Types of Mutual Funds and Popular Misconceptions

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A mutual fund is an open-ended financial vehicle that is professionally managed by the company or a stock market broker. In this, they pool money from many investors to purchase securities.

Types of Mutual Funds

There are two main types of mutual funds available in the market namely: open-end funds and closed end funds.

Open Ended Funds

Open-end funds offer traders to buy and sell securities at any point of time. This flexibility makes it one of the popular funds among retail investors. It also does not have limit to a maturity period.

There are three types of open-ended funds that are explained as under:

Index scheme: as the name suggests, this is a basically allocation of funds towards the pattern of the index. This index is the stock market index like BSE Sensex.

Sectoral schemes: These are those type of investments that are made in specific sectors such as IT sector or banking sector or the pharma sector etc.

Tax saving scheme: It is good for those people who are tax aversive and seek tax saving benefits from their investments in the share market.

All of them are good positions for you. if you are a beginner investing with small capital, you can choose sectoral schemes that will help you avail maximum profit for your investment.

Closed Ended Funds

Closed ended funds are opposite of open-end funds, here, there is a limit on the buying and selling and the assets come with a maturity period. The trader invests during the starting phase of a scheme mostly known as the new fund offering.

Big companies and Banks started mutual funds to target retail investors. They started heavily promoting their mutual funds products and then few misconceptions got traction in public life.

Mutual Funds Common Misconceptions

The perception gradually gained popularity in share market, this was the time when people assumed that mutual funds are the best way to make money from the stock market. But after some months, they realized that it is not possible to have a risk free run and there can be a few losses that can come about through mutual fund investments. The only risk in this is that you are giving your hard earned money to someone who will invest in worthless companies. This will be a betrayal of your trust. This means that you will end up making better investments on your own as you are very cautious about it but the average fund manager might not think in the same way. Many experts believe that the fund manager is just as capable as you are when it comes to investing and it is better for you to do the investing yourself instead of relying him.

Second factor is, the mutual fund company need lots of capital to stay in the business and for this, they can heavily charge the investors. If the trader wishes to deal on his own then these charges are not applicable, this is not a core feature with most mutual funds.

There was another misconception about taxation that mutual funds have low taxes or are tax free. Reality is the capital gains that you receive from your mutual funds are taxable. So you need to verify with the involved company first and also check out taxation spends associated with it.

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