Your finances are special, and making the important decision to invest them should be a well-informed decision. Talking about mutual funds, potential investors are often left scratching their heads about what it is about. However, it is simpler than you think.
How mutual funds work
Under this, money is collected from lots of investors and then invested by a fund manager in stocks and/or bonds. The whole idea is to invest in a balanced way to mitigate the risk associated with investments as far as possible. Here’s when NAV (Net Asset Value) comes into the picture. It is defined as the value per share of a mutual fund at a specific time or date. The product of NAV and the units in the fund decide the amount that shall be received by the investor once they withdraw money. Note that NAV is not an indication of the quality of the fund and should not be the sole criterion to adjudge a fund.
Types of mutual funds
Solely concerning India, there are two types of mutual funds-open-ended and closed-ended.
- Open-Ended: Open-ended mutual funds are those where investors can buy and sell units at any time. There is no fixed maturity or investment periods. They can be further classified into the following-
- Money Market/Liquid: Money market or liquid mutual funds involve treasury bills, investments, and fixed income securities apart from short-term bank certificates of deposits. As the name suggests, they focus on liquidity and hence carry short maturity periods of about 90 days.
- Debt/Income: Debt or income mutual funds are those where money invested can be put into monthly income plans, flexible maturity plans, short term plans, etc. The low-risk factor and low returns attached to them are ideal for those looking for a safe environment to put their money in.
- Equity/ Growth: Equity or growth mutual funds comprise investment in equity stocks to realise an income or capital gains.
- Balanced: Balance funds can be opted for to find a balance between equity funds and fixed income securities. This can be useful for aggressive investors to invest with caution.
- Closed-ended mutual funds: Closed-ended mutual funds have a fixed maturity period wherein investments take place only in the initial stages of the fund. It is of the following kinds-
- Fixed Maturity Plans: These plans entail the lowest charges for the scheme since they do not involve active management like other funds. In such plans, the investment is usually made in debt instruments that mature along the same timeline, owing to a fixed maturity period.
- Capital Protection: The capital protection mutual fund invest in both equity plans and fixed income securities with marginal investments in equity. The motive here is to safeguard the principal while fetching returns.
Mutual funds have ample advantages, the primary being constant monitoring of the fund’s portfolio by a fund manager, having the peace of mind that comes with informed investing without the anxiety of calculating financial ratios or analysing financial statements. Additionally, tax benefits of mutual funds allow exemptions under section 80C.
How to invest in mutual funds
The introductory step towards investing in mutual funds is to understand if the investment will be made through SIPs or Systematic Investment Plan or lump sum. How SIP works in mutual funds can be understood through the fund manager.
Mutual fund investment is a diverse area. However, we hope these basics were helpful as starters for you to develop a comprehensive idea. You keep learning as you invest.