beginners guide to mutual fund, how to start investing in mutual funds

Mutual funds are special purpose financial vehicles in which funds are collected from numerous individuals and Institutions and then invested in Securities such as Stocks, Bonds, Money Market Instruments, etc. The investments in Securities could be either singly in any of these securities or may be invested in a pool of these securities in a particular ratio as per the mandated fund.

These funds are managed by  Professional Manager and depend upon the size and mandate of funds and more nos. of Managers could be appointed. These funds are organized under the mandate of the Funds and investment is made into securities as per the objective of the Fund. The investment could be into various no. of equities Debts or Money Market Instruments.

The pooling of the Funds from various investors helps the Individual Investor to get the benefit of Professional Managers who manage their funds as per the investment objective or mandate of the funds. The corpus of Funds so collected is invested in various no. of securities and their performance can be gauged by aggregating the value of these individual securities on a particular day. Each shareholder of the mutual funds owns proportionately the value of their investment in the Fund. The Gains or losses are shared proportionately by the shareholders.

 Mutual Funds pool money from the Public and use that money to buy the security usually stocks, bonds, Money Market securities, etc. The value of the mutual funds depends upon the sum total of the value of all the securities invested in the market on a given date.  

Thus the value of a share of a Mutual Fund reflects proportionately the value of different equities/bonds invested on a given date. As Mutual Fund age, their performance is judged by the achievement of the investment objective in the given time frame. A share or portion in the  MF is representative of all the stocks. Therefore, the value of a share is given by the net asset value of all the stocks divided by the no. of shares in the Mutual Fund which is termed as Net Asset Value per unit on a particular day.

Mutual Fund shareholders do not get any voting right in the affairs of the Fund, whereas shareholders of a company do have the voting right. The sale and purchase of the assets of the mutual fund can be done anytime during trading hours, however, the price of the share will depend upon the NAV of the mutual Fund at the end of the trading season, if purchased before 3'O clock of the trading session on the same day and NAV of the next date it purchased after 3'O clock of that day and before 3'O clock of the next date. Whereas in the purchase of equity, the price is the same at the time of purchase.

A mutual fund invests in a diverse pool of assets. This provides a good diversification to the Asset pool. This Mutual Fund investment provides a good diversification of assets at a very small price. This diversification wards off fluctuation in the stock prices. 

A mutual fund earns its income by dividend income on a stock, and interest earned on a debt portfolio. Again the portfolio is also made by appreciation in the prices of security by increasing stock value and by appreciation in the price of debt stock in case of falling interest in bond stocks.

There are various types of Mutual Funds, primarily be\ased on the investment objective of the mutual funds and further depending upon the type of securities and return they intend to seek. Other types of funds could be Money Market Mutual Funds, smart-beta funds target Beta funds, sectoral funds, alternative funds and there could be Fund of Fund that buys the units of other Mutual funds. Funds could be based on the size of Equity like Large Cap Fund, Medium Cap Fund, and Small Cap Funds. Then there are Multi-Cap Funds and we also have Flexi Cap Funds. Also, there are Equity Linked Saving Scheme Funds which also provide a Tax benefit to the Investor. Then there are Sectoral Funds such as Banking Fund, Infrastructure Fund, Consumption Fund, Energy Fund, MNC Fund, Dividend Fund, Technology Funds, Pharma Funds, and International Funds. These are sectoral Funds and they invest in the companies of that particular sector. Debts Fund can be classified into Banking and PSU Fund,, Corporate bond FundCredit Risk Fund, Floater Fund, Gilt Funds, Dynamic Bond Fund, Long Duration Debt Funds, Liquid Funds, Short and Medium duration Funds, Overnight Fund and Ultrashort duration Fund and Money Market Funds. Then there are Hybrid Fundscontaining both the components of Equity and Debts in a fixed proportion and can be classified as Aggressive Hybrid Fund, Balanced Hybrid Fund, Conservative Hybrid Fund, Arbitrage Funds, Dynamic Asset allocation Fund, and Multi-asset allocation Arbitrage Funds. We further would ellobrate some of the more popular as to declutter for our readers.

ELSS Fund- Here there is a Lock-in period of 3 yrs. and Tax benefits are being provided under 80 C of the  Income Tax Act.

Large & Mid-Cap Stock- A minimum of 35% of their funds are invested in Large & Mid-Cap Stocks.

