Understanding Investment Funds: Similarities and Differences

An investment fund is a collective fund of cash gathered from different investors controlled by fund managers with the objective of buying several securities like stocks, bonds, and associated properties. The concept of investment funds is quite clear and still understandable for a beginner in the stock market. While traditional fixed deposit accounts offer a lower rate of return, mutual funds have a potentially higher return on investment because they buy securities other than individual stocks and thus ensure potential long-term return on investment.

Further down this post, it will be necessary to look at the operations of both mutual funds and index funds to be able to invest wisely. What precisely does it mean to invest in a mutual fund? Which kind of asset is it, and how does one begin participating in this sort of financial instrument?

This paper aims at giving an introduction, history, different classification, benefits, drawbacks and lastly the conclusion on investment funds.

Open End Mutual Funds

Open end mutual funds collect money from different investors so that they can use the money to buy several securities. People transfer money to the fund, and they get stocks as a proof of their stake in the fund's kitty. However, one of the key strengths of mutual funds is high liquidity, where the investor has the ability to redeem their shares at any given time.

Types of Investment Funds

  • Equity Funds: Mainly speculative in nature, these funds mostly invest in stocks: at least 65% of the total assets can be invested in equities and derivatives. These exist in different types to focus on different sectors for instance technology, value or blue-chip stocks.
  • Debt Funds: These funds mainly invest in bonds, treasury bills and other money market instruments and 65% of these funds assets is invested in debentures.
  • Hybrid Funds: A little like equity funds but more like debt funds, the hybrid funds' goal is to try and achieve a middle ground as far as returns and risks are concerned.
  • Special Category: ELSS Mutual Funds: How are ELSS Funds different?

Investment Strategies

  • Lump-Sum Investment: This involves risking a large amount of money in a mutual fund scheme where the investor earns profits based on the performance of the scheme. Though it may be more profitable, it comes with more risk than the first type of speculation.
  • Systematic Investment Plan (SIP): SIP refers to investment made at frequent intervals, which could be as small as ₹100 per month for instance. It ensures investors reduce on the risk involved in an investment and possibly get a better return in the future.

Important Documents Needed for Mutual Funds Investment

There are certain compliance issues such as KYC (Know Your Customer) that investors must abide to. Required documents include:

  • Identity Proof:
    • Recent photograph (in case if PAN card is available)
    • Photo ID proof like Aadhaar card, Passport, Voter ID, Driving License, etc.
  • Residence Proof:
    • Passport
    • Ration Card
    • Utility Bill
    • Aadhaar (UID)
    • Driving License
    • Voter's Identity Card

This guide is an effort to present a detailed understanding of different categories of investment funds as well as the general process of investing to assist individuals as they make a wise decision.