A Mutual Fund (MF) is a professionally managed investment vehicle that pools money from multiple investors and invests it in a diversified portfolio of stocks, bonds, or other securities. These funds are managed by experienced fund managers and offer you the opportunity to invest in a wide range of assets, even with a small amount of investments. Mutual funds allow you to participate in the financial markets, spread risk, and potentially achieve long-term financial goals. In this brief guide, we will explore the key features, benefits, and considerations associated with mutual funds.
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The full form of MF is Mutual Fund, which is an investment instrument where multiple investors pool their money and invest in a mix of market-linked assets, such as:
Money Market Instruments
Exchange Traded Funds (ETFs)
The mutual fund companies that are eligible to launch mutual funds establish Asset Management Companies (AMCs) or Fund Houses. These organizations collect funds from investors, promote mutual fund offerings, manage investments, and streamline investor transactions. Skilled fund managers from the AMCs handle your investments.
When you invest in a mutual fund, you essentially buy shares of that fund, and the fund uses that money to purchase a variety of assets. This helps to reduce market- risks and potentially offers profits to those who own shares of the mutual fund scheme.
Let us understand the working of a mutual fund from the following steps:
Step 1: Select an Appropriate Mutual Fund
You choose the best mutual fund scheme for higher returns as per the following factors:
Your investment goals
Your risk tolerance
Investment objectives of the fund
Past performance of the fund
Experience and track record of the fund manager
Step 2: Make Investments to Purchase Mutual Fund Units
You start investing in a fund by buying shares or units of a mutual fund. Each share represents a portion of the fund's overall holdings.
Step 3: Professional Management of Your Funds
Your funds are managed by professional fund managers who have expertise in selecting and managing investments. These managers diversify your funds in various assets and make investment decisions on behalf of the fund.
Step 4: Buying and Selling of Mutual Funds at Net Asset Value (NAV)
At the end of each trading day, the fund calculates its Net Asset Value (NAV). The NAV represents the per-share value of the fund which fluctuates with market conditions. This NAV is used to determine the share price at which you can buy or sell your fund units.
Step 7: Charging of Fees and Expenses
The AMC will charge fees to cover operating expenses and fund manager's salary and administrative costs of the mutual fund. These fees are typically expressed as an expense ratio and are deducted from the fund's assets.
Step 8: Distribution of Earnings
The earnings generated from mutual funds as dividends, interest, and capital gains are distributed among investors by some fund schemes, while others reinvest them to increase the fund's value.
Step 9: Regulation by Government Agencies
The authorities of Government of India (GoI), such as the Stock Exchange Board of India (SEBI) and Reserve Bank of India (RBI) regulate the mutual funds, to protect the interests of investors and ensure transparency.
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The following table shows the types of mutual funds available in India in 2023:
|Types of Mutual Funds||Details|
|Equity Funds||These funds primarily invest in stocks or equities. They focus on different categories of stocks, such as large-cap, mid-cap, or small-cap, or in specific sectors, like technology or healthcare funds.|
|Fixed-Income Funds||Fixed-income funds invest in bonds and other debt securities. They are generally considered less risky than equity funds and provide regular income through interest payments.|
|Money Market Funds||Money market funds invest in short-term, highly liquid securities like Treasury bills and commercial paper. They are low-risk investments and are often used for preserving capital and providing liquidity.|
|Balanced or Hybrid Funds||These funds combine both stocks and bonds in their portfolios. They aim to strike a balance between growth and income, making them suitable for investors seeking a mix of stability and potential returns.|
|Index Funds||Index funds aim to replicate the performance of a specific market index, such as the S&P 500. They offer broad market exposure and typically have lower expense ratios compared to actively managed funds.|
|Sector Funds||These funds concentrate on a specific industry or sector, like technology, healthcare, or real estate. They are more focused and can be riskier due to their lack of diversification.|
|International or Global Funds||These funds invest in stocks and bonds from foreign markets. They provide diversification across global markets but also carry currency risk.|
|Speciality or Thematic Funds||Speciality funds invest in a particular theme or strategy, such as sustainable investing, emerging markets, or dividend-focused strategies.|
|Target-Date Funds||These funds are designed for retirement planning. They adjust their asset allocation over time, becoming more conservative as the target retirement date approaches.|
|Alternative Funds||Alternative funds employ non-traditional investment strategies, including hedge fund-like strategies such as long-short, managed futures, and market-neutral approaches.|
|Tax-Efficient Funds||These funds are structured to minimize taxes on capital gains and income, making them suitable for taxable investment accounts.|
|Socially Responsible or ESG Funds||These funds invest in companies that align with certain environmental, social, and governance (ESG) criteria, reflecting investors' ethical and sustainability preferences.|
There are two main ways to invest in mutual funds:
Lump sum: You can invest a large amount of money in a single mutual fund scheme at once.
SIP (Systematic Investment Plan): You Invest a fixed amount of money in a mutual fund scheme at regular intervals, such as monthly or quarterly.
Calculating returns from mutual fund schemes is essential for you to assess the performance of your investments and make informed decisions. Two commonly used tools for calculating returns are mentioned below:
Mutual Fund Calculator
SIP (Systematic Investment Plan) Calculator
These calculators help you to determine how your investments have grown over time and project future returns based on your investment strategies.
