Overview

You must have come across the line ‘Mutual Funds Sahi Hai paisa invest karne ke liye’ once in a lifetime and decided to invest in it. That’s great… But do you know Exactly How mutual fund work? And why does it deserve your attention?

Let’s try to understand this topic, For a very long period of time FDs were the most acknowledgeable mode of investment for people. But the low interest hardly makes a cut in their savings. However investing in other modes of investment like shares, bonds, and gold can give a good ROI (Return Of Investment). But do we all have the knowledge about it?

What Is A Mutual Fund?

Let’s start from the start and try to understand what exactly a mutual fund is.

There are ‘n’ number of investors who want to invest. But don’t have the knowledge of investment tools, or financial markets to invest or to let alone manage their money. This is where a mutual fund comes into play.

Think of it as you want to go somewhere and you know the destination with the way. But you do not know how to drive so you take the bus and the bus driver helps you to reach your destination. The same goes for the mutual fund – here the passengers are the investors and the driver is the fund manager who helps you to reach your financial goals by investing your money on your behalf.

It collects money from all the investors and invests in the right tools to help their funds or money grow. These investments are handled by a professional manager who manages the fund and has a good amount of experience in financial markets.

Think mutual fund as an investment basket where all the investment tools lie.

What Are Mutual Fund Units And Net Asset Value (NAV)?

Before initiating the process of investment in a mutual fund, one should know about 2 core concepts, mutual fund units and net asset value (NAV).

Investors invest their money via a fund manager and in return they are given the units of the mutual fund. A mutual fund unit represents a fraction of ownership in the assets such as stocks, bonds, or other securities that are held by the mutual fund.

Now the second is NAV –“NAV or Net Asset Value dictates the value of one mutual fund unit”. In layman’s terms, NAV is like a price tag for one unit of the mutual fund. When the NAV grows up, the fund unit tends to become more valuable and that’s how investors make money out of it. The formula to calculate is:

NAV = (total assets -total liabilities)/total number of units issued. 

But there is no need for investors to calculate it. As it is not an investor’s job to look out for NAV’s value. It helps you in analyzing the Fund’s Value like how much to invest at the time of initiation of investment or while withdrawing of investment and many more times. 

Let us make it easy for you to understand through an example:

Let’s see a guy named Rahul wants to invest 20,000 in mutual funds so he decided to invest in it on April 10, 2022.

On 10 April 2022, the NAV of XYZ Blue Chip fund company was Rs.40, that is one unit of XYZ fund cost Rs.40.

Now, Rahul invested the whole 20,000 in this fund on 10 April 2022. Therefore, he was given 500 units.

20000/40= 500 units

Now fast forward to 6 years later, on 10 April 2028, Rahul needed this fund to make his home, so he decided to withdraw it. The fund’s NAV on 8 April 2028 was Rs.60.

For Rahul, 500 units will be worth 30,000

(500*60)= 30,000 rs

The fund has given a profit of 10,000 rs to Rahul in six years.

So let’s conclude it with the fact that any return given to investors would be distributed in proportion to the number of unit investors holds. If an investor wants to exit the investment, the redemption value of each unit will depend upon the NAV on that day of security.

Buying mutual funds: Low NAV v/s high NAV

There is a common misconception among investors that funds with low NAV will likely perform better. So let’s debunk this myth.

The fund’s return majorly depends on two things. The first is the market and the other one is the capability of the fund manager. So don’t just put your focus on the price gain from low NAV funds, rather than make sure to analyze the fund properly. 

Also, keep in mind a mutual fund with a high NAV might be an indication of a well-managed fund. A mutual fund that performs consistently well can be seen as a continued upward movement in its NAV. Over a period of time, the continuous gains result in a high NAV. It is a classical example of “Don’t judge a book by its cover”.

How Do Mutual Funds Work For Beginners: When It Comes To Mutual Fund Investment?

A mutual fund is a sort of trust that is managed by an Asset Management Company (AMC). The AMC works in collecting funds from investors and investing that money in all forms of investment tools, like equities, bonds, commodities, and many more. The entire fund is managed by a professional fund manager and his team.

