What is Mutual Fund?
Mutual Funds are professionally managed investment schemes. They represent a pool of funds that are professionally managed by expert Mutual Fund managers. The fund managers keep a record of the performance and growth of these funds and make required alterations so that the funds perform well and the investors receive the best possible returns.
Mutual Funds are controlled by an Asset Management Company (AMC) that collects funds from a group of investors and invest these funds in bonds, stocks, and securities. When you purchase units of a Mutual Fund, these units denote the holdings of your share in a certain fund scheme. You can purchase or even redeem a Mutual Fund at the prevailing Net Asset Value (NAV).
Making mutual fund investing is one of the most favored ways to create wealth, especially for beginners who want to have exposure to financial markets. Mutual funds are a collection of stocks and bonds managed by investment professionals. If you are planning to start investing in mutual funds be prepared to take these important broad steps – having necessary documents in hand, knowing the purpose of investment and selecting the right mutual fund schemes.
Different types of Mutual Funds:
• Debt funds: A debt fund is a type of Mutual Fund that invests in fixed-income securities. Under this fund, your money will be invested in short-term bonds, long-term bonds, securitised funds, floating rate debt, and money market instruments.
• Equity funds: An equity fund is a type of Mutual Fund that invests money primarily in stocks. There are both actively or passively managed funds.
• Equity linked savings schemes: This is an equity Mutual Fund that is close-funded in nature. It helps you save taxes and also helps you grow your wealth. You can enjoy tax deductions as per the Income Tax Act under Section 80C.
• Diversified funds: This type of Mutual Fund allows you to invest your money in diverse sectors or industries. You can spread your investments across various industries in the market.
• Gilt funds: These funds allocate money to securities that are offered by the state and central governments. These funds come without any default risk.
• Index funds: Under this category of Mutual Funds, your money will be invested according to how a stock market index functions. The NAV for these funds will be closely follow the rise or fall in the index.
• Liquid Mutual Funds: Liquid Mutual Funds are investment plans that will allocate funds primarily to money market instruments such as treasury bills, term deposits, certificate of deposits, commercial papers, etc. These funds come with a lower maturity period.
• Debt-oriented hybrid funds: Under this category of Mutual Funds, your money will be primarily invested in debt and the remaining part will be invested in equity. It is a blend of both debt and equity investment.
• Arbitrage funds: These funds are treated as equity plans for taxation purposes. These funds invest both in the cash market and the derivatives market.
• Dynamic bond funds: Your money will be invested in debt and money-market instruments. The maturity of the fund will vary according to the investments that it makes.
THINGS YOU SHOULD KNOW BEFORE INVESTING
However, beginners in mutual fund investing need to know few more things to help them take a right decision. Here is a list of things you should know:
1. Know your purpose of investment
The purpose of doing an investment should be well defined – buying a car, buying a home, child education planning, wedding planning, retirement planning, etc. Even if you don’t have any goal, you should be clear on how much wealth you are targeting to create and in what time frame.
“Always decide the “purpose of saving” and “year when you need your money back”. This will help in filtering various mutual fund options basis – risk level, lock-in period, payment method, etc.”
2. Risk factor should always be considered
If you are a new investor, you need to know that there are several types of mutual funds available in India based on catering one’s risk appetite. One should select the scheme as per their risk-taking capacity. “Remember, higher return expectation means associated risk. Mutual Funds possibly have an answer to all investment needs. Choose wisely, it is your money and your future.”
“You should think about your exposure to equities in a simple way. If you’re not comfortable with the value of your equity investments falling, then you shouldn’t be in euities at all.”
3. Selection of scheme and mode of investment
It is always advisable to plan for long-term financial goals. “One should take the help of a qualified mutual fund advisor. They can list down schemes (Liquid, Debt, Hybrid or Equity), option (growth, Dividend Payout or reinvestment), strategy (SIP, Lumpsum, STP, SWP, etc.) as per your preferences”
4. Select while the option
Selecting options - Dividend or Growth - becomes very important when you are defining the purpose of your financial goal. If you aim to fulfill a goal where you need a huge capital, you should opt for growth option whereas if you need some profits from time to time as and when a company gains from the market, you should select dividend option.
“Many mutual funds choose to distribute their profits to shareholders in the form of dividends, while others choose to use their profits to reinvest in the growth of the company. Your selection of dividends or growth plans should be based on how often you need the money.”
5. Have a balanced portfolio as per your age
One needs to check the time horizon of their financial goal and invest accordingly. However, there is no hard-and-fast rule, but in general, as you get older and closer to retirement, you should reduce your exposure to stocks in order to preserve your capital. “As a rule of thumb, subtract your age from 110 to find the percentage of your portfolio that should be in stocks, and adjust this up or down based on your individual willingness to take risks.”