Have you ever invested in mutual funds? If not, today I will bring some very important points to your notice that will help you understand the market and help you make an informed decision of investing in mutual funds. If yes, even then you will find something you might not know, so make sure you read till the end. So first will have a little understanding of what are mutual funds and what are its types.
The term mutual means collective, which defines that it is a fund collected from many investors by the asset management companies and invested in stocks, bonds and other securities on their behalf. So in simple words, asset management companies hire experts who have knowledge about the stock market and can take an informed decision on investing your funds carefully.
Buying a mutual fund is like buying a room in a flat where you get all the benefits and losses of your room. Which means the owner of the mutual fund will get the proportional loss or gain on his purchase.
Talking about the type of mutual funds, there are various types of mutual funds in the market, deciding one out of them may be a difficult task for a beginner. But one factor that you understand and can take a decision on is the risk factor. When we talk about risk we can classify mutual funds under three categories.
High Risk – High-risk mutual funds are those funds in which your funds will be invested in a market where high risk is involved. As you must have heard No pain No gain, these funds run on this principle, take back brilliant returns if you have no fear to lose your invested money.
One of the most popular high risk funds are Equity Funds. Investing in equity funds means you are investing in stocks. Investment in stocks is a high-risk investment but it gives growth to your money.
Medium Risk – Medium risk mutual funds are for those who can take some amount of risk on their invested money. This type of funds also offers good returns over a period of time. In this fund, Asset Management Company will distribute your funds in some high-risk funds and some low-risk funds so that your money will grow systematically with no fear to lose all your invested money.
Balanced funds are medium risk funds. In balanced funds your money will be invested partly in stocks and partly in fixed income securities. It creates a balance of high and low-risk fund which in turn helps to maintain a balance of returns and risk.
Low Risk – Low-risk funds are for those who do not want to take any risk on their invested money. But in such case, the return on investment is usually very low.
Money Market funds are comparatively safe investments under mutual funds. In money market funds, the risk to the principal amount is usually very low. The investment under money market funds is generally under government securities.
So now we know what mutual funds are and its type but the very next question would be what these asset management companies are? How to decide which asset management companies are good at their job? So for this, you can do an online search on the list of asset management companies in India and you will get a comprehensive list of top asset management companies operating in India. You can choose any one of them depending on your choice. One important thing to know is all the AMC’s (Asset Management Companies) are regulated by SEBI (Securities and exchange board of India).
Before investing in Mutual funds you should also have a little idea on different market caps. While watching market news you must have heard about small cap, mid cap and large cap. But what do these caps mean and how it can impact our funds invested in the market.
Small-Cap funds – Small-cap funds usually include companies with small market share. These are newly set up businesses who considered to have great potential to grow but does not have a strong financial background so are not established as larger companies.
So investment under small-cap funds is considered to be a high-risk high-return investment. As in case of market instability, small-cap funds can suffer a lot as less established companies go out of business.
Mid-Cap funds – Mid cap funds usually include companies with moderate market share. These are slightly bigger companies which have established their business but still have a lot of potential to grow bigger. These funds are not as unstable as small-cap funds so they usually survive on market instability.
This is the most popular investment option for the general public as it involves a moderate risk with good returns.
Large-Cap funds – Large cap funds usually include companies with higher market share. Companies fall under large cap funds are highly stable with strong financial push. Investors who can leave there money for longer duration should invest in large cap funds. These funds are low-risk investments which give returns only when you buy and hold the investment for a little longer period.
After understanding the concept of risk factor and mutual fund caps there is one more important thing that you should know before getting ahead in investing in mutual funds. The sole motive of investing in mutual funds is ‘Return’. So here you can decide what type of return you want from your mutual fund investment.
Mutual fund companies offer two options to their investors. Investors can choose one to get their ROI (Return on investment). Let’s discuss them one by one:-
Dividend Plan: – Dividend plans offers a dividend to the investors when their fund generates profit. In this plan, the NAV (Net Asset Value) remains almost the same.
For Example- You start investing in a mutual fund at a price of Rs 50 and over a period your fund generates a profit of 10%. In dividend plan, the company will transfer the profit amount i.e. Rs 5 to the investors and NAV remains the same.
Taxes on dividend plans– In dividend distribution plan the dividend received by the investors are tax-free in the hands of the investors.
Growth Plan: – Growth plan offers growth to their investors by adding back the dividend amount. This way NAV of the fund improves and gives growth to fund.
For Example- You start investing in a mutual fund at a price of Rs 50 and over a period your fund generates a profit of 10%. In growth plan, the company will add back the profit amount i.e. Rs 5 to the NAV and the NAV of the fund will improve by Rs 5. Which means now the investor can sell the unit at Rs 55.
Taxes on Growth Plan– In growth plan investors have to pay capital gain tax on the units that are sold at a profit.
Start Investing in Mutual Funds
So you are now quite aware about the mutual funds so begin your investment. For that you can connect with any mutual fund house or broker and get your KYC done. While choosing a mutual fund house you should always check the Expense ratio and exit load that your mutual house levies on your invested money. What these Expense ratio and Exit load is?
Expense Ratio– Expense ratio is a ratio that mutual fund house deducts from investors returns in lieu of advertisement, administrative charges and etc that incurs on managing the fund.
Exit Load– Exit load is a charge that mutual fund deducts if an investor sells its units before a stipulated time. It is usually 1% of NAV if the investor sells before 6 months.
Investment in mutual funds can be done on a lump sum or via SIP (Systematic investment plan). SIP is a good option for people who are less known to this market dynamics. It also helps to save a small amount of money every month out of your salary. Likewise, when you wish to withdraw your invested money you can either withdraw lump-sum or via SWP (systematic withdrawal plan).
This is all for new investors to get started to enter into mutual funds. If there is any question you can connect us through your valuable comments in the comment section below. Happy investing!