Is a mutual funds still a fresh idea, in your mind? Then, this the right place to know everything about mutual funds thoroughly.
What is a mutual fund?
Mutual funds are investment schemes which pool money from investors to invest in stocks, bonds, and other assets. This is the most popular way for new investors to gain money. It is a financial vehicle where when we can invest in a scheme managed by financial gurus, who ultimately buy shares and bonds, for us. These mutual funds investors don’t own directly the shares or bonds. Investors invest to increase their assets through mutual funds. The investor can be retail investors, High Net Worth Individuals (HNI’s) or institutional investors.
Types of Mutual Funds to Choose From:
- Money market funds: This is for a short period of time with fixed income securities.
- Fixed income funds: These funds have the aim of incoming money, on a regular basis. The fund managers in such funds, buy investments which pay a fixed rate of returns. This fund gives returns at fixed intervals like monthly or half yearly.
- Bond funds: These bonds invest in fixed income or debt securities. The bonds may be short, intermediate or long term.
- Equity funds: It is also called as a stock fund. It is kind of mutual fund, which invests primarily in stocks. The size of the fund is measured by its market capitalization.
- Index funds: This fund has a portfolio made to track the market’s index. This provides a greater exposure in the market with low operating expenses
- Fixed income funds: This fund invests in debt and money market, banks and PFI bonds
How do mutual funds work?
The mutual funds invests money in various assets, based on the scheme’s policies. The fund is managed by a manager or a team of managers.
Investors make money in three ways. The fund gains money through dividends and shareholders receive payments. If the fund sells a stock or bond at a profit, the investors share the capital gains. If the fund’s market value increase, the value of the shares purchased in the name of the investor also increases.
Factors affecting mutual funds:
- Fund managers: Fund managers implement investment strategies for higher returns for their respective mutual fund clients. They work on behalf of all investors to make profits through mutual funds.
- Cash flow: Cash flow increases when investors buy new shares. Cash flow decreases when investors see funds are not performing well and thus, reduce or cease investing further. Thus, checking cash flow and choosing the right fund is a must.
Advantages of mutual funds:
- Holds more securities and thus, the risk is reduced
- Regulated by a government body
- Transparency to the investors is maintained
- Liquidity advantage
- Professional management
The disadvantage of mutual funds:
- Income is not predictable
- High fees
- Poor trade execution
- Tax inefficiency
- Lack of transparency
- Large cash present in portfolios
How to start investing in mutual funds?
Mutual fund investment can be both online as well as offline. For an offline investment with a fund house, the following are things which are needed.
- Proof of Address
- Proof of identity
- Passport size photo
For online through the official website:
- Aadhar number number
How to pick the best mutual funds?
- Performance ranking: It is recommended to choose the scheme which is on the top of the quartile list from the mutual fund research websites.
- Fund manager’s experience: As he is the decision maker on how to earn from the funds, an experienced manager who has been known to deliver stellar returns, should be chosen.
- Size of the assets: Larger the size of assets under management i.e, the investors are known. Thus, the risk gets minimized.
Are mutual funds safe?
Investment cannot risk-free but they are certainly great investment ideas. Investors should not be worried about small fluctuations for a short period of time.
So should we invest in mutual funds?
Yes, obviously. A mutual fund should be chosen after going through all the criteria and investment goals of the fund.
Disclaimer: Mutual funds Investments are subject to market risk, Read all Scheme rated Documents carefully, before investing
Investing in mutual funds, after thorough research with regards to the fund manager, the type of investment, your financial goals, asset size, and cash flow, can help you become rich, in a relatively short span. It is important to research thoroughly and to understand the type of investor you are, before investing.