What Are Mutual Funds – Everything You Want To Know Before Investing
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.
2. Agents
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
1. Diversification
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.
3. Simplicity
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.
4. Liquidity
Liquidity refers to the ability to convert assets to cash relatively easily. Mutual Funds are sought after by investors for their liquidity.
5. Costs
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.
7. Variety
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
1. Costs
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.
2. Dilution
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.
Thank you for such a detailed post, for a beginner like myself, this really helped me gain some clarity on a bunch of concepts.
Investing in mutual funds is one investment I have always done since I started my job. All we need to know is to understand the fund, where is it investing in return. The fundamental and techNical analysis makes a lot of difference .
Investing in Mutual funds is a great option but you must know the ins and outs of it. Your article served great in informing us about the same. Thanks
Mutual funds are best way to invest for long time, i have benefitted onky from Mf, others are highly risky in market
Excellent write up! Some great information for first time investors. I’m an independent financial consultant, so I know how difficult it is for people to understand which mutual funds to invest in.
This is very useful piece for information for people who want to invest in mutual funds but aren’t aware of the basics. great post. I am sure it will clear lot of doubts
mutual funds are a great way for investment. my hubby always talk about mutual benefit and invest in mutual funds only
A good and informative post and helpful article for the people who will be investing in Mutual Funds. Thank you for this descriptive post.
I am of the opinion that everyone must have right information about the financial planning. This post is right source of information about how to which tool to pick for financial investments.
I didn’t know about all these mutual funds. Thanks for sharing this extensive list if mutual funds. It is helpful for anyone looking to invest.
Wow that’s a very detailed and informative post! I have invested in Mutual Funds on the advice of my bank and I have always been happy with that investment. It’s perfect for someone who is new to investing.
As they say : Mutual fund sahi hai, its very much required that people should wake to the advantages of investing their money in MF’s. Well described post for the beginners.
This is a very informative post for those who are planning to open mutual funds investing. Everyone should know about this.
Frankly due to the lack of indepth knowledge about mutual funds , I have always shied away from it and had opted for the more traditional ways. Lot if things have been cleared after reading this.
This is a very informative article. Next time while investing, I will come back to this article again to make an informed decision.
This is a great post will all answers one need about Mutual funds. There are many queries with moms when it comes to investments. But you have shared almost all inputs one needs.
Such an elaborated post on mutual fund investment. Totally loved it . Very much informative. Will bookmark this post for future reference.
You have explained the concept of mutual fund in such a simple manner. I am in favor of equity-based mutual funds though there are greater and quick profits but more risk as well.
Mutual funds now a days have gained a good amount of mileage but hardly people do understand them in detail, thank you for sharing such an amazing blog on the same, it was damn helpful
Wow that’s great post with all the important details about mutual funds . Thanks for sharing this with me, as it would be easy to understand and decide for investment.
I was planning to invest in mutual funds since it is best way to at least have something as backup. Thank you for such a great info.