A mutual fund is formed when an asset management firm (AMC) collects contributions from multiple individuals and institutional investors with similar investment goals. A fund manager professionally manages pooled investments by strategically investing in securities to maximize returns for investors as per the investment objectives of the fund. Fund managers are experts who have a proven track record of managing investments and a thorough understanding of the markets. Cost ratio is the annual fee charged by the fund house to operate the mutual fund. Investors benefit from regular dividends/interest and capital appreciation. They can either reinvest their capital gains in the growth option or earn consistent income in the dividend option.
Types of Mutual Funds
Depending on the structure, mutual funds can be classified as closed-ended or open-ended schemes. Mutual funds can be divided into three categories based on their nature: balanced, debt and equity. There is overlap in the classification of some schemes, such as equity growth funds, which can be classified based on nature as well as investment objective. Below, we have listed and discussed three different types of mutual funds:
Growth or Equity Scheme
These funds invest in equity shares with medium to long term capital gains targets. Due to their connection to extremely unpredictable financial markets, they come with substantial risk, but in the long run, they also offer good rewards. As a result, these schemes appeal to investors who have a high tolerance for risk. Growth funds can also be broken down into sector, index and diversified funds.
loan fund
Also known as fixed income funds are investment vehicles that focus on fixed income or debt assets such as debentures, corporate bonds, commercial papers, government securities and various money market instruments. Debt funds can be the best option for people looking for a consistent, reliable and risk-free source of income.
balanced fund
Investments in both equity and debt instruments are made by Balanced Funds. With these products, investors can anticipate both stable income and growth. They provide a solid investment option for those willing to take reasonable risk over the long or medium term.
How to invest in mutual funds?
Invest offline directly with the fund house
You can invest in mutual fund schemes by visiting the nearest branch office of the fund house. Just make sure you have a copy of the following documents –
- Address proof
- de-identify
- cancel check leaf
- passport size photograph
The fund house will send you an application form, which you have to complete and submit along with the required documentation.
Offline investment through broker
A mutual fund broker or distributor is the one who guides you through the entire process of investing. He will provide you with all the information you need to make your investment, such as features of different schemes, required paperwork, and so on. He will also advise you on which schemes to invest in. He will charge you for this, which will be deducted from the total investment amount.
Online, through official website
Most fund firms now offer the option to invest in mutual funds online. All you have to do is follow the instructions given on the official website of the fund house, fill the required information and submit. You can also complete the KYC process online (e-KYC) by entering your Aadhaar number and PAN. The information will be validated on the backend, and once complete, you can start investing. Most investors prefer the online process of investing in mutual funds as it is simple, quick and hassle-free.
using an app
Many fund firms allow investors to invest through an app that can be downloaded to their mobile devices. Investors can use the app to invest in mutual fund schemes, buy or sell units, check account statements and other facts about their portfolio. SBI Mutual Fund, Axis Mutual Fund, ICICI Prudential Mutual Fund, Aditya Birla Sunlife Mutual Fund and HDFC Mutual Fund are among the fund institutions that accept investments through mobile apps. Some apps, such as myCAMS and Karvy, enable investors to invest and access details of all their investments from multiple fund houses from a single platform.
Things to Consider Before Investing in Mutual Funds
Set your investment goals
This is the first step to invest in mutual funds. You need to specify your investment objectives, which include buying a house, funding a child’s education, planning a wedding, retiring, etc. If you don’t have an exact goal, you should at least know how much money you want to deposit and when you want to deposit it. Defining an investment objective allows the investor to narrow down investment possibilities based on risk level, payment method, lock-in period, etc.
Meet KYC standards
Investors must follow KYC guidelines to invest in mutual funds. The investor must submit copies of his Permanent Account Number (PAN) card, proof of residence and other documents.
Know about different schemes
The mutual fund industry is full of possibilities. There are plans that meet the needs of practically any investor. Before investing, make sure you have done your homework by researching the market and learning about the many types of plans accessible. Then, combine this with your investment objective, risk tolerance and affordability to see what works best for you. If you are unsure about which program to invest in, seek the advice of a financial professional. In the end, it’s your money. You must guarantee that it is used for maximum returns.
Consider Risk Factors
Keep in mind that there are many risks to investing in mutual funds. Substantial-benefit plans are often associated with higher risk. If you have high risk tolerance and want to get high returns then you can invest in equity programs. On the other hand, loan schemes are suitable if you do not want to risk your investment and are okay with modest returns.
How much does it cost to invest in mutual funds?
The value of the fund is determined using the Net Asset Value (NAV), which is the value of the portfolio after expenses are deducted. AMC calculates it at the end of each business day. Your administration fee from the AMC will go towards paying their salaries, brokerage fees, advertising and other administrative costs. An expense ratio is commonly used to measure this. The expense ratio determines how much it will cost to invest in a certain mutual fund. AMCs may also impose loads, which are essentially sales charges that the business must pay for delivery.
Benefits of Investing in Mutual Funds
business management
Mutual funds are managed by expert fund managers who do market research and analysis, choose appropriate stocks, and then buy and sell them at the right time to get favorable returns on your investments. Before investing in a company’s stock, fund managers evaluate its performance. When you buy units in a mutual fund scheme, the Scheme Information Document (SID) will contain a professional overview of the fund manager, including years of work experience, type of funds managed and the performance of the funds managed by him. , As a result, you can rest assured that your money is in good hands.
increased profits
Mutual funds provide better returns on your investments by investing in different types of assets like fixed deposits (FD), recurring deposits (RD), and so on. Equity mutual funds offer investors an excellent ability to experience high returns while simultaneously taking on high risk, making them perfect for investors with a high risk appetite. On the other hand, debt funds are less risky and offer higher returns than fixed deposits.
Diversity
Diversification is one of the most important benefits that mutual funds provide. Mutual funds reduce portfolio risk by investing in a wide variety of asset types and stocks. As a result, even if one asset/stock performs poorly, the performance of other assets can compensate and you can still enjoy favorable returns on your investment. You can further reduce the risk by diversifying your portfolio by investing in different types of mutual funds. If you are unsure about which funds to invest in or how to diversify or balance your portfolio, seek the advice of a financial professional.
Facility
Many fund firms offering online investments have made investing in mutual funds quick, easy and convenient. You can start investing in the mutual fund plan of your choice by just clicking a few buttons. Even the KYC process is now available online, with investors able to contribute up to Rs 50,000 through the e-KYC facility. However, for investments above Rs 50,000, investors will have to complete the physical KYC process.
