Mutual Fund: Meaning,Types and role in the development of the economy?
Meaning of Mutual Fund?
A mutual fund is a type of group investment or A Mutual Fund is a professionally managed firm of collective investments. A group of investors (retail or institutional in nature) jointly invest in stocks, bonds, short-term investments, or other securities.
This group investment is managed by a fund manager who determines the fund's investments and maintains a profit and loss account.
Types of Mutual Fund:-
Mutual funds are divided into several categories on the basis of risk, return, size, and investment. We have explained just four categories here;
1. Equity funds
2. Fixed-Income Funds
3. Hybrid Mutual Fund
4. Solution-Oriented Mutual Fund
Let's study them one by one
1. Equity funds:-These schemes invest money directly into shares. These schemes can be risky in the short term, but in the long term, it helps you to earn the best returns. On the basis of the size of the companies, they are further divided into small-cap, mid-cap, and large-cap. These types of mutual funds are preferred by those who like to take the risk.
2. Fixed-Income Funds:- These types of mutual funds give fixed returns to the owners. Fixed return funds are; corporate bonds, government bonds, or other debt instruments. The manager basically passes interest income to its investors. This type of investment is done by those investors who don't want to take the risk.
3. Hybrid Mutual Fund:- Hybrid Mutual Fund or exchange-traded funds (ETFs) invest in more than one type of investment security, such as stocks and bonds. These Mutual Fund schemes invest in both equity and debt. While choosing these schemes, it is important for investors to take care of their risk-taking ability.
4. Solution-Oriented Mutual Fund:- Solution-Oriented Mutual Fund schemes are made according to a specific goal or solution. These may have goals such as retirement schemes or education of the child. You are required to invest in these schemes for at least five years.
Features & Benefits of Mutual Funds
1. Risk diversification: - Diversification of funds into equity and debt securities
2. Liquidity: - The Investor can make partial or full withdrawal as per his/her requirement
3. Transparency: - Investors know exactly where the money is being invested
4. Low cost: - No entry load while investing in mutual funds
5. Professional Management:- Industry experts manage the funds
6. Tax-efficient:- The Investors get tax benefits in equity and debt funds
7. Flexibility: - Flexibility to switch investment funds from one fund to another
Role of Mutual Funds in the Economic Development
As the definition of the Mutual Funds says that its a pool of collective investment by the different investors and institutions.
1. It helps in arranging the money for investment purposes in the economy.
2. It mobilise the small savings of the public through investment.
3. We know that developing countries like India lacks capital accumulation. So mutual funds help in capital accumulation which is crucial for the development of a developing country like India.
4. It discourages the idle hoarding of the money in the house.
5. It helps in creating an environment of investment in the country.
6. It is helpful in employment generation.
So in conclusion, it is wise to say that mutual fund helps in generating the money for the seeding of many big investment projects in the country.