What Are Mutual Funds?

A simple definition of a Mutual fund is a pool of money professionally managed by a fund manager.

A mutual fund is a financial instrument where investors share a common objective and invest in shares, bonds, money market instruments, and other securities.

Each Investor owns a certain amount of units in the fund's holding. By calculating a scheme's "Net Asset Value" or NAV, the income/gains earned from this collective investment are dispersed equally among the investors after subtracting appropriate charges and taxes.

What Is NAV? Like an equity share has a traded price, a mutual fund unit has a Net Asset Value per unit. The NAV is the total market value of a fund's shares, bonds, and securities on any given day.

Why Do People Buy Mutual Funds?

Mutual funds are a popular investment option because they often provide the following benefits:

• Professionally Managed: The research is done for you by the fund managers. They choose the securities and keep track of their performance. Investing in financial instruments requires a certain amount of knowledge and skill. However, if you don't have the expertise or time to go deep into the market, A competent fund manager looks after your money and makes every effort to give reasonable returns.
• Diversification: There is a financial saying Do not put all your eggs in one basket. If you invest in one asset, you risk losing money if the market falls. You may, however, avoid this problem by diversifying your portfolio and investing in other asset types. For example, the fund manager usually invests in various companies and sectors. This reduces your risk if one of your companies fails.
• Affordability: Mutual funds can be bought through SIP investments. So investors can make the initial investment and subsequent investments at a fixed amount every month.
• Returns: One of the most significant mutual fund advantages is earning potentially higher returns than standard investing solutions that provide guaranteed returns. The fund's performance is directly linked to the performance of the market.
• Liquidity: All mutual funds are open-ended schemes so that investors can redeem their shares for the current net asset value (NAV).
• Tax Benefits: By investing in ELSS funds, mutual fund investors can claim tax deductions up to Rs. 1.5 Lakhs under Section 80C of the Income Tax Act. The lock-in period for ELSS funds is three years. As a result, you can withdraw your money once the lock-in period expires if you invest in ELSS funds.

What Types Of Mutual Funds Are There?

Money market funds, bond funds, stock funds, and hybrid funds are the four primary types of mutual funds. Each variety has its own set of characteristics, risks, and benefits.

Equity Funds: Usually invests in corporate stocks. The money is invested in equities through equity funds. The goal of these funds is to increase their value over time. However, because the returns on equity funds are connected to stock market movements, these funds are riskier. They're a fantastic choice for long-term goals like retirement planning or buying a home because the degree of risk decreases with time.

Debt Funds: Debt funds are also referred to as fixed-income funds. These funds are ideal for low-risk investors. Abd they invest in fixed income securities like Government bonds, Money market instruments, corporate bonds etc.

Hybrid Funds: Hybrid funds hold a combination of equities and fixed-income securities. Hybrid funds are divided into sub-categories based on allocating assets between equity and debt (asset allocation).

What Are The Benefits And Risk Of Mutual Funds?

Every fund has some amount of risk. For example, because the securities held by mutual funds might lose value, you could lose part or all of your money if you invest in them. In addition, as market circumstances change, dividends or interest payments may also alter.

Because past performance does not indicate future returns, a fund's past performance is not as essential as you may assume. On the other hand, past performance can tell you how volatile or stable a fund has been over time.

Mutual funds provide competent investment management as well as the possibility of diversification. They also offer three other ways to make money:

Increased NAV: A higher NAV reflects the high value of the investment. If the fund's market value increases after deducting all the expenditure, then the value of the fund and its share increases.

Dividend Payments: Dividends on stocks and interest on bonds can both provide income to a fund. The fund distributes virtually all revenue to the owners, minus fees.

How To Buy And Sell Mutual Funds?

There are three main ways to buy mutual funds online, even though many alternative investing websites-cum-trading platforms exist.

Investment Companies

The most straightforward alternative is to purchase mutual funds directly from the investment firms that provide and manage them. There are no sales charges or brokerage costs when buying straight from mutual fund firms. The main disadvantage is that you can only invest in that company's family of funds.

Investment Cum Financial Service Companies

Institutions like banks enable you to purchase and sell mutual funds and exchange-traded funds (ETFs) provided by other firms using an in-house account.

Brokerage

Another alternative is to create an online brokerage account. However, they often charge a transaction fee/commission for each trade and account setup and maintenance fees. They will, however, give the best variety of mutual funds from which to pick. In addition, their operational expenses are significantly less due to low overhead and mostly automated services, reflected in their customer pricing.

As far as the sale of mutual funds units is concerned, it is relatively simple. Shares in mutual funds are "redeemable," which means that investors can sell them back to the fund at any time. In most cases, the fund must redeem and credit you the money within seven days.

Understanding Fees

Every fund house has some investment-related expenses that cover the fund manager's compensation. In addition, a fund manager is backed up by a team of financial analysts and market specialists. Managing such a large sum of money daily while avoiding market dangers is no easy task. It requires subject knowledge, industry experience, and a healthy dose of enthusiasm. As a result, the mutual fund firm charges a SEBI-approved fee for its services.

Fees associated with investor transactions are called an expense ratio. The fees motivate the asset manager to provide stellar returns. The fees include advisory fees, operating expenses, investment management fees, registrar and transfer agent fees, legal and audit fees, agent/sales commissions etc. Management fees, administrative expenditures, and distribution fees are the main components of the expense ratio, which is charged yearly.

Avoiding Fraud

A disclaimer is always attached to mutual funds, 'read the offer documents carefully before investing.' Each mutual fund is required by law to file a prospectus and quarterly shareholder reports with the Securities and Exchange Commission (SEC). In addition, mutual fund investment portfolios are managed by separate entities known as "investment advisors" who are registered with the Securities and Exchange Commission. Always ensure that the investment advisor is registered before investing.

Frequently Asked Questions

Are Mutual Funds A Good Investment?

Although all investments include some risk, mutual funds are generally safer than buying individual equities. In addition, they offer more diversity than holding one or two individual shares since they hold many business stocks in one investment.

Is SIP And Mutual Fund Same?

A mutual fund is a financial instrument, whereas a SIP is a method of investing in mutual funds. As the name implies, a mutual fund SIP allows you to invest consistently over time and build a corpus to achieve your various financial goals.

Can Mutual Funds Go To Zero?

Mutual funds investment is directly linked to the market's performance. While a complete loss of value is unlikely, the fund's administrator may liquidate a poorly performing fund. As a result, investors are usually protected against fraud or other capital losses, but not from a fund's poor performance or the risks assumed.

Can I Buy Mutual Funds On My Own?

Yes, any individual with a smartphone and an internet connection can buy mutual funds unit online.