In return, managers create a portfolio of commodities, bonds, and stocks by vividly analyzing market conditions, the future performance of companies, and mutual fund investment policy.

Although, later in the time the fund manager keeps realigning the portfolio as per his judgement and knowledge of the market. Maybe they can buy some new tools and sell the old ones to gain more profit out of it. 

On the investor side, they will benefit from the growth of the fund which is directly proportional to the market if the market moves on their side and vice versa.

What are the different types of mutual funds?

By now, it must be already cleared how a mutual fund works so now let’s discuss which mutual fund has been categorised:

Investors used to get confused as to exactly where they should invest and where they should not. So SEBI which regulates mutual funds stated to companies that you can now have only major types of mutual funds.

1. Equity fund.
2. Debt funds
3. Hybrid fund
4. ETF
5. Tax saving Fund

Equity funds

Equity funds invest in the shares of different-different companies. Where the fund manager tries to offer great returns by diversifying the portfolio with varying market capitalization. Generally, equity funds are known to give better returns as compared to debt-based funds.

Debt fund

A debt fund is a mutual fund scheme that invests in fixed-income instruments or tools with a maturity date like corporate and government bonds, corporate debt securities, money market instruments, etc. that offer capital appreciation. 

The key objective of a debt fund is to generate income for investors through interest and capital appreciation. While lowering the risk associated with debt securities. These funds are often chosen by those investors who seek a stable and predictable source of income over potentially higher but less stable and more volatile returns of equity funds.

Hybrid funds / Balanced Funds

Hybrid funds are a type of mutual fund that invests in multiple types of assets. Usually, it is a combination of stocks and bonds, and sometimes they can also include gold investments. Due to the diversification, it gains balance and so also known as balanced funds.

Exchange-Traded Funds

ETF or Exchange-traded funds are exactly as the name suggests, which are funds that are traded on exchanges by, particularly following a specific index. In layman’s terms Investing in ETF provides an advantage, in that you can buy and sell funds directly from the Demat account. 

For example, let’s say, you want to invest in the IT sector but are uncertain about which companies to invest in due to many options, here ETFs provide a solution. When you purchase an ETF specific to the IT sector, you effectively invest in the entire sector. Which leads to diversifying your investment across the stocks within that sector.

Tax-Saving Funds (ELSS)

ELSS or Equity Linked Savings Schemes are Mutual fund investment schemes that help you save your money by saving your income tax. That’s why they are also called tax-saving funds. According to the Income Tax Act, under section 80c, it allows taxpayers to invest up to INR 1.5 lakh in specific securities and claim it as a deduction from their taxable income.

SIP v/s lumpsum, which one should you opt for?

SIP and lump sum are the two investment methods to invest in mutual funds:

Lump Sum investing-

Lump sum investment means putting a particular amount of money into a mutual fund all at once, Instead of gradually investing smaller amounts over time.

Benefits of Lump Sum

1. One-time contribution -Lump Sum investment involves making an investment in a mutual fund in one go. Now you can enjoy peace of mind knowing that your money is working on your behalf. Which can reduce your financial burden and allow you to focus on other areas of your life.

2. The opportunity for high return- investment in a lump sum gives you an open window to immediately put your money to work in the financial market. If the market performs decently well, then your investment will be able to generate high returns compared to rupee-cost averaging. 

3. Lower Transaction Costs- investing via Lumpsum investment will give you the benefit of lower transaction costs compared to making multiple smaller investments over time. Which can improve your overall return on investment.

SIP-

SIP stands for Systematic Investment Plan which is a popular investment method in mutual funds. Here investors regularly invest a fixed amount of money at predecided intervals (usually monthly). It allows investors to gradually build their investment portfolio over time.

Benefits of SIP

Now let’s try to understand the benefits of a SIP.