Helps you to plan your investments effectively by providing insights into how your investments may grow over time.
Mutual Fund and SIP calculators are user-friendly and require minimal input.
You can use these calculators to set specific financial goals, such as saving for retirement, buying a home, or funding your child's education.
You can compare the potential returns of different mutual fund schemes or SIP amounts.
By using these calculators, you can assess the impact of various rates of return on your investments.
*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
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Following are the major charges involved in investing in mutual fund schemes:
These charges are levied by the mutual fund house or the distributor for each transaction, such as buying, selling, or switching mutual fund units. Transaction charges are typically a percentage of the investment amount, with a minimum charge.
This is an annual fee that is charged by the mutual fund house to manage the scheme. The expense ratio is expressed as a percentage of the fund's Assets Under Management (AUM). It covers all the costs of managing and running a mutual funds scheme, such as investment management fees, marketing and distribution expenses, brokerage fees, and custodial, transfer agency, legal, and accountants' fees.
Some mutual funds charge an exit load when you sell or redeem your units within a certain period after purchasing them. The purpose of the exit load is to discourage short-term trading and promote long-term investing. The exit load percentage and the holding period required to avoid it can vary between funds.
The key advantages of investing in mutual funds are as follows:
Diversification: Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. This diversification helps spread risk because your investment is not reliant on the performance of a single asset.
Professional Management: Mutual funds are managed by experienced fund managers and investment professionals who make investment decisions on behalf of investors. These experts conduct research and analysis to select the best investments, which can save individual investors time and effort.
Liquidity: Mutual fund shares can usually be bought or sold on any business day at the fund's Net Asset Value (NAV). This provides liquidity, allowing you to access your money relatively quickly compared to some other types of investments.
Affordability: Mutual funds typically have a low minimum investment requirement, making them accessible to a wide range of investors, including those with limited capital.
Automatic Investment Options: Many mutual funds offer automatic investment plans, such as Systematic Investment Plans (SIPs) or Systematic Withdrawal Plans (SWPs), which allow you to regularly invest or withdraw funds, making it convenient for long-term planning.
Transparency: Mutual funds provide regular updates on your holdings, performance, and NAV. You can easily track your investments and assess how the funds are performing.
Professional Research and Analysis: Fund managers have access to extensive research and analysis tools, which can help in making informed investment decisions. They have the expertise to adjust the fund's portfolio as market conditions change.
Variety of Investment Options: Mutual funds offer a wide range of investment options, including equity funds, debt funds, hybrid funds, sector-specific funds, and more. This allows you to choose funds that align with your risk tolerance and financial goals.
Tax Benefits: In some countries, certain types of mutual funds offer tax benefits, such as tax-saving mutual funds (e.g., ELSS in India) that provide deductions under the tax code.
Professional Asset Allocation: In the case of hybrid or balanced funds, the fund manager handles the asset allocation between equities and fixed-income securities, ensuring a balanced investment approach based on the fund's objectives.
To choose the best mutual fund scheme for you in 2023, you should consider the following factors:
Your Risk Appetite: How much risk are you willing to take with your investment? Mutual funds are available in a variety of risk profiles, from low-risk debt funds to high-risk equity funds. Choose a scheme that matches your risk appetite.
Your Investment Goals: What are you investing for? Are you saving for retirement, your child's education, or a down payment on a house? Choose a scheme that is aligned with your investment goals.
Your Investment Horizon: How long do you plan to stay invested in the market? Mutual funds are a long-term investment option. Choose a scheme that has a good track record over the long term.
The Fund Manager's Track Record: Evaluate the fund manager's experience and track record in managing the scheme. Look at the fund manager's investment style, performance history, and how long they have been managing the scheme.
The Track Record of Fund House: The fund house's track record is also important. Look at the fund house's investment philosophy, investment process, and overall performance.
Mutual funds are a popular and accessible investment option that offers diversification, professional management, and a wide range of choices to suit different financial goals and risk profiles. They provide an effective way for you to grow your wealth, save for specific objectives, and navigate the complexities of financial markets. However, it is crucial to conduct thorough research, align your investments with your goals, and stay informed about fees and risks. Mutual funds can be a valuable tool for building financial security and achieving long-term financial success.
Mutual funds can be categorized into several types based on their investment objectives and asset classes. Four common types of mutual funds include:
Equity Funds: These funds primarily invest in stocks or equities of companies.
Debt Funds: Debt funds invest in fixed-income securities such as government bonds, corporate bonds, and money market instruments.
Hybrid Funds: Also known as balanced funds, these mutual funds invest in a mix of both equities and fixed-income securities.
Money Market Funds: Money market funds primarily invest in short-term, highly liquid instruments like treasury bills, commercial paper, and certificates of deposit.
Mutual funds are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. They are managed by professional fund managers who make investment decisions on behalf of the investors.
You buy shares or units in the fund, with the value fluctuating based on the portfolio's performance. Mutual funds offer liquidity, charge fees, and provide an accessible way for you to participate in the financial markets while spreading risk through diversification.
*All savings are provided by the insurer as per the IRDAI approved insurance
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
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