Mutual fund market has been here for since decades. But why it has started getting so much attention in recent times? This reason is quite clear that it takes time to create credibility. Only a few people showed interest at its inception stage and now they are reaping the yield of what they sowed. They set an example and motivated others who were otherwise conservative, to invest some part of their savings in mutual funds. Still, there are people who think mutual funds are risky. Thankfully the percentage of such people is shrinking day by day. The reason being other traditional saving methods such as bank FDs, RDs are not much profitable anymore. Whatever is earned from such savings seems tiny when looked through the glasses of inflation.

Therefore, it is very necessary to diversify your savings in different options to make more out of it. Otherwise, you may feel that you earn nothing in front of the time you have sacrificed your money that for. Yes, it is a sacrifice not using your money by saving and investing it. Now, why the mutual fund is a better option than FDs, RDs or even equity shares? How the mechanism of mutual fund works? How can the earnings through mutual funds be inflation-proof? But above all, what exactly mutual fund is? Let us find the answers to every question that arises in your mind when someone talks about the mutual fund.

 

What is a mutual fund?

Whatever you can visualize with the literal meaning of mutual fund can partly answer this question. A fund created by the mutual contribution of several investors. It is a pool of investment where every individual invests as per his or her capacity. There are several investment instruments other than traditional ones which were mentioned earlier, there are equity and debt instruments, commodities and forex. Even the instrument such as equity and debt are diversified on the basis of their respective companies. There are different sectors and under them, there are different companies. The shares and debentures of the same do not necessarily perform equally. Sometimes the financial sector is booming and sometimes the retail sector is having a blow and vice versa can also happen. This uncertainty discourages retail investors to switch to these investment tools from their traditional ones.

As a retail investor, we need the knowledge to invest properly. After investment, we have to monitor the trends of returns to decide whether to continue or discontinue the existing investment. To do that, we need to spare time. But this is impossible along with our job and household commitments. Now, how the mutual fund can be of help in this situation? Investing through mutual funds is like hiring someone to manage your investments professionally. Those professionals are called fund managers who buy securities on your behalf. They are well-informed, trained professional and they also do the monitoring part for your investments by regularly observing the same.

Apart from that, there is a prime advantage of investing in the mutual fund over that in share equities. When you buy a share worth of rupees 100 from a company, your entire 100 is invested in the same company. But when you buy a mutual fund unit worth rupees 100, your money is divided and invested among different companies of different sectors. That is the reason why the mutual funds are bought and sold in units. Each unit is segregated into different investment options or invested in different sectors.

The market value of each mutual fund unit is termed as Net Asset Value (NAV). Whenever you invest an amount in the mutual fund, you buy the number of units depending on the NAV. The calculation is as follows:

 

Number of units = Amount Invested/NAV

 

The mutual fund units can be bought in the fractions as well.

 

Advantages of investing in the Mutual fund

  1. Risk diversification– As mentioned earlier, each unit of a mutual fund is not solely invested in one company/instrument. Your invested amount is professionally divided among different business sectors. Investing in sectors which are not directly linked or are of different nature diversifies the risk involved. If one sector fails, others are there to keep yielding returns for you.

 

  1. Professionally managed– Your investment is managed as you want them to be managed. You save your money today in order to meet certain needs in the future. For that, you need your savings to generate a certain percentage of returns for you during the gestation period. To do that you need to keep monitoring the market and keep switching your investments on the basis of opportunities. But it is not possible for investors to do everything. Therefore, you have to have a professional to do that for you.

 

  1. Convenient– You do not need to have a demat account to buy mutual funds. The mutual fund investment can be done in both online and offline mode. And both can be done without a demat account.

 

  1. Secure– Mutual fund companies are watched and monitored by SEBI (Securities and Exchange Board of India). It is fully governed by its rules and regulations. Therefore, investors can put their full faith in mutual funds.

