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.
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.
– 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:
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:
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:
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.