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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. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. The returns generated from the mutual fund investment are distributed proportionally among the investors. A professional and competent manager who has a sound knowledge of the financial market manages the fund, thus bridging the gap of layman’s knowledge of the financial world and that of an expert.
- REGULAR PLAN vs DIRECT PLAN
- EQUITY FUNDS
- DEBT FUNDS
- LIQUID FUNDS
- ELSS
- Regular Plan: Regular plans are those mutual fund plans that are bought through an intermediary. These intermediaries can be brokers, advisors, or distributors. The intermediaries charge the fund house a certain fee for selling their mutual funds. The expense ratio for regular mutual funds is slightly higher than direct mutual funds. Hence the returns tend to be a little higher for direct plans. A regular plan best suits to investors who do not have the knowledge about the market nor the time to monitor their portfolio. They receive expert advice at a nominal fee.
- Direct Plans: Direct Mutual Fund is the type of mutual fund that is directly offered by the fund house. In other words, there is no involvement of third-party agents – brokers or distributors. Since there are no third-party agents involved, there are no commissions and brokerage. Hence the expense ratio of a direct mutual fund is lower. Thus, the return is higher due to a lower expense ratio. The direct plan of a mutual fund can be easily identified; the word ‘Direct’ is prefixed in the name of the fund. These mutual funds can be bought through either online or offline mode.
Equity funds primarily invest in stocks, and hence go by the name of stock funds as well. They invest the money pooled in from various investors from diverse backgrounds into shares/stocks of different companies. The gains and losses associated with these funds depend solely on how the invested shares perform (price-hikes or price-drops) in the stock market. Also, equity funds have the potential to generate significant returns over a period. Hence, the risk associated with these funds also tends to be comparatively higher.
Debt funds invest primarily in fixed-income securities such as bonds, securities and treasury bills. They invest in various fixed income instruments such as Fixed Maturity Plans (FMPs), Gilt Funds, Liquid Funds, Short-Term Plans, Long-Term Bonds and Monthly Income Plans, among others. Since the investments come with a fixed interest rate and maturity date, it can be a great option for passive investors looking for regular income with minimal risks.
Like income funds, liquid funds also belong to the debt fund category as they invest in debt instruments and money market with a tenure of up to 91 days. The maximum sum allowed to invest is Rs 10 lakh. A highlighting feature that differentiates liquid funds from other debt funds is the way the Net Asset Value is calculated. The NAV of liquid funds is calculated for 365 days (including Sundays) while for others, only business days are considered.
ELSS or Equity Linked Saving Scheme also known as tax-saving funds, over the years, have climbed up the ranks among all categories of investors. Not only do they offer the benefit of wealth maximization while allowing you to save on taxes, but they also come with the lowest lock-in period of only three years. Investing predominantly in equity (and related products), they are known to generate non-taxed returns in the range 14-16%. These funds are best-suited for salaried investors with a long-term investment horizon.