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All you need to know before investing in mutual funds

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Created on
July 25, 2022

Summary

What’s Inside

In many ways, the mutual fund investment process in India is like buying a new mobile phone. Buying a good mobile has always been a challenge. Choosing the best one can be daunting since there are numerous options to choose from.
The process for investing in mutual funds is kind of similar. With each fund having its own sets of pros and cons, you need to define your objective and invest accordingly. Worried? This piece will take you through how these funds work and what you need to consider before investing in the right fund.

How mutual funds work

Mutual funds operate by pooling capital from several investors to purchase assets such as stocks, bonds and other tradable securities in the markets. In other words, when you invest in a mutual fund, you’re investing in a bunch of regulated assets in different asset classes. This is one of the best ways to diversify your investment and lower the risk on your portfolio. 

All the investors partake in the risk and rewards when investing in mutual funds. Depending on how the funds are managed, mutual funds are broadly two types.

Actively managed funds 

These are handled by fund managers that keep investing the collated capital into prospective assets aimed at growth. Usually, these funds aim at generating returns higher than the benchmark like Sensex and Nifty. Hence, they require the constant attention of the fund manager as it has a lot to do with the performance. These usually offer a high-risk, high-reward scheme.

Passively managed funds 

These don’t require the fund manager to be proactive compared to actively managed funds. They usually have a defined set of assets under their portfolio based on the nature of the fund or the maturity goals. These funds offer moderate returns and tend to follow benchmark returns. 

There are other classes of mutual funds based on the risk profile and asset class. These include sector funds that invest in businesses operating in a particular sector such as insurance or real estate; growth funds which invest in company stocks and equity shares; fixed-income funds which invest in treasury bonds, company debentures, etc.

What’s in it for me?

Mutual funds are one of the country’s most popular investment options today. It’s also because the mutual fund investment process in India is simple. You’ll be surprised to find out that in FY22, mutual funds added over ₹3 Cr investor accounts as compared to 81 lakh accounts the previous year. So here’s why you should invest.

  • You can diversify your investments in one go without paying significantly high charges.
  • You share the risks with all the other investors, thus decreasing your chances of loss. 
  • Mutual Funds are closely regulated by SEBI in India, which means the chances of scams or manipulation are low.
  • You can invest with an amount as low as ₹500 in a monthly systematic manner.
  • Mutual funds are managed by experts who research on your behalf, so you can benefit from their expertise and experience in the domain. 
  • Low surcharges, no account opening fees, and low maintenance charges.
  • You get various options to choose from different types of funds. For instance, some funds offer high growth, capital stability and other tax benefits. You can review these funds and opt for the plan that suits you best. 
  • The mutual fund investment process in India offers a wide range of modes you can invest through, including systematic investment plans, systematic transfer plans, systematic withdrawal plans, and one-time investment options. 
  • Certain mutual funds allow you to withdraw even before the stipulated maturity period, thus keeping your portfolio relatively liquid. 
  • You can keep a tab on the performance and also read about the fund and its goals before investing.

Anything else I need to be aware of?

All investments are subject to market risks, so it’s advisable to read all the scheme-related documents carefully before investing. On that note, here are a few fine prints you should be aware of when choosing a mutual fund that works for you:

  • Note the maturity period for the fund and understand whether it allows you to withdraw before the given maturity period. Also, understand if there are any exit charges involved with such untimely withdrawals. 
  • SEBI has categorised companies into large-cap, mid-cap and small-cap options. And fund managers invest in these depending on the fund objective. Understand these limits associated with the mutual fund so that it suits your investment objectives. 
  • Keep track of the Net Asset Value (NAV), which determines the fund's market value per unit, which will help you figure out if it is an expensive or balanced option.
  • Know the specific market that your fund is investing in to stay ahead of the risks associated with the volatile nature of the equity markets. 
  • All funds come with some fees beyond the taxation and company charges. This is known as the expense ratio. While SEBI has capped this at 2.25%, several funds charge only around 0.8-1.5%. A lesser ratio means more returns in your account.
  • Research on the performance of the fund and the assets under its management. The better the performance, the more credible the mutual fund is. 
  • Check the expertise of the fund manager or investment officer in charge of managing the fund and asset diversification. 

To Conclude

Investing in mutual funds is a lucrative option to grow your current savings. So regardless of whether you’re an experienced professional or a novice investor, the process for investing in mutual funds is relatively straightforward. I’m not the best at deciding on the perfect mobile for myself, but I certainly don’t want to lose out on choosing the right investment.

Learn more here: A Mutual Fund Deep Dive: Mahindra Manulife Mutual Fund

Frequently Asked Questions

1. What is the first basic process for investing in mutual funds?

Mutual Funds are financial products that make investing effortless & safe. First, it pools money from many investors. Next, it appoints highly skilled professionals who research & invest the funds on your behalf. Money managers will track the ever-changing financial market & try to make sure your investment performs well. Plus, Mutual Funds offer complete transparency. You can quickly learn where & how your money is being invested. All this costs very little! Thus, Mutual Funds provide great value for money — especially as you start your investment journey. Invest in commission-free Mutual Funds on Fi Money

2. What happens when you invest in mutual funds?

When you invest in a mutual fund, your money goes into a bunch of regulated assets in different asset classes. This is one of the best ways to diversify and lower risk levels in your portfolio. Mutual funds are broadly two types depending on how the funds are managed.

Actively managed funds: 

-Has fund managers that keep investing your money & try to grow it 

-Tries to generate returns higher than the benchmark like Nifty

-Offers a high-risk, high-reward scheme

Passively managed funds: 

-Don’t require the fund manager to be proactive 

-Usually have a defined set of assets under their portfolio

-Offer moderate returns and tend to follow benchmark returns 

 

3. What are the 3 types of mutual funds?

Mutual Funds are broadly divided based on structures, asset class, investment objectives, speciality and risks. There are 3000 mutual funds in the Indian market at the moment. But here are the 3 main types of Mutual Funds:

Equity Funds:

Such schemes select & manage stock portfolios on your behalf. Your money is placed in stocks — certificates claiming you own a microscopic slice of a company. There’s an element of risk in such investments, as it depends on how well a company fares.

Debt Funds:

Debt is a way for companies/governments to raise money; your investment is a loan to them. Borrowers typically return the cash in monthly/yearly interest payments & a principal payout. Debt funds invest in safe bonds where payback is consistent — it’s less riskier than equity.

Hybrid Funds:

This is a good instrument to spread your risk. Hybrid funds invest in more than one asset class like equity, debt, gold, etc. Depending on your risk appetite, you can choose the hybrid fund that suits you the best.

Disclaimer

Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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