If you are someone who is just getting started then you might have the question what is mutual fund? Granted that you might find it a bit confusing, at least in the beginning. The sheer number of mutual funds and the hundreds of schemes that they share does not make it easy to choose a scheme or understand how they work.
The mutual funds definition is easy enough to explain, though. It is basically the amount of money that people invest into a pool before it is used to buy securities that usually incur profits for the investors. Of course, some mutual funds are more about saving on taxes than earning profits in the form of dividends.
Making a mutual fund investment gets easier once you understand how mutual funds work. When you invest money in a mutual fund, it acts as a pool of money that is collected from various investors and managed by a professional. The pool is then invested in buying securities like bonds, equities or money market.
When these securities make profits, the profits are divided among the investors depending on how much money they originally invested. This is done by calculating the NAV or the Net Asset Value of the Scheme. The more you invest, the more your profit margin basically.
The reason people go “mutual funds sahi hai” is because of the opportunity it provides one to make a monetary profit outside of their regular earnings. One can, thus, invest with certain objectives in mind, like a retirement plan or saving up for children’s education, and invest and save accordingly.
Mutual Fund is a type of investment fund that pools a collection of money from different investors to buy securities like stocks and bonds. These funds are managed by financial officers who allocate the fund’s assets and attempt to yield profits for the investors.
Now, there is always some mutual fund risk. They can be Market Risks, which implies that the fund assets don’t perform well in the market either due to recession, inflation or change in supply-demand or even a natural calamity.
There is a Liquidity Risk, which can happen if the assets are not sold to a buyer and the investment can’t be redeemed without a loss for the investor. Then, there is Concentration Risk where you could run losses if you concentrate all your money into one scheme only. You can reduce the risk by mutual fund risk diversification.
Mutual Fund diversification, also known as risk diversification, is the process of investing in more than one type of mutual funds. This way you reduce the risk of losing all your assets because, even if one fund doesn’t perform well, there are others to compensate for your loss. You could buy shares in equity funds, invest shares to buy bonds in debt funds or keep a mix of both in Balance funds. The debt funds promise larger returns and are tax-efficient.
You can check your rights as an investor as laid down by the AMFI. In case you are a fund distributor, AMFI has banned the use of “Mutual funds sahi hai”, or MFSH for advertising mutual funds so be careful.
Ever wondered what is NAV that keeps appearing in your SOAs every time? This video explains mutual fund NAV in a much simpler and comprehensible way. The video gives you an opportunity to learn more about mutual fund NAV in uncomplicated everyday lingo so that you keep up with all that is happening in your account. Being susceptible to multiple market risks and apprehensions, you cannot really afford to get the wrong end of the stick when it comes to simple mutual fund terminologies. This video is relevant for anyone interested in understanding mutual funds better, from CA Inters and Brokers to any general investors looking forward to broadening their financial portfolio.
The Net Asset Value of mutual fund is the perfect denominator of how exactly the mutual fund is performing. NAV is revealed at the end of every day after calculations are done on the basis of the day’s closing market prices, following a system completely different from stocks exchange that fluctuates with every passing second. The NAV is computed by considering the sum-up value to total cash & securities and dividing it by the number of outstanding shares after deducting liabilities. So, the simple formula to compute NAV is Assets minus Liabilities, divided by the total number of outstanding shares. All investors must always keep a close eye on the NAV in order to gain from market price fluctuations every day.
To learn more on what is net asset value, check out this video now.
What can be better than a mutual fund that has no lock-in period and has better returns than a fixed deposit? Investors having a shorter time horizon with less risk appetite should consider having liquid mutual funds in their portfolio. Also, liquid funds offer a huge margin of safety that helps in capital preservation and growing capital consistently over time with less volatility.
What is liquid fund?
Liquid fund is a kind of mutual fund that invests in securities. The residual maturity of a liquid fund is up to 91 days. And the most prominent feature of liquid funds is that there is no lock-in period.
Although an assured sum of return is not guaranteed with liquid funds, the investor will still benefit a lot from these than from fixed deposits. If you think liquid funds are a risk, think twice because they have the lowest risk involved in interest rate as compared to all other debt funds, the reason being liquid funds are an investment in fixed home securities. Also, there are no entry and exit loads in liquid funds.
Liquid funds are the best choice for investing for short term, especially when you are planning to do it in a high inflation rate scenario. While investing, you can choose among a variety of plans suitable for every need.
Still confused about liquid funds? This video will perfectly explain you the concept and also the pros of investing in liquid funds.
What are debt funds?
Debt funds are mutual fund schemes which invest in different fixed income instruments including government and corporate bonds, money market instruments, corporate debt securities, etc. These instruments offer capital appreciation and are also referred to as bond funds or fixed income funds.
There are advantages that come with investing in low-cost structure debt funds, including high liquidity, stable returns, and reasonable safety. Debt mutual funds are perfect for investors looking for regular income but are averse to risks. Furthermore, investing in debt mutual funds is a favorable option it helps in achieving goals in a more tax-efficient manner.
