Mutual funds are now a very preferred investment medium of many people, which is gaining popularity day by day, especially in the last few years. If you need to maintain financial stability while coping with the ever-increasing inflation, you should definitely look at your investments.
If you keep your money in a savings account, you will get 3-5% interest which is almost equal to the rate of inflation, so many people have chosen to invest in different areas in order to improve their financial situation.
The most popular medium of investment is this mutual fund. But before investing you must know about this fund. This article provides detailed information on what are mutual funds, benefits of investing in these funds, types of mutual funds etc.
What is Mutual Fund?
Let’s take a look at why mutual funds are such a popular and relatively safe investment medium. If you want to invest directly in a stock, bond, gold or any other asset, your risk is higher according to the share price because you are investing in only one place.
As investment is always linked to the market, it is more or less risky. So it can be seen that sometimes the price of a company’s stock goes down and then the price of gold goes up at that time, or sometimes the opposite happens.
Therefore, if you invest in multiple places at the same price without investing in a particular place, the risk is much less and it can be seen to be profitable in the long term because it is normal for the market to rise compared to the inflation in the long term.
Mutual funds do exactly this, where the mutual fund company collects money from multiple investors and invests it in stocks, bonds, gold or any other asset, and the profit or loss on the investment is shared in proportion to the investors’ contributions. As a result, the risk is reduced because you have invested in multiple positions, where one of them falls in price, while the other gains because the market is always bullish in the long term.
Also, since mutual funds are managed by professional experts, you don’t have to worry about investing any more.
Benefits of Mutual Funds
With mutual funds you get the following benefits:
Diversification or diversification of investments
A common saying when it comes to investing or hedging that we all know is to never put all your eggs in one basket, just like if you invest in a single stock or bond, you will only lose if the market goes bad, so the risk is high. There are more
In the case of mutual funds, the amount of risk is much less because of diversification or investing in different securities.
Professional expert
Another significant benefit of investing in mutual funds is getting the help of a professional market expert, as investing in the financial markets requires a certain amount of expertise.
If you want to invest directly, you must do market research for which you must also have knowledge of economics, stocks, bonds or company finances.
But in mutual fund you will get a professional fund manager who will manage the entire fund with experience and skill at low cost.
Higher return potential with less risk
Any investment involves more or less risk, but mutual funds are more likely to offer higher returns than other investments with lower risk or savings accounts.
Increase in purchasing power
In the case of mutual funds, you get the opportunity to invest your money in multiple sectors with minimal investment, which directly helps to reduce your investment risk and increase your purchasing power.
Liquidity facility
Another advantage of investing in mutual funds is its liquidity, i.e. you can easily buy or sell shares at the current net asset value of the fund, so you don’t have to worry about the investment being stuck.
Invest easily
You can invest in mutual funds very easily, and investing does not require detailed knowledge of stock market or investment strategies. The mutual fund will take full responsibility for your investment and the entire fund will be managed by professional experts, where there is no need for you to be actively involved.
Secure
Another reason to invest in mutual funds is its protection. Mutual funds are regulated by the Securities and Exchange Board of India (SEBI) under the Mutual Funds Regulations, 1996, with a focus on investor protection and proper transparency.
Tax benefits
Although mutual fund investments are not tax free, you are eligible for tax benefits in case of ‘Equity-Linked Savings Scheme’ or ‘Tax-Saving Fund’ (ELSS) and some retirement or retirement funds. As per the Income Tax Act, under Section 80C, you can claim income tax deduction up to Rs 1.5 lakh on investment in ELSS.
How do mutual funds work?
A mutual fund is an asset management company, which operates in the following manner:
Raising money for investment
Many individual and institutional investors invest in mutual funds. All that money is pooled to create a fund, which can be used to buy various stocks, debentures and other securities.
Share
Investing in mutual funds means buying shares of the fund. The price of each share is called the Net Asset Value (NAV), which changes daily. The fund’s share price moves up or down depending on the performance of the fund’s securities, which is calculated at the end of each trading day.
Managed by professional experts
The pooled fund money is reinvested by the experienced fund manager to buy various shares and securities keeping in mind the market and economic conditions and the fund’s returns.
Since mutual funds invest in different assets like stocks, bonds, gold, debentures etc., the amount of risk in this case is very low.
profit or loss
A mutual fund investor may make a profit if the net asset value of the fund increases when he sells his shares or he may suffer a loss, but the potential for profit is maximum in long-term investments.
What are the types of mutual funds?
There are different types of mutual funds and each mutual fund has a specific objective and level of risk.
Mutual funds can be divided into many different categories depending on its asset type, investment style, investment objective etc., listed below.
Depending on the type of asset, mutual funds can be divided into following categories-
Equity Mutual Fund
In case of equity mutual funds, your money is invested in stocks. Capital appreciation is the most important task in this type of investment, which requires monitoring the movement of stocks over a long period of time and the risk of this fund is high as it is market linked.
Hence, it is a good investment for long-term investments such as retirement or home buying plans and the risk level decreases over time.
Debit Mutual Funds
Debt mutual funds or debt funds invest in assets like government securities and corporate bonds. The amount of risk involved in investing in these types of funds is much less than equity funds and it also provides reasonable returns. So investing in this type of fund is definitely a good option for a fixed income with low risk.
Hybrid mutual funds
Hybrid mutual funds are a combination of equity and debt mutual funds. If you want to invest in a mix of high-risk investments with low-risk securities like equity mutual funds, then hybrid mutual funds are the way to go.
Based on the percentage of equity and debit in the case of this fund, it has some sections like balanced fund, asset allocation fund etc.
Based on the structure, mutual funds can be divided into the following as-
Open-ended mutual funds
You can buy or sell open-ended mutual funds on any business day. Open-ended funds are highly liquid, meaning you can sell your units on any business day at your convenience
Open-ended funds have no maturity period, meaning you can invest in the fund for as long as you want.
Closed-Ended Mutual Funds
Closed-ended funds have a pre-determined maturity period. Investors can invest in the fund only when the fund is launched. After formation of this fund, a fixed number of shares are issued and listed in the stock market. Next time no new shares are created.
As this fund has no liquidity, you can withdraw money from the fund only at the time of maturity.
Types of Investments in Mutual Funds
In mutual fund you can invest in the following two types respectively-
One time investment
You can buy mutual fund shares through one time investment. The share price will depend on the net asset value of that day, ie if the net asset value or nav is Rs.200/- then you can buy a total of 50 shares for Rs.10,000/-.
Systematic Investment Plan (SIP)
A popular method of investing in mutual funds is the systematic investment plan, where you don’t need a lump sum to invest. In this case you can start investing with a small amount like Rs.500-1000/- per month.
One of the advantages of this plan is that you don’t have to pay a lot of money at one time, but you can invest a good amount every year, and you don’t need to monitor the ups and downs of the market in this type of investment.
How to invest in mutual funds
You can easily invest in mutual funds through the following methods-
Official website of the company
Every mutual fund company has its own official website, where you can invest by creating an account and after online KYC verification.
Company office
You can invest in mutual funds by submitting the application form directly at the mutual fund’s branch office or ‘Investor Service Centre’ (ISC) or through an agent.
Company App
You can also invest in mutual funds using asset management companies’ own mobile applications or third party companies’ platforms. There you can easily check and compare portfolios of mutual funds, besides keeping an eye on account details, unit sales and share movements.
