A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
Are there funds that need me to stay invested for a set time?
One of the biggest advantages of a mutual fund scheme is liquidity, that is, the ease of converting investments into cash.
Equity Linked Savings Schemes (ELSS), which offer tax benefits under section 80C, are required by regulation to “lock-in” units for a period of 3 years, after which, they are free to be reimbursed.
There is another category of schemes popularly called “Fixed Maturity Plans” (FMPs) in which investors must remain invested for a set period that is predefined in the scheme’s offering document. These schemes have an investment duration of between three months and a few years.
However, some open-end schemas can specify an exit load period. For example, a scheme may specify that units redeemed with 6 months would attract an output load of 0.50% at the applicable NAV.
It should be borne in mind that while there may be some rules and regulations on the minimum time horizon, it is best to follow the advice of an investment advisor to know the appropriate or ideal time horizons for each type of scheme.