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Mutual Funds
MF is a special kind of investment through which one can invest in different types of securities together. There is a greater risk if we invest all the money in a single entity, but through MF, one can make a diversified investment by investing in various securities. Asset Management Company(like ICICI, Aditya Birla, DHFL, and many more) starts mutual funds. Basically, we give our money to any Asset Management Company, and many people like us will also do the same. Now this company will invest all the money collectively at different places. A group of appointed experts suggests where we need to invest the money.
Understanding MF:
Mutual funds are the investments made by the public which a mutual fund company uses to invest in various securities. These securities can be anything from stocks of different companies to bonds, debentures, etc. These investments are diversified, and the growth of a mutual fund company depends on the portfolios it has invested in. A group of financial experts does a careful analysis, and then investments are made. The performance of these investments determines the profits of a mutual fund company and the investors’ returns. Depending on the investments and the underlying conditions, various mutual funds have varying returns and risks. It is essential to understand the risk involved and the expected returns.
How MF work:
A Mutual Fund company issues some shares to the public. People buy these shares, and the purchase price of these shares(Mutual Funds) is called NAVPS (Net Asset Value Per Share). NAV is the Net Asset Value of the fund as per the market value. Since we are buying the shares of a Mutual Fund company, we are given the ownership of the MF.
The Mutual company then invests these Mutual Funds into various sectors, securities, and companies. These investments can be in stocks, companies, bonds, etc. Depending on the performance of the various investments made by the company, we get our returns. These returns can be in the form of capital gains, dividends, etc.
Advantages of Mutual Funds:
People are aggressively welcoming mutual funds, and there has been quite a lot of demand for it. There are a variety of reasons for this rise in the market of mutual funds:
> Diversification: MF is considered the healthiest investment option because of its diversification. Our funds are allotted in various sectors and securities like debentures, bonds, stocks, cash, etc., ultimately reducing the risk. It will also increase our chances of high returns.
> Ease of investment: The process of investing in MF is quite simple. We can either invest on our own or take the help of a financial expert to invest in MF. SIP’s (Systematic Investment Plan) allows us to pay the investment in regular intervals.
> Affordable: The minimum investment of MF is meager, and through SIP, we can start investing from as low as ₹100. So, anyone can begin their investment in Mutual funds with accurate information.
> Expert solutions: We can get the opinions of financial advisors and experts on the booming sectors and companies and invest in them accordingly. Since the funds are diversified, we can be safe even if the predictions are wrong.
> Liquidity: Almost all the MF are easily liquified, i.e., we can convert them into cash quickly. Unless and until we have invested in a fixed maturity plan MF, we can redeem our investments as per our choice. Also, we can transfer the funds to cash and get them deposited into our bank account in no time.
Example of Mutual Funds:
S&P 500 Index Fund is something that any investor craves. It has assets worth 10 billion, and it is on the smaller side of the heavyweights. This S&P 500 Index Fund mutual fund is known to have a complete record backdating to 1997. Charles Schwab, a renowned industrialist, is known for his focus on making investor-friendly products. S&P 500 Index Fund’s razor-thin expense ratio stands as the proof to this point.
0.02 percent is the expense ratio of the S&P 500 Index Fund, which says that it will cost us $2 for every $10,000 that we invest.
Equity MF:
In Equity MF, money will be invested in the stock market. So naturally, in this type of MF, the risk is more and also the return. In the stock market, there are three Equity Mutual Funds depending on the kind of company we are investing in.
- Large-Cap MF: In Large-Cap Mutual Funds, we invest our money in the stocks of a large company. The risk associated with large companies is low, and the probability of high returns is also less. There is a perfect chance of liquidity conversion, and we can get a lot of information about the company.
- Small-Cap MF: In the case of investing in a small company, the risk is very high, but we can also expect high returns. The probability of liquidity is very low, and we may not get ample information about the company.
- Medium Cap MF: Investing in the stocks of a medium-size company will yield high returns, but the risk associated is also high. Since it is a medium-sized company, the liquidity is good, and we can get ample information about it.
- Diversified Equity Fund: Here, the investment is diversified in the large, medium, and small-cap companies, or the investment can be made in different companies. They are also called as Multi-Cap Equity Funds.
