Over 10 years we help companies reach their financial and branding goals. Engitech is a values-driven technology agency dedicated.

Gallery

Contacts

411 University St, Seattle, USA

engitech@oceanthemes.net

+1 -800-456-478-23

Twitter Facebook-f Pinterest-p Instagram

Investment ( Mutual funds )

Mutual funds

What Is a Mutual Fund?

Mutual funds’ meaning is simple. As an investment vehicle, mutual funds are a pool of funds from investors. They invest this money in different financial instruments, including stocks, bonds, gold, government securities and other asset classes.

Mutual funds are managed by experienced financial professionals or fund managers who deploy the money to various asset classes in line with these funds’ respective investment objectives. Also, the decisions on when and where to make the investments rest with these fund managers.

Losing-Money-in-Mutual-Funds

How do Mutual Funds Work?

In its most simple form, mutual funds are pools of capital managed by a fund manager who invests the money in different securities to generate a good return in exchange for a fee. This fairly long sentence defines the working of mutual funds well, as it has multiple moving parts that one must understand. Let’s begin with the most important part, which is the price of the asset. In a mutual fund case, what you pay for are units of that fund, and the price of those units is called the NAV

Benefits of Mutual Funds

Mutual funds have steadily become one of the most popular investment options. The reason is simple. This is because investing in mutual funds carries many advantages and benefits, especially when directly compared to stocks. Let us take a look at the many mutual fund benefits below

Diversification
Diversification
Regarding mutual funds, diversification means that a single financial instrument does not support the pooled amount of invested money. It is divided and invested in various securities, including equity or shares, debt funds, and money market instruments. The logic behind this is that there is very little chance of all these instruments failing simultaneously. When one of these fails and gives low returns, others may increase and give higher returns, thus balancing each other out. This ensures that the invested money is much safer, unlike stocks, where you may lose your entire investment because it was put in to buy shares of one company, which is not doing well.
Professional management
Professional management
Mutual funds are monitored and managed by professional money managers. They are responsible for deciding when and where to invest in the mutual fund by closely following market trends and researching. Investment, whether mutual funds or stocks, is quite an exhaustive process that requires a good understanding of the financial market and great skill. When it comes to mutual funds, all the hard work is done by these money managers, who are professional experts well-equipped with all the tools required to manage them. Therefore, you can rest assured that your money is in good hands
Liquidity
Liquidity
The term liquidity means the ability of an asset to be converted into liquid cash. The money in your bank account is purely liquid because you can instantly withdraw it whenever you want. If you have some gold saved, it is still liquid, but it can be converted to cash by selling it quickly. On the other hand, something like your home or your car is not a liquid asset. When you want to sell it for cash, it could take weeks for the transaction to take place. In this regard, a mutual fund investment is highly liquid, so you can easily convert it to cash when required. Of course, this depends on the type of mutual fund. Enquire about the conditions for selling your mutual fund units before you invest.
Low capital requirement
Low capital requirement
Unlike stocks and real estate, which require huge investments to get feasible returns, mutual fund investments can be made with as little as Rs 500. Moreover, there is also the option of Systematic Investment Planning or SIP, which allows you to make small investments monthly for as long as you like. This is one of the most significant advantages of mutual fund investment because people from all strata of society can easily invest according to their capabilities
Convenience and simplicity
Convenience and simplicity
Investing in the stock market can be complicated. Unlike the stock market, mutual fund investment is as simple as possible. You can approach any bank or Non-banking financial company and get your mutual fund investment going instantly. All you will require are some essential Know Your Customer (KYC) documents, and you will be ready
Nav,(net,Asset,Value),-,Abbreviation,For,Wooden,Cubes,On

What is NAV

NAV per unit refers to the price you can buy or redeem your mutual fund investments.Let us give you an example. Suppose you invest ₹1,000 in a mutual fund scheme where the NAV is ₹10. Then, you will be allotted (1,000/10) or 100 units of the fund.Remember that a mutual fund’s NAV changes daily based on the fund’s underlying asset. If the underlying asset of a fund performs well, then the price of its NAV will go up and vice versa.So, based on the above example, if the NAV of your mutual fund increases to ₹20, then your 100 units will amount to (100 units x ₹20) = ₹2,000. And if you redeem your units, you will receive ₹2,000 against your initial investment of ₹1,000.Historically, it has been seen that the equity markets have been able to provide inflation-beating returns in the long run.Unlike some popular investment avenues like fixed deposits (FDs), mutual funds have been able to yield returns between 12 and 15%t in the last 10-20 years.So, if you invest in an equity mutual fund and stay supported for a long time, you can grow your money several times and thus create wealth.

What Are the Categories of Mutual Funds

Mutual funds can be classified in more than one way. For instance, based on how a manager manages it, mutual funds can be classified into two broad categories.

