In this article, we will discuss the Objectives of Mutual Funds.
Mutual funds are a popular investment choice for risk moderator people. People who want capital appreciation but do not want to take much risk to opt for mutual funds. Usually, working-class people, who don’t have enough time to study and check for daily stock market updates, opt for mutual funds.
Mutual funds offer more capital appreciation than government bonds, fixed deposits, and gold investments. They offer less risk than the stock market. These two factors make mutual funds the perfect place for risk-moderating investors.
Along with the risk and return factor, there are several other reasons why investors choose mutual funds. In this article, we will study the investment objectives of mutual funds. Whether you should invest in mutual funds or not based on your investment objective
Before we jump on the investment objectives of mutual funds, let’s understand what mutual funds are.
What is Mutual Fund?
A mutual fund is a collection of several investments. The fund manager creates a pool of investments collected from investors with similar financial goals. After that, these investments are further invested into several different market instruments such as stocks, bonds, gold, and so on. A mutual fund is also a financial instrument used for investment.
”Mutual” is used because your funds are mixed with others with similar financial goals. Here, you don’t directly invest in the company’s stock. Instead, you give it to a mediator, who invests your funds for you. You share the risk and return with others in the same pool of funds as you.
Mutual funds offer you safety regulation by the market regulator – SEC. The mutual fund also offers you the fund manager’s expertise regarding your investments.
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Now, let us take a look at The investment Objectives of Mutual Funds.
Objectives of Mutual Funds
Every person has a different objective for investing in mutual funds. So based on investments for similar objectives, the fund manager makes a pool of investors’ funds. Let’s take a look at what are these investment objectives of mutual funds.
Provide Investment in Growth Funds
Let’s start the list of objectives of mutual funds with the growth funds. Funds invested in expensive and high-growing stocks are known as growth funds. Growth funds are a great way to hedge against the inflation rate. These funds provide a better return than income funds. With higher returns, they also come with higher risks.
Growth funds are generally known as equity funds. Growth funds are invested in equity shares and preference shares. Growth funds are aimed to be invested for medium to long-term periods.
Provide Investment in Income Funds
Income funds refer to a type of investment that generates regular income. Investors not interested in long-term investment and capital appreciation opt for income funds. Income funds generate income at regular intervals.
Such funds are invested in bonds, equity shares, preference shares, and real estate investments of blue chip companies providing dividends. The income is generated after a certain interval, like 3 months, 6 months, etc. Mostly, the income is 3% – 8% of the investment.
Provide Investments in Value Funds
The next in the list of objectives of mutual funds is to provide value fund investments to investors. Compared to the other two, value funds don’t provide high returns. With low returns, they also have low risk associated with them.
Value funds are helpful for medium and long terms investments. People who want the low risk associated with their funds opt for value funds. These funds can be beneficial for hedging against inflation in the long run.
Provide Diversification of Risk
One of the main Objectives of Mutual Funds is to provide risk diversification. As the investments are integrated into a pool with other investors’ funds, the risk becomes less. The fund manager takes a portion of your investment and deploys it on various investments. This helps to reduce the risk of an individual’s investment.
When funds are invested in a single investment, it has more risk. The reason is that all of the capital is employed at one point. If the price of the asset falls, the capital value falls altogether.
On the other hand, when capital is deployed on various assets, a fall in one asset won’t make much difference. The other investments can even balance out the loss of the first investment. This is why mutual funds are considered moderately safe investment opportunities.
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FAQs
What is the objective of a mutual fund?
There are 4 main Objectives of Mutual Funds, they are –
Growth funds
Income funds
Value funds
Risk diversification
What are 5 types of mutual funds?
Equity funds
Debt funds
Hybrid funds
Growth funds
Income funds
What are 5 advantages of mutual fund?
Risk diversification
Expert fund manager
Low brokerage fee
Advanced portfolio management
Dividend reinvestment
Closing Statement
Mutual funds are the trending investment option right now. People willing to bear a moderate and high-risk level can opt for mutual funds. Mutual funds offer a variety of benefits that investors can find attractive.
A specialized fund manager, diversified risk, and low brokerage fees can be major attraction points for mutual funds. Mutual funds can be useful for medium and long-term capital appreciation. It is also a better option to hedge against inflation than other investments.
I hope this article about The objectives of mutual funds is informative. If you have any doubts or suggestions, provide your valuable perception in the comment box.
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