Types of Mutual Funds
There are various types of mutual funds that exist, catering to different people based on their needs. They can be categorized into:
1. Growth or Equity Funds: They invest mainly in equities and have a primary objective of wealth creation or capital appreciation. They also have an added potential of generating higher returns over long-term investment.
2. Income Funds: These are funds which invest in fixed income securities such as bonds or government securities, commercial papers and debentures, bank certificates of deposits, as well as money market instruments like commercial paper and treasury bills.
3. Hybrid Funds: They invest in fixed income and equities, offering the best of both worlds. They also have the benefits of growth potential and income generation.
The benefits of investing in mutual funds include the wide range of types you can choose from.
Exchanged Traded Funds or ETFs are funds that are traded like common stock exchanges but are different from mutual funds. ETFs are usually bought by unit and sold via a registered broker working in a recognized stock exchange. ETF investing units are listed only on the stock exchange and aren’t bought or sold like normal equity and open funds. The investor can purchase as many units as he wishes without any restriction, considering it is validated and vetted by a recognized exchange office.
ETFs also have higher liquidity daily and a lower fee as compared to mutual fund schemes, making them an excellent alternative for any individual investors.
Mutual funds are diverse and can feature multiple investments in order to maintain the security of an investor’s portfolio. These different schemes can sometimes be clubbed in order to gain maximum benefits from both, in a concept known as hybrid mutual funds. It is a popular type of fund where an individual can invest in two or more types.
These hybrid mutual funds can be equally divided into either gold and debt, or equity and debt and many more. The most popular type of a hybrid fund is however, debt and equity assets. If you’ve ever wanted to know what is a hybrid fund, log on to Mutual Funds Sahi Hai.
What is an equity fund?
An equity fund is a mutual fund that generally invests in stocks or shares of different companies. These funds are also known as growth funds. They can be active or passive. Active funds have a fund manager who scans the market, conducts necessary research, and examines performances. Passive funds have a manager who builds a portfolio that mirrors a popular market index, such as Sensex.
Equity mutual funds can also be divided based on market capitalization and they can be large, mid, small, or micro cap funds. Thus, equity funds aim to invest in a company’s shares and provide investors the benefit of diversification and professional management.
Benefits of a mutual fund:
Managing investments can be a challenge if you do not have the right expertise and awareness. When it comes to money, it’s always better to trust someone who is experienced to manage it for you. There are also a host of other benefits to this. Here are the benefits of mutual funds:
You can hire someone to do a job that would otherwise require you to devote time on a daily basis. You can concentrate on more important activities while someone ensures your money is growing.
You could spend more time looking for other activities that you like and concentrating on your interests. The benefits of investing in mutual funds also mean that one doesn’t necessarily have to manage it on their own. Others can do it for you, and do a better job.
Short term or Long term investments
Depending on your goals, short term investments and long term investments can be varied. Based on the type of returns you are expecting, you can invest in different types of investments.
Different types of investments will improve your returns within different time periods and you can discuss your financial goals with your advisor before investing.
If you’re looking for the best long term investments, you can apply for a long term bond fund, which will give you great returns in three years. The best short term investment plans, such as liquid funds, will give you great returns within a time period of just one year. Short term bond funds are perfect for people who want returns within 1 to 3 years.
People want to grow money but don’t know how and where to invest. Mutual fund investment is the best way to invest and grow your money online. To know more about mutual funds and it’s functionality, visit us online. Visit us to know more about How to grow money
Debt-oriented schemes distribute the dividends on the basis of profit and loss made by the scheme; the investor has put his/her money in. Systematic Withdrawal Plan(SWP) is a better alternative for all those who are looking for a fixed monthly income. The investor only has to mention a certain amount expected by him/her every month and the said sum of units will be redeemed at a specific date of every month. SWP is one of the safest and most efficient plans for earning tax returns. This scheme is perfect for people who do not have a regular monthly cash flow.
Inflation is the rise in prices over time, relative to the money available. Visit us to know more about what is inflation.
ELSS investment( Equity Linked Saving Scheme) is a type of tax saving mutual funds where an individual can save up to 1.5 lacs on his/her annual income. The tax on mutual funds after finishing the lock-in period of years is zero. ELSS mutual funds are similar to the PPF scheme but are more beneficial and safe. ELSS is considered as one of the most flexible tax saving mutual funds. Investors can also invest through SIPs and avail the benefits of mutual fund taxation by ELSS. With a lock-in period of just three years, ELSS ensures the maximum growth potential for investors.
Systematic Investment Plan (SIP) can be an overwhelming process for some of us to understand. However, it is not. SIP investment is a plan offered by mutual funds. The investor can invest a fixed sum of money every month into his/her choice of mutual funds scheme. SIP is being recognized as a prominent mutual funds investment because of its low risk and disciplined strategies. Investors can invest the smallest amount of money in SIP and also conveniently make a debt of some amount as per their will. The only key to get the best returns from SIP is to begin early and invest regularly.
A mutual fund trust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities.
Professional fund management is one of the best benefits of Mutual Funds. You can either manage your finances yourself, or hire a professional firm. To know other various benefits of mutual funds, visit us Mutual Funds Sahi Hai