When it comes to investing, a lot of people struggle. They’re intimidated and don’t know where to start. They also don’t know where to go for advice. If you’re one of those people, mutual funds could be a great place to build your portfolio. Mutual funds are a type of investment. They pool money from many investors and buy stocks, bonds, and other investments. The original investor then gets a small share of ownership in each company the mutual fund invests in. This way, they don’t have to know each company as well, assuming that they would not have time to research individual companies. We’ll cover some specific reasons why people use mutual funds over individual stocks. You may find yourself asking these questions when looking at some mutual funds: What is a mutual fund? How do mutual funds work? Are there any fees involved in mutual funds? How are they any different from stocks, and why should I invest in them? Worry not, as we are going to address all of your questions in this blog, so keep reading to make an informed decision.
What is a Mutual Fund?
Mutual funds, also called “collective investment schemes” in India, are designed to lower the risk that is associated with investing. The fund manager decides on which stocks and/or bonds will be purchased as well as the amount of money to invest in each equity instrument. This means that you don’t have to decide where and how to invest your hard-earned money; instead, you can simply enable an automated deposit or cash flow into your mutual fund’s account.
Mutual Funds in India
The Securities and Exchange Board of India (SEBI) regulates mutual funds in India. As a wise investor, you will be aware that it is important to pick the right mutual funds. You need to look for a transparent method to decide which fund will give you returns. With hundreds of plans at your disposal, there is no reason why your money should not be growing according to your expectations. There are different types of mutual funds available in the Indian market. Still, it is wise to pay special attention to systematic investment plans, or SIPs, as they give you many advantages over other methods of investment.
Types of Mutual Funds
Keeping in mind the key aspects of mutual fund investing, let’s take a look at some of the more popular types of funds that one can opt for.
Equity Funds: Equity funds are funds that invest in equity stocks/shares of companies. They are considered high-risk funds but also tend to provide high returns. Equity funds can include specialty funds like infrastructure, fast-moving consumer goods, and banking to name a few. They are linked to the markets and tend to fluctuate with the market condition.
Balanced Funds: If you are looking for a balanced investment option, Hybrid Funds are the best bet. These funds make it possible for you to invest in both debt and equity, giving the desired return. They manage risk by having a higher proportion of equity than debt in some cases, while the other way round in others.
Money Market Funds: Money market funds are mutual funds that invest in short-term debt securities such as certificates of deposit and treasury bills. These are the safest, but most stable options for those looking to park their money for a short period of time since they offer low returns, generally around 1%. The primary risks with money markets are interest rate risk, reinvestment risk, and credit risk.
Index Funds: Index funds are funds that replicate a particular benchmark index such as the Sensex or Nifty. They are extremely popular because they offer both high returns and lower risk compared to actively-managed funds, which invest in companies based on their own judgment. They also have very low costs, so investors make more money through lower fund expenses.
Debt Funds: The debt funds are a safe investment. These funds provide fixed returns, and the investor will not be deducted from the source of interest income if invested through equity funds. But if you invest in this fund, you are liable to pay the tax yourself, if the gain from it is more than Rs 10,000.
Income Funds: Income Funds are ideal for investors looking for regular income and the safety of principal. These funds invest in a variety of fixed-income instruments, including bonds and debentures, which are secured against the underlying assets.
Fund of Funds: A fund of funds is a mutual fund that invests in other mutual funds rather than stocks or bonds. Typically, these funds invest in exchange-traded funds (ETFs) and invest based on a specific investment strategy. Fund of funds is usually viewed as a “safe” investment because the investor is not taking on any additional risk without knowing it.
Specialty Funds: Sector/Speciality funds are mutual or exchange-traded funds that focus on a particular industry or market. These funds take a targeted approach and invest only in companies in certain segments of the economy, rather than diversifying among thousands of companies.
Why You Should Invest in Mutual Funds
Unlike direct equity investment, which requires a large outlay of funds right at the start, mutual fund investments are relatively low in initial costs and you can get started on a smaller capital outlay.
Mutual funds would help you achieve your investment objectives easily with the help of professional advisors and fund managers.
Investing in mutual funds allows you to tap into professional fund managers’ expertise and diversify your portfolio by investing in a range of stocks, bonds, and other securities. They’re a great way to spread your risk across multiple stocks.
Unlike stocks, mutual funds offer far more liquidity than fixed deposits and bonds. In addition, Mutual Funds can be convenient for first-time investors as there are a lot of mutual fund companies that offer easy investment plans via monthly contributions.
The best part about mutual funds is that they help investors diversify their portfolios without subjecting themselves to unnecessary risks. They are broadly categorized into various schemes based on the underlying investment philosophy chosen by the fund manager.
Liquidity is the ability of an asset to be quickly and easily traded. Mutual funds encourage liquidity, as compared to investment options like life insurance plans (LICs) and Government small savings schemes (ELSS) which limit the opening and closing of an investment.
Things to Keep a Check on before Investing in Mutual Funds
Know Your Financial Goals: Before investing in mutual funds, you need to know whether you are aiming for growth or value investments. You should invest in equity mutual funds or aggressive hybrid funds if you want high returns over short periods of time. However, if your goal is to invest for long-term financial goals, you should make value-driven investment decisions.
Measure the Risk: The next step to a successful financial plan is to identify your risk tolerance as it is one of the most important factors when investing in mutual funds. By understanding what kind of risks you want to take and how much you can handle, you can make informed decisions regarding your investments. And once you’ve got a clear-cut idea of how risky you can be, start moving on to analyze the returns.
Performance Analysis: Before investing in a mutual fund scheme, it is important for the investors to check the past and present performances of the schemes. This is done on an ongoing basis by comparing their respective performance with the category average, or benchmark index, and their own performance in the past. The financial planning experts recommend that investors should not be investing in mutual funds whose performance has been poor for five consecutive years.
Expense Ratio: When you are planning for Mutual Funds, it is important to keep a count on the charges that you will incur and evaluate how much it affects your return from investment. The expense ratio is one of the most common factors that one should analyze before investing in any mutual fund. Management, promotion, administration, and distribution of a mutual fund incur charges for the services rendered. These charges are generally between 1-2% and some of them are lower than 1%.
Expertise of the Fund Manager: If you are planning to invest money in any mutual fund, it would be better if you check the experience and performance of fund managers, before investing in the Mutual Fund. There are various fund managers and various schemes managed by them. The returns on a scheme depend on how well the fund manager manages the scheme.
FAQs
A mutual fund is like a pool of funds contributed by various investors. The fund manager, along with a team of analysts selects and buys securities. This team works hard to pick the right stocks, bonds, and other assets to earn higher returns and the returns are passed on to the investors in the form of dividends or share price appreciation.
Net asset value or commonly recalled as NAV, is the market value of each unit of a mutual fund. The NAV is computed on a daily basis and mutual fund companies publish it to the whole world every day. It helps us know if the mutual fund has gained or lost its value in comparison to yesterday’s close.
A Systematic Investment Plan or SIP is an investment plan with a pre-determined periodic investment amount that can be done on a weekly, quarterly, or monthly basis, wherein the same amount is invested in mutual funds.