- Sector Mutual Funds: In this type of MF, we invest in companies that belong to a significant sector like Agriculture, Transport, Pharma, etc. These funds are riskier because all the investment is made in one industry.
- Index Funds: Index funds are passively managed funds which means no one from the Asset Management Company looks at where to invest the money. As per the market’s rate’s ups and downs, they too go up and down. They are entirely dependent on Sensex/Nifty.
- Equity Linked Saving Scheme: This is a particular type of Equity fund to save our tax. In this type of MF, the fund manager purposely invests in places with high returns and high risk.
Debt MF:
The MF that is invested in the debt instruments. Debt instruments are bonds, debentures, certificates of deposits, etc. There are several kinds of debt MF such as
- Liquid funds: Liquid Funds are those MF that can be converted into cash quickly and easily. These MF have a shallow risk. In other words, this can be considered as an alternative to a savings account.
- Gilt funds: These are those funds whose investments are done on Government-issued bonds. Since the Government is borrowing our money, we can say that it is a zero risk MF. But the interest rates might fluctuate.
- Fixed Maturity Plan funds: Fixed Maturity Plan is a type of MF that can be treated as an alternative to Fixed Deposits. We have a high risk, just like FD, and the investment is made for a fixed time. So we can’t withdraw the money before the set time.
Hybrid MF:
Some people want to invest in the stock market but don’t want to invest all the money there. They want to invest some amount in the debt instruments also. Such funds are called Hybrid MF
- Balanced Savings Funds: If most of the money is invested in a debt fund, it will be called the Balanced Savings Funds. Approximately, the ratio of investments in Debt and Equity MF would be in the proportion of 70:30.
- Balanced Advantage Funds: In this type of MF, 70% of the investment is done in the equity funds at higher risk, and the remaining 30% is invested in the debt.
Why should we invest in Mutual funds?
Markets and the economy are volatile. Moreover, money loses its value in due course of time. Hence the safest and healthy option to earn returns on investment is Mutual Funds.
Are Mutual Funds safe?
Mutual Funds are safe as long as we invest with a calculated and systematic approach. There are underlying risks involved, but we can be safe if we invest correctly.
What are the risks involved in mutual funds?
If we are not careful, we might lose on some or all of our investment. Dip in markets, Inflation, Interest rates fluctuations can increase the risk of our investment.
Can a beginner invest in a mutual fund?
With a proper understanding of underlying risks and the guidance of a financial expert, anyone can invest in mutual funds. They are straightforward to understand and invest in.
What is NAVPS?
NAVPS is the Net Asset Value Per Share, which is essentially the purchase price of the shares issued by the Mutual Fund Company.
Which NAV should I choose?
Ideally, it is better to choose a NAV that is low because our investment will be less. But ultimately, our return depends on various factors and not just on NAV.
Is this a good time to invest in mutual funds?
We are mistaken if we think that there is a good time to invest in mutual funds. We can finance any time and on any day.
Do I get any tax benefits with Mutual funds?
Any Capital gains that are less than one lakh rupees are tax-free. ELSS is the type of MF that doesn’t include any tax.
As a beginner, should I go with MF or Stocks?
As a beginner, one should always go for MF. Stocks are hazardous and volatile, whereas the risk is low in the case of MF when we take a calculated step.
What are some of the best funds to invest in 2021-22?
The best options are S&P 500 Index funds, Government bonds, Nasdaq-100 index funds, etc.
Choose Funds which suit you
You can choose Mutual Funds based on several parameters like return expectation, risk tolerance, investment horizon etc. You can map the asset across parameters like expense ratio, past performance, fund manager reputation etc.
“Craft Your Wealth Journey: Choose Funds to Invest In”
Embark on a journey of financial growth by taking control of your investments. At Fundswala we empower you to shape your wealth strategy by offering a diverse selection of carefully curated mutual funds. Whether you’re a seasoned investor or just starting, our platform provides the tools and insights you need to make informed decisions. Explore, analyze, and choose funds aligned with your financial goals, ushering in a new era of personalized and prosperous investing. Your wealth, your choices – start investing with confidence today.
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