1. Rupee Cost Averaging – SIP works on the principle of rupee cost-averaging. Where it averages out the price at which you purchase units of a mutual fund. In layman’s terms, you invest a fixed amount at regular intervals. You get to buy more units when the price is low. So through the rupee cost-averaging you get the liberty to invest systematically in the mutual funds.
   
   Let’s understand with an example, what is rupee cost averaging. Assume that you invested your first chunk in a mutual fund, at the unit price or NAV at 100 rs. Next month, the price of that same unit of mutual fund comes down to Rs.80 and you decide to invest the same amount at that point also, so what is your average investment? 
   
   Somewhere between 90rs, you will get the benefit on the 90, unlike lump sum where you have to wait till the price surpasses 100rs price mark. 

2. Disciplined investing – it’s a natural human tendency that people don’t invest in a disciplined manner rather they invest randomly. But investing in the form of SIP makes you a disciplined investor. As you have to invest in the predefined time interval.

3. Flexibility – Investors can start, stop, and modify their SIP investment based on their financial goals and circumstances. Take the example of Corona, imagine you are doing a SIP of let’s say 20,000 per month, and unfortunately, because of Corona, you had to face a salary cut. Now with the cut in your salary, you are not able to invest 20,000 per month. You can pause your SIP for the time being and resume it later.

What to choose SIP or LUMPSUM?

One should make this decision on the basis of their financial goals, money management ability, and the information given above. But please keep in mind that Mutual Fund investments are subject to market risks, so read all the scheme-related documents carefully.

Conclusion

Mutual funds are a good investment option for people who seek diversification and professional management of their money. They offer convenience, liquidity, and potential capital appreciation. However, investors should carefully consider their investment objective, risk tolerance, and money management skills to make a sound investment decision that aligns with their financial goals.

FAQs

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Investing in mutual funds can be a highly effective strategy to achieve your financial goals. Whether you’re planning for retirement, saving for your child’s education, or aiming to grow your wealth, mutual funds offer a wide range of benefits and opportunities. In this comprehensive guide, we will explore the ins and outs of mutual fund investing and provide you with valuable insights on how to reach your investment objectives using these powerful investment vehicles. 

WHAT ARE MUTUAL FUNDS?

Mutual funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of securities. These funds are managed by professional fund managers who make investment decisions on behalf of the investors. The capacity of mutual fund to offer diversification is one of their primary benefits. You can gain exposure to a wide range of securities, including stocks, bonds, and other assets, by investing in a mutual fund. Diversification helps spread the risk and reduces the impact of any single investment on your overall portfolio.

TYPES OF MUTUAL FUNDS

There are various types of mutual funds available to suit different investment objectives and risk profiles. Some common types include :

Equity Funds: These funds invest primarily in stocks and are suitable for investors seeking long-term capital appreciation.

Dividend Funds: In order to provide shareholders with consistent income year after year, these funds only make investments in high-dividend stocks and bonds.

Tax-saving Funds: Tax saving funds are also known as equity-linked saving schemes(ELSS). These funds are designed in such a way that they give tax benefits to the people. 

Index Funds: Index funds track a specific market index, such as the Nifty50, and provide broad market exposure at a low cost.

SETTING YOUR INVESTMENT OBJECTIVES

Before investing in mutual funds, it’s essential to define your financial goals. Are you saving for retirement? Planning to buy a house? Or maybe you want to build an emergency fund? Clear objectives will help you determine the right investment strategy and the appropriate mutual fund to consider.

Understanding your risk tolerance is crucial for successful investing. Some individuals are comfortable with higher levels of risk and volatility, while others prefer more conservative approaches. Mutual fund offer options for different risk appetites, so it’s important to align your investments with your risk tolerance.

SELECTING THE RIGHT MUTUAL FUNDS:

1. Research fund performance

When evaluating mutual funds, it’s essential to review their historical performance and the list of stocks present in them. Look for funds that have consistently outperformed their benchmarks over the long term. However, past performance is not a guarantee of future results, so consider other factors as well.

