Mutual Funds are investment funds gathered from a group of investors in order to purchase a financial asset. Money is collected on the behalf of the investors and a small fee is charged for managing the money of the investors. The pooled capitals of the investors are invested in stocks, bonds, and shares on their behalf. Mutual Funds are professionally managed and also allows investors to invest in small amounts.
Mutual Funds – Everything You Want To Know Before Investing
The first modern investment funds, which precedes the modern Mutual Fund, was first established in the Dutch Republic. Mutual Funds were first introduced in the USA during the 1890’s. In India, the Mutual Funds are registered with the Securities Exchange Board of India (SEBI) and hence are well-regulated by them. So investing on Mutual Funds is quite safe.
Mutual Funds provide higher returns than other forms of investing. It is the best form of investment for investors who do not have much knowledge or experience regarding investments, and at the same time enables them to access large portfolios.
Types Of Mutual Funds
Based on Asset Class, Mutual Funds can be classified into:
1. Equity funds
The investors primarily invest in stocks of different companies. The amount of returns is directly proportional to the stock market. Hence it ensures quick growth at a higher rate of risk.
2. Debt funds
It involves investors investing in fixed-income securities such as government treasury bills or bonds and reputed corporate deposits. It is ideal for those who want to want minimal risks. It generates small but regular returns.
3. Money Market funds
It involves investors investing in the money market, i.e., trading money in the money market (similar to trading stocks in the stock market). Short-term plans generate lower risks.
4. Hybrid or Balanced funds
It involves investors investing in both stocks and bonds in such a way that risks and returns are balanced; an optimum amount of risk is taken such that returns are higher. This involves investing on equity funds (stocks) or debt funds (bonds) in a varied or fixed ratio.
5. Solution-oriented schemes
Investors invest in such a way that the investments are devised for specific goals such as retirement or child’s education.
Based on the structure, Mutual Funds are divided into
1. Open-ended funds
Such funds have no limits to how long investors need to invest or how much capital the investors need to invest. An investor can trade at their convenience and stop when they like. But an Open-fund may also decide to stop taking in new investors if they cannot or do not want to manage large funds.
2. Closed-ended funds
There is a pre-agreed amount of capital to be invested by investors and some funds have a New Fund Offer (NFO) period, which places a deadline to buy funds.
3. Interval funds
It has the traits of both Open-ended and Closed-ended funds. They can be purchased or exited only at specific intervals which are decided by the fund house. They remain closed during the rest of the time. It is suitable for investors who want to save a large amount of money for an immediate goal.
How To Invest In Mutal Funds?
There are various means to investing in Mutual Funds, they are:
1. Direct Investment
Investors directly contact fund houses and apply for schemes. This saves money on brokerage. It is advisable for seasoned investors.
Investors can purchase funds through professional sellers or brokers. This saves lots of time and effort. But brokers charge commissions for their services. It is advisable for investors with lesser experience in making investments.
3. Online distributors/fund houses
It is the most famous form of investment nowadays and it saves time, effort and commission cost.
Advantages of Mutual Funds
Investing in Mutual Funds promotes diversification and hence reduces risks; by investing on multiple funds the risk of loss is reduced. What’s more is that diversifications in Mutual Funds are done automatically.
2. Professional Management
Mutual Funds are managed by professional experts. So all investors need to do is choose the right Mutual Fund, and then the experts will handle the rest.
Generally, investment requires the gathering of information regarding the investment, but this is time-consuming. This disadvantage is overcome by Mutual Funds which automatically gather statistical data and only require investors to analyze the performance. The performance is analyzed by comparing funds based on metrics such as the level of risk, price, and return.
Liquidity refers to the ability to convert assets to cash relatively easily. Mutual Funds are sought after by investors for their liquidity.
Mutual Funds are relatively cheaper than other vehicles of investment.
6. Tax Efficiency
Mutual Funds are much more tax efficient than other forms of investments. Long-term capital gain tax on Equity funds is zero. It is applicable for debt funds when held for three years. Equity Linked Savings Scheme (ELSS) funds are exempt under Section80 c for investments under Rs. 1.5 lakhs.
There are various types of Mutual Funds which investors can choose from, depending on their goals.
8. Starting Small
Unlike other investments such as stocks or real estate, Mutual Funds allow investors to start with investments as small as Rs. 500 or Rs. 1000. Some funds even allow you to start with Rs. 100.
9. Automated Investment
The Systematic Investment Plan (SIP) automatically debits money from your bank account.
10. Safe and Transparent
Investments in Mutual Funds are very transparent and safe as they are under the surveillance of the SEBI.
Disadvantages of Mutal Funds
Mutual Funds includes expenses such as charges for managing funds, fund managers salary, distribution costs, exit loads (if funds are sold within a specified duration), etc. Different funds have different expense ratios, with passively managed funds having lower expense ratios than actively managed funds.
Diversification saves investors from suffering a major loss, but it also prevents investors from making major gains. Hence it is recommended that investors do not invest in too many Mutual Funds, to avoid dilution of gains.