What is Mutual Fund?

what is Mutual Fund

In Mutual Fund many people invest the money in one fund house and the fund manager invest this money in many different securities and earns the returns for you, in return he takes the commission.

In Mutual Funds, the money is invested in various form such as stocks, bonds, government securities, etc.,

These fund houses are managed by an asset management company, for example, SBI MF, AXIS Bank MF, ICICI Prudential, Aditya Birla, etc.,

Why Mutual Fund?

Whenever you like to invest we have to keep in mind about the 4 important points

Risk Risk means, for example, there is no investment without risk, there is no 0% risk even if you keep the money in a savings account because what if the bankrupt occurs for a bank then what about the money which we have saved for years?

Returns – How much returns one can expect, here the long term average returns are considered example what is the returns for 5-10 years, if the returns are not more than the inflation then such kinds of returns are of no use

Volatility – Volatility means Ups an Downs in the invested Money, Some times we get too low returns and some time we get too high returns.

So it is very important to check how volatility the returns are because there may be the chances that you are in very much need of the money and the returns are too low at the same time.

Liquidity – Liquidity means how fast you can withdraw the amount from any investment or in simple how fast an investment can be converted into cash.

In Mutual Funds, the money is invested in various form such as stocks, bonds, government securities, etc.,

  • Risk is very moderate in MF
  • Returns can be very high or very low, but on an average, you get 13-15% of returns
  • Volatility is very high in MF as the market fluctuates up and down very often depending on the Sensex and Nifty
  • Liquidity is high as you can sell or convert the investment anytime and convert into cash.

The reasons why we invest in Mutual Fund is because we get a chance to earn high returns

If you are interested in stocks and do not have much knowledge on how to trade then you can invest through Mutual Fund

The risk gets reduced because Mutual Fund invests the money in multiple stocks which through the expert’s analysis

Mutual Fund is the best option for better returns and yes the returns are always higher than the inflation if the investments are made for 5-10 years

 

Benefits of Mutual Funds


Features & Types of Mutual Funds

Types of Mutual Funds

Mutual Fund is mainly classified into 3 main types, here the investments are made on the type of risk you want to take

Equity Mutual Funds – Investments are made in stocks – High Risk

Debt Mutual Funds – Investments are made in security bonds – Moderate Risk

Hybrid Mutual Funds – It is the mix of both Equity Mutual Funds & Debt Mutual Funds – Moderate or Low Risk

Open Ended Funds & Closed Ended Funds

Open-Ended Mutual Fund

An Open End fund is a type of MF, that does not limit the share & issues but rather issues as many share the investors are willing to buy in addition open-end funds also buy shares from investors

Close-Ended Mutual Fund

A Close-Ended Mutual Fund is launched through an IPO and trade in the market like a stock or an ETF (Exchange Traded Fund)

A Close-Ended fund limits the shares they issue and do not buy back shares but rather allow the shareholder to sell those share on the open market

Balanced Mutual Fund

A Balanced Fund is a Mutual Fund that includes a Stocks, Bonds & sometimes a money market component in a single portfolio.

Generally, these funds are a mix of stocks and bonds. The holdings are balanced between equity and debt with the focus between growth and income. This is why we call is as “Balanced Mutual Fund”

Mutual Funds can be categorized into 3 main categories

  1. Large Cap Mutual Funds
  2. Mid Cap Mutual Funds
  3. Small Cap Mutual Funds

Further down we can categories Mutual Fund into sector funds

  1. Technology
  2. Banking
  3. Automobile
  4. Agriculture
  5. FMCG

Tax Saving Mutual Funds

Tax saving Funds which we call it as ELSS, if you want to invest in ELSS you have to keep in mind about 2 things

  • Tax deduction under Section 80C
  • The liquidity is high as you cannot withdraw the money immediately as the lock-in period is 3 years

Indexed Funds

These funds are directly linked with Sensex & Nifty and the returns are based on the Sensex, the returns are high as the Sensex grow high and vice-versa. As the fund is directly linked with Index we call it as Indexed Fund

Hope you all understood the features and types of Mutual Funds


How to invest in Mutual Fund

How to Invest in Mutual Funds?

Here you may think to invest in SIP or Lumpsum

SIP (Systematic Investment Plan)

SIP - Systematic Investment Plan

Systematic Investment Plan – it the plan in which you invest systematically every month.

Returns – Average out

These SIP’s are highly recommended because the advantage here is you get into a habit of investing regularly every month.

Lumpsum

Lumpsum Mutual Fund

Here I will let you know when to invest in Lumpsum. You should invest when the stock market is down and not when the stock market is high as you may encounter the risk of the market crash and losing the money.


What to check while selecting a Mutual Fund?

  • % of Returns for 5- 10 Years.
  • Check the mutual fund expense ratio which should be 1-2% which is taken as commission.
  • Always try to invest in direct plans where u can save on brokerage charges
  • Check for the entry load and exit load.
  • Entry load means you have to pay some amount of money at the beginning of the investment.
  • Exit load means you have to pay some amount of money while you are exiting from the Mutual Fund at the end.

Goal-Based or Monthly Target

  • To check or analyze your goal can visit the SBI Mutual Funds website and set the Goal or Monthly based target. It is the best mutual fund calculator.
  • You can calculate the SIP or the returns on LUMPSUM amount from the SBI mutual fund calculator.
  • Once you have set the goal or monthly target you need to submit the KYC documents to the Mutual Fund Companies.

You can also invest in Mutual Funds online and also there are various apps nowadays to start investing

I think by now you might have got an idea on what type of Mutual Fund one should select and where to invest

Pros & Cons

Benefits of Mutual Fund

Pros

  • High Returns & Moderate Risk.
  • High Liquidity.

Cons

  • High Volatility – Many advisors won’t tell you about the Volatility.
  • Volatility means Ups an Downs in the invested Money.
  • It is not that the MF provides you the return of 15% every year, it is possible only when you invest for the period of 5-10 years.

5 Mistakes to avoid while investing in Mutual Fund

  1. Investing without a plan
  2. Timing the market
  3. Frequent reshuffling of the funds
  4. Panic exist
  5. Too many Funds

If you have liked this article and feel it is a useful one then please share this article with friends and family members so that it helps them in understanding Mutual Fund.


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