What are mutual funds?
A mutual fund is a company that pools money from various investors and then invests the money in securities i.e., stocks, bonds, short-term debts, assets, etc., So these underlying types of securities which are known as holdings combine to form one mutual fund, which is known as a portfolio of that mutual fund. Mutual fund shares are purchased by investors. Each share reflects a shareholder's ownership interest in the fund and the income it produces.
Why do people buy mutual funds as an investment option?
People often buy mutual funds because it includes the following features.
· Diversification: It is said that “Don’t put all your eggs in one basket” Instead we have to put them in different baskets to avoid high risk. In the same way, mutual funds frequently make investments across a variety of businesses and sectors. This reduces the danger of you losing money if one firm fails.
· Liquidity: Investors in mutual funds can conveniently redeem their shares at any time for the current net asset value (NAV) plus any redemption costs.
· Professional management: The professionals i.e., the fund managers will do the research for us and finds the best mutual fund option to invest in and get good returns. They usually choose the securities and keep an eye on the results.
· Affordability: The investors should be able to afford the investment amount. For the first investments and subsequent purchases, the majority of mutual funds have relatively low dollar amounts.
What are the different types of mutual funds?
There are three main categories – Based on structure, based on investment objective, based on investment style which has different risks, features, etc.,
Based on structure: There are three types of funds.
· Open-ended funds: Open-ended funds are funds that are bought at any time and sold at any time, i.e., they have no fixed maturity time.
· Closed-ended funds: Closed-ended funds are funds that can only be purchased at the time of its launch and can be redeemed once the investment period has expired i.e., they run for a specific period.
· Interval funds: An interval fund is a sort of investment company that offers to repurchase its shares from shareholders on a regular basis. They are the variant of closed-ended funds.
Based on investment objective: There are three types of funds which are:
· Debt funds: Debt funds are the funds that invest in short-term and long-term debt instruments.
· Equity funds: Investors invest more into equity.
· Hybrid funds: Hybrid funds are funds in which investment can be done in a combination of debt and equity.
Based on investment style: There are two types of funds. They are:
· Passive funds: They replicate a market index. Expenses will be less and there will be no active selection of any stock/ sector.
· Active funds: They actively manage the allocation to the market securities and cash. The fund manager carefully looks at the market dynamics.
What are the benefits of investing in mutual funds?
Mutual funds provide expert investment management as well as the possibility for diversification. They also provide three ways to make money.
· Capital Gains Distributions: The value of a fund's securities may rise. When a fund sells securities whose price has risen, the fund realizes a capital gain. The fund distributes these capital gains, less any capital losses, to investors at the end of the year.
· Dividend Payments: A fund's revenue may come from stock dividends or bond interest. The fund then distributes nearly all of the revenue to the shareholders, minus expenditures.
· Increased NAV: After deducting expenses, the market value of a fund's portfolio improves, as does the value of the fund and its shares. The higher the NAV, the greater the value of your investment.
What are the risks associated with mutual funds?
While mutual funds can offer many benefits, there are also some risks associated with it. They are
· Market risk: Mutual funds, like all investments, are exposed to market risk. The fund's holdings' value can fluctuate owing to variables such as interest rate changes, economic conditions, or geopolitical developments.
· Manager risk: The performance of a mutual fund is primarily reliant on the fund manager's abilities. If the management makes poor investment decisions or underperforms, the fund's performance may suffer.
· Mutual funds often impose fees and expenditures, which might reduce your returns. Management costs, administrative fees, and distribution fees are examples of these fees.
· Mutual funds may invest in securities that are difficult to sell or have restricted liquidity. If a large number of investors attempt to sell their shares at the same time, the fund may experience liquidity concerns.
· Concentration risk: Certain mutual funds may be overly concentrated on a single industry or asset class, increasing the risk of loss if that sector or asset class performs poorly.
How to buy and sell mutual funds?
We can buy mutual funds through a direct plan or a regular plan.
Direct plan: Direct plan is buying mutual funds directly through the company website or we can buy them through a broker.
Regular plan: The investor invests through an intermediary i.e., through a broker, distributor, banker, etc., who will be paid a fee by the AMC i.e., Asset Management Company.
How to buy a mutual fund? – The Process
Choose a mutual fund: Do some research to find a mutual fund that aligns with your investment goals and risk tolerance.
To purchase mutual funds, you must first open an account with a broker, financial advisor, or mutual fund firm.
Choose your investment amount: Determine how much you want to put into the mutual fund. Many mutual funds have minimum investment requirements, so be sure to check this before investing.
Place your order: Once you've decided on a mutual fund and an amount to invest, you can place your order through your broker, financial advisor, or online at the mutual fund company's website.
How to sell a mutual fund? -The Process
Determine when you want to sell your mutual fund shares: Determine when you want to sell your mutual fund shares. This could be due to market changes, changes in your investment objectives, or other factors.
Place your order: You can sell your mutual fund shares through your broker, or financial advisor, or online at the mutual fund company's website.
Get your proceeds: When your mutual fund shares are sold, you will receive the cash minus any applicable fees or taxes.
What are the charges which investors have to bear?
As with any business, running a mutual fund involves costs. Funds pass along these costs to investors by charging fees and expenses. Fees and expenses differ from one fund to the next. To achieve the same returns for you, a high-cost fund must outperform a low-cost fund. Even small differences in fees can mean large differences in returns over time.
How is the investor protected?
There are very stringent and strong laws by the SEBI(Securities and Exchange Board of India) and AMFI(Association of Mutual Funds in India) to protect investors. There is a complaint redressal mechanism system on the SEBI website which is also known as SCORES (SEBI Complaints Redress System) for any complaints against any mutual fund companies. Investors are protected by the regulation, custody of assets, redemption, insurance, and disclosure.
It is crucial to recognize that, while these safeguards can assist in reducing hazards, investing always involves some level of risk. Investors should thoroughly examine any mutual fund in which they are contemplating investing and contact a financial advisor to decide whether the investment is appropriate for their individual financial condition and goals.
Ms. Kompella Chandana
Brand Ambassador: Well Being Shiksha Foundation
Student: Institute of Public Enterprise, Hyderabad
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