Mutual Fund Fundamental

Mutual Funds –

Mutual funds are managed by an ‘Asset Management Company’ (AMC). There are various AMCs in the market according to investment goals, types of assets, the value of investments etc.

In simple terms, Mutual funds are the common investment by various investors towards the pre-stated objective of the scheme. The AMCs study the market conditions and invest the money in multiple assets at a single time. There are various types of AMCs like equity, instruments etc.

Mutual funds give an opportunity to get the benefits of the large returns of share market with a relatively lowered risk.

 

Benefits of Investing in Mutual Funds –

 1. Professional Management –

As stated earlier, the mutual funds are managed by the AMCs. As AMCs are the companies founded especially for the asset management, they have professionals working exclusively for this purpose. As these professionals manage the investments made by the investors, there is very high probability of profit makings for the investors.

 

2. Low Risk –

In mutual funds, the investors need not research the assets on their own to invest. As stated earlier, the mutual funds are managed by the professionals in the AMCs. This reduces the potential risk in the investment by a significant amount for the investors.

 

3. Low Investment Threshold –

The mutual funds offer very low participation amount starting from ₹5,000. Through the SIP, the investor can participate in mutual funds at even lower amount, as low as ₹100 per month. This low investment amount enables everybody, including middle and low income groups to get benefits of stock market.

 

4. No Need of Deep Market Study –

As mentioned earlier, the investors do not need to engage directly in the study of stocks for investment. They just need to study the AMCs, which is relatively very easy. The investors can study just the AMC’s return percentage for last several years, the threshold for participation amount and SIP instalment.

 

5. SIP (Systematic Investment Plan) –

The SIP is very similar to the term Recurring Deposit (RD) in regular banking. In the SIP, the investors need to pay some fixed amount of instalments per month toward the mutual fund. This enables the investor to participate in the mutual funds at very low amount starting from ₹100 per month. This is very beneficial for salaried income groups, who cannot invest a large amount lump-sum, but can afford to invest a small fixed amount per month.

 

Investment in Mutual Funds –

There are few things that need to be considered while investing in the mutual funds. The investor has to invest in the mutual funds through AMCs. The main things to be considered while choosing an AMC are as follow-

1. Past Performance –

The AMCs are bound to provide all the detailed information about their past financial performance. This past performance include the details such as returns, investment amount, net asset, exit time and AMC registration details.

 

2. Net Asset –

The net asset of an AMC shows what type of the company it is. The net asset provides the information about the type of asset the AMC is investing in. Some examples of such assets are – Equity, Debt and Futures etc. Normally, any AMC trades in various kinds of assets simultaneously by dividing their assets.

 

3. Investment Amount –

The AMC provides the information about the minimum required investment value to participate in mutual funds or minimum required SIP to participate in the mutual funds. The investor needs to choose the AMC according to his financial convenience.

 

 4. Exit Time –

There is a fixed minimum exit time for every AMC’s mutual fund. Normally, the AMCs offer the minimum exit period after 1, 3 or 5 years. There are some AMCs which offer the small exit periods as 1, 3 or 6 months. The investor can keep invested after this exit period but if he wishes to exit before this exit period, he needs to pay some fine, same as F.D. or R.D.

 

5. Returns –

The return is simply the amount the investor is getting from his mutual fund investment. All the AMCs provide the information about their past returns up to 5 years. This return is provided in the form of percentage of investment.

 

6. Risk Factor –

The investor needs to choose the AMC according to his risk bearing capacity. This information can be found on some financial information websites or through broker-firms. High risk taking AMCs often yield higher returns but sometimes may result in losses also. Low or moderate risk taking AMCs offer relatively low returns but mostly are secured against losses.

It is often good to invest in more than one type of mutual fund for minimizing the risk and maximizing the profit.

 

Trading in Mutual Funds –

Trading in mutual funds is very similar to the trading in simple share market. First opening a demat account with broker or broker firm, then selecting the AMCs or mutual funds to trade in, and then confirming the buy/sell order.

There are few things that need to be considered while trading in the mutual funds.

 

1. Long Term Performance –

The mutual funds must be evaluated based on their long term performance as 1 to 5 years, not by their short term performances. Choosing the mutual funds based on the short term performances may be proved as a wrong investment.

 

2. Patience in Selling –

Patience is very important while trading in the mutual funds. Mutual funds operate on long term basis, so, they may look like low performers or sometimes even make loss for a small span of time. But if considered for a long time span, like 1 to 5 years, these mutual funds often yield reasonable profit. So, the investors should hold such low performing mutual funds for at least a year before deciding to get rid of them.

 

 3. Broad Choice of Mutual Funds –

As there are many things in stock market which are often unpredictable, even the well-performing mutual funds are not always 100% risk-free. So, the investor should always invest in more than one type of mutual fund rather than keeping a narrow choice about mutual fund.

 

Types of Mutual Funds –

Based on Fund Scheme –

1. Open Ended Scheme –

Open-ended schemes do not have fixed priority. The fund can issue units whenever it wants. These schemes have unlimited capitalization and do not have a fixed maturity date. These funds are not generally listed on any exchange. The unit capital of open-ended funds are often volatile and may fluctuate on a daily basis.

2. Close Ended Scheme –

Close-ended scheme have fixed maturity periods. Investors can buy into these funds are open in the initial issue. Once that window closes, such schemes can not issue new units except in case of bonus or right issues.

 

Based on types of assets –

1. Equity –

The equity asset mutual funds invest only in stocks. They are often high-risk and high-returning funds.

 

2. Debt –

The debt asset mutual funds invest in debt instruments such as bonds, debentures, government securities etc. They often offer a fixed interest over period of investment. They are low-risk and low-returning funds.

 

3. Hybrid –

As the name suggests, the hybrid mutual funds invest in both stock market and debt market. They are relatively preferred because there is relatively low risk with good return capacity.

 

 

 Based on Returns –

1. Fixed Income Funds –

It offers a fixed amount of income on a fixed interval of time. They are very similar to debt funds and are of low-risk. But a high-amount of profit is very unlikely through these funds.

 

2. Growth Funds –

They are often high-risk funds. They mostly invest in equities. They promise capital returns in long-term. They usually provide relatively low dividends.

 

3. Balanced Funds –

They are like hybrid funds. They invest in both equities and debt funds and try to find a profitable mid-point between risk and income.

There are various other types of mutual funds like Tax-Saving mutual funds, Sector mutual funds, Real Estate mutual funds and so on.

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