What are Investment Funds? – Meaning, Types, and Examples

Before investing in investment funds, check out what makes them so attractive:

• Diversification: Your money is not locked into just one stock or bond. Instead, it is invested in a basket of securities. 
• Professional Management: Experienced fund managers handle the complexities of the market.
• Accessibility: Start with as little as Rs. 500 via SIPs in Mutual Funds.
• Liquidity: Open-ended funds can be bought and sold at any time.
• Transparency: Regular updates on performance, holdings, and expenses.

All of these benefits make will help to make choice for many Indians.

Exchange‑Traded Funds (ETFs) 

These are like mutual funds but trade on stock exchanges just like individual stocks. You can buy or sell them during market hours, which gives you high liquidity. ETFs provide diversification and usually have lower fees. This makes them a smart option for investors who want both convenience and cost-effectiveness. They often track a specific index or asset class.
 

Mutual Funds 

Mutual funds pool money from many investors and invest it in a mix of stocks, bonds, or other securities. Managed by professionals, these funds are suitable for long-term financial goals. Be aware that all the mutual fund buy and sell orders are processed at the end of the day at the closing Net Asset Value (NAV). This investment fund offers simplicity and broad diversification for retail investors.
 

Hedge Funds

Hedge funds are private investment vehicles that use advanced strategies like short selling, leverage, and derivatives to try and potential returns. They are usually accessible only to institutional or wealthy investors as they carry high minimum investment requirements. These funds aim for high gains but come with increased risk and less regulation.
 

Open‑Ended Funds

Open-ended funds can issue or redeem units at any time, based on investor demand. They do not have a fixed number of shares and are priced daily based on NAV. Investors can enter or exit these funds freely in the secondary market. This makes them highly liquid and a popular choice for long-term and short-term goals alike.
 

Closed‑Ended Funds

These funds issue a set number of units during their launch and do not allow fresh purchases or redemptions thereafter. Investors can trade these units on stock exchanges (after the end of the lock-in period), but prices may differ from the fund’s NAV. They are less liquid and usually suited for specific investment timelines or goals.
 

Publicly‑Traded Funds

These funds are listed and traded on stock exchanges. They allow investors to buy and sell units just like regular stocks. The price is based on the market forces of demand and supply. Be aware that liquidity and pricing can vary, but they are convenient for investors who prefer the stock market route for fund investing.
 

Private Investment Funds

These are professionally managed funds structured like private companies. Generally, they cater to institutional or high-net-worth individuals (HNIs). These investment funds have limited liquidity and higher entry requirements. They are not widely accessible to the general public.
 

Actively‑Managed Funds

In these funds, professional managers aim to make investment decisions to outperform market benchmarks. They adjust portfolios based on market conditions and opportunities. While they may offer potential returns, they usually come with higher management fees. These funds are suited for investors who trust expert judgment.
 

Passively‑Managed Funds (Index Funds)

These funds track a specific market index. Fund managers in charge of these index funds are not involved in active decision-making. Thus, they are cost-effective due to low management fees. These investment funds offer steady and market-mirroring potential returns. They are suitable for long-term investors who are looking to gain a broader market exposure. 

Dig Deeper: Mutual Funds Investment Plans

Let us simplify this with real-world illustrations:

Example 1: Growth-Oriented Investing

Sneha is in her 20s and comfortable with risk. She starts investing Rs. 3,000/month via SIP in a growth plan. Over the years, her consistent investment in an equity-oriented mutual fund may help her build potential long-term wealth for buying her dream home.

Example 2: Retirement Planning

Amit is a 35-year-old salaried professional. He starts investing Rs. 5,000/month in an index-based ETF through his demat account. ETF perfectly mirrored the market’s performance and may help Amit to accumulate a potential sizable retirement corpus over a long-term horizon. 

It’s important to understand that all investment funds carry different risks including but not limited to:

Want to manage these risks? Try to keep your portfolio diversified by investing in multiple asset classes and investment sectors. Additionally, always focus on financial instruments with strong credit ratings. Never overconcentrate on any particular asset and invest as per your risk appetite.      

The list of risks mentioned above is not exhaustive. Mutual fund investments are subject to market risks. Read all scheme-related documents carefully. 

Choosing the appropriate fund depends on:

1. Your Goal

Short-term goals (1 to 3 years): Debt mutual funds

Medium-term goals (3 to 5 years): Hybrid mutual funds

Long-term goals (5+ years): Equity mutual fund, growth mutual funds, ETFs

Above examples are indicative and decision will depend based on risk appetite of an investor
 

2. Your Risk Appetite

If you’re risk-averse, lean toward gilt or fixed-income mutual funds. If you are comfortable with volatility, opt for equity mutual funds.
 

3. Time Horizon

The longer you stay invested, the better your chances of averaging out risks and reaping compounding benefits.

Follow these steps to get started:

1. Complete your KYC
2. Choose your platform: AMC website, distributor, or fintech app
3. Select the fund that matches your goal
4. Decide between SIP or lump sum
5. Review your fund’s performance periodically

If you're just beginning, explore the mutual funds for beginners via SIPs. Also, use a SIP calculator to visualize potential returns.

Dig Deeper: How to Identify the Best Mutual Funds to Invest in?

The Rule of Asset Allocation

Do not put all your eggs in one basket. Investors spread their investments across equity, debt, and even gold. For instance, under hybrid mutual fund, Multi Asset allocation mutual fund make this easier by balancing your portfolio internally.

A sound long-term investment in mutual fund strategy ensures you stay on track through market ups and downs.

Investment funds make it easier for everyday investors to grow their money without needing to become experts in the stock market. From tax-saving mutual funds to debt mutual funds, and from index mutual funds to fund of funds mutual fund options, the variety ensures there's something for every investor.

Whether you're saving for retirement, a child’s education, or just looking to grow your wealth over time, there's an investment fund that fits your needs. Start small, stay disciplined, and invest according to your risk appetite and financial goals.
 

Disclaimers:

• An Investor Education and Awareness Initiative by Tata Mutual Fund
• To know more about KYC documentation requirements and procedure for change of address, phone number, bank details, etc., please visit: https://www.tatamutualfund.com/deshkarenivesh
• Please deal only with registered Mutual Funds, details of which can be verified on the SEBI website under ‘Intermediaries / Market infrastructure institutions.’
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Nomination is advisable for all folios opened by an individual, especially with sole holding, as it facilitates an easy transmission process.

This communication is a part of the investor education and awareness initiative of Tata Mutual Fund.