There are several key objectives of mutual funds, aiming to cater to the diverse needs and preferences of investors.
Firstly, they provide professional management of investments by employing experienced fund managers who make strategic decisions to achieve the fund's objectives.
Secondly, mutual funds aim to diversify investments across various asset classes, such as stocks, bonds, and money market instruments, to reduce overall portfolio risk and potentially enhance returns. Read the full blog to explore the key investment objectives of mutual funds.
Overview of mutual funds in India
Mutual funds play a significant role in India's financial structure and working, offering investors a range of investment options and benefits. The industry has experienced substantial growth, driven by increasing investor awareness and regulatory reforms. SEBI regulates the mutual fund industry, ensuring transparency and investor protection. Investors can choose from various mutual fund types, including equity, debt, and hybrid funds, tailored to different risk profiles and investment objectives. Distribution channels such as AMCs, banks, and online platforms facilitate investor access to mutual funds. Investor education initiatives promote financial literacy and responsible investing. Technological advancements have made investing more accessible, with online platforms enabling convenient transactions and monitoring.
What are the objectives of mutual funds in India?
Professional management
Mutual funds aim to offer professional management of investments to both individual and institutional investors. Fund managers utilise their expertise to select and manage investments across various asset classes like equity, debt, and money market instruments. They adhere to an internal investment model tailored to achieve the fund's objectives effectively.
Diversification
Mutual funds provide investors with the advantage of diversification by spreading investments across different sectors and asset classes. This strategy helps mitigate overall portfolio risk and ensures a well-diversified investment, potentially yielding better returns that are often adjusted for inflation.
Capital protection
Many mutual funds prioritise capital protection as a primary objective. This feature is particularly appealing to risk-averse investors seeking stability in their investments. Although returns may be lower compared to more aggressive funds like pure equity or aggressive hybrid funds, the risk associated with these funds is significantly reduced.
Liquidity
Mutual funds offer investors the flexibility to redeem their investments at any time, providing liquidity. This feature is valuable, especially for investors who allocate a portion of their emergency fund to mutual funds. It ensures accessibility to funds when needed, enhancing financial security.
Convenience
Investing in mutual funds is convenient and straightforward. Investors can buy or sell units of a mutual fund scheme through various channels such as online platforms, agents, distributors, or directly from the mutual fund company. Additionally, investors can choose between SIP or lump sum investment modes based on their capital availability, enhancing flexibility and encouraging broader investor participation.
What are the functions of mutual funds in India?
In India, mutual funds perform several key functions such as mobilising funds from investors and investing them in a diversified portfolio. Also, they allow investors to benefit from professional expertise and earn decent returns while managing risks.
For more clarity, let’s check out some of the primary functions of mutual funds in India:
Investment management
Mutual funds collect money from investors and invest it in a variety of securities, such as stocks, bonds, and money market instruments. The goal is to create a diversified portfolio that represents the investment objectives of the mutual fund scheme.
Be aware that fund managers are responsible for selecting and managing these investments to:
- Optimise returns
and - Minimise risks
This process mostly involves continuous monitoring and rebalancing of the portfolio. Such techniques ensure that the investments made by the fund meet the stated goals and adapt to changing market conditions.
Professional expertise
Mutual funds employ experienced fund managers. They specialise in different types of investments. These professionals utilise their expertise to make informed decisions about which securities to buy or sell. Also, they evaluate the various investment opportunities by:
- Performing extensive research
- Making a deep market analysis
- Analysing financial data
Most fund managers use their knowledge to maximise returns for investors while managing risks. Their expertise provides individual investors with the benefit of professional management that they might not have on their own.
Transparency
Mutual funds in India are committed to maintaining transparency with their investors. They regularly provide detailed reports on the performance of the fund. Commonly, this includes updates on the:
- Returns
- Portfolio holdings
- Any changes in investment strategy.
This information is mostly disseminated through newsletters, annual reports, and online updates. By keeping investors informed about the fund’s activities and performance, mutual funds help them make better investment decisions..
Risk management
Effective risk management is a crucial function of mutual funds. Mutual funds diversify their investments across different sectors and asset classes to minimise risk. This reduces the impact of any single investment’s poor performance on the entire portfolio.
Additionally, fund managers use various risk management techniques, such as hedging and asset allocation strategies. Such careful management protects investors' capital while aiming for reasonable returns.
