Basics Of Mutual Funds
Last Updated: Jan -21-2020
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In the recent times, investment into stock market opportunities is increasing by several folds. Despite having risks involved in it, there are high returns as well. One of the most popular ways of investing in the stock market is through mutual funds. The funds that are invested into the mutual funds are all collected by the AMCs – Asset Management Companies. Then, the money is invested further into different financial products, such as equities, debts, and government securities.
In this blog, we will understand the basics of mutual funds and the method of investing into them. To begin with, let us look at the different categories of mutual funds available for the investors.
Open-Ended and Close-Ended
Open-ended mutual funds are highly flexible from the investor’s perspective. An investor can enter or exit the mutual fund at any time he or she wants. There is no specific time period involved in the investment.
On the other hand, close-ended mutual funds are time-bound. They are not flexible and once entered an investor can only exit after a stipulated period of time. It depends on the purpose of investment and requirements of the investor to choose between the two.
Large, Mid, and Small Cap
This category of mutual funds is based on the size of the companies in which the money is invested.
Large Cap – As the name suggests a large monetary portion is invested in companies that have a greater market capitalization. It involves least amount of risk as the companies are large and have a proven record of performing and delivering large market capitalization.
Mid Cap – The money is invested into mid-sized companies. Since they are mid-sized, they involve high risks and high returns. A large number of investors choose for Mid Cap mutual funds.
Small Cap – The corpus is invested into small companies. This involves high risks; however, the money is invested in smaller companies that have potential to give exceptional returns. Hence, they are capable of offering high returns to the investors. Only the investors who have high risk-taking capabilities choose small cap mutual funds.
Equity, Debt, and Balanced Funds
This category of mutual funds is on the basis of how the money is invested into the market.
- Equity Mutual Funds – When the money is invested into stocks
- Debt Mutual Funds – When in the money is invested into government securities, corporate bonds, and / or fixed deposits
- Balanced Mutual Funds – When it is a combination of corpus investment into equity and debt
Now that we have seen the different categories of mutual funds, let us understand the benefits of investing in them. Due to recent changes made by SEBI (Securities and Exchange Board of India) the AMCs need to be extremely careful while making the investments. This also helps people with non-financial backgrounds make informed investment decisions.
- Mutual funds schemes are managed by experienced fund managers. This increases the possibility of getting higher returns on the investment made.
- Entry load is eliminated, and exit load is also negligible.
- Mutual funds schemes are rated by CRISIL – Credit Rating Information Services of India limited. This makes the selection of mutual funds scheme easier.
- Investment in mutual funds is possible through online mode.
- Offline mode of investment through stock brokers is also available
- If you already have a demat account with CDSL or NDSL through the AMC, then you don’t need to fill up the KYC again.
A large number of AMCs offer a variety of mutual fund schemes. Here are some points that you must consider while making a decision of investing in mutual funds.
- Understand your investment objectives and identify schemes that match your investments needs. While doing so consider factors such as expected returns, liquidity, and your risk-taking capacity.
- Compare the performance of all available mutual funds and understand the returns offered by each. You can do this by choosing top five MF schemes and compare their returns.
- It is important to diversify. Never invest your entire corpus in just one mutual fund scheme. Look for 2-3 schemes that match your investment expectations and distribute your money in all of them. This will help you minimize the risk and help you gain good returns over time.
- Mutual fund schemes also include hidden costs which must not be ignored. Costs like management fees, exit loads, maintenance costs, etc. add to the overall costs of the MF which is often overlooked. These are additional costs that can impact your returns. Hence, study the scheme well to understand the actual investment required and the returns gained.
- Some mutual fund schemes offer tax benefits, such as, the Equity-Linked Savings Schemes (ELSS). These schemes allow you to save tax up to Rs. 1.5 lacs. Another advantage of this scheme is that the interest earned on it is also tax-free. This contributes towards your returns.
Since investment in mutual funds can be done through online medium, it has become even more convenient for the investors. They can research well, talk to the experienced investors and make their decisions. Here are some ways in which one can invest into mutual funds
If you are new to mutual funds and know nothing about how to invest, then better hire a mutual fund advisor. He will suggest you the top performers and help you with the entire investment procedure. The advisor will also track your investments and recommend timely selling for higher returns. The same can be achieved by opting assistance from broking firms. Hiring an advisor or approaching a broking company will cost you more but will also prevent you from incurring losses.
If you know well about mutual funds, have invested before, and made your own buy/sell decisions, then direct plans are meant for you. Through direct plan you major save on commission costs. All you need is PAN card, Aadhaar card, and cheque book, and you can make a MF investment directly through the website. You can also visit the branch and make an investment face-to-face.
Several websites and mobile applications also help you in investing in mutual funds as per your convenience. No matter what, investment in mutual funds is considered to be more fruitful in terms of returns as compared to the conventional means of investments like fixed deposits, and recurring deposits.
Despite involving high risks, mutual fund investment is capable of offering extremely high returns. It is just a matter of investor’s risk-taking capabilities.
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