2. Analyze fund expenses

Mutual fund charge various fees and expenses that can eat your returns. These costs include operating expenses and transaction costs. It’s important to compare the expense ratios of different funds and choose those that offer a good balance between cost and performance.

3. Read fund prospectus

The fund prospectus is a legal document that provides detailed information about the mutual fund’s investment objectives, strategies, risks, and expenses. Take the time to read and understand the prospectus before investing. It will help you make an informed decision and align your investments with your objectives.

4. Selection of right SIP

Mutual fund companies typically offer SIPs ( systematic investment plan ), and investors can select from a wide range of funds based on their risk tolerance and investment goals, and time horizon. It is totally up to the investor whether he has to do SIP or LUM-SUM. To get the most out of SIP, investors must, however, carefully consider their investment objectives and select appropriate mutual funds.

5. Regular monitoring and rebalancing

Once you’ve invested in mutual funds, it’s important to regularly monitor your portfolio’s performance. Market conditions and investment goals can change over time, so periodic reviews are necessary. If your portfolio becomes imbalanced due to market fluctuations, consider rebalancing by adjusting your holdings to maintain your desired asset allocation.

CONCLUSION

Investing in mutual funds can be a powerful tool to achieve your financial objectives. By understanding the fundamentals of mutual fund investing, defining clear goals, and selecting the right funds, you can enhance your chances of success. Remember to regularly review and adjust your portfolio as needed, and consider seeking professional advice when necessary. With a well-thought-out investment strategy and a disciplined approach, you can confidently navigate the world of mutual fund investing and work towards reaching your long-term financial goals.

FAQs

What is a Mutual Fund?

Best mutual funds are a type of investment vehicle that pools resources from numerous investors to put these resources into an arrangement of stocks, bonds, or other assets. The mutual fund’s total holdings are referred to as its portfolio, and each mutual fund investor owns a proportional share of the portfolio based on the amount of money they have invested in the fund. Professional portfolio managers oversee mutual funds and make investment decisions on behalf of fund investors. 

Moreover, mutual funds are overall seen as a decently negligible investment decision, as they allow professional managers to achieve profits without purchasing individual stocks or securities.

Benefits of investing in Mutual Funds:

Putting money into mutual funds has numerous advantages. First and foremost, mutual funds offer diversification, which assists in distributing investment risk across a variety of securities. Moreover, mutual funds also offer proficient administration, permitting investors to profit from the experience of professional managers. best Mutual funds additionally give liquidity, permitting investors to trade their portions at the ongoing net asset value (NAV). Besides,best mutual funds offer openness, making it more straightforward for investors to enter the market with lower investment sums contrasted with direct investments.

Factors to consider when investing in Mutual Funds:

There are several important considerations to make when selecting the best mutual funds for your investment portfolio. These incorporate your financial objectives, risk appetite, cost proportions, fund manager’s expertise, tax implication, reserve execution, track performance records, and asset charges. By evaluating these aspects, you can select funds that are in line with your financial goals and make well-informed choices for your investment.

TOP-NOTCH MUTUAL FUNDS TO INVEST

Here are some best Mutual Funds to invest in India in 2023:-

1. HDFC Mid-cap Opportunities Fund:

HDFC mid-cap fund was launched on June 25, 2007, and it is benchmarked against the NIFTY mid-cap 150 index. The main objective was to build a portfolio of mid-cap companies that have reasonable growth prospects, sound financial strength, sustainable business models, and an acceptable valuation that offers potential for capital appreciation.

2. TATA Dividend Yield Fund:

Tata Dividend Yield Fund – Regular Plan is an Open-ended Thematic-Dividend Yield Equity scheme that belongs to Tata Mutual Fund House. The fund was launched on May 20, 2021. The investment objective of the fund is to provide capital appreciation or dividend distribution by investing predominantly in a well-diversified portfolio of equity and equity-related instruments of dividend-yielding companies and It is benchmarked against the NIFTY 500 Total Return Index.

