What is a Mutual Fund?
Mutual funds may seem complicated and intimidating to most people. We will try to make it simple and clear for you at a very basic level. Actually, mutual funds are created only when the money of many investors is deposited. Fund managers are appointed to manage this fund.
It is a trust that pools money from a large number of investors who have a common objective. It then invests this amount in various options such as equity, bonds, money market instruments, and/or other securities. Each investor owns units that represent a portion of the fund’s ownership. The income / profit that is generated from this collective investment is distributed among the investors in the right proportion, after calculating the ‘Net Asset Value’ or NAV of the scheme, some expenses are also deducted from that amount. Simply put, Mutual Funds are the most viable option for a common man that provides him an opportunity to invest in a wide variety of professionally managed securities at a relatively low cost.
What are the types of Mutual Funds?
Different types of mutual funds exist to meet the different needs of different people. Broadly these are of three types.
- Equity or Growth Funds
- They mostly invest in equity i.e. shares of companies.
- Their value objective is wealth creation or capital appreciation .
- They have good potential to give high returns and are best for long term investment.
- For example
- “Large cap” funds are those that invest primarily in companies with large established businesses.
- “Mid Cap” funds that invest in mid-sized companies.
- “Small Cap” funds that invest in small-sized companies
- “Multi Cap” funds that invest in a mix of large, medium and small companies.
- “Sector” funds invest in companies that are related to a type of business. For example, technology funds are those that only invest in technology companies.
- “Thematic” funds are those that invest in a shared theme. Such as infrastructure funds that invest in companies that benefit from the growth of the infrastructure segment
- tax-saving fund
- income or bond or fixed income funds
- They invest in fixed income securities such as government securities or bonds, commercial paper or debentures, bank certificate of deposits and money market instruments such as treasury bills, commercial paper.
- These are comparatively safe investments and suitable for income generation .
- Examples can be liquid, short term, floating rate, corporate debt, dynamic bond, gift fund etc.
- hybrid fund
- They invest in both equity and fixed income, thus providing the best of income generation along with growth potential .
- Examples of these are Aggressive Balanced Fund, Conservative Balanced Fund, Pension Fund, Child Plan and Monthly Income Plan etc.
What are the benefits of investing in Mutual Funds?
Most of us cringe at the mere thought of managing our own investments. Professional fund
managers have the facility with the company that on the basis of education, experience and skills, they assign the work to the appropriate persons to carry out various activities.
As an investor, you can invest your own capital or take the help of a professional firm. You choose the second option when:
1. You are best unable to do this job yourself – most of us hire a professional for our income tax return or an architect for our house.
2. You lack both time and interest. Much like hiring a driver even though you know how to drive.
3. When you hire a professional rather than doing it yourself, you potentially save. The way you go somewhere by driving your own vehicle, which is more expensive than rail travel.
4. You can spend your time in your favorite activities.
Professional fund management is the best advantage of mutual funds. The information graph on the left highlights its other benefits. With these advantages, there is no reason why you should look for any other investment.
When should I start investing in Mutual Funds?
There is a very beautiful Chinese saying, ‘The best time to plant a tree was 20 years ago, the second time is today’.
There is no reason for anyone to delay investing except that he does not have the money to invest. Under this, it is better to use mutual funds rather than doing it on your own.There is no minimum age for investment. The moment one starts earning and saving, one can start investing in Mutual Funds. In fact even children can open their investment account with mutual funds with the money they occasionally get as gifts on their birthdays or festivals. Similarly, there is no upper age limit for the investor to invest in Mutual Funds.
Mutual funds have a variety of schemes, suitable for different purposes. Some are suitable for long-term growth, some are for people who need security of regular income, and some are designed to provide liquidity in the short term as well.
It is worth noting that whatever age group you are in or whatever your needs are, Mutual Funds have a solution for all of them.
How to start investing in Mutual Fund schemes?
Now investing in mutual funds has become so easy and simple that one can think of investing in multiple funds without additional documents. First time investors investing in mutual funds need to complete their KYC which is a one time process. You can visit a distributor or investment advisor to help you complete the KYC verification or you can do e-KYC online. KYC is like a key to the world of Mutual Funds. Once your KYC is complete, you can invest in any fund without going through further verification for each investment.
Once you are ready to invest after KYC verification, you may choose to invest with the help of a mutual fund distributor, registered investment advisor, stock market broker, bank or any other financial representative. But if you wish to invest in person, you can visit the nearest office of the fund house or visit their website to invest online or do so through any online platform.
The choice between investing directly or investing through a distributor is a personal one. If you prefer to manage your investments yourself, you can of course invest online through the fund’s website or through an online platform. But if you want advice or need help investing, you can invest through a representative, such as a distributor, investment advisor, bank, etc.
How can I invest in Mutual Funds directly?
If your KYC is complete then you can invest in mutual funds directly offline or online. If you feel inconvenient to transact online, you can invest in funds by visiting the nearest branch.
Online is the easiest way to invest directly in mutual fund schemes and you don’t even have to pay commission. You can invest online through the fund’s website or its RTA’s site or fintech platform. Investing directly on the fund’s website requires you to manage multiple logins.
Investing in a Direct Plan means that you take the responsibility of creating a financial plan, choosing the best-suited funds for your goals, managing your portfolio on a regular basis and making adjustments as and when required. Not everyone knows how to choose the right funds and manage the portfolio in mutual funds. Hence the Direct Plan is for those investors who can do this easily. Otherwise, people who are less knowledgeable about mutual funds are advised to invest by the distributor.
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