Mutual Funds: Everything about mutual fund

mutual funds india

When we see the advertisement on television about mutual funds we always have a common question in a mind what is mutual funds India, mutual fund kya hai? mutual fund kya hota hai? what are the types of mutual funds,  Which is the best funds to invest during COVID-19? Let’s understand and Learn about Mutual Funds, how they work, benefits, and how to invest.

Everything you need to know about mutual funds

A Mutual Fund (MF) is formed when capital collected by various individuals (investors) is invested in purchasing company shares, stocks, or bonds.

Shared by thousands of investors, mutual funds investments are collectively managed by a professional fund manager to earn the highest possible returns. This is how mutual funds work, not only in India but, anywhere in the world.

Investing in Mutual Funds is the easiest way to grow your wealth. The fund manager’s expertise is an important factor to consider while choosing the fund.

All Mutual Funds are registered with the Securities Exchange and Board of India (SEBI) and hence, your investment is safe.

A mutual fund is a professionally managed investment scheme. It is run by an asset management company (AMC) which acts as a mediator for the retail investors.

The AMC pools in money from a large number of investors and invests it in equity shares, bonds, money market instruments and other types of securities.

Each investor, in return, is assigned a specific number of units proportionate to his invested amount in the fund. The investor is known as the unitholder.

The unit holder shares the gains, losses, income and expenses of the fund in proportion to his investment in the fund.

The fund manager manages your mutual fund plan. He frames the investment strategies based on the investment objectives of the fund.

The fund manager tracks the fund portfolio daily and decides when to buy/sell the shares of the underlying asset class. As a mutual fund investor, your mutual fund units depict your part of holdings in a specific scheme.

These units are valued at Net Asset Value (NAV) which is determined at the end of every day. The NAV keeps fluctuating according to changes in the prices of fund’s holdings.

A unitholder can purchase or redeem the units as per the prevailing NAV. He participates proportionally in the gain or loss of the fund. SEBI is the regulator of all the mutual funds in India.

It formulates the fund provisions keeping the interests of the investor in mind

Types of mutual funds

Mutual funds are broadly classified into three categories Equity funds, Debt funds and Hybrid funds based on their investment traits and risks involved.

Understand all mutual fund types and analyse them to check if your requirements would be served by investing in a particular type of mutual fund. Following are the types of mutual funds:

Equity Funds

Equity funds primarily invest in shares of different companies. Your equity funds investment would make a profit when the share prices surge, while they suffer a loss when the share prices fall.

Investing in equity funds is apt for those who stay invested for an extended period and is comfortable with moderate to high risk.

 

Debt Funds

Debt funds primarily invest in fixed income government securities such as treasury bills and bonds, or reputed corporate deposits.

Investing in debt funds is less risky than equity funds. Debt Funds are apt for those who are risk-averse and looking for a short-term investment.

 

Hybrid funds

As the name suggests, hybrid funds invest in both equity and debt instruments to balance the risk and maintain a specific rate of return.

The fund manager decides the ratio to reap the best of both debt and equity instruments.

Why we should invest in Mutual Funds?

Mutual Fund investment offers various benefits that make them the most profit-making investment option.

Expert Money Management

Mutual fund companies have fund managers to choose the company shares, sectors, and debt papers in which the pooled mutual fund investment would be invested.

This decision would be made by keeping the investors’ interest in mind.

Lock-in Period

The Lock-in period is the duration in which investors cannot withdraw their Mutual Fund investment or sell their Mutual Fund units. It varies across Mutual Funds.

Generally, open-ended funds do not have a lock-in period while the tax-saving funds (ELSS) have a lock-in period of 3 years.

Low Cost

Mutual funds investment is a very affordable option for those who wish to invest in small amounts. MF houses levy a small fee called the expense ratio, and it ranges from 0.5% to 1.5% of the Mutual Fund investment.

The expense ratio cannot exceed 2.5% as per SEBI regulations.

