What is meant by mutual fund?
What are mutual funds?
Mutual funds pool funds from many investors and invest in a diversified portfolio of securities. These professionally managed funds provide individuals a way to invest in a variety of assets, including stocks, bonds, and money market instruments.
Mutual fund investing provides instant diversification, and the fund’s holdings help minimize risks. In India, mutual funds are regulated, which makes them transparent and highly popular among new and experienced investors.
How do mutual funds work?
Investors in mutual funds are allotted units based on the NAV of the fund.
NAV or Net Asset Value in mutual funds is the per share price of the fund. Investors are allotted units based on their total investment and NAV of the fund. Calculating NAV involves dividing the total asset value of the fund by the number of shares outstanding. For example, if the total asset value of the fund is Rs 1 crore and the fund has 1 lakh outstanding shares, the NAV is the total asset value (Rs 1 crore) divided by the outstanding shares (1 lakh), which is rounded off to Rs 100. Is equal. Meaning the NAV of the fund is Rs 100.
NAV is calculated daily. Therefore, it keeps changing and can go up or down depending on the performance of the securities in the portfolio.
NAV is affected by market volatility. If the NAV value increases at the time the investor redeems the units, the profit is called capital gain. Similarly, if the NAV value decreases, you may also incur losses
Types of Mutual Funds
Following is the broad classification of mutual funds.
Based on fund structure
Open-ended funds are perpetual. Open-ended funds allow investors to redeem their units at any time.
Closed-Ended Funds: These schemes have a fixed maturity. You can never invest in or withdraw from a closed-end fund.
based on asset allocation Mutual fund classification based on asset allocation includes equity, debt and hybrid funds.
Mutual fund investment methods Investors can invest in mutual funds in two popular ways.
Lump sum: When you make a large payment to the mutual fund, units are allotted to you based on the day’s NAV price. For example, if the NAV of the fund on that day is Rs 50 then you will be allotted 200 units for a lump sum investment of Rs 10,000.
SIP: In SIP you make regular investments in the fund. These are small fixed installments paid every month, and units are allotted based on that day’s NAV price. A systematic investment plan encourages regular investment practices and eliminates the need to time the market.
How to invest in mutual funds?
There are 3 common ways to invest in mutual funds.
Through the website of the mutual fund company: In that case, you have to register on their website and create an account. However, this method may be ineffective if you want to invest in multiple funds from different companies.
Through Banks: Sometimes your bank allows you to invest in funds available on their net banking or mobile banking platform. But this may limit your ability to explore potential schemes as the bank can only promote a limited number of funds.
Via Angel One: Angel One is a well-known brokerage house. We offer advanced screeners and reports to help you find a mutual fund that suits your needs.
Benefits of investing in mutual funds
- Diversification: Mutual funds provide instant diversification, thus spreading the risk across different asset classes and reducing the impact of the performance of any one investment on the overall portfolio.
- Professional Management: Fund managers use their expertise and research to invest in promising investment opportunities.
- Liquidity: Liquidity makes mutual funds suitable for short-term or emergency cash needs. Investors can buy or sell their mutual fund units on any trading day.
- Affordability: Mutual funds are affordable and allow investors to benefit from economies of scale.
- Transparency: Mutual funds are required to publish regular performance reports. This level of transparency enables investors to make informed decisions.
- Regulatory oversight: This ensures compliance with industry standards, providing a level of security and confidence to investors when investing in mutual funds.
Flexibility: Mutual funds are available in a variety of variants, allowing investors to choose funds that suit their investment goals, risk appetite and time horizon. - Dividend reinvestment: In mutual funds, dividends generated are often reinvested, potentially promoting long-term wealth accumulation.
- Tax Efficiency: Mutual funds can be structured to provide tax benefits. For example, investors can save tax up to Rs 46,800 per year on investments up to Rs 1.5 lakh under Section 80C of the Income Tax Act, 1961 by investing in ELSS mutual funds.
Objectives of mutual funds
Mutual funds achieve the following
- Objectives for the investor:
- Diversification: Mutual funds provide instant diversification, which helps reduce risk and improve risk-adjusted returns.
- Key Protection:
Some mutual funds offer key protection to some extent. Mutual funds are highly regulated and discourage aggressive investment strategies. - Capital appreciation:
The primary objective of mutual fund investment is capital appreciation. - Tax Savings:
Some mutual funds have the benefit of tax savings, like ELSS. However, it also comes with an initial lock-in of three years, making it less liquid.
Conclusion
The Beginner’s Guide to Mutual Funds aims to provide a solid foundation for understanding these investment instruments. By explaining the meaning, types, advantages and disadvantages of mutual funds, this article provides a thorough understanding that will help beginners make an informed decision.
