- Credit Rating: This is the first step in selecting a mutual fund scheme. The independent rating agencies rate mutual funds issued by companies after careful evaluation or assessment of securities based on multiple factors.
- NAV: An NAV or Net Asset Value is the total market value after taking out all fund related expenses of all the shares held in the portfolio divided by the number of units available. Whenever there is an increase in profit of the funds, net asset value grows without any change in the allocated units, thus determining that there are earnings on the investment and vice-versa.
- Expense Ratio: Expense Ratio defines total operating expenses divided by the total value of assets under management (AUM). AUM is the total market value of the property that an investment or financial institution manages on behalf of an investor, company or a firm.
- Entry Load: Entry load is charged when an investor makes an investment in the mutual fund. It is the percentage added to the prevailing NAV at the time of investment.
- Exit Load: Exit load is charged at the date of redemption, and its value depends from fund to fund. The money that is deducted in the form of the sales charge, exit and entry load goes directly to the AMC, not the mutual fund.
- AMC: Asset Management Company (AMC) runs a mutual fund and has good and professional fund managers.
- AUM: Asset Under Management (AUM) is the total fund a mutual fund scheme holds for investments.
- Benchmark: Benchmarks are Sensex and Nifty which help you compare your return.
- Fund Manager: Fund manager is a person who decides where to invest your money in the mutual fund. Performance of a mutual fund largely depends on its fund manager.
- Holdings: Holdings are names of companies whose shares or bonds are bought by the scheme.
- Launch Date: It’s the date on which a mutual fund is launched. The older the fund is, the better you can judge about its performance.
- Lock-in Period: This is the period of time, from the date or investment, for which the investment cannot be withdrawn. Tax saving Mutual Funds (ELSS) have a lock-in of 3 years.
- Returns: Return is a profit or loss on an investment which is basically the change in value/principle amount. In mutual funds, we generally check for 1Year, 3Years and 5Years returns.
- Risk: Risk is the deviation from the standard or the expected value. Every mutual fund is rated against risk associated depending on its asset allocation.
- SIP Minimum: This is the minimum investment amount you need to invest every month (SIP) in the mutual fund. The amount is decided by the AMC.
Mutual Funds
Why Invest in a Mutual Fund?
Investing in mutual funds offers numerous benefits and opportunities for individuals looking to grow their wealth and achieve their financial goals:
Convenience
Mutual funds provide a convenient way for investors to pool their money together and invest in a diversified portfolio of assets. This eliminates the need for individual investors to research, select, and manage investments on their own.
Professional Management
Mutual funds are managed by professional fund managers who have the expertise and experience to make investment decisions on behalf of investors. These managers conduct thorough research and analysis to identify investment opportunities and manage risk effectively.
Diversification
Mutual funds invest in a wide range of assets, such as stocks, bonds, and other securities. This diversification helps spread risk across different investments and reduces the impact of any single investment underperforming.
Risk Management
While there are risks associated with investing in mutual funds, professional fund managers actively monitor and manage these risks to protect investors' capital. Additionally, the diversification offered by mutual funds helps mitigate risk by spreading investments across various asset classes.
Customization
Mutual funds offer a variety of investment options to suit different investor objectives and risk profiles. Whether investors seek capital growth, income generation, or a combination of both, there are mutual funds available to meet their needs.
Expert Advice
Mutual fund distributors provide valuable advice and guidance to investors, helping them make informed investment decisions based on their financial situation and goals. These professionals offer insights into market trends, investment strategies, and fund selection.
What to look for before Investing in Mutual Funds?
What are various modes of investing in Mutual Funds?
Choosing between a single lump sum investment and various systematic investment plans depends on your financial situation, investment goals, and risk tolerance. Here’s a brief overview of each option
Single Lump Sum Investment
This option suits individuals who have accumulated a significant amount of funds and are ready to invest it in one go. It offers the potential for higher returns, but timing is crucial, and it's essential to have a longer investment horizon.
