Beginners Guide to Mutual Funds

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Jun 21st, 2017
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If you are planning to invest in mutual funds, you need to get your basics clear. Mutual funds are completely different from bank saving schemes, stock investment, etc. Before you dive into the mutual fund industry, you should read this beginner’s guide to mutual funds.

For a long term investment, a mutual fund is a reliable platform. Your portfolio includes diversified assets. You need to pay a fee before operating your account. There are different types of mutual funds like equity funds, debt funds, balanced mutual funds, and so on. Are you confused? If yes, read on to clarify your doubts regarding mutual funds.

What is a Mutual Fund?

Mutual Fund is an investment company that handles the investments made by the people in the firm. It collects the money from the interested investors and invests the money in money market instruments such as stocks, shares, government equities, market commodities, etc.

Mutual Funds are beneficial for the investors who do not have optimum knowledge about the money market. The investors do not know about the companies, different types of instruments, the right time to invest, and so on. Hence, mutual funds seem to be a viable option. The mutual fund will invest your money in different companies and hence, you will have a diversified portfolio with investment in different money market instruments. People also prefer investing in Systematic Investment Plans, as it helps them save regularly in small portions. There are several other benefits of SIPs that you can learn about, once you familiarize yourself with the basic concepts of mutual funds. The fund manager at the mutual fund will manage your investment and will make sure that you get the maximum return on your investment.

Types of Mutual Funds

  • Equity Mutual Fund – The money is invested in the stock markets. The return on the investment is dependent on the market performance of the company. Equity mutual funds are preferable for long-term investments.
  • Debt Mutual Funds – These money instruments offer a fixed return on your investment. Hence, the risk associated with these investments is comparatively less. But, the return is also less. Government bonds and other fixed income investments come under the Debt Mutual Funds.
  • Balanced Mutual Funds – As suggested by the name, your investment will be divided into debt and equity instruments. The analysis and decision are based on the parameter of maximized returns on your investment.
  • Open Ended Funds – In this mutual fund, you can enter any time and exit anytime. There are no restrictions, or any lock-in period, for your investment.
  • Closed Ended Funds – There is a minimum lock-in period associated with closed ended funds. You cannot withdraw the amount before stipulated time period.

Asset Management Company and Fund Managers

Asset Management Company, or AMC, is the firm that launches the Mutual Fund. The investors can invest their money in the mutual fund operated by the AMC. These mutual funds are regulated by Securities and Exchange Board of India (SEBI). SEBI ensures that the investor’s money is safe and there are no frauds in the mutual funds.

For handling these investments, you need a professional who has a sound knowledge of the mutual fund industry. This professional is known as the Fund Manager. The Fund Manager will manage all the money invested in the mutual funds. Their experience and instincts are crucial to maximize return on the investments.

Portfolio and Net Asset Value (NAV)

The investments made in a mutual fund are categorized in a portfolio. The portfolio will include details about all the money market instruments in your possession.

In mutual funds, you purchase a certain number of units for a particular amount. This unit value is known as Net Asset Value (NAV).

Mutual Fund Charges

There is a small charge when you either enter or exit the mutual fund. Usually, it is 2% of the whole amount invested in the mutual fund. So, if you invested Rs 100, Rs 2 will be charged as the entry or exit load. The remaining Rs 98 will be invested in the mutual fund.