Objectives of Mutual Funds

One crucial element of a mutual fund's investment goal concerns the relationship between risk and return. Explore further to understand additional objectives of mutual funds by clicking here.
Objectives of Mutual Funds
3 mins read
10-Apr-2024

There are several key objectives of mutual funds, aiming to cater to the diverse needs and preferences of investors.

Firstly, they provide professional management of investments by employing experienced fund managers who make strategic decisions to achieve the fund's objectives.

Secondly, mutual funds aim to diversify investments across various asset classes, such as stocks, bonds, and money market instruments, to reduce overall portfolio risk and potentially enhance returns.

Additionally, mutual funds seek to generate capital appreciation over the long term by investing in securities with growth potential. Some funds focus on income generation through dividends or interest payments, appealing to investors seeking regular cash flows. Risk management is also a priority, with mutual funds employing techniques like diversification and research to mitigate investment risk. Finally, mutual funds offer liquidity, allowing investors to buy or sell fund units conveniently. Overall, these objectives and concept of mutual funds underscore mutual funds' role in providing investors with accessible, professionally managed investment options aligned with their financial goals.

Overview of mutual funds in India

Mutual funds play a significant role in India's financial structure and working, offering investors a range of investment options and benefits. The industry has experienced substantial growth, driven by increasing investor awareness and regulatory reforms. SEBI regulates the mutual fund industry, ensuring transparency and investor protection. Investors can choose from various mutual fund types, including equity, debt, and hybrid funds, tailored to different risk profiles and investment objectives. Distribution channels such as AMCs, banks, and online platforms facilitate investor access to mutual funds. Investor education initiatives promote financial literacy and responsible investing. Technological advancements have made investing more accessible, with online platforms enabling convenient transactions and monitoring.

What are the objectives of mutual funds in India?

  1. Professional management
    Mutual funds aim to offer professional management of investments to both individual and institutional investors. Fund managers utilise their expertise to select and manage investments across various asset classes like equity, debt, and money market instruments. They adhere to an internal investment model tailored to achieve the fund's objectives effectively.
  2. Diversification
    Mutual funds provide investors with the advantage of diversification by spreading investments across different sectors and asset classes. This strategy helps mitigate overall portfolio risk and ensures a well-diversified investment, potentially yielding better returns that are often adjusted for inflation.
  3. Capital protection
    Many mutual funds prioritise capital protection as a primary objective. This feature is particularly appealing to risk-averse investors seeking stability in their investments. Although returns may be lower compared to more aggressive funds like pure equity or aggressive hybrid funds, the risk associated with these funds is significantly reduced.
  4. Liquidity
    Mutual funds offer investors the flexibility to redeem their investments at any time, providing liquidity. This feature is valuable, especially for investors who allocate a portion of their emergency fund to mutual funds. It ensures accessibility to funds when needed, enhancing financial security.
  5. Convenience
    Investing in mutual funds is convenient and straightforward. Investors can buy or sell units of a mutual fund scheme through various channels such as online platforms, agents, distributors, or directly from the mutual fund company. Additionally, investors can choose between SIP or lump sum investment modes based on their capital availability, enhancing flexibility and encouraging broader investor participation.

Example of how mutual funds work in India

Now, to understand the objectives and concept of mutual funds let us consider a scenario where an individual, let's call her Priya, wants to invest in mutual funds in India. Priya starts by researching different types of mutual funds available in the market and identifies a few schemes that align with her investment goals and risk tolerance.

  • Selection of mutual fund scheme: After thorough research, Priya decides to invest in an equity mutual fund scheme that focuses on large-cap companies, aiming for long-term growth. She chooses a scheme offered by a reputable mutual fund company known for its consistent performance and experienced fund managers.
  • Investment process: Priya begins her investment journey by completing the necessary paperwork to open an account with the mutual fund company. She provides her KYC details and other required documents. Once her account is set up, Priya decides to invest a portion of her savings in the chosen mutual fund scheme.
  • Allocation and fund management: The mutual fund company, upon receiving Priya's investment, allocates her funds along with contributions from other investors into the selected scheme's portfolio. The fund managers then utilise their expertise to strategically invest these funds in a diversified basket of large-cap stocks.
  • Portfolio monitoring and performance: Over time, Priya keeps track of her investment's performance through regular updates provided by the mutual fund company. She receives periodic statements detailing the scheme's NAV (Net Asset Value), portfolio holdings, and overall performance. Priya also monitors market trends and economic indicators to gauge the fund's performance against benchmarks and her investment objectives.
  • Reinvestment and redemption: As Priya's investment grows, she may choose to reinvest dividends received from the mutual fund scheme to further enhance her investment. Additionally, if Priya needs liquidity or wants to rebalance her portfolio, she can easily redeem her mutual fund units either partially or in full, subject to applicable terms and conditions.

Conclusion

The example illustrates the functioning of mutual funds in India along with the investment objective of mutual funds, showcasing how investors like Priya can leverage these investment vehicles to achieve their financial goals. Mutual funds offer a convenient and accessible way for individuals to participate in the capital markets while benefiting from professional fund management and portfolio diversification. Through careful selection, monitoring, and periodic review, investors can navigate the dynamic investment landscape and build wealth over the long term. The Bajaj Finserv Platform stands out as a comprehensive solution for investors seeking accessible and diverse investment opportunities. With over 1000 mutual funds listed on the platform, investors gain access to a wide array of investment options tailored to their financial goals and risk profiles. Investors also get the option to compare mutual funds. By leveraging the Bajaj Finserv Mutual Fund Platform, investors can benefit from professional management, diversification, and liquidity offered by mutual funds.

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Frequently asked questions

What are the three objectives of mutual funds?
The three main objectives of mutual funds are capital appreciation, income generation, and risk diversification.
What is the main objective of a mutual fund distributor?
The primary objective of a mutual fund distributor is to facilitate the sale of mutual fund products to investors by providing them with information, guidance, and assistance in selecting suitable funds based on their financial goals and risk profiles.
What is the growth objective of a mutual fund?
The growth objective of a mutual fund is to achieve capital appreciation over the long term by investing in securities with the potential for growth. These funds typically focus on investing in stocks or equity-oriented instruments to generate higher returns for investors.
What are the objectives of the Association of Mutual Funds in India (AMFI)?
The objectives of AMFI include promoting the mutual fund industry's growth and development, protecting the interests of investors, ensuring ethical conduct and transparency among mutual fund companies, and conducting investor education and awareness programs to enhance financial literacy.
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