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.
Why do debt funds offer lower returns than equity mutual funds?
The returns of mutual funds depend on the type of investment you make and the risks associated with these investments. The taste of a cake differs from that of a samosas because both are made up of different ingredients and are prepared differently. Similarly, equity mutual funds and fixed income funds offer different types of returns due to the type of securities that make up their portfolio and how these securities generate their returns.
Fixed income funds invest in interest-bearing securities such as bonds, bonds and money market instruments. These securities promise to pay fixed interest at regular intervals to these mutual funds. The rate is closely linked to the prevailing lending rates in the market. Because issuers of these securities may not keep their promise, they promise to pay higher periodic interest than current lending rates as risk compensation in such investments. A well-established company is likely to offer lower interest (lower risk premium) on its bonds than a fledgling company because its bonds have a higher credit rating than the new venture.
The returns on an investment are directly linked to the risk at stake. Debt securities are usually considered less risky than stocks. Therefore, low-risk investments such as fixed income funds will offer lower returns unlike equity funds