What is Mutual Fund ?
- To many people, Mutual Funds can seem complicated or intimidating. We are going to try and simplify it for you at its very basic level. Essentially, the money pooled in by a large number of people (or investors) is what makes up a Mutual Fund. This fund is managed by a professional fund manager.
- 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. Simply put, a Mutual Fund is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
What are the different types of mutual fund schemes?
A) Schemes according to Maturity Period:
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.
i) Open-ended Fund/ Scheme:
An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.
ii) Close-ended Fund/ Scheme:
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.
B) Schemes according to Investment Objective:
A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:
i) Growth / Equity Oriented Scheme:
The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.
ii) Income / Debt Oriented Scheme:
The aim of income funds 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. However, long term investors may not bother about these fluctuations.
iii) Balanced Fund:
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.
iv) Money Market or Liquid Fund:
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.
v) Gilt Fund:
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.
vi) 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 launched by the mutual funds which are traded on the stock exchanges
How to invest in Mutual Fund?
There are various platforms available for investment in Mutual Fund :
i) Paytm Money
ii) Zerodha
iii) Direct investment through Banks
i) Paytm Money App:
Under this you just Sing In your account in Paytm Money App or Website if, you have already your account with paytm.
After Sing In you will see the options of Scheme of Mutual funds as i have mentioned above for your information.
Note :- Tax Saving scheme Mutual Fund (ELSS scheme) are generally 3 years lock-in-periods if, you will invest in this scheme then you could not withdraw money until 3 years lock-in-periods are completed.
ii) Zerodha
In Zerodha you need to open demat account with zerodha. After that you need download Coin Zerodha App or website.
In which Mutual Fund Scheme we should invest?
As we know that various scheme of mutual funds are available in the market by many assets management companies like HDFC Tax Saving M.F. , SBI Blue Chip M.F., ICICI Direct Growth, HDFC Nifty 50 M.F. etc.
So, it's very confusing in which Mutual Fund we should invest as there are various schemes of mutual fund of various companies are available. Hence, we should take proper care while investment in mutual fund. Because, one wrong step give you heavy loss. Therefore, i will tell you information which help you make more profit and more return return in comparison of various scheme of mutual funds.
i) Fund Manager and their experiences:
This is the various important factor we should check before investment in any scheme of mutual fund. Before investment always check who is the Fund Manager? How much experience they hav?, How many fund they have managed and are those fund give better return in last 5 years?
In my personal experience i always check that Fund Manager have good experience and are they have managed any fund and their return.
ii) Scheme Assets Size:
Always invest on those mutual fund whose Scheme Assets Size are above 1500 Crore but note more than 5000 Crore. Because in medium size, fund manager effectively manage the fund of investors. In small size, it's represent that investors are not investing their fund in this scheme and in Large size fund manager couldn't manage the fund effectively due to heavy flow of fund.
Hence, my personal suggestion is that invest in medium size scheme.
iii) Allocation of Funds:
I always check that in which companies funds are invested. This information available in allocation section of scheme.
I'm suggesting to see allocation of fund to check that whether fund manager are utilising your money to invest in goods companies or not.
If, they are invested in big companies like HDFC, Infosys, Asian Paint etc. then there would be low risk. When big company market shares goes down then it would be better to invest in mutual fund at that time because when price goes up then it will give you have return.
Note:- Always select for SIP investment method because when market down or up it give you constant return in comparison of Direct/Lumpsum Investment. However, you could invest Direct/Lumpsum like SIP.
For Example: When NAV goes down invest Rs.500 as Lumpsum and when NAV goes up hold for months. Only headache in Lumpsum investment method is to check whether NAV does down or not. But in SIP it will automatically invest every month what ever amount you set for SIP investment method.
Note:- Before investing check Exit Load. Suppose, if you want to withdraw from mutual fund due to some emergency then it will cost you lest at the time of exit.
Note:- Always invest in famous mutual fund like HDFC, Axis , ICICI etc. Since, their Assets are managed by well qualified Fund Managers.
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