Breaking down mutual funds: What you need to know
Blog Post
In the recent decade, mutual fund investments have gained a lot of traction among investors. This is because of their multiple benefits and different types of investment options.
Essential factors driving mutual fund investments include the option to invest as low as INR 500 through Systematic Investment Plans (SIPs) and professional management. Also, mutual funds give investors the advantage of investing without a demat account.
This article breaks down mutual funds for beginners and helps understand the basics of investing.
Breaking down mutual funds: What you need to know
What are mutual funds?
A group of investors mutually come together to invest in a basket of securities, including stocks, bonds, government securities, money market instruments, or gold. The collected sum is invested by professional fund managers in different assets depending on the type of mutual fund selected.
Once the investment starts earning profits, the profit is distributed proportionately among the investors. The fund first deducts applicable expenses and levies, by calculating the scheme’s Net Asset Value (NAV). Mutual funds issue “units” against the amount invested at the current NAV.
Also Read: How an SWP (Systematic Withdrawal Plan) helps you generate regular income from your mutual fund
How does a mutual fund work?
Depending on the investor’s financial goals and risk tolerance, they can select either an equity, debt, or hybrid mutual fund to build their investment portfolio. Funds like equity require a longer investment horizon, while for short-term financial goals, an investor can opt for debt funds.
An investor can earn from mutual funds through either interest and dividends or capital gains. The interest and dividends are paid out when the fund's underlying investments generate profits. If an investor sells their units for more than the initially amount, they will earn capital gains.
Mutual funds are ideal for investors who want to grow their wealth but lack the time to conduct research or are still learning. They can start with a small investment through the SIP mode and gradually build their portfolio over time.
Why invest in mutual funds
Investment goals vary among investors and can include objectives such as wedding, house purchase, children’s education, post-retirement funds, and many more. The goals can be achieved with different types of mutual funds.
Another major advantage of mutual funds is diversification across various asset classes and securities. For instance, if an investor invests in a large-cap equity mutual fund, even if one of its underlying stocks performs poorly, the overall performance of the fund will be balanced out by the other underlying stocks.
Some other benefits of mutual fund investments include investing in a variety of securities for a low cost and professional management by expert fund managers.
Important points to remember
- A mutual fund is a share pool of capital from multiple investors, managed by a professional fund manager.
- In India, mutual funds function as a trust under the Indian Trust Act of 1882, under the Securities and Exchange Board of India (SEBI) (mutual funds) Regulations of 1996.
- The fees and expenses that mutual funds charge for managing a scheme, known as the expense ratio, are regulated and must adhere to the limits set by SEBI.
Conclusion
Mutual funds offer a versatile and accessible way for individuals to grow their wealth with the assistance of professional management and a diversified portfolio. Investors can pick from a range of different mutual fund schemes depending on their goals, risk tolerance, and investment horizon. Mutual funds also offer the benefit of investing through SIPs, allowing investors to gradually build their portfolios over time
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