In this guide you will gain the knowledge about Mutual Funds and if they are same or different than the Stock Market. More importantly, how they can benefit you. So let’s start.
When we were young & healthy we were told to eat well, study well & live well. With times gliding down the aisle of adulthood, we were forced to find ourselves a work which pays us and with that came the golden saying – ‘Savings for the rainy day’. Very true indeed.
With time, things change and so do our lifestyles. Now for starters we all want an iPhone or price equivalent android phone and boy, they don’t come cheap. Nothing comes easy or as free lunch.
The question is how you would accomplish that? The answer is simple – Compound Interest, nah, that comes little late, first you invest and then with the returns you invest again and that’s how you double triple your earnings over the years.
What is a Mutual Fund? The Basics
To begin with the basics, you are new in the market, you haven’t yet explored the possibilities and the opportunity the market holds for you.
Let’s take a case scenario, you heard people invest in stock market and they earn 10%-20% return on their investments and they buy a new car, new this, new that. You really want to be there, but how?
Simple, since you are new to the market and it will take time for you to study and get to the core of it, you decide to take your money and go to a broker, now broker is a person who will invest your money with his knowledge about the market, simply put, he will invest in stocks which he believe will rise in value over time and for that he charges a small fee.
What are these stocks? They represent the company which is working day in and day out to provide the world with one service at a time, and now how well the company does economically decides how it will do in the Stock Market. Keeping in mind you being a newbie on the block, how would you know about the company’s annual growth and how that company is going to perform in the Stock Market. Even if you did know, but you are too busy with your own work life that you ain’t got no time to study.
Now, just like the broker you met above, who would help you invest your money, you have another broker who is already working for you without you reaching out for help.
Welcome to the world of Mutual Funds.
Answering the basic question – Mutual Fund is an investment option where a group of investors mutually invest their money across stocks, shares, bonds and other securities.
The Asset Management Company’s (AMC’S) are the one’s who take care if the investors money.
There is usually a Fund Manager who invests this money on their behalf for a small fee. These fund managers then invest the pool of money they have collected from investors across various portfolio’s to help your money grow at a desired rate and help you with solid returns.
Who is it for?
It is for you, him, her, them and anyone who wants a safer way to invest money without doing too much of market research.
Also, every investor is an investment so it doesn’t really matter if you have been in Stock Market from past 5 years hence you should not invest in Mutual Funds, there is nothing like that.
In fact, it’s always good to diversify your investments and portfolio.
The first mutual to launch in India was the Unit Trust of India (UTI), which was launched in 1963. Today, mutual funds in India manage over 20 lakh crores of assets.
Benefits of Investing in Mutual Funds in India
The beautiful benefit of mutual funds is that the investor can redeem the units at any given point in time. Unlike Fixed Deposits, Mutual Funds are flexible when it comes to withdrawal of funds, however, pre-exit penalty or exit load should be taken into consideration.
Safe and Transparent
Yes, you will be handing your money in someone else’s hands, however, they are experienced fund managers, whose results you will be able to see in real time and take a good decision. This making sure everything is transparent and works with you.
‘Never put all eggs in one basket’. One of the most important aspect to save your investment in a sudden market fall is Diversification as it helps you to have a variable portfolio which ensures that if one security is affected due to certain market conditions, it does not impact all of your investments.
With Fund Managers and their knowledge they invest your money in segments across various securities like Company Stocks, Bonds, funds to safeguard your interest.
Awesome Tax Saving option
ELSS Mutual Fund helps in getting yourself Tax Exemption of 1.5 Lacs a year under section 80C of the Income Tax Act, is actually sweet. Yes, it’s a drop in the ocean, I had say whatever good comes let it come, no matter how small it is.
All other Mutual Funds in India are taxed based on the type of investment and the tenure.
Plus ELSS Mutual funds have higher tax saving benefits than other saving schemes like PPF, NPS, Tax saving FD’s.
Convenience of Expert Management
With some one else doing the homework for you, I think it’s the easiest way to complete homework. Yes, the fund managers do the same for you, the fund houses where they work and help your money grow is a gem of a thing to have.
Lowest Lock-in Period
Tax Saving Mutual Funds have the lowest lock-in period of 3 years, which is lower than the 5 years for FD’s or other similar schemes.
The best part is you always have the option to stay invested after the completion of the basic lock-in period. Hence if you see good returns why not invest again and again and grow.
Types of Mutual Funds
Mutual funds being so flexible and content with scope for the future, they also have an excellent diversity. Each Mutual Fund is tailored for a specific objective, which means they provide you with more options to choose from based on your investment goals. Some popular funds types are –
These are funds with their assets invested only in stocks. They do grow at a faster pace than the money market or fixed-income funds. However, yes they usually involve more risk. Different types of equity funds includes – Growth Stocks, Income Funds, Value Stocks or a combination of these.
These funds are also called Debt Funds which are invested only in Fixed Income Securities. These funds pays a fixed rate of return, and are very much similar to government bonds or securities, investment linked corporate bonds and high yield corporate bonds. Yes, they are safe investment options as the risk element is less and the returns are usually consistent. These funds are not affected by the fluctuations in the market, hence they are good for investors having a long-term outlook to seek appreciation over a period of time.
These funds are partially invested in Stocks and partly in Fixed Income securities and thus maintaining a balance between high returns and risk potential. The money is split among different investments. The risk factor is somewhat more than Fixed Income Funds but lesser than pure Equity funds. With this option, you can have taste of little thunder while you invest.
Money Market Funds
These are the funds invested in short term fixed income securities such as government bonds, treasury bills, commercial paper and certificates of deposit. Money market funds are considered to be a safer option, but with lower return potential than other mutual funds.
These funds are aimed to track the performance of a specific index such as Nifty or Sensex. The value of the mutual fund will fluctuate with the value of the index. Index Funds typically have lower costs than other managed mutual funds because the portfolio manager doesn’t have to do as much research as they would have to do for other investments. More common when you invest in US market through an Asset Management Company (AMC) in India.
‘Some Mutual Funds are open-ended, while other’s are close ended’ – Click here to read more
Exchange-Traded Funds (ETFs)
ETFs, like the Index Funds are mutual funds traded on the Stock Exchange like shares. An ETF holds assets such as stocks, commodities or bonds. This offers the flexibility of purchasing and selling of units on the stock exchange throughout the day. Still a safer option than dealing with individual company stocks.
These funds are specifically focused on securities such as real estate, Auto, pharma, commodities or socially responsible investing such as a fund for a company that supports environmental cause or human rights, etc.
These funds invest in other funds. They are similar to balanced funds, where they make asset allocation and diversification easier. The Managing Cost (MER) for Fund-of-Funds tend to be higher than exclusive mutual funds.
- Mutual Funds are best for you if you feel you lack the required knowledge of market or it is going to take time to figure out best investment options for yourself.
- Mutual funds are maintained by Fund Manager or schemes of banks. Hence making the information about them genuine.
- Asset Management Companies (AMCs) maintain mutual funds according to investment objectives.
- Each mutual fund is there to fulfill a specific purpose depending on which scheme is chosen –
Equity, fixed-income, balanced, money market, index, specialty, fund-of-funds are some of the popular mutual fund investment plans.
All in all Mutual Funds Sahi hai. It just depends on your investment goal and return aspirations with which you can decide on where to invest, how much to invest, rest assured if done with correct understanding and expectations you are going to rock your investments and roll the dice in your favor.