Mutual Fund – Guide

Introduction

Mutual funds are popular because of the significant advantages they provide in comparison to other investment options. However, if you are a first-time investor, mutual funds might appear confusing, whereas they are one of the most convenient, quick and easy investment options.

Check this mutual fund guide to understand what mutual funds are and how to invest in mutual funds.

What are mutual funds?

An asset management company (AMC) allows individual and institutional investors to pool money to achieve a common investment objective in a mutual fund scheme. All mutual funds should be registered with the Securities Exchange Board of India (SEBI). A fund manager who invests in financial securities professionally manages these funds as per the investment objective.

How do mutual funds work?

Mutual funds function as a trust, which sources money from different investors with a common financial goal and investment strategy. Mutual funds are formed, managed and operated by authorized AMC. Each mutual fund has an investment objective, risk level and investment strategy catering to the collective investors' needs. 

Depending on the investment mandate, mutual funds allocate your money in different avenues, such as stocks, bonds, gold, and other market securities. Professional fund managers manage mutual funds. These managers have expertise in carefully selecting and investing in market securities aligned with the scheme's investment objective. Fund houses levy an annual mutual fund management fee (also known as an expense ratio).

When you invest in a mutual fund, you buy the corresponding percentage stake in the investment scheme. Mutual funds make money through dividends, interest and capital appreciation. The income or loss from the mutual fund scheme is proportionately distributed among stakeholders.

Additional Read: 7 reasons to invest in Mutual Funds

What are the different types of mutual funds?

Mutual funds based on asset classes

• Equity funds: These mutual funds comprise investments in equity and related securities. Equity funds have the highest potential for returns but also come with a high risk.
• Debt funds: These funds invest your money in debt instruments like government bonds, corporate bonds and other securities that offer fixed income. Debt funds are low-risk investments but offer mediocre returns.
• Balance funds: Also known as hybrid funds, these schemes invest in two or more asset classes – stocks, bonds, etc., as per the investment mandate.

Mutual funds based on the investment objective

• Growth funds: The primary objective of these funds is to grow your capital. These funds usually invest in equity funds that offer high returns.
• Liquid funds: These funds invest your money in short-and very short-term (91 days or less) maturity instruments. These funds carry low risk and offer lower returns.
• Income funds: These funds invest your money in bonds and debentures, giving you a regular income.
• Tax-saving funds: Also known as ELSS (Equity Linked Saving Scheme), these mutual fund investments are tax-free under Section 80C. These funds invest 65% of the money in equity.

Mutual funds based on the structure

• Open-ended funds: These can be sold and purchased throughout the year as per their NAV (Net Asset Value).
• Close-ended funds: These funds can only be purchased in the NFO (New Fund Offer) period. These schemes come with a fixed maturity period and can only be withdrawn or redeemed after the tenure expiry.
• Interval funds: Interval funds are a mixture of open-and close-ended funds. These funds are available for sale and purchase in intervals.

Additional Read: What are arbitrage mutual funds?

Why invest in mutual funds?

• Investing convenience: You can invest in mutual funds online with minimal documentation. You can invest in a mutual fund that best meets your risk tolerance and financial goals. You also have the flexibility to rebalance your portfolio and switch between your mutual funds to evade market volatility or optimize opportunities.
• Minimal investment: You can choose to invest in a lump sum or SIP (Systematic Investment Plan) mode. In the SIP mode, you contribute a pre-decided sum at a fixed interval for a specific duration. You can start a SIP with Rs. 500 a month.
• Professional fund management: Mutual funds are managed by professionals backed by financial researchers and experts. That ensures portfolio optimization and maximization of returns as per your investment mandate. In short, they are a real-life mutual fund investment guide who understands how the market works.
• Tax benefits: Mutual fund investments (like ELSS) up to Rs. 1.5 lakhs are tax-free under Section 80C.

How to invest in mutual funds?

• Sign up for your mutual fund account
• Complete your KYC formalities
• Fill in necessary details
• Select the mutual fund scheme as per your financial goals
• Choose the mode of investment – lump sum or SIP
• Make or schedule your first payment, and your mutual fund is active.

Additional Read: 5 mistakes to avoid while investing in Mutual Funds

Conclusion

Mutual funds help you optimize your investment portfolio and achieve financial goals. Use the mutual fund guide and invest in a scheme early to grow your money significantly in the long run. You can even begin investing with a low amount. However, it is important to identify your goals, understand your risk tolerance, and choose an appropriate mutual fund.