 

  1. Multiple ways of investing

    – There are various methods through which one can invest in mutual funds. You can choose the one you find suitable for you. The different investment ways are as follows:

    1. Lumpsum investment– Sometimes you have a lumpsum amount with you which are of no use to you during that particular time. Say for example when you get a bonus or when any of your FDs/RDs matures. You may want to restrain yourself from unnecessary spending of that money. In such situations, it is only the best option to invest it. You can spend that entire corpus of an amount on mutual funds.
    2. Systematic Investment Plan (SIP) – If you don’t have a lumpsum amount to invest but you can save some amount every month from your income, then this is the best way for you to invest in mutual funds. In the SIP method, you can decide a fixed amount depending on your capacity to save to invest monthly, weekly or quarterly. The biggest advantage of using SIP as a way of investing is that it lets you take the maximum benefit of market up and downs.
    3. Systematic Transfer Plan (STP) – There can be a situation when you have a lumpsum amount of money which you want to invest as soon as possible. But the market is booming which means the NAVs of the funds which you want to invest in are very high. High NAV means getting a low number of units. What you can do here is you can invest your money in any money market fund and slowly transfer a fixed amount weekly monthly or quarterly to the fund of your choice. In this way, you can avail the benefit of market fluctuation. The mutual fund allows you to exercise such as option because its purpose is to be as convenient as possible for investors.
    4. Systematic Withdrawal Plan (SWP)– There can also be a situation when you have an amount of money which you don’t need right now. But you need to take a small portion out of it in regular interval throughout a time. Most of you will not prefer that unused part of the money to stay stagnant until it is usable The mutual fund ha as a solution for that as well. You can invest your amount, buy units and can opt for SWP. A fixed amount of your choice will keep withdrawing from it while the rest of the money will earn returns for you.

 

  1. Compounding benefit– There are two ways in which you can earn returns from your mutual fund investment. One is the dividend payout and another is the dividend reinvestment. In the dividend payout option, you will keep getting payouts as when the dividend declares. But if you opt for dividend reinvestment you can earn more returns because your dividend gets reinvested as capital and again earns for you. Consequently, you will get a huge corpus of an amount at the maturity of your investment.

 

  1. Multiple types of funds-

If you are getting an impression that mutual fund investment only means investing in share market, then kindly read more. There are different categories in which one can invest. They are:

 

    1. Money Market fund – These types of funds are 100% safe funds because it invests in government bonds, Treasury bill, commercial papers, certificate of deposits. The returns in such type of funds barely earn more than interest earns from the savings account. However, this type of fund is useful to park money for short durations. When you don’t need money for a short period of time or the market is at its peak and you don’t want to keep your money stagnant, then this fund is useful.
    2. Debt funds – Also famous as fixed income funds, these funds are also 100% safe ones. They earn significantly more than money market funds but does not let you have the benefit of the market uprising. It gives a fixed rate of return periodically to investors. Such types of funds are best for those who are close to retirement or the ones who have a low-risk appetite.
    3. Equity funds– These are risky funds because they invest in equity shares of companies. The investment is segregated among different sectors like finance sector, retail sector, FMCG, pharmaceutical and many others. The risk is diversified among different sectors, that is why it is less risky and more profitable in long-term and vice versa in short-term.
    4. Balanced funds– Funds such as balanced funds, also called as hybrid funds and therefore best for most of the investors. Whenever the investment duration is unsure, such funds come into the picture. It is because such funds partially invest in equities and partially on debt-oriented funds. Therefore, no matter what you will earn a decent earning despite market downfall.
    5. Index funds – Funds that invest directly in market indexes such as Sensex or Nifty are Index funds. In such funds, the performance of your investment is directly proportional to that of the indexes.
    6. Thematic funds – Funds that invest in one particular sector are thematic funds. For example, a real-estate theme based fund will invest in companies like cement companies, steel companies, and others. A finance theme fund will invest in banks, insurance companies, mutual fund companies, and finance companies. Therefore, the performance of your fund highly depends upon the performance of the respective sector.
    7. Fund-of-funds- Different types of funds create a single fund. The risk is more diversified in such type of fund and you can enjoy safety and profit at the same time.
    8. Gilt funds– Funds that wholly and solely invest in different government bonds gilt funds. They are100% secure but comparative lower on the returns side.

     

    Benefits of choosing a regular plan over a direct plan

    First of all, understand what are direct plans and regular plan.

    Direct plan– A well-informed investor who possesses full knowledge about different types of funds and their potentials can directly buy an MF scheme. Such plans are direct plans. Here, the investor takes no advisory service and entirely depends upon his or her own judgment.

