Mutual funds represent some of the highly preferred avenues for investments and in these cases, an AMC or asset management company takes money from several willing investors and this money is then invested across several market instruments which include securities, debt, money markets and equity. Profits are then allocated to investors based on how much they actually invested. The Association of Mutual Funds or AMFI is the apex body that regulates the working of mutual funds in India. Further, in order to invest properly in the best performing mutual funds, it is imperative to understand its different types which are as follows:
1. Equity: also known as growth funds, these invest exclusively in the stocks of domestic companies listed on the stock exchanges. These funds are usually perceived as having higher levels of risk.
2. Money market: these are intended for investors who are on the lookout for short-term profits and easy liquidity. Categorized as low-risk funds, these funds are invested in money market instruments such as Treasury bills, Commercial Papers, Repurchase Agreements, and government securities.
3. Debt: also called income funds, these provide fixed returns by investing exclusively in low-risk fixed income securities.
4. Hybrid or balanced: these funds invest in both fixed income securities (debt) and stocks (equities). Thus they offer a balanced portfolio to investors.
5. Close-ended: These funds come with fixed maturities, and thus, you cannot easily withdraw or close before maturity.
6. Open-ended: these can be withdrawn at any point of time and you will get refunds within a week. More and more mutual funds are offering open-ended fund options these days.
Calculation of the value of the fund is usually done on the basis of the NAV or net asset value system which equates to the net expenditure incurred for every mutual fund unit. The AMC works this out post every working day. An annual fee is imposed by these asset management companies which the investors have to shell out and this takes care of costs involved in paying salaries, brokerage expenditure, administrative costs and advertising related expenses. The bigger the size of the fund, the lower the fee that is charged annually as a thumb rule.