3. UTI Flexi-cap Fund:

It is a mutual fund that invests in equity and securities that are related to equity and can invest in any Indian economic sector and has a flexible investment strategy. The UTI Flexi Cap Fund is an equity scheme with no expiration date and can invest in stocks, bonds, money market instruments, and other assets. While the fund focuses primarily on equity investments, it is also exposed to fixed-income securities and money market instruments.

4. AXIS Mid-cap Fund:

It is an open-ended mid-cap equity fund that focuses on long-term capital appreciation and invests in equity and its related instruments of mid-cap companies. It is benchmarked to the S&P BSE 150 Mid-Cap Total Return Index. Since 2011, the fund has been managed by the Axis Mutual Fund.

5. KOTAK Emerging Equity Fund:

The equity mutual fund scheme known as Kotak Emerging Equity Fund Direct-Growth was launched by Kotak Mahindra Mutual Fund. This mutual fund primarily invests in mid-cap companies, the plan aims to generate long-term capital appreciation from the portfolio of equity and equity-related securities. The fund was launched on January 1, 2013, and since its inception, its average annual returns have been 6.26 percent.

6. ICICI Prudential Nifty PSU Bank ETF:

It is an exchange-traded fund that aims to provide returns similar to those provided by the nifty PSU bank index, subject to market error. This index represents 12 PSU banks based on floating market capitalization. Also, this index is re-balanced on a semi-annual basis i.e. March and September.

7. BANDHAN Tax advantage ( ELSS ) Fund:

Bandhan tax advantage (ELSS) funds were incepted on 26 December 2008 and are benchmarked against S&P BSE 500 TRI (w.e.f. 1st Dec 2021 ). An Equity Linked Savings Scheme (ELSS), with a 3-year lock-in, enables investors to avail of a deduction on total income, as permitted under the Income Tax Act, of 1961.

8. SBI Equity Hybrid Fund:

It is a hybrid mutual fund scheme that SBI Mutual Fund has introduced. By investing in a combination of debt and equity, the plan aims to provide investors with long-term capital appreciation and the liquidity of an open-ended plan.

9. PARAG PARIKH Long Term Equity Asset:

Parag Parikh Long-term Equity Asset is an Unconditional Flexi Cap Value plot that puts resources into stocks and value-related instruments. It puts resources into organizations with a drawn-out point of view and has been under the asset house PPFAS Common Asset since its commencement in 2013. It is also benchmarked against the NIFTY 500 Total Return Index.

10. MIRAE Asset Hybrid Equity Fund:

It is a hybrid mutual fund scheme offered by Mirae Asset Mutual Fund. The Plan focuses to create capital appreciation and current income from a consolidated arrangement of value and value-related instruments, debt, and money market instruments.

CONCLUSION

Putting resources into common assets can be a reasonable system to accomplish long-haul monetary objectives. You can choose the best mutual funds to invest in, in 2023. by taking your investment goals, risk tolerance, and other essential factors into consideration. Whether you favor capital appreciation, tax saving, or regular income there are choices available to suit your inclinations. Make sure that your investment portfolio stays in line with your financial objectives by reviewing and reevaluating it regularly.

MUTUAL FUNDS VS STOCKS: INTRODUCTION

Investing your hard earned capital is a critical decision to make. When it comes to choosing between mutual funds Vs stocks, it is very important ‌to understand ‌all the key points related to both. Both the investments have pros and cons equally so it depends on your financial goals and risk appetite, ‌ what you consider as a better option.

So what to choose?

Mutual funds are managed by professionals who charge some fees, which can reduce your profits a bit. On the other hand, Stocks comparatively offer higher returns but come with higher risk and require more research and monitoring.
Ultimately, the choice between mutual funds Vs stocks depends upon your investment goals, risk tolerance, and time horizon.

This blog will further guide you all about mutual funds Vs stocks.

UNDERSTANDING MUTUAL FUNDS

Mutual funds are a very popular choice among people when it comes to stability and secured income. They offer you professional management and diversify your money into different investments that is why they are considered as minimum risk investment options. There are different types of mutual funds available like equity funds, debt funds, Hybrid funds, Tax saving funds etc. and one has to choose the mutual funds according to their investment goals.

