Investing often feels massive task especially at the start of it. Nevertheless, the most favored type of Investment among beginners and longtime investors alike is Mutual Funds. Mutual Funds offers a mixture of simplicity, diversification, along with professional expertise which makes Investing in Mutual Funds a great starting for the one who is looking to grow their wealth. In this article, you will get a fair idea about everything one needs to know regarding Investing in Mutual Funds.
What is a Mutual Fund?
Basically, Mutual Fund is an investing instrument where money of various Investors is clubbed together and then invested in various Assets namely Stocks, bonds, Gold, money market instruments and combination of various Assets. Mutual Funds is managed by professional fund managers which ensures money is invested effectively to achieve specific investment goals.
One owns the units of that fund in which the money is invested. This is in proportion to the amount invested. Practically one’s investment returns is directly linked to the performance of that Mutual Fund.
How Do Mutual Funds Work?
To explain in simplest way, the Mutual Funds operates as follows:
- Investors Pool Money: Individual Investors money is clubbed together in one common fund.
- Fund Manager Allocates Assets: A professional fund manager is appointed by the mutual fund to handle the funds and invest this funds in variety of Assets as per the investment strategy.
- Returns are shared: Returns earned on this investment is distributed among the investors in proportion to the funds invested by each and every investor.
For Example, if the amount invested by you is invested in equity stocks by the fund manager, than the performance of that equity stock decides your returns on the invested amount.
Types of Mutual Funds
Mutual funds are of various types offering investors wide options to select as per one’s investment goal and risk-taking capacity:
- Equity Funds: Amount invested in this fund is mostly invested in equity stocks. This fund is best suitable for long term investors who are looking for higher returns and are willing to take more risk on their investments.
- Debt Funds: Amount invested in this fund is mainly invested in fixed income securities like bonds, treasury bills etc. The investor gets stable returns with lower risk on the amount invested in this fund.
- Hybrid Funds: Amount invested in this fund is equally invested in equity as well as debt investments. Risk and returns are balanced in this fund.
- Index Funds: Amount invested in this fund is invested in Index Funds. The performance of this fund is directly linked to the performance of that Index for ex. Nifty 50. This fund offers low-cost investing options.
- Sector Funds: The amount invested in this fund target specific sectors for investment for ex technology, healthcare etc. This fund is suitable for investors who are confident about the growth in specific sectors.
Benefits of Investing in Mutual Funds
- Diversification: Investing in Mutual Funds gives one an opportunity to invest in numerous assets which also enables in reducing the risk of losses from one particular asset.
- Professional Management: Mutual Funds is managed by professional fund managers thus enabling in reducing the risk and maximizing the chance of better returns.
- Liquidity: Buying and selling in Mutual Funds is very easy thus more and more investors invest in Mutual Funds.
- Affordability: One can start investing in Mutual Funds with a very small amount, thus it gives opportunity to everyone to invest in Mutual Funds.
- Tax Benefits: There are particulars Mutual Funds namely Equity Linked Savings Schemes (ELSS) which provides tax exemption under section 80C of the Indian Income Tax Act.
Risks Associated with Mutual Funds
Though Mutual Funds are considered as one of the safest investments, it is not entirely risk free. The risk factor depends on the type of Fund selected for investments. The risk factors are as follows:
- Market Risk: As the amount invested in Equity Funds is invested in Equity stocks, the risk involved is directly linked to the equity stock in which funds are invested.
- Interest Rate Risk: Amount invested in Debt Funds faces risk of loss if the interest rates rise.
- Credit Risk: The risk factor increases if the bonds in debt funds defaults.
- Liquidity Risk: If the liquidity in a particular fund is less than the investor may face issue while selling it in open market.
Understanding of one’s investment goal as well as risk appetite is essential in minimizing this risk.
How to Start Investing in Mutual Funds
One can start investing in Mutual Funds very easily:
- Set per-defined Investment Goals: Identify the purpose for your investment. It can be buying of new home, retirement or maybe creation of wealth.
- Understand Your Risk Appetite: One should have a fair bit of idea regarding one’s risk-taking capacity as well as risk absorbing capacity.
- Selection of Right Fund: Selection of Right Fund is the most crucial aspect and it should correlate with one’s investment goal and risk appetite.
- KYC Compliance: Submitting identity proofs as well as address details will enable in successful completion of Know Your Customer (KYC) process.
- Invest Through an App or a broker: Investment in Mutual Funds can be done directly through an App or also through a broker.
- Monitor Regularly: One should review their investments periodically which helps in making decisions swiftly.
SIP: A Beginner-Friendly Way to Invest
The most preferred way of Investing in Mutual Funds is through Systematic Investment Plan (SIP). Systematic Investment Plan (SIP) enables one to invest a fixed amount regularly (monthly, quarterly etc.) thus one also is benefited by rupee cost averaging and compounding returns.
SIPs are highly recommended to beginner investors as this instill financial discipline and diminishes the need to time the market.
Final Thoughts
One of the powerful tools for building generational wealth and offering something to every type of investor is Mutual Funds. Whether one is looking for long-term growth, steady income, or tax savings, there is Mutual Fund that can meet all such requirements.
One should give time to understand own financial goals, risk appetite and should educate self for different types of funds and their performance. With proper planning and right approach, Mutual Funds can be a cornerstone of one’s Investment journey.
Remember the famous saying: “SLOW and STEADY wins the race.”
For more information on various other types of investments please click here
Open your Demat Account now and start Investing – Click Here