SIP Option

If you don’t have a lump sum to invest, then you can invest in a Systematic Investment Plan (SIP).

The best thing about investing in mutual funds with asset management company (AMC) mutual funds is that you can invest as low as Rs 500 an instalment.

Flexibility to Switch Funds

A good investor knows when to switch funds to keep up or stay ahead of the market. There are various MF schemes that allow you to switch funds.

The fund manager will have an eye on the market to ensure the best returns while not getting burnt by the market volatility.

Investments Based on Goals & Focus Sector

Each investor invests in MF with a financial goal to achieve. There are funds with varying risk factors that help you in achieving all kinds of goals.

Diversification

MFs invest across various asset classes and company shares to mitigate risk. When one asset class underperforms, gains from other asset classes will negate the loss.

However, it is recommended not to invest in too many (more than 5) as it may get difficult to monitor the performance of all avenues.

Flexible Tenure

Equity-linked savings scheme (ELSS) is the only MF scheme that comes with a lock-in period of three years.

This gives investors enough flexibility in terms of their financial goals, whether short-term or long-term. Investing over a certain timeframe makes it easier to plan when and how to invest.

Liquidity

Investing in Mutual Funds offer liquidity. You are allowed to redeem your investment at any time. There is no requirement of justifying your decision or searching for a buyer.

You just have to place a request with your fund house and they will credit the money into your bank account within 3-7 working days.

Handpicked Funds

There are various MFs based on investment goals, individual risk appetite, sectors, and fund size, among others.

Considering the number of available options, it can be a difficult task to research and compare the performance of various funds.

 

Ease of Trading & Transaction Experience

Buying, selling, and redeeming fund units at the current market price per unit (NAV) is quite simple.

All you have to do is place a request with the MF House and the fund manager will take care of the rest. The liquid nature of MFs can help you in case of an emergency situation.

Tax Efficiency

Investing in ELSS offers a twin benefit of tax deductions and wealth accumulation. Investments in ELSS are eligible for tax deductions under Section 80C of the Income Tax Act, 1961.

You can deduct a maximum of Rs 1, 50,000 a year. ELSS offers the highest returns among all Section 80C instruments.

Investment Safety:

All MF houses are under the purview of the Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI).

Both SEBI and AMFI are government bodies and hence, you can consider your Mutual Fund investments to be as safe as bank deposits.

Ease of Tracking

Investors might not have the time to analyse the performance of their MF investment. To make things simpler, MF houses provide investors with regular statements which makes it easy to track the performance of the fund(s).

How to Invest in Mutual Funds?

There are various avenues from where you can buy mutual fund units:

  1. Direct Plans: You can approach the asset management company (AMC) and invest in a direct plan of your choice. These plans have a low expense ratio because they don’t charge distributor commission. Hence, you can earn a better rate of return
  2. MF Distributor: You can contact a registered mutual fund distributor. He will help you out to complete the required documentation. You will be investing in a regular plan which will charge a distributor’s commission
  3. Online: There are a number of third-party portals available online. You can visit one of them and invest in a variety of mutual funds by paying a nominal fee

Nature of investment (SIP/Lumpsum)

There are two ways of investing money in your favourite mutual funds. You can either invest through a SIP or invest a lump sum amount.

  1. Lump-sum investment: Here, you spend a considerable portion of your disposable funds in a mutual fund scheme of your choice. It generally happens when you receive a massive corpus from the sale of an asset or retirement benefits. However, investing a lump sum involves higher risk. That’s why it is always recommended to go via the SIP route.
  2. Systematic Investment Plan (SIP): Under a SIP, you instruct the bank to deduct a fixed sum from your savings account every month and invest it in the said mutual fund scheme. In this way, you can buy units continuously without worrying about the right time to enter the market. You can also get the benefit of rupee cost averaging and enjoy the power of compounding.

Let us know if you have any more question or queries related to mutual funds or SIP at Join now

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