Question

Ms. Goyal, after completing her graduation, recently joined a bank. With a steady income and good growth prospects for her career, she intends to save regularly and increase the amount of savings gradually over the years. Her colleagues in the bank have advised her investing in Mutual Funds (MFs), as a suitable option for her. However, Ms. Goyal is not at all familiar with MFs. Advise Ms.Goyal with the below queries:

a. Explain brief on Mutual Funds and its features.

b. Enumerate any four types of Mutual Fund to Ms.Goyal

Answer 1

a.

Mutual Fund is a commingled investment pool of funds collected from various investors who are willing to invest in securities, equity, bonds etc. For example : A mutual fund raises money from 5 investors and issues 10,000 shares. Each shares has an value of $10. Now, the mutual fund invests this money in stocks and if the value of stock goes up to $150,000 from $100,000, the wealth of investor grows. The wealth grows by 50%. The investors can claim their wealth proportionate to what they invested in the beginning.

Features of Mutual Fund

• Managed by Experts : Mutual fund hire experts to manage money of investors. An investor willing to invest in stock market may not be able to analyse the various different market. Therefore, investing in mutual fund ensures that his/her investment is managed by experts.
• Lump Sump or SIP : In mutual fund you can invest lump sum amount or you can opt for SIP i.e.. Systematic Investment Plan where in you can invest your money in equal payments over a period of time.
• Transparency : Mutual Funds provides with all the information regarding the investment they made and in what proportion. You can check all the relevant data of your money like where it is invested, in what quantity etc.

b. Types of Investment :

1. Money Market Fund : These funds make investment in short term money market such as government securities, treasury bills, commercial papers etc.They are risk free investment, however, return on these investment are also less.
2. Bond Market Fund : These funds makes investment in fixed income bonds. Investment may include corporate bond and government bonds. The interest of income is fixed and is payable at equal interval. The income is steady and almost risk free.
3. Stock/Equity Market Fund : These funds make investment in stock or shares of companies listed on the stock exchange. The funds are divided in various categories such as Mid-Cap, Small-Cap, Large-Cap and these funds make investment according to their categories. For example a Mid-Cap mutual fund will make investment in Mid-Cap companies. The investment are riskier. However, the returns are huge.
4. Index Market Fund : These funds make investment in various indexes such as S&P 500 or Dow Jones. The return is based on the performance of the index. Index is a measure of cumulative performance of the listed companies in that particular index.

If you have any doubt, ask me in the comment section.