Mutual funds are investment options wherein the money from several investors is collected together by an AMC (Asset Management Company) and thereafter deployed across diverse market instruments like equity, debt, money markets and securities. The profit that is derived, after deductions by the AMC, are divided amongst the investors according to their portfolios. The AMFI or Association of Mutual Funds in India is the regulator for mutual funds in the country. Further, in order to invest properly in the top performing mutual funds in India, it is imperative to understand its different types which are as follows:
1. Equity: also known as growth funds, these make investments only for domestic company stocks (companies that are listed on the stock exchanges). These are usually considered to be high-risk funds.
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 make investments in both equities/stocks and debt/fixed income based securities and offer balanced investment portfolios for 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 Open-ended: these can be withdrawn at any point of time and you will get refunds within a week. Nowadays, many mutual funds are coming with open-ended options for funds.
The value of the fund is worked out as per the NAV (Net Asset Value) which comprises of the net expenditure on every fund unit. This is calculated by the AMC when every business day ends. AMCs charge an annual fee to investors, which encompasses their salaries, brokerage, advertising, and administrative expenses. The bigger the size of the fund, the lower will your annual fee for AMCs be as a rule of thumb.