All you need to know about Mutual Funds
Basics on Mutual funds
You have seen the advertisement that Mutual funds Sahi hai and there is still risk involved.
After reading this blog you will be clear on "what is a mutual fund", "should you invest in it or not", "different types of mutual funds" and "it's advantages and disadvantages".
What are mutual funds
Ever wondered what is the meaning of mutual funds. The name says mutual means shared so when you invest in a mutual fund like you, other investors invest.
The fund manager invests the money collected by all the investors so the fund manager who has expertise in stock picking invests the pool of money collected by all the investors and distributes back the profits.
Out of the profits they take out some portions for their purpose known as management expense or people called it expense ratio. The expense could typically be 1 to 3% of the total investment amount.
So when you invest in mutual funds you hand over your money to the experts. And in exchange, the AMC (asset management company) give mutual fund units.
With mutual funds, you can invest in Equities, bonds, and securities, or all three that depend on the objective of the mutual fund and the option you selected.
Types of mutual funds:
Earlier every mutual fund company comes with a new type of mutual fund this used to cause a lot of confusion in investors so SEBI (Securities Exchange Board of India) came up with the regulation that mutual funds will be of five to six types only.
● Equity mutual fund
In an equity mutual fund, the fund manager invests the money in the stock market. It will have the risk involved as the investment is in equity. It can be mid-cap/ small-cap scheme or diversified, etc.
● Debt mutual fund
In the debt mutual fund, the pool of money collected is invested in debt and the income is in the form of interest rate. It is low on risk as compared to the equity mutual fund but the risk is not completely zero if the company goes into liquidation the debt is paid first but it is a long process and the money can be stuck for a longer period. However, the case of happening this is low as the fund manager does his research.
● Hybrid mutual fund
As the name suggests the hybrid fund will be the combination of the debt and equity at what ratio the combination will be there that depends on the option you choose. Some of the hybrid mutual funds are balanced mutual funds, equity-oriented mutual funds, and debt-oriented mutual funds.
● Solution-oriented mutual fund
This type of mutual fund is more popular it solves the financial problem which will arise in the future. The investment is generally for a longer period and it can be for a child’s future education or marriage expenses occurred in the future or even plans for retirement, etc.
● Other mutual funds
It includes other types of mutual funds like index funds what an index fund does is invest the money on the indices of the stock exchange which is nifty or Sensex the gain is dependent on the performance of the two indices.
● Exchange traded fund (ETF)
It can be said that ETF’s are like a combination of stocks and mutual funds because like a stock it is traded on a stock exchange, its price keeps on fluctuating and its shown in the Demat account and it is similar to index mutual fund and it has comparatively lower expense ratio.
One thing to keep in mind is when an investor wants to sell an ETF there should be a buyer who is willing to buy that particular ETF if there are no buyers the investor cannot sell their ETF.
In India currently, most ETFs don’t have the volume so it can so happen that an investor bought an ETF but in the future, the investor is not able to sell. So it’s important while buying ETF to look into the volume of that particular ETF.
Advantages of investing in mutual fund
There is a reason why the mutual fund is the choice of most investors and common men today.
● Managed by professionals
A team of experts and fund manager track the activity of the market and try to make the best of the available opportunities that will optimize the portfolio of the investors. So the investors don’t need to track the market and worry about losing an opportunity.
Another benefit of investing in a mutual fund is liquidity. Most of the funds don’t have a lock-in period so whenever the investor wants to take back the ownership or redeem the funds he or she can very well do so.
In a mutual fund, the investor can choose according to the need, goal, and risk appetite. Whatever the future need or goal the investor easily finds the right choice of investment.
One can make a diversified portfolio in a cost-effective way. If one wants to make a diversified portfolio on their own it cost more than diversifying using mutual funds.
● Smaller denomination
With mutual funds, anyone can invest monthly SIP which can be as low as Rs 500, so an investor can start investing even with less money in smaller denominations. Smaller denomination investments for a longer period can yield great returns compared to other investment types.
● Safe investment
There is a general notion that only bank investments are safe but the mutual fund companies are constantly on the watch by statutory government bodies like SEBI and AMFI (Association of mutual funds in India). The SEBI gives the option of verification of credentials of the fund house and asset manager.
Disadvantages of mutual funds
Everything comes with its own set of advantages and disadvantages knowing about the limitations gives the power to overcome the disadvantages and make the most of its advantages.
● Exit load charge
Many mutual funds charge an exit load on the redemption it is when an investor wants to exit the mutual fund scheme. So it discourages the investor from redemption thus, making it less liquid.
When a fund manager sells a mutual fund the gain which occurred cannot dodge capital gain tax. Those who are concerned about the impact of taxes can invest in tax-sensitive funds.
● Management fees/ Expense Ratio
Even on the incurring of loss or less profit due to some reason the management fees have to be paid. So this creates an added expense on the investor.
Additional factors :
★ Many investors take too many funds that are similar in nature that doesn’t diversify just by investing in a mutual fund doesn’t give a diversification in a portfolio if you have invested in one sector.
★ There are 44 asset management companies offering 2500 mutual funds so the confusion among the investors is natural. It’s important to know about your need and goal besides the performance of the asset management company and fund manager.
★ It is significant for mutual fund companies to sell their scheme because the performance of an investment does not make a difference to the company. the company has already gained through the collection of money from investors and they will charge expense ratio on it.
We at Equiseed Wealth are always on our toes to enlighten our users and impart financial knowledge in a simplistic way.
Mutual funds are a topic of day to day and every investor thinks or has invested in the mutual funds.
We hope this blog has given you the required knowledge of some key factors one should know before getting started with Mutual Funds.