What is a Mutual Fund?
In a mutual fund, money is gathered from numerous individuals to buy securities such as stocks, bonds, money market instruments, and other assets. Asset management firms are in charge of managing mutual funds (AMCs). For the purpose of getting a decent return on your investment, these AMC’s professionals constantly monitor your funds. They charge a fee for this service, which serves as their primary source of income.
How do mutual funds work?
This is an open-end, expertly managed fund that is positioned in one place and is invested in the market. It lowers the risk since if one place experiences a loss, another place will experience a profit.
This can be understood by considering that if a lot of money is invested in 100 funds, even if 40 of the 100 businesses’ stocks experience a loss, the remaining 60 firms’ stocks still make a profit. This is how mutual funds work, and it lowers the risk involved.
Who can invest in mutual funds?
Anyone can invest in mutual funds. A minimum investment of ₹ 500 is permitted. You can also invest in the names of your spouse or children. If your child is a minor (under the age of 18), you will have to provide your information when investing in his or her name. You will manage the account until it reaches 18 years of age. Even partnership companies, LLPs, trusts, and companies can invest in mutual funds.
Who is a mutual fund right for?
For those who do not know much about investing in the stock market, Mutual Funds are a good option for investment. Investors can choose a Mutual Fund Scheme according to their financial goals.
Types of mutual funds
- Equity fund: Investments in company equity stocks are made by these funds. These are considered high-risk funds, but they provide high returns. Equity funds may primarily consist of infrastructure, banking, and consumer goods company stocks.
- Debt fund: These are funds that make investments in debt securities such government bonds, corporate debentures, and other real estate. They are regarded as safe investments and provide fixed returns.
- Liquid Fund: These schemes invest the money mostly in short- or very short-term instruments. Treasury bills, commercial paper, and other instruments are used to provide liquidity. These are perfect for investors with short-term investment deadlines because they feature minimal risk and moderate returns.
- Balanced or hybrid funds: These funds invest across a range of asset classes. The ratio of equity to debt varies depending on the situation. In some, it is larger. Risk and return are balanced in this. The Franklin India Balanced Fund-DP (G), which invests 65% to 80% in equities and the remaining 20% to 35% in the debt market, is an example of a hybrid fund. This is so because there is less danger on the debt market than on the equity market.
- Pension Fund: Mutual funds that are really invested with a long-term objective are called pension funds. These are primarily intended to offer consistent returns around the time the investor is prepared to retire. Equity markets offer large returns at a high level of risk, while debt markets balance the risk and offer low but stable returns. Investments in these funds can be split between equity and debt markets. These funds’ returns may be received as a lump sum or a pension.
How do I choose the right mutual fund?
There are many different types of mutual funds available on the market, and choosing one of them is not an easy task. For this, you need to keep these things in mind.
- Firstly, understand your needs.
- The next step would be to find out what your goal is.
Since there is always a risk with mutual funds, no matter how small, it is important that investors read their policy documents carefully before investing. It would be a good idea to read the document to make sure that they, the investors, really understand what they have invested in and all the features that are available to them with that investment.
How do I get my returns from mutual funds?
Mutual fund returns are calculated by calculating the increase in the value of your investment over time in comparison to the initial investment.
The return over a period from a mutual fund is calculated as follows:
(Sale date NAV – Purchase date NAV)*100 / Purchase date NAV
What is NAV
NAV stands for “net asset value.” The NAV of a mutual fund indicates its price and is used in calculating returns from your mutual fund investments.
Note: Any net dividend or other income distribution by the fund during the holding period is also added to the capital appreciation while computing total returns.
How can I invest in mutual funds?
You should accurately evaluate your risk-taking capacity before investing in mutual funds. It is the process of determining how much risk you are willing to accept.
After determining your risk capacity, you should try to allocate your funds among different asset classes. To balance the risks, your asset allocation should ideally include both debt and equity securities.
Based on past performance and investing goals, you can compare mutual funds.
Select the mutual fund schemes you want to invest in, then submit your application either online or offline.
Online mode
- You can choose to invest online through the websites of the respective mutual funds.
- You can also invest in mutual funds through the mobile app of the respective mutual fund house.The app will allow investors to invest in mutual fund schemes, buy or sell units, view account statements, and check other details concerning their folio. SBI Mutual Fund, Axis Mutual Fund, ICICI Prudential Mutual Fund, Aditya Birla SunLife Mutual Funds, and HDFC Mutual Funds are a few of the fund companies that permit investments using an app. Some apps, like myCAMS and Karvy, allow investors to invest and access the details of all their investments from multiple fund houses on one platform.
Offline mode
- You may invest with the help of or through a financial intermediary, i.e., a mutual fund distributor registered with AMFI, or you may choose to invest directly, i.e., without involving or routing the investment through any distributor.
Who is the Mutual Fund Distributor?
A mutual fund distributor may be an individual or a non-individual entity, such as a bank, brokerage house, or online distribution channel provider. They earn income in the form of commissions from mutual fund investments. To provide a good strategy for the investor, they need to be aware of their situation, level of risk tolerance, and financial objectives.
- You can also invest in mutual funds by submitting a duly completed application form along with a check or bank draft at the branch office, designated Investor Service Centers (ISC) of mutual funds, or Registrar & Transfer Agents of the respective mutual funds.
Just ensure that you carry a copy of the below documents.
The fund house will provide you with an application form, which you will need to fill out and submit along with the necessary documents.
- Proof of Address
- Proof of Identity
- Cancellation of Cheque Leaf
- Passport-size photograph
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Difference between mutual funds and shares
| Particulars | Mutual Funds | Shares |
|---|---|---|
| Concept | Mutual funds pool money from the investing public and use that money to buy other securities, usually stocks and bonds. | Shares are units of the entire capital of a company. |
| Value | The value of mutual funds depends upon the performance of the securities that the companies decide to buy. Therefore, when you purchase a unit or share of a mutual fund, you are actually purchasing a portion of the portfolio’s value rather than the performance of the fund’s portfolio. | The value of a share depends upon the performance of the listed company, and when you buy a unit of shares, you actually purchase the right to ownership of the share value in that company. |
| Choice | Predetermined portfolio of stocks. You have no control over the investments, nor can you choose to exit from any particular stock in the portfolio. | You are directly responsible for the choice of stocks. You have the option to trade or exit the stocks at your leisure. |
| Diversification | You can have a diversified portfolio with a one-time investment. | At a time, you can purchase only a particular share. |
| Fixed investment | You can invest in fixed monthly Systematic Investment Plan (SIP) | There is no option for a fixed investment as prices fluctuate regularly. You have to monitor the prices constantly. |
| Risk | Less market risks | Risky investment. Subject to high market volatility |
