What is mutual fund ? Kya mutual fund sahi hai ya nahi ? These are very basic question every new investor asks. Any one who starts earning also look for these answers. We will understand this in very simple way.Any one who does not understand about financial matter will understand what is mutual fund .The purpose of this article and other associated articles in this blog is to prepare every one to take informed call about their own investments .Individuals looking to increase their wealth and reach their financial objectives are increasingly turning to mutual fund investing. For both experienced investors and those who are new to the financial sector in India, mutual funds provide an accessible and varied investing option. In this article, mutual funds in India are introduced along with their concept, types, advantages, and role in the Indian investment environment.
Table of Contents
What is mutual fund
Before we discuss what is mutual fund, let us recall where a ordinary person put his savings. It could be saving bank, FD, Insurance policies ,Gold, Silver, real estate, Share market or Government bonds. I will repeat this in many articles that there is no one solution which is best and if possible investment should be diversified. First let us understand there is a term called ” AMC” Asset management Company. This AMC takes pooled money from individual persons. It collects money from investors and this money can be as small as 500/- per month or 5000/- one time lump sum. AMC manages collected money and appoint a fund manager. He is a professional knowledgeable person who invest this collected money in shares, bonds, government securities or gold etc. This is concept of mutual fund. Suppose I want to buy a share of Nestle India, which today cost 18000/- for one share. If I have only 5000/- today I can not buy this share. But I can invest in a mutual fund which has bought Nestle shares with this 5000/- .Depending upon where AMC fund manager invest collected money ,there are different types of mutual fund. AMC can invest in Shares, bonds, government securities ,gold or real estate. With small amount of money a small investor can not take exposure to real estate but definitely he can buy a mutual fund who has bought real estate companies like Godrej properties etc. Here names of companies are only for example ,not investment advice.
A mutual fund is an investment vehicle that pools money from multiple investors and invests it in a diversified portfolio of securities such as stocks, bonds, or a combination of both. It is managed by professional fund managers who make investment decisions on behalf of the investors. Each investor in a mutual fund owns units, which represent a portion of the holdings of the fund
How Mutual Fund Works/ Mutual Fund NAV
Before we discuss WHAT IS MUTUAL FUND? Let us discuss how mutual fund works. Suppose 10 friends together pool 10000/- each and collect 100000/- total. They go to a friend Ramesh who has a company ABC and Ramesh is having knowledge of share market and he has time for doing this. It was assumed that one unit cost is Rs 10/- so each friend got 1000 units .Total number of units added together were 10000.Ramesh bought shares worth 100000/- of different good blue chip companies. After some times ,share prices move up and total value of shares goes to 120000/- .Total number of units still remains 10000.So value of each unit goes to 120000/10000=12 /- .This 12/- is called mutual fund NAV (Net Asset Value ) per unit of mutual fund. Each friend has 1000 units so each friend has net value of 12000/-.So each friend has got gain of 12000-10000=2000/- Now another friend comes and proposes to invest 10000/- , but now one unit cost is Rs 12/- instead of 10/- so he will get 10000/12=833.33 units. Total fund value on the date will become 130000/- and total unit in fund will become 10000+833.33=10833.33 . So this is how a mutual fund works. Here Ramesh is a fund manager and company ABC is mutual fund.
Types of Mutual Funds in India
There are various classifications for Mutual Funds
Open and Closed Ended Fund :
After knowing what is Mutual Fund ,let us understand one classification of Mutual Fund .It is open ended and close ended. In open ended fund ,one can buy any time and sell any time. It is perpetual and there is no maturity date. It is a ongoing process .In closed ended mutual fund ,there is a period for which scheme opens then it closes. There is a fix maturity date for redemption.
Actively Managed and Passively Managed Fund
Actively Managed Mutual fund are those fund where fund manager keep researching performance of companies, global and local economic and political factors and parameters. Based on these inputs he takes continuous call to buy or sell. There are two platform where shares are bought and sold, these are BSE (Bombay Stack Exchange) and NSE (National Stock Exchange) .There are two indexes for these exchanges ,one is Sensex and other is Nifty. Sensex comprises of 30 chosen stocks and Nifty comprises of chosen 50 stocks. There is well defined weightage of each stocks. In passively managed fund, job of fund manager is just to replicate index stocks. It means He will buy only Sensex or Nifty stocks and in same weightage and will not do anything else. He will not put his own mind in selection of stock.