Convenience
Mutual funds offer a convenient way for individuals to invest and gain exposure of a diversified portfolio of securities. Investors can easily buy or sell mutual fund units through various channels, such as:
- Online platforms
- Financial advisors, and
- Directly from mutual fund companies
This flexibility makes it simple for investors to enter or exit their investments as needed. Moreover, mutual funds handle the complex process of buying, selling, and managing individual securities on behalf of their investors.
Also read: What is a mutual fund
Types of mutual funds based on investment objectives
Mutual funds are designed with specific investment goals in mind. Some aim to increase your wealth, while others focus on providing a steady income, saving on taxes, and more. To enhance understanding, let’s study different types of mutual funds based on their objectives:
Growth funds
Growth funds are primarily focused on increasing your capital over the long term. These funds mostly invest in equities (stocks) and have the potential for high returns. However, they also come with higher risks. That’s why they are less suitable for conservative investors or those with a short-term investment horizon. Usually, these funds suits those who are willing to take on more risk for the chance of higher returns over time.
Liquid funds
Liquid funds invest in short-term financial instruments that mature within 91 days or less. The primary goal is to provide high liquidity so you can easily access your money when needed. These funds are low-risk. Mostly, they are suitable for short-term investments or as a place to park funds temporarily. However, be aware that due to the lower risk, the return potential is also relatively low.
Income funds
Income funds are designed to provide regular income to investors. These funds mainly invest in fixed-income securities such as debentures and bonds with a set maturity date and offer regular interest payments. They are a good option for investors looking for a steady stream of income rather than capital growth.
Tax-saving funds
Tax-saving funds, commonly known as Equity-Linked Savings Schemes (ELSS), offer tax benefits under Section 80C of the Income Tax Act. By investing in ELSS, you are eligible for a tax deduction of up to Rs. 1.5 lakhs in a financial year. These funds are equity-oriented, and they invest at least 65% of their portfolio in stocks. This way, they offer the dual benefit of potential capital appreciation along with tax savings.
Example of how mutual funds work in India
Now, to understand the objectives and concept of mutual funds let us consider a scenario where an individual, let's call her Priya, wants to invest in mutual funds in India. Priya starts by researching different types of mutual funds available in the market and identifies a few schemes that align with her investment goals and risk tolerance.
- Selection of mutual fund scheme: After thorough research, Priya decides to invest in an equity mutual fund scheme that focuses on large-cap companies, aiming for long-term growth. She chooses a scheme offered by a reputable mutual fund company known for its consistent performance and experienced fund managers.
- Investment process: Priya begins her investment journey by completing the necessary paperwork to open an account with the mutual fund company. She provides her KYC details and other required documents. Once her account is set up, Priya decides to invest a portion of her savings in the chosen mutual fund scheme.
- Allocation and fund management: The mutual fund company, upon receiving Priya's investment, allocates her funds along with contributions from other investors into the selected scheme's portfolio. The fund managers then utilise their expertise to strategically invest these funds in a diversified basket of large-cap stocks.
- Portfolio monitoring and performance: Over time, Priya keeps track of her investment's performance through regular updates provided by the mutual fund company. She receives periodic statements detailing the scheme's NAV (Net Asset Value), portfolio holdings, and overall performance. Priya also monitors market trends and economic indicators to gauge the fund's performance against benchmarks and her investment objectives.
- Reinvestment and redemption: As Priya's investment grows, she may choose to reinvest dividends received from the mutual fund scheme to further enhance her investment. Additionally, if Priya needs liquidity or wants to rebalance her portfolio, she can easily redeem her mutual fund units either partially or in full, subject to applicable terms and conditions.
Conclusion
The example illustrates the functioning of mutual funds in India along with the investment objective of mutual funds, showcasing how investors like Priya can leverage these investment vehicles to achieve their financial goals. Mutual funds offer a convenient and accessible way for individuals to participate in the capital markets while benefiting from professional fund management and portfolio diversification. Through careful selection, monitoring, and periodic review, investors can navigate the dynamic investment landscape and build wealth over the long term. The Bajaj Finserv Platform stands out as a comprehensive solution for investors seeking accessible and diverse investment opportunities. With over 1000 mutual funds listed on the platform, investors gain access to a wide array of investment options tailored to their financial goals and risk profiles. Investors also get the option to compare mutual funds. By leveraging the Bajaj Finserv Mutual Fund Platform, investors can benefit from professional management, diversification, and liquidity offered by mutual funds.
