Mutual - Fund

About Mutual Fund

A mutual fund is defined as an investment channel made up of a pool of funds collected form multiple investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets. These investments are usually done by the investors who are interested in making their capital grow.
Mutual funds are functioned and managed by full-time professional fund managers who have one basic aim to make the investment grow and attempt to produce capital gains and/or income for the fund’s investors.

To match the investment aims stated in its prospectus, a mutual fund’s portfolio is structured and maintained. Also it becomes very easy due to the professional support that an investor gets, rather than buying and selling individual stocks and bonds by themselves. Additionally, there is also an advantage of flexibility to settle the mutual fund investment as and when the investors need to.

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Top 10 Mutual Funds to Invest in 2019

Objectives Based Classification of Mutual funds

The main objective of a mutual fund is to give maximum returns to the investor but with a minimal risk as compared to individual stock and bond investments. 

The different types of mutual funds and their objectives are described below.

Growth Fund:

It is a type of fund that attempts to produce high yields for its investors. This is the most common objective of mutual fund. This means a fund where an investor gets an increase in their investment over a short or long term, therefore, these funds invest in stocks have a high degree of risk associated with them.

Income Fund:

It is a type of fund that generally invest in a variety of fixed-income securities and their key objective is to create a regular income. In this fund, a major portion of the asset is invested in stocks, bonds, fixed interest debentures and dividend-paying stocks, etc. These are mostly preferred by retired investors as it provide a steady income with minimal risk.

Sector Fund:

It is a type of fund that aims to invest only in precise sectors or industries, such as real estate, healthcare, transportation, etc. The main objective of these funds is to expand the yields by financing in sectors that are flourishing at the moment.

Balanced Fund:

These funds basically represent a mixture of income and growth objectives. These are intended to offer the investors with double benefits of potential growth and dividend income. This type of fund commonly features a combination of equity and fixed income safeties. Equity investments provide potential growth, whereas, fixed income securities provide stability to the funds during market instability.

Mutual Fund Frequently Asked questions (FAQs)

Mutual Fund is a kind of investment where many small investors give their saving to large investors who then pool the entire amount and invest in the most potentially profitable companies. The big investment companies charge a small fee for the managing and handling of the amount and in return, they distribute the profit and loss with the investors. The amount collected is used for the purchase of stocks, bonds, shares, and debentures. 

A mutual fund is considered one of the safest modes of investment. It is also beneficial for investors who do not have adequate knowledge of the market and its patters. The large investor companies recruit many experienced agents and brokers who do intense research before investing the amount. The research includes the study of Market pattern, market prediction, company’s position, and its policies. The individuals who have some saving and are willing to invest can easily invest in mutual funds as it is a safe and secure investment. Mutual fund investment is considered more beneficial over a simple deposit of the money in the bank as the return is much higher if the market goes well. 

The large investors usually divide the amount collected into various types. The part of the amount is invested in schemes where the invested amount is safe at any cost and the risk is low in this case. The other part of the collected amount is invested in high risk and return schemes. In these schemes, the return is high compared to safe investment but there are higher risk factors involved. The main objective behind these type of investment is to ensure the basic capital amount and to take a risk on a less amount. The investors must invest only in registered companies and must read the scheme related documents properly. Few top Mutual Fund investors in India are:

  • SBI Mutual Fund
  • Kotak Mutual Fund
  • HDFC Mutual Fund
  • Birla Sun Life Mutual Fund
  • ICICI Prudential Mutual Fund
  • LIC Mutual Fund

There are various types of Mutual Funds:

    • Equity Mutual Funds: – Quick Growth but the risk of losing the money is high. The amount collected is invested in buying shares of different companies.
    • Debt Mutual Funds: – Good for the investors who are looking for a small and regular income with minimal risks. It is invested in fixed income securities like Monthly income Plan, Short Term Plans, Liquid Funds, etc.
    • Money Market Fund:Risk is low and the investment is done in the stock market and money market which are usually run by the governments, banks, and corporations. The maximum investment period is 13 months.
    • Hybrid Funds: – Here the money is invested in a specific fixed ratio. Few percents of the amount in stock and rest in bonds. The risk in this type of investment is high, but the return is also high.

It is an important decision to choose what mutual fund is best for you. There are a variety of mutual funds and each of them is suitable for a different type of investors. Different investors will have different goal and capacity to invest. The factors to be taken into consideration before choosing the mutual funds are:

    • Identify goal: The investors must first identify the goal for their investment in mutual funds. You should know your objective where your investment is for a long term capital gain or a short term investment. Whether the fund raised will be used for the pension after retirement or for the marriage or to pay the college fee. It is one of the most crucial steps as through setting goals you will be able to choose the best scheme out of the thousands of mutual fund schemes.
    • Risk Tolerance: – Risk tolerance in simple words means the capacity of the investor to accept the dramatic swings in the value and market. The investors who want a secured investment must choose the Debt Mutual Fund as it provides a secure and low-risk investment. Whereas for the investors looking for a short term growth can invest in schemes which offer the high return and short term schemes. 
    • Time Horizon:The investors must decide the desired time period for which they want to invest. Some investors may choose to invest for a long term mutual fund whereas others may desire to invest in Short term mutual funds. Higher the investment tenure more secure is the investment and more is the return. Lower investment usually is riskier in nature. The investors who invest in tax benefits must understand that the minimum lock-in period must be 3 years. 
    • Size of the Fund in Mutual fund investment: – The amount to be an investment is very crucial for choosing the adequate mutual fund. The commission on the investment is also a major reason to be considered during investing. Many may invest just to gain the tax benefits guaranteed by the government. The tax exemption for the mutual fund as per the latest regulation is 1.5 lakh a year. 

 

Before investing in the mutual fund the investor actually needs to identify the goals, risk tolerance, time Horizon and total of the amount he is intending to invest. The beginners must choose the type of mutual fund they want to invest in after considering the above-mentioned factors. There are thousands of mutual funds schemes available in the market and offered by various companies. The investor must choose the scheme that suits better according to his needs. It is usually recommended for the first time investor to invest in a balanced or debt fund as it comes with minimal risk and high return.

 The first time investors are also advised to diversify their portfolio i.e. to invest in more than one mutual funds at a time so that the risk factor can be reduced and even if he faces loss in one fund the rest will balance the portfolio. For a fluent process of investment, the investors are advised to keep their KYC documents updated. KYC is mandatory as per the government rules for most of the financial transactions in India. For the completion of KYC, the investor needs his PAN card and Valid Address proof. 

An Internet banking account is also one of the essentials for smooth investment in mutual funds. The investment can be completed through debit card and cheques but Net Banking is the safest option. The time taken to complete transactions in net banking is faster compared to other modes of transactions. 

The first time mutual fund investors are also advised to consult a mutual fund expert. A mutual fund expert does intense research in the field and knows the market patters. Choosing a perfect mutual fund from thousands can be a tough task for the investors but an expert knows about all the schemes fully and can guide you to the best option for the beginners.

It is not mandatory to have a Demat account to invest in Mutual funds. Earlier it was necessary to have a Demat account to invest but now an investor can invest in mutual funds through a distributor, directly through a fund house website or through a broker. The investors can create an account directly on the AMC website. Demat account is mandatory for trading in the stock market. The only necessary requirement for investing in a mutual fund is KYC. Investing through Demat is complex as the investor has to create the account first and even after that it is a complex task. Instead, the investors can opt for direct investing by physically visiting the registered office or through their official website. The alternative process is much simpler and cheaper than investing through Demat. The Demat account charges annual charge to maintain the account and also various other miscellaneous charges. 

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