When you invest in a mutual fund, you purchase shares of the different companies. The value of the shares is analyzed by the fund’s NAV, which is calculated by dividing the total value of the assets by the number of shares outstanding.

Any broker you choose for investing in mutual funds will diversify your funds and will manage them professionally. You will have no involvement and stress about managing your funds. Mutual funds make sense for investors seeking comfort and expansion because they don’t require as much in-depth stock research or constant portfolio monitoring across the board.

Why should one buy Mutual Funds?

There are certain advantages to buy mutual funds:-

1. Professionally managed:

Mutual funds are managed by brokers generally so you remain stress-free about what stocks you must invest in.

2. Liquidity:

Mutual funds are very easily bought and sold. It is a hassle-free process so you can liquidate your investments when needed.

3. Convenience:

Investing in mutual funds is very easy because you only have to have a conversation with your broker and he will do all required things for you according to your future investment goals.

4. Diversification:

Mutual funds are generally chosen because of their diversified nature. Because of diversification, you have fewer risks in mutual funds.

5. Minimum investment:

You can start investing in mutual funds with the minimum investment amount of rupees 500  and this factor makes mutual funds accessible to a wide range of investors.

ALL ABOUT STOCKS

Stocks are the shares or we can say a small unit of a particular company. The stock is more valuable if the company’s fundamentals are strong. They do carry risk at a higher level but investing in stocks can give you the best returns and profit, although you can easily navigate all the risks if you have valuable skills and knowledge. Stocks can be risky because prices do fluctuate and you can not predict ‌the prices of the stocks but when you start diversifying your portfolio you can manage this also.

You need to have proper information and knowledge about the stock market for trading like a professional. Stocks can be very profitable if you invest time in them and improve your knowledge in the same. Furthermore, stocks give you the stability to be financially independent at the same time. Stocks are a very stable and flexible source of income, they are also considered as one of the most liquid assets.

You can determine the price of stocks by Demand and Supply but can be affected a little by the factors such as economic conditions, performance of the company and market trends but overall stocks can be the most profitable source of income if you have a suitable knowledge about technical and fundamental analysis.

Why should one buy stocks?

There are certain advantages of buying stocks:-

1. Great returns:

Stocks can give you potential returns. They do involve risk but if you know how to manage the risk, you can easily generate good returns from them.

2. Diversification:

You can get the best returns by diversifying your portfolio as it minimises your risk and divides your investment in multiple sectors which will in turn reduce the risk of losses.

3. Liquidity:

Stocks are an easy-to-buy and easy-to-sell option. You can easily buy any stock or sell it because there are a lot many buyers and sellers available in the market.

4. Compounded growth:

Stocks can make your returns double as the return from your specific investment can be reinvested at the end of each period of the investment’s lifespan.

5. Participation in the growth of the Economy:

When you invest in ‌mutual funds Vs stocks you are responsible for the growth and success of the company and overall company’s growth will make the economy stronger

WHICH ONE IS THE BEST: MUTUAL FUNDS VS STOCKS ?

Mutual funds Vs Stocks both have different capacities of generating profits and It depends only on the particular person on what to choose and what ‌ not to choose depending on investment objectives, risk management, and tolerance. Generally, mutual funds include different types of stocks, bonds, or other assets which makes them very diversified by its nature.

Furthermore, stocks offer more stability and returns with a little higher risk because stocks are based on a particular company. Moreover, investing in stocks can be beneficial when you have knowledge about trading in a very professional manner.

Then again, mutual funds are largely viewed as a more secure venture than individual stocks, as they do not involve stocks from specific companies only. Mutual funds can be a decent choice for long-term financial investors hoping to create financial stability over the long run, as they offer moment expansion for a minimal price. Where as stocks are a bit riskier but they have the potential of generating higher returns if traded with a proper knowledge about it.

