The last few decades have seen mutual funds gaining traction as one of the most popular investment options among beginners, with a variety of professionally managed investments that have made it easy for people to get their foot in the door of the financial markets. Mutual funds are great investment options for novice investors, as they are diversified, managed by fund managers, and offer easy access to markets. This article will help guide conversations around the question: what are mutual funds, what types are available, what are their benefits, and how to invest in them, as well as other valuable tips for mutual fund investment.
What is a Mutual Fund?
A mutual fund is an investment company that raises money from investors to invest in a diversified portfolio of securities, including stocks, bonds, and money-market instruments. Professional money managers decide how the fund’s investment portfolio is traded based on the fund’s investment objective. A mutual fund investor becomes the unit holder of the proportion of the money capital raised by the mutual fund’s composition of units.
How Do Mutual Funds Work?
The funds raised from investors are invested as per the objectives of the fund. The returns or losses derive from those investments and are allocated relatively to investors. The price of one unit of a mutual fund is referred to as Net Asset Value (NAV) and it is computed at the close of every trading day using the market valuation of the fund’s underlying assets.
Types of Mutual Funds
1. Equity Mutual Funds
Equity mutual funds mainly invest in company stocks. These funds are suitable for those who are seeking higher returns over a longer period and are willing to take the market-linked risk. There are many types of equity funds, depending on where they invest, such as large-cap, mid-cap, small-cap, and sectoral funds.
2. Debt Mutual Funds
These funds invest in fixed-income instruments called government bonds, corporate bonds, and other debt instruments, on which the entity that borrows from you agrees to pay you a predetermined flow of interest. These funds are relatively less risky as compared to equity funds, making them ideal for investors looking for a regular income and stable returns.
3. Hybrid Mutual Funds
Hybrid funds invest in a mix of equities and debt. The number of companies and the split between equity and debt also vary depending on the fund’s investment objective. They are supposed to split the difference between the two funds in terms of both risk and reward and can be suitable for moderate risk investors.
4. Other Types of Mutual Funds
There are also specialized mutual funds including index funds, which track a specific market index; solution-oriented funds, like retirement or children’s funds; and fund of funds, which invest in other mutual funds rather than directly in stocks or bonds.
Benefits of Mutual Fund Investments
- Professional Management: Expert Management Mutual funds are handled by professional fund managers who know how to analyze the market, choose securities, and manage portfolios. That lifts from investors the task of researching and following individual stocks or bonds.
- Diversification: Because mutual funds hold a variety of securities, there are diversification benefits. Even if some investments do badly, others may fare well, while bringing down the overall risk of the portfolio.
- Affordability and Convenience: Investors can get started with mutual fund investments using small amounts of money, as low as ₹100, via Systematic Investment Plans (SIPs). Also, mutual funds are easy to get into and out of, as you can generally redeem shares on any business day.
- Regulatory Safety: Indian mutual funds are regulated by SEBI and have to adhere to strict compliance and transparency standards, which means investors’ interests are safeguarded.
How to Get Started Investing in Mutual Funds?
1. Define Your Investment Goals
Before you put your money in an investment, you need to decide what your financial goals are. Depending on whether you are investing for retirement, your children’s education, or building wealth, shaping your investment goal will help you choose the right mutual fund.
2. Understand Your Risk Appetite
Risk: Not all mutual funds are created equal. Whereas equity funds are relatively riskier but potentially fetch higher returns, the debt funds are safer and provide a moderate return. Understanding your own risk tolerance also helps in your decision on which fund to invest in.
3. Choose the Right Fund
Once you’ve decided on your risk tolerance and investment objective, you should choose a fund matching your investment profile. You will need to analyze fund performance, manager quality, expense ratio and reputation of the fund house before making your decision.
4. Complete KYC Requirements
You will be required to complete the Know Your Customer (KYC) process to be able to invest in mutual funds. This is by providing identity proof, address proof and a recent photograph. The KYC can be done now online so as to expedite things and make it easier.
5. Start with SIPs
As a beginner, it’s best to start with a Systematic Investment Plan (SIP). A SIP allows you to invest a fixed sum at regular intervals, teaching the virtues of financial discipline and taking advantage of the power of compounding and rupee cost averaging.
Basics to Know About Investing in Mutual Funds
- Invest for the Long Term: We know that mutual funds, like investments in equity funds, provide better returns over time. Remaining invested when markets are up and down is the key to the best results.
- Monitor Your Investments: Even though mutual funds are managed for you, it’s always a good idea to review them every once in a while. Your financial goals and the market change over time and so, taking a second look at your mutual funds can help with this process.
- Diversify Across Fund Categories: It can also help if investments are diversified across various categories of mutual funds – equity, debt and hybrid funds, to spread risk and generate better returns.
- Consult a Financial Advisor for Help if Necessary: It’s also a good idea to consult a professional financial advisor if you feel overwhelmed or unsure about which funds to choose and how to structure your investment.
Mistakes Beginners Should Avoid
- Ignoring Fund Objectives: Lack of comprehension can also lead to mismatch with your financial objective in assumption with the FOF. Read the scheme information document always.
- Only Looking at Past Results: Past performance of a fund is an indicator, but it should not be the sole factor in choosing a fund. Other factors to consider might include the consistency and experience of a fund manager and the expense ratio.
- Exiting Too Soon: Short-term market volatility can be unnerving but selling investments too soon can lead to losses. Remain loyal to your investment plan, especially for lack of a compelling reason not to.
Conclusion
If you’re new to the stock market and want exposure to markets with low risk and easier access, then mutual funds are a great alternative for you. By focusing on the basics, selecting the appropriate funds and staying the course, an investor new to this game can build significant wealth over time. So, when you start your mutual fund investment plan, remember that patience, discipline, and knowledge-based decision-making are the foundation of success.
