What is Mutual Fund?: You may hear about Mutual Fund some were. Then the first question that comes to your mind what is a mutual fund? How to invest in a mutual fund? A mutual fund is a very simple asset of investment. You don’t need to go deep into the stock market investment and trading. You don’t need to go deep in Forex market trading. Simply you have to choose one good mutual fund and start investing in it, then your fund manager manages it all.
Some advantages of investing in mutual funds
- You can diversify your portfolio in various assets like stocks, gold, debt, and more.
- You can start investing with a minimum amount(like 100, 500 Rs).
- You can start investing monthly with a SIP (Systematic investment plan).
- You don’t need to open a Demat account.
First Understand What is Mutual Fund?
If I don’t have any idea about how to invest money in the stock market. Then can I hand over my money to any professional investor? The answer is yes. There are so many good companies in the market.
You can invest your money in the market by taking their help. You can indirectly invest your money in the stock market, bonds, cash, and other securities.
Fund managers invest their money in some good schemes called Mutual funds.
What is Mutual Fund?
A mutual fund is actually a typical pool of cash during which investors put off their contributions. This collective money is then invested in respective assets to achieve certain goals.
This collected money can be invested in shares, bonds, gold, real estate, and different related assets. These funds are operated by experienced investors called fund managers or money managers. He always tries to reach desired goals and increase the value of invested assets.
In mutual funds fund managers manage the investment in various assets. It can be one or more than one fund manager according to the requirement and direction of AMC. In the process, fund managers decide when to buy assets and when to sell them according to the investment objective.
Types of mutual funds:
> Equity funds – funds that make investments solely in shares and different equity assets
- Large-Cap – Top 100 companies according to market capitalization
- Mid-Cap – Companies between 101st- 250th according to market capitalization
- Small-Cap – Companies onward 251 st according to market capitalization
> Debt funds – funds that make investments solely in fixed earnings assets
> Money market funds – funds that put money into short-term money-market assets
> Hybrid funds – funds that divide investments between equity & debt to create a balance
How do Mutual funds work?
A mutual fund is ready within the type of belief, which has a sponsor, trustees, Asset-Management-Company (AMC), and custodian. The belief is established by a sponsor who’s just like the promoter of an organization. The trustees of the mutual fund hold their property for the benefit of the unitholders. The custodian, who’s registered with the SEBI, holds the securities of varied schemes of the fund in its custody. The trustees are vested with the overall power of superintendence and path over the AMC. They monitor efficiency and compliance with SEBI Rules.
A fund manager or AMC professional employee has good experience in investing in equity and debt. Who collects money from people and invests in his favorable assets.
That particular AMC could have many mutual funds schemes. People or investors can select a particular scheme according to their needs or which can fulfill their investment goals.
All AMCs are ruled by a Board of Administrators and are available below the SEBI (Mutual Funds) Rules, 1996. The regulator or SEBI has set clear mutual fund laws and requires all mutual fund schemes of an AMC to obviously spell out the fund’s goals in its prospectus that an investor should learn earlier than he/she invests in a mutual fund.
Advantages of investing in mutual funds?
This is one of the best advantages of investing in mutual funds. We can redeem units at any point in time. But if you invest in Fix deposits or PPF then you are unable to do so.
But if you withdraw investment early then you have to pay certain penalties and exit load.
2. Diversified Investment
A good example of diversification is Mutual funds. If the value of certain assets decreases in your portfolio then the value of certain assets increases, in that way volatility in a mutual fund can be balanced. That can help you to reduce risk on investment.
3. Professional Management
If you are new to the market or investing then you can hand over your money to experts. Mutual fund managers have good experience in investing. In that way, you can invest your money in a good palace whether you are a newbie.
Also, you have no time to track the market or to learn the market then also you can invest your money with the help of that professional managers.
4. Can start Investment with a small amount
There is no restriction to start investing big money in mutual funds. You can start investing in a mutual fund with a small amount.
If you are a salaried person then you can start investing monthly with SIP as low as 500 Rs.
5. Low cost
Various mutual funds managers collect money from people and investors and then invest in their schemes. In that process, they charge some fees. That cost is very less compared to other assets like FD, PPF, and ULIPS.
6. Easy to buy
Nowadays Mutual funds are very easy to buy. You can buy a mutual fund from anywhere in the world. You can buy it online and offline both. You can buy mutual funds from
- Directly from AMC
- Brokerage Farms and online platforms.
- Banks and Agents
In that way, you don’t require any Demat account to invest in mutual funds.
7. Good tax-saving option
You can easily save your tax by investing in mutual funds. If you invest your money in tax-saving mutual funds then you can save more tax compared to PPF, NPS, and tax-saving FDs.
Disadvantages of investing in Mutual funds.
1. Cost require to manage mutual funds.
Managing mutual funds require more knowledge, more experience, and more expertise. That AMC manages a huge amount of capital every. For that reason, they charge a small number of charges.
2. More locking period
Normally mutual funds have a longer period of locking period i.e 3 years. That restriction gets removed after 3 years. If you decide to withdraw your investment before the locking period then you can lead to huge penalties or exit loads.
It is true that diversification is good to minimize risk. But it is not recommended to invest in too many mutual funds at the same time. More diversification leads to making a low profit in the market.
Excepting those disadvantages mutual funds are a very good option for investment.
How to Invest in a Mutual fund?
Now you understand “what is a mutual fund?”. What are the advantages and disadvantages of mutual funds? How do they work? Now we see “how to invest in mutual funds online?”.
We can invest in mutual funds online directly with AMC and with the help of some apps and online websites. In this section, we will understand deeply.
A) By directly creating a new account on the AMC website.
Every mutual fund AMC has its official website. You can directly invest in a mutual fund by opening an account on their website.
Just you have to fill in all the required details on their website for KYC purposes. You require required documents like an Aadhar card and PAN card for verification purposes. After completing all these processes you can start investing.
B) With the help of Apps
Asset Management Company permits investors to invest in their schemes with the help of some mobile applications. You can easily invest in respective mutual funds very easily. You can easily buy and sell units in these apps. You can see account statements here. You can see all the different mutual fund schemes in these apps.
Frequently Asked Questions
If I can directly invest in stocks, bonds, and gold then why I do invest in mutual funds?
1. If you are new to the stock market then it is very difficult to identify stocks for consistent returns. Sometimes new investors pick the wrong stock at the initial stage.
2. Mutual funds are well-diversified assets.
3. Mutual funds are managed by experts.
4. You can start investing with a small amount.
What is the best time to invest in mutual funds?
It is good to invest when the market falls but nobody knows what is the low of the market. Then don’t wait to fall market invest now.
shall I go with lumpsum or sip?
1. I earlier mention that nobody knows when the market will fall or rise in the short term.
2. If the market is undervalued then go with lumpsum and if the market is overvalued then go with SIP which will help you average your position in the market.
Are Mutual Funds a Safe Investment?
There is no definitive answer to this question as there is with any investment. However, mutual funds tend to be a relatively safe investment when compared to other more volatile options such as stocks. This is because mutual funds are typically diversified, which means that they are spread out across different investments and are not as susceptible to the ups and downs of any one particular stock.
How many mutual funds should I have?
Most people believe that you should have a minimum of three and no more than six mutual funds in your portfolio. Because mutual funds are already more diversified hence it does not make any sense to invest in more funds.
Hope you understand What is Mutual Fund. Happy Investing!