds invest in long term or short term papers that are issued by companies, banks or the government. These papers can be redeemed on a particular date at a pre-determined rate of interest. Once again, each debt funds invests the investors money as per the stated investment objective.
The advantage of Debt is that it is a less riskier option compared to equity schemes, though there is no guarantee of the returns.
The disadvantages are low returns compared to equity funds and returns are subject to interest rate fluctuations.
Hybrid Funds are funds that are a Combination of Equities and Debt funds. An equity-oriented hybrid fund must invest atleast 60% assets in equity funds. The same logic applies to a debt-oriented hybrid funds, with atleast 60% assets lying in debt schemes.
These schemes are suitable for first-time investors who would like to get a feel of both asset classes.
What are Open-end and Close-end Schemes?
Open-end schemes allow investors to transact (buy, sell, switch) on any business day.
Close-end schemes do not allow investors to transact on any business day. They specify a time horizon for which they will remain close-end post which they can either be converted to open-end or the scheme ceases its operations after redeeming all unit-holders.