What are Mutual Funds? How to Invest in Mutual Funds?

Aren't you familiar with the tagline, "Mutual funds are subject to market risks, read the scheme-related documents carefully" and not to mention the n number of advertisements we come across on television claiming, "Mutual funds Sahi hai!" But are you someone who is still unaware of what mutual funds are or are wondering how to invest in one? Read on to find answers to all your mutual fund-related questions.

What are Mutual Funds?

When it comes to saving or investing money, most Indians prefer keeping their money in Saving Accounts with the banks or in Fixed Deposits. Keeping your money in the bank is surely safe but not at all profitable. While investing directly in the Stock Market may turn out to be profitable but is barely safe. 

Is there any investment option that is profitable and also safe? Mutual Fund is your answer. People in India are very skeptical about the stock market and very few people have actual knowledge of the market. This is yet another reason to invest in mutual funds.

Mutual fund companies that are rightly known as Asset Management Companies (AMC) collect funds from the general public and institutional investors and invest a large combined fund into diversified investment options such as shares, government bonds, debentures, etc. HDFC Mutual Fund and ICICI Prudential Mutual Fund are examples of AMC's operating in India. 

How do Mutual Funds Work?

AMC's, design different Mutual Fund schemes such as Kotak Standard Multicap Fund, and Parag Parikh Flexi Cap Fund. Retail investors and institutional investors invest in these funds. Investors may choose to invest a lump sum amount or through a Systematic Investment Plan (SIP) that is small consecutive amounts every month. 

Once the target fund is achieved by AMC, they invest the Assets Under Management (AUM) that is the overall fund accumulated into different stocks, bonds, and debentures through their Fund Managers. Fund Managers are appointed by Mutual Fund companies for efficient management of AUM. Fund Managers take responsible decisions regarding the investment of the AUM. 

Investors may choose to invest for a particular period like 5 years, 10 years, etc. Returns on the invested fund may be received by the investor regularly or at the expiry of the scheme.

Types of Mutual Fund

Though there are a huge variety of mutual fund schemes in the market we can primarily divide them into 3 types,

  1. Equity Schemes:

Funds of equity schemes are invested directly in the stock market. Investment in equity schemes involves high risk but it also provides an opportunity for high growth.

Examples- Axis Bluechip Fund, Parag Parikh Long Term Equity Fund.

  1. Debt Fund Schemes:

Debt funds are mutual funds that are invested in fixed interest instruments such as government bonds, debentures, corporate bonds, money market instruments, etc. Investment in debt fund schemes is safe but stagnant. 

Examples - ICICI Prudential All Seasons Bond Fund, Kotak Dynamic Bond Fund.

  1. Balanced or Hybrid Mutual Fund:

Hybrid mutual funds are funds that invest in different types of assets such as equity, debt, real estate, gold, etc. The risk involved in the hybrid fund can be balanced as per the risk an investor is willing to take. The ratio of debt to equity asset decides the risk factor of the fund.

Examples - Motilal Oswal Dynamic Fund, SBI Equity Hybrid Fund.

Apart from these three types of Mutual Fund Schemes, there are specialized schemes such as 

  • Equity Linked Saving Scheme(ELSS) is a scheme that is specially designed for tax-saving purposes of the investors.

  • Unit Linked Insurance Plan (ULIP) is a combination of both mutual fund and insurance plan to give benefits of investment and insurance under one roof. This scheme is provided by Insurance companies.

  • Exchange-Traded Fund (ETF) is a fund that constructs its portfolio based on Market Index such as Nifty 50 and Sensex.

Factors to consider before choosing a Mutual Fund Scheme

  1. Fund Manager's Credentials 

A Fund Manager is the person responsible for the investment decisions of the fund. A Fund Manager is expected to be highly educated, have professional credentials, and be a market expert. Every mutual fund scheme discloses the Fund Manager's credentials on their scheme documents.

  1. Assets Under Management (AUM) 

AUM is nothing but the overall Market Value of the total funds that an AMC manages on behalf of its investors. The AUM of a particular fund shows the credibility of the fund.

  1. Expense Ratio 

The expense ratio is the percentage of the fund that is taken by the AMC as their share of the fund. The expense ratio is a portion of the fund that you pay to AMC for the efficient management of your funds. An expense ratio greater than 1.5% is considered high. A good expense ratio is anywhere around 0.5%- 0.75%.

How to Invest in a Mutual Fund?

  1. Through a Mutual fund Broker 

You may invest in a mutual fund through a Mutual Fund Broker or a Mutual Fund Distributor. The mutual fund broker may provide you with guidance on which scheme you must invest in and the other procedures. A broker charges a nominal fee for providing such services.

  1. Through AMC's Official Website 

Most Mutual Fund companies offer online services to their customers. Through a simple Know Your Customer(KYC) process, you may invest in a mutual fund by providing basic details such as Aadhar number, PAN, and Bank details. 

  1. Through AMC's official mobile applications

Today many mutual fund companies provide services to their customers through their mobile apps. A process similar to the website procedure is used to let investors invest in mutual funds through the app. Aditya Birla Sunlife Mutual Funds, HDFC Mutual Fund, SBI Mutual Fund are a few examples of mutual fund mobile apps.

  1. Through Demat Account

If you are an investor and already have a Demat account with a broker such as Zerodha, Grow, Angel Broking, etc you may invest in a mutual fund through your Demat account.

Closing Thoughts 

Mutual Funds are surely a better option than most of the traditional investment options such as Bank FD, PPF, or Gold. If you choose a scheme carefully, a mutual fund will turn out to be safer than investing directly in the stock market. If you are looking for a long term investment or investing for a particular purpose and period then Mutual Fund is the best option available. 

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