In this article, I tell you all the basics of mutual funds if you want to invest in mutual funds.
Funds mean money taken from people. A mutual fund is a fund where the money is collected from Peoples.
The company that manages this fund is called Asset Management Company. Each Asset Management company has a Fund Manager.
Fund managers invest people's money according to their objectives, the profit that comes from that investment is then distributed to the investors.
In exchange for managing the fund, the asset management company charges something fee, it is called the expense ratio. ICICI Prudential Mutual Fund, SBI Mutual Fund, etc... are Mutual fund asset management companies.
In mutual funds, your money is invested in equity or debt funds. In debt mutual funds, the money is invested in government securities, treasury bills, etc...
In Equity Mutual fund, the money is invested in the stock market. The fund manager manages the money of the people, so you have to check the past performance of the fund manager before investing in the mutual fund.
There are two ways you can invest in mutual funds i.e. SIP and Lumpsum. If you invest all the money together in a mutual fund, it is called lumpsum investment. If you put money in the mutual fund a little bit every month, it is called a SIP investment.
Just as there are shares of a company in the stock market, there are units in the asset management company of the mutual fund.
Just as we understand the price of a share by its share price, in the mutual fund, we understand the value of a unit from its NAV(Net Asset Value).
In Equity Mutual Fund, if you withdraw your money before one year, then the mutual fund company fixes the exit load i.e. some percentage of fine on your investment.
As stock market companies have IPO(Initial Public Offering), similarly Mutual fund Asset Management companies have NFO(New Fund Offer).
Types of Mutual Funds:
There are three types of mutual Funds:
1. Equity Mutual Funds
2. Debt Mutual Funds
3. Hybrid Mutual Funds
The Equity Mutual Funds are further classified into-
a. Large Cap Funds
b. Mid Cap Funds
c. Small Cap Funds
d. Sector Funds
e. Diversified Equity Funds
f. Dividend yield Funds
g. ELSS
h. Thematic Funds
Large Cap Funds: Large cap funds means money is invested in companies with large capital.
Mid Cap Funds: Mid cap funds means money is invested in companies with medium capital.
Small Cap Funds: Small cap funds means money is invested in companies with small capital.
Sector Funds: Sector fund means money is invested in different sector companies such as pharma, real estate, media, entertainment, etc...
Diversified Equity Funds: Diversified equity funds means money is invested in different sector companies as well as companies with different market capitalization.
Dividend yield Fund: Dividend yield fund means money is invested in companies and company profit is then shared with the investors which are dividends.
ELSS: The long form of ELSS is Equity Linked Saving Schemes. The lock-in period for this fund is 3 years. The investor also gets tax benefits under section 80C.
Thematic Fund: Thematic fund means money is invested in different themes such as e-commerce, media, etc...
The Debt Mutual Fund invest money in government debentures and are classified into-
a. Gilt Fund
b. Junk Bond Schemes
c. Fixed Maturity Plans
d. Liquid Schemes
Gilt Fund: Gilt Funds invest money in Government bonds.
Junk Bond Funds: Junk bonds funds invest money in Junk Bonds.
Fixed Maturity Plans: Fixed Maturity plans have specific maturity dates as like Fixed Deposit but these plans give more returns than bank Fixed Deposits.
Liquid Schemes: Liquide schemes invest money for a short time in companies. You can withdraw money anytime in these schemes.
The Hybrid Fund is a fund in which money is invested in both equity and debt mutual funds.
The Hybrid mutual fund is further classified into-
a. Monthly Income Plan
b. Balanced Funds
c. Arbitrage Funds
In monthly income plans, about 90% money is invested in equity mutual funds and 10% money is invested in debt mutual funds.
In Balanced Funds, about 80% money is invested in equity mutual funds and 20% money is invested in debt mutual funds.
In Arbitrage funds, about 65% money is invested in equity mutual funds and 35% money is invested in debt mutual funds.
Mutual Funds are also classified on the basis of structure-
A. Open Ended Fund
B. Close Ended Fund
C. Interval Fund
Mutual Funds are also classified on the basis of Management of Funds-
A. Actively Managed Fund
B. Passively Managed Fund
Now the question is How to Invest in Mutual Funds. Investors can invest in mutual funds in two ways i.e. lumpsum or SIP(Systematic Investment Plan).
What is Lumpsum Investment?
When money is invested in lumpsum amount then it is called lumpsum investment.
What is the SIP(Systematic Investment Plan)?
When money is invested every month or quarter like a recurring deposit then it is called a systematic investment plan.
Whatever your investment period is, you will get an average return.
For Example, If Ram invests 2000 Rs. at the beginning of the month then on that day according to NAV(Net Asset Value) of a particular mutual fund, ram gets units. For example, the price of NAV is 1000 Rs. then Ram will get 2 units.
When market down, there may be chances of losing money in case of the lumpsum amount. Investors can invest lumpsum amount only when Investor have sufficient knowledge of the stock market. But Investors can invest money for the long term i.e. for the period of 10 years or 20 years then there may be chances of getting a higher return than SIP.
I suggest you invest money in lump sum only when you have money in a lump sum amount and if you want to invest money regularly then invest through SIP.
Difference between Mutual Fund and Stock Market:
Companies can raise there fund by listing in the Stock market. When any company wants to grow there business then the company takes a loan from banks or takes money from people through the stock market.
When people invest in a company then the company gives shares to the investors. When the company grows then its price of a share is also increases.
Mutual fund company has a fund manager and it invests money in the market according to the objectives of investors and the profit is distributed to the investors.
When money is invested in the stock market, then the investor is the direct owner of the shares. In the case of mutual funds, investor money is indirectly invested in the stock market.
Demat account is necessary for investment in the Stock market. You can invest in mutual funds with saving account and PAN.
When you purchase a share of any company, then you have to make all decisions but in case of mutual funds, all decision is taken by fund managers.
Can Mutual Fund Company Frauds with Investor Money?
Each Mutual fund company has custodian for storing there shares and investment. Asset management companies and custodians are situated at different locations.
The capital market is regulated by SEBI(Securities and Exchange Board of India). Mutual Funds also come under SEBI. According to SEBI regulations, each AMC has to choose their custodian for Assets.
If a mutual fund asset management company wants to leave its business in the future for any reason, then it must first find another asset management company, then it can leave the business.
With this SEBI's guidelines, Investors can safely invest their money in Mutual Funds.
How to Choose Best Mutual Funds:
Before investing in any mutual fund, You have to check its Goal and Objectives of that particular fund. You get all its goals and objectives in the mutual fund offer document. You can easily get an offer document by searching the company name and offer document.
You must check the past return of that particular mutual fund company. You must also check the return in the long term. Compare return with its benchmark return.
If a company is new in the market then check the past performance of the fund manager of that company. You also check the risk and rewards of that company.
Investors can also check the Expense ratio of that company. If you choose a regular plan then the Expense ratio is higher than the direct plan.
Try to invest in mutual funds through the Direct Plan.
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