Equity Fund
Equity funds invest primarily in stocks or shares of companies. They aim for capital appreciation over the long term and are suitable for investors willing to take higher risks.
Debt Funds
Debt funds primarily invest in fixed-income instruments such as government securities, corporate bonds, and debentures. They aim for regular income and capital preservation
Balanced Funds
Balanced funds, also known as hybrid funds, invest in a mix of equity and debt instruments. They offer a balanced approach by combining capital appreciation and regular income
Index Funds
Index funds aim to replicate the performance of a specific market index, such as the Nifty 50 or the BSE Sensex. They invest in the same proportion as the underlying index
Sectoral Funds
Sectoral funds invest in specific sectors or industries, such as banking, technology, or healthcare. They provide exposure to a particular segment of the economy
Tax-Saving Funds (ELSS)
Equity Linked Savings Schemes (ELSS) are tax-saving mutual funds that offer potential tax benefits under Section 80C of the Income Tax Act. They have a lock-in period of three years
How Mutual Funds Works
Now we know what is mutual fund ,next When you invest in a mutual fund, money is pooled with that of other investors and used to buy a diversified portfolio of stocks and other type of securities.. The fund manager makes investment decisions based on the fund’s investment objective and strategy. The returns generated by the fund are distributed among the investors based on their holdings
Advantages of Investing in Mutual Funds
Diversification: Mutual funds provide instant diversification by investing in a wide range of securities
Professional Management: Experienced fund managers handle the investment decisions, saving investors the effort and time required for individual stock selection
Liquidity: Mutual fund units can be easily bought or sold, providing investors with liquidity
their investment Affordability: Mutual funds allow investors to start with small amounts and gradually increase over time
Factors to Consider Before Investing
Before investing in a mutual fund, it is important to consider the following factors:
- Investment Objective: Understand your financial goals and choose a mutual fund that aligns with them.
- Risk Profile: Assess your risk tolerance to determine whether you are comfortable with a higher-risk equity fund or prefer a lower-risk debt fund.
- Fund Performance: Evaluate the historical performance of the fund and compare it with relevant benchmarks and peer funds.
Expense Ratio: Consider the charges associated with the mutual fund, including the expense ratio, which affects the overall returns
Mutual Funds vs. Other Investment Options
Mutual funds offer distinct advantages over other investment options such as fixed deposits, direct stock investments, and real estate. They provide diversification, professional management, and liquidity, making them an attractive choice for investors seeking long-term wealth creation
Top Mutual Fund Companies in India
- HDFC Mutual Fund
- SBI Mutual Fund
- ICICI Prudential Mutual Fund
- Aditya Birla Sun Life Mutual Fund
- Axis Mutual Fund
Tips for Successful Mutual Fund Investing
- Set clear financial goals and choose mutual funds accordingly.
- Understand the risks associated with different types of mutual funds.
- Diversify your investments across different asset classes and fund houses.
- Review your portfolio periodically and make adjustments if required.
- Stay updated with market trends and consult a financial advisor if needed
Conclusion
Mutual funds provide individuals with an opportunity to participate in the financial markets and achieve their investment objectives. With a wide range of funds available in India catering to different risk profiles and investment goals, investors can make informed choices based on their financial needs. It is important to conduct thorough research, consider personal circumstances, and seek professional advice before investing in mutual funds
FAQs
1. Are mutual funds safe investments?
Mutual funds carry inherent market risks, but they offer diversification and professional management, which can mitigate risks to some extent. It is important to choose funds based on your risk tolerance and investment goals.
2. Can I lose money investing in mutual funds?
Yes, the value of mutual fund investments can fluctuate based on market conditions, leading to potential losses. However, the risk can be managed through careful fund selection and a long-term investment approach.
3. How can I invest in mutual funds in India?
You can invest in mutual funds through various channels, including online platforms, directly through the fund house, or through financial advisors. KYC (Know Your Customer) compliance is mandatory for investing in mutual funds.
4. Can I redeem my mutual fund investment anytime?
Yes, mutual fund units can be redeemed at any time based on the fund’s redemption policies. However, certain funds may have exit loads or lock-in periods that restrict immediate redemption.
5. How can I track the performance of my mutual fund investments?
Fund performance can be tracked through regular updates provided by the fund house, online portals, or mobile applications. It is advisable to review your investments periodically and consult with a financial advisor if needed.
Read this also : Best top 5 Small Cap Mutual Funds in India for 2023