Systematic Investment Plan (SIP)
SIP is ideal for those with regular monthly income and no substantial savings. It involves investing a fixed amount at regular intervals, regardless of market conditions. SIPs help average out the cost of investments over time and are suitable for long-term goals.
Systematic Transfer Plan (STP)
STP is suitable for investors who have a lump sum but prefer a gradual approach to investing. It involves initially investing in a low-risk fund and systematically transferring funds to a higher-return scheme over time. STP helps manage risk and volatility while potentially earning higher returns.
Dividend Transfer Plan (DTP)
DTP is beneficial for low-risk investors who have invested in debt funds. It allows for the transfer of dividend income from a debt scheme to an equity scheme, or vice versa. DTP helps balance risk and returns while maximizing income potential.
Systematic Withdrawal Plan (SWP)
SWP is designed for individuals who want to maintain a steady income stream post-retirement. It allows investors to withdraw a predetermined amount regularly from their investments to cover living expenses while keeping the remaining funds invested to continue earning returns.
Factors for selecting the Mutual Fund Category
Investment Objective
Investment objective refers to an investor’s financial goal which the individual aims to accomplish with the mutual fund investment. It can be short-term or long-term financial aspiration of the investor like buying a house or a car, financing children’s higher education, going on a vacation, retirement, etc.
Time Horizon
Time horizon refers to the time period for which an investor wishes to keep the money invested in a mutual fund scheme. The market can be highly volatile in the short term but tends to provide higher earnings growth over time.
Risk tolerance
Risk tolerance refers to the amount of risk an investor is willing to take with the invested money. The 5 risk levels are – low, moderately low, moderate, moderately high, and high.
Who all can Invest in Mutual Funds?
- Indian resident above the age of 18 either jointly(not exceeding 3 people) or individually
- Companies, corporates bodies, trusts and corporate societies.
- Partnership firms
- Qualified Foreign Investors
- HUF (Hindustan Undivided Families)
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Frequently Asked Questions (FAQs)
Certainly! Here are 20 frequently asked questions (FAQs) about LIC along with their answers
A mutual fund is a professionally managed investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities, based on the fund’s investment objectives.
Mutual funds collect money from investors and invest it in a diversified portfolio of securities according to the fund’s investment objectives. Investors purchase shares of the mutual fund, and their returns are based on the performance of the fund’s underlying assets.
Some benefits of investing in mutual funds include diversification, professional management, liquidity, accessibility, and the ability to invest in a wide range of assets with relatively small amounts of money.
Mutual funds can be categorized into various types based on their investment objectives, asset classes, risk profiles, and other factors. Common types include equity funds, bond funds, money market funds, index funds, sector funds, and balanced funds.
Choosing the right mutual fund depends on factors such as your investment goals, risk tolerance, time horizon, and investment preferences. It’s essential to consider factors like fund performance, expenses, investment strategy, and the fund manager’s track record.
The minimum investment required for mutual funds varies depending on the fund and the investment platform. Some mutual funds may have minimum initial investment requirements, while others may offer lower minimums for subsequent investments or through systematic investment plans (SIPs).
Mutual funds may charge fees and expenses, including management fees, administrative fees, sales charges (loads), and operating expenses. It’s essential to understand the total cost of investing in a mutual fund, as it can impact your returns.
Mutual fund returns are calculated based on the change in the fund’s net asset value (NAV) over a specific period, considering factors such as capital gains, dividends, and distributions. Returns are typically expressed as percentages and may be annualized for comparison purposes.
Mutual funds carry various risks, including market risk, credit risk, interest rate risk, liquidity risk, and inflation risk. The level of risk depends on factors such as the fund’s investment strategy, asset allocation, and market conditions.
Yes, investing in mutual funds involves risks, and it is possible to lose money, especially in volatile markets or if the fund’s investments decline in value. However, diversification and a long-term investment approach can help manage risks and potentially mitigate losses over time.