Mutual Funds

What is Mutual Fund ?

Mutual Funds are the money pooled in by a large number of people (investors) is what makes up a Mutual Fund. These funds are managed by a professional fund managers. The common objective of mutual funds are generating income by investing in equities and debt markets.

It is a trust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities. Each investor owns units, which represent a portion of the holdings of the fund. The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value or NAV.

Benefits of investing in mutual funds

We invest in various investment avenues based on our requirements, e.g. for capital growth – we invest in equity shares, for safety of capital and regular income – we buy fixed income products.

To manage investments, one can outsource certain tasks one is unable to do. Anyone can outsource ‘managing one’s investments’ to a professional firm – the Mutual Fund company. Mutual Funds offer various avenues to fulfill different objectives, which investors can choose from based on one’s unique situation and objective.

Mutual Fund is a great convenience for those who need to invest their money for future requirements. A team of professionals manages the money and the investors can enjoy the fruits of this expertise without getting involved in the mundane tasks.

Type of Mutual Fund Schemes

Equity Funds

The objective of Equity funds is to provide capital appreciation over the medium to long- term. Equity schemes normally invest a major part of their corpus in equities Min 65% to Max 100 % in equites. Such funds have comparatively high risks and higher return possibilities. Equity Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.

Debt Funds

The aim of Debt Fund is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa.

Balanced Funds

The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

Liquid / Money Market Funds

These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

Gilt Funds

These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.

Index Funds

Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc these schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as “tracking error” in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.

There are also exchange traded index funds (ETF) launched by the mutual funds which are traded on the stock exchanges.

Savings vs Investing

Most of us think that Saving and Investing are the same thing. While the terms are often used interchangeably by many, they are as different as chalk and cheese. The difference between your monthly income and your expenses is what constitutes your “savings”.

But when you multiply the money you save by putting it in various asset classes such as stocks, bonds, real estate or gold, you are creating wealth by “investing”.

Money kept in a safty valult though sage does not generate adequate returns to beat inflation. Money invested in products like mutual funds is subject to risk but has the potential to grow over time.

The power of compounding

The concept of compound interest that you studied back in high school can turn a few rupees into a sizeable amount over time.

This simple but powerful concept of investing acts as a multiplier in your investment portfolio. The great thing about compounding is that you will eventually reach a point where the amount of money reinvested will become greater than the original principal amount.

All you need to do is start investing early and over time, compounding will grow your money for you. The more you invest at a young age, the more your money works for you over time and the sooner you will achieve financial freedom. Hence, to invest wisely, it is important that you leverage the power of compounding and start saving & investing early.

Advantages of investing in Mutual Funds

Advantages

Easy Diversification.
Professional Management.
Small is enough.
Easy Entry / Exit.
Easy Liquidity.
Short / Medium / Long Term Plans.
Invest for life goals (Education, Marriage, Retirement, Travel, Start up, Create Wealth).
Tax Saving Plans.
Inflation beating returns.
Well Regulated by AMFI & SEBI

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Mutual Fund investments are subject to market risk, read all scheme related documents carefully.