Actively managed funds

These are managed by an experienced fund manager. These managers hold expertise in market analysis and research. They devise the strategy of these funds in a way that helps them outperform certain index returns or benchmarks.Passively managed funds:These funds are governed by a fund manager, too; however, the role is limited. This is because these funds are designed to follow one or the other index. Sub-categories include Exchange Traded funds (ETFs), Index Funds, or Funds of Funds (FOFs).Similarly, all mutual funds can be divided into two categories based on entry and exit restrictions

01
Open-ended funds:
In open-ended funds, you can sell and buy units anytime


02
Closed-ended funds:
In closed-ended funds, you can buy units only during the initial launch of these funds. Once you invest in these mutual funds, you can withdraw the amount at the time of their maturity.

What Are the Types of Open-Ended Mutual Funds?

Open-ended mutual funds are again classified based on their investment objectives and underlying securities. We have listed them below for your reference.

  • Equity Mutual Funds
  • Debt Mutual Funds

These funds invest around 65% of the assets in stocks of various companies. Given their volatile nature, equity mutual funds are mainly suitable for long-term investments (5 years and more). These funds can provide better returns but at the cost of higher risks.

Further, mutual funds are of various types. The following are some popular types of equity mutual funds.

  • Equity-linked Savings Scheme (ELSS):

These are tax-saving equity mutual funds that invest around 80% of their assets in stocks. ELSS schemes come with a lock-in period of three years from the date of your investments. Also, remember that with your ELSS investments, you can enjoy tax benefits under Section 80C of the Income Tax Act.

  • Flexi-cap funds:

These funds are invested in the stocks of any company, be it large caps, mid caps, or small caps.

  • Mid-cap funds:

These funds invest around 65% of their assets in mid-cap companies.

  • Index funds:

These types of mutual funds simply invest in all the securities of market indices. For example, you invest in an index fund that tracks the Sensex. Then, the fund will deploy your money to the same companies that are a part of the Sensex and in the same proportion. These funds try to replicate the returns of their underlying indices closely. Unlike other funds, these funds' operating costs and portfolio turnover are quite low.

  • Large-cap funds:

As the name suggests, these funds invest around 80% of their assets in the stocks of large-cap companies.

  • Small-cap funds:

They invest about 65% of their assets in small-cap companies

These mutual funds invest in companies listed in other countries to provide geographical diversification to investors

Debt funds mainly invest in fixed-income securities, such as government securities, debentures, bonds, etc. Unlike equity mutual funds, these funds are unaffected by the stock market's volatility, providing more stable returns. However, this is just a relative comparison; debt funds also carry their risks.

Debt mutual funds are classified into different types based on the maturity period of their underlying securities. Some examples include:

  • Liquid funds:

These funds are invested in highly liquid instruments, such as certificates of deposits, treasury bills, and commercial papers, and they have a maturity period of less than 91 days. Therefore, these funds are less risky. You can also park your emergency funds in liquid funds as they have almost nil volatility.

  • Hybrid Mutual Funds

These mutual funds invest in a mix of equity and debt instruments based on the investment objectives of these funds. With hybrid funds, you will enjoy diversification across various asset classes. Besides, you will get capital appreciation from the equity side and capital protection from the debt side. In the mutual funds market in India, you will find different types of hybrid funds, including the following

  • Balanced advantage funds:

These funds balance equity and debt regarding asset allocation to minimise risks while maximising gains; balanced advantage funds keep changing their asset allocation based on the market movement.

  • Short-duration funds:

These mutual funds are mandated to maintain a Macaulay duration of 1-3 years. Short-duration funds mainly invest in a mix of government and corporate bonds of different varieties.

  • Aggressive hybrid funds:

These mutual funds invest 65-80% of their assets in equity and the rest in debt instruments. In addition to the mix of debt and equity, aggressive hybrid funds take advantage of the arbitrage opportunity.

  • Conservative hybrid funds:

Unlike their aggressive counterparts, these funds invest around 75-90% of their assets in debt securities and the rest in equity. Hence, conservative hybrid funds are more secure than aggressive hybrid funds.

  • Overnight funds:

As their name suggests, overnight funds invest in overnight securities or assets that come with a maturity of one day.

Methods of Investing in Mutual funds

Lumpsum

 A lumpsum investment in mutual funds is a one-time payment made in full at the beginning of an investment period.

It is a single, large payment made upfront, without any subsequent payments.

Whenever an investor wants to invest in mutual funds can be done through this Lumpsum method

SIP

A SIP or Systematic Investment Plan is process of investing your money via monthly payments in Mutual Funds.

You can start from as low as Rs 500 per month and increase as you become more aware. There is no upper limit for a SIP and it all depends on what your monthly savings are like and how much you would like to invest.

After your SIP is initiated, your money is directly debited from your bank account via an ECS Mandate and sent to the Mutual Fund company

You can invest in a SIP for a minimum of 6 months and continue as long as you like. You can also withdraw your money anytime you wish if it’s invested in open ended mutual funds

If you invest in Equity Funds, you can expect an annual return ranging from 12% to 20% depending on the funds provided you stay invested for a long period of time( > 5 years and upwards)