Eventually, the decision between mutual funds Vs stocks depends upon the individual’s choice, risk management, risk tolerance, and financial planning.

CONCLUSION

After comparing mutual funds Vs stocks with their risk and reward aspects, Stocks can give you specific higher returns but they also carry risk with them, so one must learn about risk management if planning to invest in stocks. On the other hand, mutual funds are ‌investments that are less risky and will give you less returns as they diversify your portfolio and are professionally managed.

Both the investment options ( mutual funds Vs stocks ) have their ‌pros and cons equally so you should choose your investment option according to your risk capability and future goals. It’s a great idea to talk to a professional financial advisor to figure out the best investment between Mutual funds Vs Stocks.

What are mutual funds?

When we are up to mutual funds we have a lot of questions at the same time about how to invest in it and when to invest in it. 

Mutual fund, as the name suggests, is a fund which is owned by a company and managed by a fund manager. People put their money in these funds and the fund manager pools all the money and invest it in stocks, bonds or some short term debt funds. There are 2 main reasons why mutual funds are formed:

1. Beneficial for a novice

When some one knows not much about markets, or investing, it’s very difficult to manage the money. He/she wouldn’t know how to trade stocks, or how to invest for a long term. So, for these people, a simple way is just to give their money to someone else who can manage it properly and help you grow your money. 

But, you can not give all your life’s savings just to anyone. What if the person you gave money to ran away with it?? That’s why mutual funds are set up so that you can put your money into funds and the fund managers can manage it. Since, funds are managed by AMC, and AMCs are monitored by trusts, your money is safe. Plus these fund managers are intelligent, keeping track of markets and all the economic activities, they are very much qualified to manage your money.

2. Advantage of scale and diversity

Suppose you only have Rupees 2,000 with you, and you want to invest it in a stock, which costs around Rupees 4,000? You just cannot buy half-stock, and you don’t have enough money to buy a single share. Or you want to diversify your portfolio to reduce market risk, but you cannot buy 10 different stocks with that amount. So what will you do? You put your money into a Fund, similarly, other people also invest their money into the fund, and the whole amount is pooled at one place and it can be invested in some stocks or bonds. It can also be diversified across multiple stocks or bonds to reduce the risk. that is why the mutual funds are formed.

How are mutual funds are operated?

Mutual fund is the pool of money invested by the people in a particular fund. Fund managers are liable to manage the amount by investing them in securities to get the best returns out of it. Fund managers are well educated and well aware about the market conditions and economic activities that is why they can be trusted by people. people with a capital of 500 rupees can also start investing in mutual funds, now you must be thinking how?

let’s understand this by an example:-

Suppose there is a total corpus of Rupees 1 crore (total corpus also known as AUM). So, what the AMC will do is, they will divide the 1 crore into small parts of Rupees 50 each, so it becomes 2 lakh parts in total. Now this 50 rupees will be the initial NAV of the Fund, at which you or any other person can just buy the units from the AMC. So, if you have 2000 rupees, you can get 40 units. The AMC will then pool the money collected and invest it. This money will be invested in securities in expectation of generating a good returns out of them. So suppose, the current value increased to 1.2 crore rupees, Since there were 2 lakh units, the NAV will now be Rupees 1.2 crore divided by 2 lakh units, i.e. 60 rupees. That means the Rs.2000 you invested at Rupees 50 has now become 60 Rupees and your total investment becomes 2400 now. Similar would be the effect if the value of the total corpus fall. 

this is How mutual fund works. 

Types of Mutual Funds:

Primarily 3 different types of Funds are there:-

Equity Funds:

These funds are also known as stock funds. And as the name suggests these are the funds that are invested in stocks.

Debt Funds:

These funds are the type of investment that are invested in government, corporate debt. It is the best way to gain exposure to a variety of security and to generate a fixed income.

Hybrid Funds:

Hybrid funds are also known as balanced funds. These types of funds are equally distributed in equities and debt. The very main objective of this fund is to have regular income with reasonable profit at the same time.

