Objectives of mutual funds: Exploring investment goals

As a new investor, you may have wondered what mutual funds really aim to do, and how they work. Why do people invest in mutual funds, and what do they hope to get in return? Mutual funds are one of the most popular ways to invest money today, especially for those who are new to investing.

In this article, we will take a closer look at the objectives of mutual funds, especially in the Indian context. Whether you are just starting your financial journey or looking to understand mutual funds better, this guide will help you make informed investment decisions.

• Table of contents

• Overview of mutual funds in India
• What are the objectives of mutual funds in India?
• What are the functions of mutual funds in India?
• Types of mutual funds based on investment objectives
• Example of how mutual funds work in India

Overview of mutual funds in India

A mutual fund is a pool of money collected from many people. This money is then invested by a professional fund manager in different investment instruments like shares (equity), bonds (debt), or other assets. When you invest in a mutual fund, you are basically putting your money together with others to make a bigger investment.

Here are a few basic points about mutual funds:

• Mutual funds are managed by Asset Management Companies (AMCs).
• These funds are regulated by SEBI (Securities and Exchange Board of India).
• The Association of Mutual Funds in India (AMFI) also works to promote mutual funds and protect investors' interests.

What are the objectives of mutual funds in India?

The main objective of a mutual fund is to help individuals and investors achieve various financial goals. Each mutual fund is created with a particular purpose in mind. Here are the key objectives:

1. Capital growth
   • This means helping your money grow over time.
   • Mutual funds put money into assets like shares, which have the potential to grow in value over time.
   • Suitable for long-term investors who want to build wealth
2. Income generation
   • Some mutual funds are focused on providing investors with a relatively steady stream of income.
   • These funds often invest in bonds, government securities, or dividend-paying stocks.
   • Useful for retired people or those looking for steady income.
3. Mitigating impact on capital
   • This is about mitigating volatility impact on capital while earning returns.
   • These funds usually invest in relatively stable, low-risk options.
   • Suitable for people who are close to reaching their financial goals or who do not want to take big risks.
4. Diversification
   • Mutual funds allocate money across a variety of investment options.
   • This helps minimise risk and balance out overall returns.
   • Even if one investment doesn’t do well, others might perform better.

Read Also: What is a Mutual Fund Fact Sheet? Key Components & Importance

What are the objectives of mutual funds in India?

Mutual funds do more than just invest your money. They have several important roles:

• Collect money from many small investors.
• Create and manage portfolios based on investment goals.
  Provide access to professional fund managers.
• Offer liquidity, meaning you can take out your money when needed (except in some closed-end funds).
• Reduce risk by spreading investments across different assets.
• Provide transparency through regular reports and disclosures.

These functions are particularly useful for investors who may not have the time or the knowledge to make investment decisions.

Types of mutual funds based on investment objectives

Mutual funds in India come in many types designed for various purposes. The key is to match your financial goal, like saving for a home, planning for retirement, or building an emergency fund, with the right type of mutual fund. Here are the main types based on investment goals:

1. Growth funds

Aim: Capital growth
These funds primarily invest in stocks or equities of companies. They carry a higher level of risk, but they also offer the chance for relatively better returns over time. They are suitable for investors who want to grow their wealth and can stay invested for several years. Great for long-term goals like buying a house, higher education, or retirement.

2. Income funds

Aim: Regular income
These funds focus on fixed-income instruments such as bonds, government securities, and debentures. Their goal is to generate consistent income from the interest earned on these investments. These are suitable for investors who want relative stability and less risk. Often chosen by retired individuals or those looking for regular payouts.

3. Hybrid funds

Aim: Mix of growth and income
These funds combine investments in equity for potential growth and debt for added stability, aiming to maintain a balance between risk and returns. They are a suitable middle ground for investors who want some growth but also some stability. Suitable for medium-term goals like planning a wedding or saving for a car.

4. Liquid funds

Aim: Short-term liquidity
Liquid funds invest in short-term money market instruments like treasury bills, certificates of deposit, or commercial papers. These are very low-risk and can be easily converted to cash. Investors use them for parking money temporarily or for emergency funds. Returns are modest, but your money stays relatively stable.

Example of how mutual funds work in India

Let’s take the example of Ramesh, a 30-year-old IT professional, who wants to invest Rs. 10,000 but doesn’t know much about the stock market. He decides to invest in a mutual fund.

• He chooses an equity mutual fund that aims for long-term growth.
• His Rs. 10,000 is pooled with money from thousands of other investors.
• A fund manager uses this combined money to buy shares of different companies.
• After one year, if the stock market goes up, the value of Ramesh’s investment may increase.
• He can also choose to keep investing regularly using an SIP (Systematic Investment Plan).

In this way, Ramesh’s money is managed professionally, and he gets the benefit of diversification and expert knowledge.

Conclusion

Mutual funds are a popular way to meet different financial goals and requirements. Whether you want your money to grow, earn regular income, or stay stable, there is a mutual fund for you. Always remember, the key is to match the mutual fund’s objective with your investment goals. Also remember that it’s okay to start small: every investor begins somewhere . By understanding the features and objectives of mutual funds, you can select the right one for your needs.

Read Also: What is a mutual fund trustee?

FAQs

What are the three objectives of mutual funds?

The three main objectives of mutual funds are:

1. Capital growth: Growing your money over time.
2. Income generation: Earning regular returns.
3. Mitigate volatility impact: Reduce the impact of market volatility on capital.

What is the main objective of a mutual fund distributor?

A mutual fund distributor’s primary role is to guide investors in selecting suitable mutual funds that match their financial goals and risk tolerance. They also help with paperwork and ongoing support.

What is the growth objective of a mutual fund?

The growth objective aims to boost the value of your investment gradually. These funds typically invest in equities or stocks and are well-suited for long-term financial planning.

What are the objectives of the Association of Mutual Funds in India (AMFI)?

AMFI’s objectives include promoting ethical practices among mutual fund companies, educating investors about mutual funds, helping protect the interests of investors, and representing the mutual fund industry to regulators like SEBI.

What is the objective of a growth mutual fund?

Growth mutual funds aim to deliver high returns by investing in the shares of companies that show strong potential for expansion. It’s suited for investors who can take some risk and stay invested for a longer time.

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