Large Cap Mutual Funds- These are those funds where a minimum of 80% of their funds are invested in Large Cap Funds.

Mid Cap Mutual Funds- These are those funds that invest at least 65% of their funds in Mid Cap Socks.

Multi-Cap MF- This is a fund whose investment in each of the small-cap, mid-cap, and large-cap stocks is at least 25% in each of the categories.

Value-Oriented MF- These are those funds that follow a value strategy.

International  Mutual Fund- Funds that invest more than 65% of their funds in International/Foreign Stocks

Sector  & Thematic Funds- These are those Mutual Funds that invest at least 80% of their Funds in that particular Secor.

Thematic Fund- Funds that can not be classified in any existing categories.

Debts Fund Banking & PSU debt Funds- These are the Debt Funds where at least 80% of their Funds are invested in Debt Instruments of  Banking or PSU debt Funds or Municipal bonds. 

Corporate Bonds- Funds investing at least 80% of their funds in Assets of AA+ and above-rated companies.

Credit Risk Funds- Funds investing at least 65% in AA and below rated corporate bonds.

Dynamic Bond- Dynamic funds investing across duration.

Aggressive Hybrid Fund- Funds investing 65-80% in equity and the rest in Debt.

Arbitrage Funds- Funds investing 65-80% in equity and the rest in debt.

Balanced Hybrid Fund- Funds investing at least 40-60% in equity and the rest  in  debt,

Conservative Hybrid Fund- Funds investing 10-25% in equity and the rest in debt.

Dynamic Asset Allocation Fund- Funds that dynamically manage the asset allocation between equity and Debt.

Equity and Savings- Funds investing at least 65% in Equity and 10% in Debt.

Multi-Asset Allocation Fund- Funds investing in 3 different Asset classes and 10% each in these Asset classes.

Advantages of investing in Mutual Funds

1. Diversification: The first and foremost advantage of investing in a Mutual Fund is that it gives the advantage of diversification in Once assets at a very low price. Each unit of the Mutual Fund is representative of the Assets invested in the Mutual Fund which invests in a large no. of Industries that may be in different sectors and in various types and sizes of the Industry. This diversification helps the fund to absorb the fluctuations in the Industry with the other Investment in varying types of industries with different Assets is difficult for an Individual Investor with a small amount of Investment. It would be difficult for an Individual Investor to make such a diversified portfolio with a small amount of Capital or Investment. Thus the biggest advantage of a Mutual Fund is that it provides you diversification in your Assets which resultantly provides you a cushion to your Investment to withstand fluctuation in your Investment.

2. Easy Access: The purchase and sale of Mutual Fund have become very easy and thus they have become very liquid. Investments in Mutual Fund are much better than Assets like Real Estate which take much time in an inquiry into legality and Asset verification.

3. Economies of Scale: By investing a minimum amount in the Mutual Fund one can participate in the whole spectrum of Assets in the Mutual Fund is invested, We get a slice of the Spectrum of Assets, in the Mutual Fund is invested in. This participation in such a large no. of Assets is otherwise not possible at the level of individual investors. Further buying individually of these no. of Assets will not only cost an individual a large amount of money but also the charges in buying these Assets of Individual Stock by these Investors.

4. Professional Management: The Mutual Funds are being run by Professional Managers who are bestowed with a team of researchers. They select the stocks after very careful research for their potential and longevity. To an individual investor, this service is available at a very nominal cost, which is distributed among umpteen no. of Investor. To an Individual, it is difficult to do such research and devote so much time.

5. Transparency: Mutual Funds being under the regulation of SEBI ( Securities and Exchange Board of India)  do maintain transparency, accountability, and fairness towards the Investors.

Disadvantages of Mutual Funds:-

Fluctuating Returns: You can not expect regular growth in Income from Mutual Fund investment. They do now grow regularly at a constant growth but over time, there could be wide savings. Thus not suitable for those who want to grow at a regular pace. However in the longer term of 10-15 yrs. they give decent returns.

Cash Drag: Mutual Funds do maintain a very substantial portion of their funds for withdrawals by Individuals and simultaneous purchases of stocks when scrips are down.

Mutual Funds are a very important system by which an Individual could amass wealth gradually by investing a small Capital regularly in a pool of Assets of the Mutual Funds which are managed by professional Managers for a small fee. These Funds are operated transparently as they are being overlooked by SEBI( Securities & Exchange Board of INDIA.

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