    Regular plan– When an investor invests in mutual fund through an independent financial advisor (IFA), it is a regular plan. Here the investor gets A to Z service from an advisor i.e. from documentation to post investment services. Post investment services like top-up, account statement, redemption, cancellation and many other services. A financial advisor guides you to buy an appropriate mutual fund scheme depending on your financial goals.

    Benefits of a regular plan:

    • Complete guidance – An IFA guides you and hence more fruitful for you depending on your financial goals and on how long you can wait to achieve those goals.
    • Portfolio designing– Depending on your risk-taking capacity, a mutual fund advisor will divide your investment money into different categories. Some portion in equities, some in debt or some in commodities, depending on your risk profile. This process is what we call as portfolio designing.
    • Evaluating risk appetite– An IFA evaluates your capacity to take a risk. On the basis of that he/she decides the appropriate investment for you. The basis of evaluation are:
      • Your income – Your income has to be above the amount you need to fulfill your basic requirement. Then only you will be able to save and invest.
      • Age– Age also matters a lot when it comes to taking a risk. The young investors can take more risk because they can give their investments more time compared to old ones.
      • The number of dependents– If there are people who are financially dependent on you, for example, if your spouse is not earning, your children, a physically/mentally challenged family member or old aged parent, your risk capacity decreases. You need to have some money invested in safer options to meet sudden demands.
      • Financial goals– If you have a short duration financial goal, that is in the next 2-3 years, investing in risky funds may prove fatal. If you can wait a long time, like 10 years or more, then it is good to take equity-oriented funds.
      • Saving capacity– Even when you earn sufficient and have less or no financial dependents, your spending habits may affect your investment plan. If you are a person who loves to spend and fails to save at every month-end then low-risk investment is better for you. On the other hand, a person who saves enough in a disciplined way can take more risk.
      • Existing liabilities– When existing loan EMIs are already taking a chunk of your income, investing in risky funds is not a wise decision. But it highly depends on how much money you still manage to save after all your expenses and EMIs. Apart from that, it also depends on the duration for which you want to invest. If you are saving less and also your goal is in near future, the debt-oriented fund is a wise choice.
      • Willingness to take a risk– Even when everything is good, you have a good income, you save a good amount, you have less or no dependents and you have no loan going on, there is one more factor to evaluate your risk appetite. Your willingness to take a risk. Whether you want to take a risk or want to play it safe is more crucial than other abovementioned factors.

     

    The categories of investors on the basis of risk appetite:

    • Aggressive– Those investors who are willing and also capable of investing a major portion of their savings in risk-oriented funds.
    • Conservative– Investors who either don’t have the capacity or not willing to invest in risky funds are conservative investors. They always prefer to choose safe debt funds.
    • Moderate– Investors, who want to keep their capital safe and also willing to make the most out of market opportunities, come under this. They choose to take a calculated risk.

     

    Financial goals

    We have used this word many times in this article. But what does it mean? You may have a dream to own your house, a car, a vacation abroad or sending your children abroad for higher studies. All of these require money. That is why we term it as financial goals. Things to keep in mind while setting a financial goal.

  • Evaluate the value of your financial goal- Whatever financial goal you have, whether it is buying a house or a vacation, has a monetary value. You have to do the evaluation of that value. Then only you can plan your savings and investments so that you have the required corpus of the amount at the time of need.
  • Don’t ignore inflation- We all know that the value which one hundred rupees had ten years ago is not at present. We are all aware of inflation. Therefore, do not ignore this part while doing the evaluation of your financial goals.
  • Take advice- In case you do not have time for all these, take the help of a financial advisor. Your advisor will do all the evaluation for you and recommend the appropriated fund to meet the same.
  • Stay committed- Do not redeem your investment to meet petty expenses which are manageable through other ways. If you are not feeling confident in your current investment, change the scheme but do not withdraw your invested money.

Top AMCs (Asset Management Companies) in India

  • ICICI Prudential Mutual Fund
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  • Reliance mutual fund
  • SBI mutual fund
  • Kotak Mahindra mutual fund
  • Franklin Templeton mutual fund
  • DSP Blackrock mutual fund
  • Axis mutual fund
  • IDFC mutual fund
  • L & T mutual fund
  • Sundaram mutual fund
  • Motilal Oswal mutual fund
  • Mirae Asset mutual fund