Mutual funds are an interactive and organized platform where investors invest their money in various asset classes and earn good returns.
It is actually an intelligent Saving Scheme as it helps investors in saving their money by investing it in a small purchase in the form of shares.
The money invested by investors is used by the mutual fund company for investing in a scheme to operate in the market so as to earn good returns which is then shared back to the investors who invested the money.
It is a beneficial two-way scheme benefiting both sides by sharing the profit earned among them.
Mutual funds are basically classified into three categories on the basis of their investment:
- Small-cap mutual funds
- Mid-cap mutual funds and
- Large-cap mutual funds
In the first two types of mutual funds, the funds are invested in small companies with small market capitalization whereas in the last type of mutual fund, the funds are invested in large companies with large market capitalization.
All types of mutual funds have their own benefits in accordance with the investment.
Risk and reward in mutual funds
Where there is a reward, there is a risk. Mutual funds offer decent returns to investors who invest their money, but it also comes with a certain risk.
Some benefits or rewards provided by mutual funds are:
- Decent returns – Mutual funds provide decent returns to investors.
- Regular source of income – Mutual funds also come with a scheme for helping those who are looking for a stable source of income for their regular needs.
- Liquidity – Mutual funds offer a high degree of liquidity by allowing the facility of instant redemption of money as and when required by the investor.
- Regulation – Mutual funds are regulated by SEBI (Securities and Exchange Board of India) providing confidence in the form of security to investors.
In addition to all benefits, certain risk factors are also associated with mutual funds.
The risk in mutual funds depends upon the type of fund investors are investing in.
- Mutual funds are not like bank savings account. Returns are not always guaranteed.
- The value of investment declines if there is a decrement in the investment market.
- Funds can’t sell an investment which is deteriorating in value because there are no buyers.
- If a bond issuer cannot repay a bond worth, eventually it may end up becoming a wasteful investment.
Many different types of mutual funds are available in the market with various benefits and associated risks. As it is said, mutual funds are subject to market risks therefore one should take into consideration all the factors required to be taken care of before investing in any mutual fund scheme.