Some more Mutual Funds are listed below:

Bond Funds:

Investments with a fixed rate of return, such as corporate bonds, government bonds, or other debt instruments, are the primary focus of a Bond Fund. The shareholders receive interest income from the portfolio of the fund. These funds are frequently & actively managed to acquire bonds that are relatively undervalued in order to sell them at a good profit.

Dividend Funds:

These funds consists of stocks which provide high and regular dividends.

Tax saving Funds:

these funds are designed in such a way that they give tax benefits to the people. These are also known as equity linked saving schemes(ELSS).

Index Funds:

These funds are the type of funds that invest in the major market index such as Nifty or Bank Nifty.

Income Funds:

These types of funds are generally made for the cash flow to the investors. Investors are generally retirees who want a stable income. In income funds we invest in government and high quality debt only.

Money Market Funds:

Money market funds are also known as treasury bills. These are the risk free funds and for a short period of time which provides a decent profit to the investor.

Exchange Traded Funds:

These are generally not considered as mutual funds but they employ strategies that consist of mutual funds. People generally sell ETFs on the same trading day so it can be considered as short term investment also.

How should one select the mutual fund?

Before you select the mutual fund, you need to shortlist the mutual fund category. The very first step is to identify the financial goal with the duration and the expected amount of the target. We don’t know if the market will rise or fall in the short term. For any short-term financial goal, it is better to invest in short-term debt funds.

Always build an emergency fund by investing in liquid funds to take care of unexpected expenses. One needs to stay updated with economic activities at the national and international levels. The more you learn and understand about mutual funds, the more confident you become with your investment.

What are the advantages of mutual funds?

There are many advantages of mutual funds, some of them are listed below:-

1. Low cost

Mutual funds are preferred because of their low costs due to economic scale, that is why it becomes a bit easy to invest in them and it is beneficial for the people who have a little less capital.

2. Easy to invest

Investments can be made in lump sum or periodic payments (easy on the pocket) through Systematic investment plan ( SIP ). One can start an SIP with as less as 500 rupees. Mutual funds are easy to buy and sell. That is why it is considered easily accessible to all investors.

3. Highly regulated and transparent

The mutual fund industry in India is very well regulated and transparent. It is closely monitored and regulated by Securities Exchange Board of India ( SEBI ).

4. Professional management:- saves time, costs and reduces risk

While investing in mutual funds, you don’t need to monitor the market because AMC’s are doing it for you and it gives you a leverage of time and cost both.

5. Diversification:- to protect from downside risk

Mutual funds are always diversified ( invested in different sectors ) so one is always at low risk. Your portfolio is diversified in such a way that it will cause minimal risk to your investments.

6. Tax saving

There are tax saving funds under ELSS. Under section 80C of the Income Tax Act, you can have a deduction of a maximum of Rupees 1,50,000 a year.

7. Liquidity

Mutual funds are very liquid as compared to other investment schemes, they can be sold at any time during market hours.

What are ways one can invest in mutual funds?

There are several ways to invest in mutual funds, some of them are listed bellow:-

1. Direct investment

One can invest in Mutual Funds by submitting an application form along with a Cheque or bank draft at the branch office or designated Investor Service Center (ISC) of Mutual Funds or Registrar & Transfer Agents of the respective the Mutual Funds.

2. Online Mutual Fund investment platforms

One can also choose to invest online through the websites of the respective Mutual Funds.

3. Using a DEMAT account

One can use existing DEMAT account and bank account for transacting in mutual funds. All you need to do is log in to your DEMAT account and look for mutual fund investment options.

4. Mutual Fund agents

Investment in Mutual funds can be done by the agents or brokers. It can be suitable for the ones who do not have a DEMAT account or Net banking.

Conclusion

Mutual Funds are a pool of money which can be invested in securities by the experts and it can generate a consistent return to the investor. Mutual funds are beneficial to all the people who wish to enter the market but don’t know how to do it. People who are having no knowledge about the stock market and securities can also benefit from these funds because they are managed by professionals and they are one of the most liquid forms of investment one can make.