Friday 30 March 2018

Basic Knowledge of Mutual Funds for the Beginners

What is Mutual Fund?


A mutual fund is a collection of investments, such stocks, money market instruments, bonds, gold and other types of securities funds owned by a group of investors and managed by a professional financial manager. A mutual fund investment is like sharing a car ride with the people who are going to the same location or nearest location of your destination. And the driver of the car is a professional fund manager. The fund managers are the experts and their tasks are to analysis the market. They use their knowledge and experience to drive you to your destination.  Basically, the money pooled in by a large number of investors is what makes up a Mutual Fund.

It is basically a trust that collects money from a number of investors who share a common investment goal. Then, the fund managers invest the money in equities, bonds, money market instruments or in other securities. Each investor holds units, which represent a portion of the holdings of the fund. The income generated from this collective investment is circulated correspondingly among the investors after deducting certain expenses, by calculating a scheme’s NAV (Net Asset Value). A Mutual Fund is one of the most feasible investment options for the common investors as it offers an opportunity to invest in an expanded, professionally managed bag of securities at a comparatively low cost.

Mutual funds are managed by the Asset Management Companies (AMCs)


AMCs is a company who takes investor capital and put it to work in different investments including stocks, bonds, real estate, master limited partnerships, private equity, and more. All Asset management companies give investors with more diversification and investing selections. They also hire specialized fund managers who buy and sell securities in line with the fund’s specified objective. AMCs are involved in the daily administration and act as investment consultants for the fund.

All Mutual Funds are regulated by SEBI (Securities and Exchange Board of India). SEBI formulates policies and regulates the mutual funds to guard the interest of the investors.  SEBI also issues rules to the mutual funds and are subject to monitoring and inspections. All mutual funds have a Board of Directors of Trustee that represents the mutual investors' interests in the mutual fund.


Lump Sum Investment or SIP – Which One is Better for You 


A lump sum investment offers more time to investment. This will give the investors higher returns since the power of compounding increases as the time goes by. An investor can purchase their favourite mutual funds unit when the market is in correction mood. One can expect a higher return when they are investing in the corrected market. However in SIP, you will participate in the markets all through higher levels as well as lower levels, and you will get a weighted average return over a period of time.

SIPs (Systematic Investment Plans) are not magic. What this means is that most of the time, under most situations, over a sufficiently long period of time, SIPs will do well. SIP is a consistent investment in a fund of a fixed amount at a fixed frequency, usually monthly. SIPs precisely solve the two main problems that inhibit investors from getting the best possible returns from mutual funds. In SIPs investors automatically buy more units when the markets are low and fewer units when markets are high. This takes the investors to an average price. But if you invest large money in one go, you could end up catching a high point of the equity markets. That means you have invested at a high NAV and that would decrease your gains if the market falls. A SIP is a decent way to invest at an average price over a period of time.


Objectives of a Mutual Fund


The main purpose of mutual fund investment is to provide you higher returns but with lower risk as compared to individual stock and bond investments. Different types of mutual funds objectives are given below:

Growth Fund: 


The main aim of the growth fund is to achieve capital appreciation by investing in growth stocks. The main focus of the fund managers is on companies that are experiencing significant profits or revenue growth, rather than companies that pay out dividends. The expectation is that these fast-growing companies will continue to increase in value, thus allowing the fund to advance the benefits of large capital gains. In overall, growth funds are more volatile than other funds, increasing more than other funds in bull markets and dropping more in bear markets.

Income Fund: 


Income fund is suitable for investors who are looking for a consistent source of income. To guarantee a stable income, a main portion of the asset is invested in bonds, stocks, fixed interest debentures, chosen stocks and dividend-paying stocks etc.

Sector Funds: 


These mutual funds aim to invest only in precise sectors or industries, such as banking, real estate, transportation or healthcare. The main objective of this fund is to maximize the returns by investing in sectors that are flourishing at the moment.

Value Funds: 


This option usually aims of investing in stocks which are underrated in price. Stocks that have less value because of some hitches in the market are expected that once they are corrected, their stock prices will increase. This manner, the investor who has invested in these funds will make a profit.

1 comment:

  1. Thanks for the basic guide!
    Very easy to understand yet quite informative

    Shares to Buy

    ReplyDelete