Whenever we make a large purchase, such as a household appliance, we conduct thorough research, evaluate each component, and then narrow down our options—understanding what to expect from the goods guarantees a positive experience with what we purchase.
The same applies to mutual funds. Before investing in them, you should know a few things to ensure a good investment experience. We will explain everything about mutual funds in this blog.
Mutual funds are not as tricky as they appear to newcomers; instead, they are the ideal alternative to holding money in fixed deposits or bank accounts, where profits are limited. Mutual funds allow you to reduce the risks associated with direct stock investment while still providing the possibility to generate larger long-term returns. To invest in mutual funds, you must first understand that term. What are the different types of mutual funds, and how do you invest in them?
What is Mutual Fund?
A mutual fund is an organization that pools money from several investors and invests it in securities such as stocks, bonds, and short-term loans. The portfolio of the mutual fund is its total holdings. Investors purchase mutual funds. Each share represents a shareholder’s interest in the fund and the income it generates.
Mutual funds have emerged as the ideal investment option for ordinary investors in India. The AUM (Asset under management) of Indian mutual funds has increased from Rs.8 trillion in 2013 to a stunning Rs.24 trillion in 2018, with equities funds accounting for roughly one-third of this total. The monthly SIPs are around $1.2 billion and increasing. All of this means that, following the demonetization, there has been a significant increase in individuals investing in mutual funds as a legitimate source of wealth growth.
In short, you can say that:
Mutual funds allow you to combine your money with other investors to “mutually” purchase stocks, bonds, and other investments.
- Professional money managers select which securities to acquire (stocks, bonds, etc.) and when to sell them.
- You have exposure to the fund’s investments and any income they generate.
- They provide a diverse range of investing methods and approaches.
Why do people invest in mutual funds?
Mutual funds are popular among investors because they often provide the following benefits:
Professional administration: The fund managers carry out the study on your behalf. They will choose stocks and maintain track of their progress.
Diversification: Diversification is sometimes known as “not putting all your eggs in one basket.” Mutual funds often invest in a diverse variety of businesses and sectors. This reduces your risk if one firm fails.
Affordability: Usually, mutual funds have quite a low initial fee and subsequent purchase criteria. Liquidity. Investors in mutual funds can simply redeem their shares at any time for the current net asset value (NAV) plus any redemption costs.
Types of Mutual Funds
1. Equity Fund
Equity funds are the most popular forms of mutual funds since they are favoured and given significant space in most investors‘ portfolios. Equity funds, as the name implies, invest primarily in stock market shares. A fund’s entire investment must be at least 65% in shares and derivatives to be labelled an equity fund. There are also many equity funds based on the equities they invest in. For example, if a fund primarily invests in IT firms, it is known as a technology fund; similarly, if a fund primarily invests in large market-cap companies, it is known as a blue-chip fund.
2. Debt Funds
Debt funds primarily invest in fixed-income debt products. A minimum of 65% of total funds are invested in debt instruments such as government and corporate bonds. The rest can be invested in any way.
3. Hybrid Funds
A hybrid fund combines both equities and debt funds. They maintain a delicate mix of stock, debt, and other instruments to stabilise returns and avoid risks. Now that you’ve learned about the many sorts of mutual funds, it’s time to learn about the various methods you may invest in a mutual fund.
Mutual Fund Investing Options
1. Systematic Investment Plan or SIP
SIPs are designed for investors who do not wish to invest large sums in mutual funds all at once. SIP allows individuals to invest a certain amount (as little as Rs 100) each month in a mutual fund plan of their choice. The same thing may be automated using a bank e-mandate, in which the sum is automatically taken from your bank account every month on a predetermined date. SIP helps you to develop a stable investment habit while earning considerable long-term returns. You may learn about your returns by using the SIP returns calculator.
2. Lump-sum investment
A lump-sum investment occurs when an investor puts a large sum of money in a mutual fund scheme. Investors can get returns on the fund’s performance. You can increase your investment in the same fund and withdraw at any time. For example, imagine you make a lump sum investment of Rs 10 lakhs in a mutual fund that you estimate to provide 15% annual returns for the next ten years. After ten years, the corpus would be Rs. 40,45,557. You may discover your returns by using a lumpsum investment return calculator.
5 Things you should know before investing
1. Asset Allocation and Rebalancing are Important
It is said that you should never put all of your eggs in one basket. This is also true when it comes to investing. The technique of splitting your investments among asset classes to decrease portfolio risk is known as asset allocation. So, before you begin investing, decide how much you will invest in various asset types such as shares, gold, debt, and so on, and then invest. And, while asset allocation is essential, it will not be as advantageous as rebalancing. Rebalancing implies that if one asset class rises in value and its percentage in your portfolio rises, you record profits and reinvest the proceeds in other asset classes in your portfolio.
2. You will not receive the same results year after year
When you hear about mutual fund returns, you usually hear about annualized returns. This may give the idea that your results will be consistent year after year. Assume the annualized returns of a certain Mutual Fund Scheme are 8%. This does not imply that you will make 8% every year. This is because Mutual Fund returns are not linear. For example, a Mutual Fund Scheme may provide +10% returns in the first year but just -2% in the second year. There may also be times of no return. As a result, you should be prepared to experience similar unpredictability in your annual returns.
3. Risk Levels Vary Between Categories of Mutual Funds
The most fundamental and critical fact is that every class of mutual funds has a different risk. Based on a standard scale or criterion, you cannot declare that a certain mutual fund category has a high or low risk. Indeed, equity mutual funds provide low risk compared to direct stock investments. However, each type of mutual fund has a unique level of risk. Hence, we must always evaluate the riskometer of a mutual fund before investing. You can see the risks you will take with each plan since each has a risk.
4. SIPs assist in developing investing consistency.
Automated investing using SIPs promotes discipline and allows you to profit from market fluctuation. This is so that you may buy more units for the same price when the market declines. This aids in lowering your overall investment cost. This process, known as rupee cost averaging, might help you make high profits.
5. Direct Plans Produce Better Results
The next crucial factor is that direct plans have a lower expense ratio than standard plans. As a result, Direct plans produce more returns than Regular plans. Some investors believe that mutual fund schemes’ direct and regular plans are distinct. That is untrue. These are different versions of the same plan. The only distinction is that no commission or brokerage is imposed in direct plans because no agent or broker is involved. As a result, the fund house will incur lesser charges, resulting in lower yearly fees for your assets.