Mutual funds (MFs) offer a convenient and accessible way for beginners to start investing in the financial markets. However, understanding the ins and outs of MF can be overwhelming for newcomers. In this blog, we will demystify mutual funds and provide an overview for beginners.
What are Mutual Funds?
Mutual funds are professionally managed financial vehicles that pool money from multiple investors. The fund manager invests money into a diversified portfolio of securities such as stocks, bonds or a combination of both.
Types of Mutual Funds
a) Equity Funds: These funds primarily invest in stocks and aim for long-term capital appreciation. They carry higher risks but also offer the potential for higher returns.
b) Debt Funds: Debt funds invest in fixed-income securities such as bonds and government securities. They are considered less risky than equity funds and are suitable for investors looking for regular income and capital preservation.
c) Balanced Funds: Balanced or hybrid funds invest in a mix of equities and debt instruments. They aim to provide a balance between growth and income while managing risk.
d) Index Funds: Index funds aim to replicate the performance of a specific market index, such as the Nifty 50 or Sensex. They offer diversification and lower expense ratios compared to actively managed funds.
e) Tax-saving Funds (ELSS): Equity Linked Saving Schemes (ELSS) are tax-saving mutual funds that offer potential tax benefits under Section 80C of the Income Tax Act. There is a lock-in period of three years for ELSS mutual funds.
Benefits of Mutual Funds Investment
a) Diversification: Diversification means combining different classes of assets that are not precisely correlated. This helps reduce the concentration risk associated with investing in a single security. For example, if you invest Rs. 1000 in “SBI Large & Midcap Fund – Direct Plan-Growth”. Your investment will be invested in a portfolio of 71 companies.
b) Professional Management: Experienced fund managers handle investment decisions and portfolio management, leveraging their expertise to generate potential returns for investors.
c) Liquidity: MFs offer liquidity, allowing investors to buy or sell their units at the prevailing Net Asset Value (NAV) on any business day.
d) Affordability: Mutual funds provide an affordable entry point for beginners who can invest relatively small amounts.
e) Systematic Investment Plans (SIPs): Mutual funds offer the flexibility of investing through SIPs, allowing investors to invest a fixed amount regularly. This helps in disciplined investing and benefiting from rupee-cost averaging.
How Are Mutual Funds Priced?
The price of any mutual fund is commonly known as Net Asset Value (NAV). The formula for calculating the NAV is the investment portfolio’s total value divided by the fund’s outstanding units.
How to Invest in Mutual Funds?
a) Assess your Financial Goals: Determine your investment objectives, risk tolerance and time horizon to select the appropriate mutual fund category.
b) Research and Select Funds: Conduct thorough research on mutual funds, considering historical performance, fund managers’ track records, expense ratios, and investment philosophy.
c) KYC Compliance: Complete the Know Your Customer (KYC) process by submitting the required documents to comply with regulatory guidelines.
d) Choose a Mutual Fund Platform: To open an account and start investing, select a mutual fund platform. You can directly visit the website of a mutual fund company for investment.
e) Monitor and Review: Regularly monitor your investments and review the performance of the mutual funds in your portfolio. Make necessary adjustments if they no longer align with your investment goals.
Final Words:
Mutual funds provide an accessible and diversified investment option for beginners. You can confidently embark on your investment journey by understanding the basics of MF, exploring different types, and considering their benefits. Remember to assess your financial goals, conduct thorough research, and stay informed to make investment decisions.
Note: We recommend you contact your financial advisor before carrying out specific transactions and investments.