What are the roles played by a Mutual Fund?

Mutual funds are formed to mobilize the savings of individuals by offering them a certain percentage of income. Mutual funds were introduced in India in 1964. It was Unit Trust of India (UTI). UTI enjoyed a monopoly in the Indian markets till 1987, and thereafter banks were allowed to offer mutual funds. Later on, various other financial institutions and insurance companies started offering mutual funds for individual clients.

A Novel Way of Investment

Mutual funds are a novel way of investment because the firms offering them know about the market and can foresee the growing industries to some extent. In that sense, mutual funds offer individual clients a way to earn money from the market in percentage terms to their investments. However, mutual funds do not guarantee a return on investment and sometimes the growth may also be negative.

Types of Mutual Funds

There are various types of mutual funds depending on the time periods, industries, terms for which the funds are used and investment categories, etc. Mutual funds usually offer the information in which category they’d invest the money accumulated from the public. Therefore, individuals can be in peace, knowing the growth prospects and income from a certain type of fund where they invest their money in.

Mutual funds usually have two broad categories −

• Closed-ended mutual funds have a closing date and funds accumulated during the period are returned to the investor in such a fund.

• Open-ended mutual funds do not have a closing date, and participants may join or leave the fund whenever they wish.

Based on the return generated, mutual funds may be categorized in various domains. Some of the types of such mutual funds are income funds, growth funds, tax savings funds, etc.

Subject to Market Risks

It is notable that mutual funds invest the money of individuals and offer a certain portion of the profit from the investment to the public in return. However, they do not guarantee a profit and sometimes they can be loss-making too. Mutual funds are always subject to market risks.

Provides a Scope to Invest in Large Projects

Mutual funds assist the public income to grow by offering them a scope to invest funds in large investment projects. The individuals participating in a mutual fund may not be able to invest in large projects individually as their investment amount may be below the expected range. Mutual funds offer them the opportunity to benefit from large profit, albeit in a fraction. This is a good opportunity for individual investors to invest in high-growth industries.

Conclusion

There are numerous types of mutual funds in the market for people with different needs. It is the choice of the investor in what kind of firm they want to invest in. The mutual fund companies are also rated by rating firms to show their creditworthiness that can signal the performance of a certain mutual fund.