We don’t have to be smarter than the rest.
We just have to be more disciplined.
Mutual Funds are Trusts which pool money from common investors and invest in securities markets. This collected amount is invested in shares, bonds and other financial and physical assets depending on the scheme objectives. Each scheme is handled by a team of financial experts, headed by a Fund Manager. Investor owns units which represents a holding of a portion of the fund. Mutual Funds in India are regulated by Securities Exchange Board of India, SEBI.
Benefits of investing in Mutual Funds
Anyone who is aware of stock market is not new to mutual funds. Mutual funds have gained in popularity with the investing public especially in the last two decades following are some of the primary benefits. However, mutual fund investing is not limited to stock investing alone but includes other financial and physical instruments too.
Professional Financial Experts
Investing directly in shares is no cake walk. It requires experience and expertise which most retail investors lack. Every mutual fund scheme has a Fund Manager who along with a dedicated team of financial experts handle the investments of the scheme. They diligently and judiciously study economy and markets, scan individual companies and financial instruments and after through analysis decide the best investment options for the fund.
It plays a very big part in the success of any portfolio. Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security. Mutual fund unit-holders can benefit from diversification techniques usually available only to investors wealthy enough to buy significant positions in a wide variety of securities.
Mutual Funds generally provide an opportunity to invest with fewer funds as compared to other avenues in the capital market. You can invest in a mutual fund with as little as Rs. 5,000 and also have the option of investing a little of Rs.500 every month in a SIP or Systematic Investment Plan.
Investors can redeem their units anytime unlike fixed deposits and similar financial instruments. Some schemes may have lock in period and exit loads but here too after expiry of such period, units can be redeemed anytime.
Variety of Investment
Mutual funds invest in a variety of instruments. There are funds that focus on blue-chip stocks, sector specific stocks, bonds, gold or a mix of stocks and bonds and with due assistance from a financial expert. The investors can choose a scheme that aptly fits their requirements, and helps them achieve maximum profitability.
Types of Mutual Funds
An equity mutual fund is a mutual fund that predominantly invests in stocks. As mandated by SEBI, equity funds are required to invest a minimum of 65% in equities and equity related instruments. They primarily aim to provide capital growth but can declare dividends out of realized profits.
Debt or Income Funds
Debt instruments are fixed income instruments with a fixed tenure and are usually tradable. They can be of various tenures ranging from a single day to several decades. Debt instruments with tenures up to one year are referred as money market instruments. Debt funds invest in a basket of debt instruments and primarily aim to provide steady income with limited capital appreciation.
The aim of balanced funds is to provide both growth and regular income as such these schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. The investor may wish to balance his risk between various sectors such as asset size, income or growth. Therefore the fund is a balance between various attributes desired, however, NAVs of such funds are likely to be less volatile compared to pure equity funds
Liquid funds are a safe place to park your money. It is an appealing alternative to bank deposits because they aim to provide liquidity, capital preservation and slightly higher interest rates than bank accounts. Returns on these funds fluctuate much less compared to other funds as the fund manager invests in ‘cash’ assets such as treasury bills, certificates of deposit and commercial paper.
Index funds are passively managed funds i.e. the fund manager attempts to mirror the performance of a benchmark index like the BSE Sensex or the S&P CNX Nifty, by being invested in the same stocks. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index.