Basics of Mutual Fund

Rahul a final year engineering student was very happy with his placement in one of the leading Software Company. He was excited with his CTC package as it would be enough for him to enjoy the kind of life he has imagined.  The job was in another city and he was having no idea on how he would manage his expenses. He was having enough financial support from his father and that’s the reason he was not worried about savings.

It was after 1.5 years of joining when his seniors advised him to go for higher studies while continuing his job. He chose to do Executive MBA for which he was asked to pay registration fees of Rs.50,000. As he was not having any habit of saving he asked his father to support him with his MBA fees. His father use to advise him to save little amount out of his salary every month so that, it would help him later. But he didn’t pay attention and finally learnt a lesson.

Once he discussed this matter with one of his colleague, who suggested him to start saving through SIP in Mutual funds. Being from engineering background Rahul was financially illiterate and was having no idea on how to start saving in Mutual Funds. So his friend introduced him to a Financial Planner who helped him in understanding his needs and also helped him in start saving in mutual funds.

Is this story similar to your? Do you save enough or do you have any knowledge about Mutual Funds? This is the story of almost 60% of the young earning population who have either less or no habit of savings. So In this article we’ll discuss about Mutual Funds, What kind of Mutual funds you should choose, and advantage of investing in Mutual Funds.  

So what are Mutual Funds?

Keeping it simple, Mutual Fund is a pool of fund, where individuals, group of people come together and collectively invest their money into equities, bonds, and other securities. Then each of the investor gets some percentage of share in proportion to the amount invested which is in the form of units.       

To invest this collected amount, a Fund Manager is hired who work according to the kind of fund he is managing. If it’s long term growth fund, then his priority is to beat the index over the long term. If he is managing debt fund then he would try to generate high returns with lowest risk.   

What are different options available in Mutual Funds?

Basically, there are three categories of Mutual Funds available in India – Equity Fund, Debt Funds and hybrid Fund. There are many other categories but they are more or less variants of these three categories.

Equity Funds: This is the largest category of Mutual funds. The money collected through this kind of schemes is invested into direct equities in secondary market. The objective of this kind of fund is long term growth.

Debt Funds: These funds are also known as Fixed Income Funds. The primary objective of these funds is to generate regular income for the investors as mostly who invest in this fund are conservative investors or retired people. The risk associated in this fund is much lesser then in Equity fund.

Hybrid Funds – These type of funds generally have a balanced type of portfolio where equity and debt are in certain ratio. If Equity allocation is high then funds are categorised as aggressive hybrid funds or if debt allocation is high then funds are called as conservative hybrid funds. 

Advantage of investing in Mutual Funds:

Equity Mutual funds are considered as the alternative to direct equity. With limited knowledge, time and money people find mutual funds a popular investment vehicle for their savings. Let’s look at few points which are beneficial for any investor:

Liquidity – Mutual funds are most easy to trade. In many funds it is very easy to get in and get out. Thus this feature makes it more attractive. Many people keep their savings a/c money into liquid funds as the returns are higher and easy availability of money. In simple words one can sell mutual funds in a short period of time. 

Diversification – A famous quote about investing “Never put all your eggs in one basket” It really applies when one invest into mutual funds. Diversification means mixing of different investment styles. It helps in lowering the risk by spreading the money across different options available.  

Professional Management: A common person finds it difficult to keep a track on the stocks. It requires research and time to pick the best stocks so that the desired return is generated. Mutual fund schemes are managed by professional fund managers who are expert in stock picking. They do research and analysis about different sectors and then invest the money to achieve the objective of the scheme.

How to select the fund which is right for you?

Every fund has its own strategy of investing like some only invest into blue chip stocks or some only invest into corporate and government bonds. One should always invest into those mutual funds which serves the purpose of investing. Before investing one should identify the goals and need of investment. Once the goal is clear, then it would be easy to pick the right kind of mutual fund scheme.

Conclusion

Mutual funds are considered to be the best investment vehicle for the first time investors as well as for the established one. The advantage of this product makes it more attractive to look out for. If one is looking out for a professionally managed fund then it is the one stop solution for you. Also one can seek the help of his/her advisor to choose the right scheme to invest in.

Written by:

Ayush Bhargava,
Certified Financial Planner

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