Mutual funds: An Overview
First and foremost, Have you invested in mutual fund schemes without knowing it. In a layman’s language mutual fund is pool of fund created by the small investors. The purpose is to invest it in to financial market. For better understanding, See the table below.
You can understand from the table above that how different investors have different amount to invest and how all funds put together collectively making mutual fund. Fund managers will manage these fund with their expertise.
Objective of mutual fund:
First of all you must understand the types of Mutual Funds that are available which includes:
Equity: These are funds that invest exclusively in the stocks of domestic companies listed on stock exchanges. These are categorized as high-risk funds.
Money market: Investors looking for easy liquidity and returns in the short-term. These funds invest in money market instruments such as Treasury bills (T-Bills), Commercial Papers (CPs), and government securities.
Debt: These are funds that are considered as an alternative to Fixed Deposits. These funds invest in fixed-income securities. Debt funds are typically low-risk funds.
Hybrid or balanced: These funds invest in both fixed-income securities (debt) and stocks (equities), thereby offering a balanced portfolio to investors.
Why you should invest in mutual fund?
Being a retail investor you don’t have a professional expertise to choose from funds. I am explaining few reasons below:
Mutual Funds allow you to diversify your investment across assets and asset classes, something that is very difficult to do on your own.
There will be an option to pick any type of fund as per your risk profile, and bundle all of them into a single portfolio. Data about the performance of the funds is easily available for you to take those buy and sell calls.
The fund managers of Mutual Funds are usually highly experienced in their respective fields and will have years of experience handling different types of assets. So, you must know the profile of your fund manager so that you know who’s actually handling your hard-earned money.
There’s nothing more convenient than a central database providing you with all the required information and even highlighting what’s best for you. This is possible through Mutual Funds.
Your Fixed Deposit may be offering decent returns with little option for liquidity, or the stock market may give you decent returns with easy liquidity and a high probability of losses. A Mutual Fund is a fine balance between the two offering you good returns while providing you with decent liquidity. As a results you get flexibility.
You need to invest in Equity Linked Savings Schemes (ELSS) of Mutual Funds for the same. However few schemes offers tax rebate.
Net asset value(NAV) is the value of a fund’s asset less the value of its liabilities per unit.
I think this generic definition confused you. In simpler terms you can understand; Suppose you have Rs 1000 with you and you have to purchase pastries and cost of 1 pastries is Rs 50. How many pastries you can purchase, of course 20 pastries. Consider cost of pastries is your net asset value and total no. of pastries you bought is the units that you got.
Net asset value always fluctuates day to day and rates are different as per market condition. Assume if you are investing Rs 2000 per month, Net asset value will be different and the units which you will get will also fluctuate. Higher the NAV lesser units and Lower NAV higher units you will get.
Systematic investment plan
I think you all must understood that what mutual fund is all about and why they are better way of investments. Now what about systematic investment plan(SIP). They allows retail investors to invest periodically in a systematic way. There is a flexibility to opt for monthly, quarterly, half yearly, or annually. They are better mode to invest in mutual funds. A simple table below will clear all your doubts about SIP.
|MONTH||SIP AMOUNT||NAV||UNIT PURCHASED|
What’s say it’s easy or hard to understand.
Next you can see how Rs 2000 invested every month where NAV was different and you tends to get different units every months and at the end your amount will mature with the total NAV you hold. The major benefits that you get is you are are investing systematically and at the end averaging of all units may gets good profit. All things considered but it does not guarantee that it will benefits and usually monthly/quarterly/half-yearly investments lowers the risk.
For this reason “Invest now and reap benefits later”. Above all in investments there is a saying start early stay for long and meet your financial goals.
Hope this article helped you to enhance knowledge.