I have worked with a renowned Mutual Funds company for many years. So thought of sharing the basics of Mutual Funds.
India offers a variety of investment options, but it isn't easy to choose the best. We all strive to achieve high returns, but we don't know which investment product would help us. Therefore, it is essential to gain basic Mutual Funds knowledge before we start investing.
Mutual Fund is an investment product that can offer us high returns in the long term. Read on to understand the basics of Mutual Funds Investments.
There are different types of Mutual Funds. Many of them offer different investments and return objectives. Some are considered high risk, as they invest in risky instruments like shares, while others are relatively less risky as they invest in bonds and cash instruments. We need a piece of expert advice and the right knowledge to make the right investment decision. Through this blog, I wish to share my basic knowledge of Indian Mutual Funds to continue our learning journey from here and take our investment decision wisely.
What is a Mutual Fund?
Mutual Fund is an investment type that uses a pool of investment from various investors to invest further in shares, debentures, money market instruments, etc. This decision is taken by a professional fund manager designated by a Mutual Fund company.
As many of us do not have experience investing directly in instruments like shares, debentures, etc., we can choose Mutual Funds. Fund Managers have the required expertise to manage our investments to yield better returns. Nevertheless, we should always carefully read the Mutual Fund offer document to understand the risk profile completely before investing.
Benefit and Risks Associated with the Mutual Funds
The biggest benefit of a Mutual Funds around the world is that it allows us to invest indirectly in shares, bonds, etc., with the help of experienced fund managers. However, we should always keep in mind that our capital is subject to market risks. We may not even get our original investment back if markets are negative, and our original invested amount can erode with the declining stock markets. Therefore, we must invest wisely with a long-term horizon and keep track of our investment to get desired results.
Diversify investments within the Mutual Funds Range
There are various types of Mutual Funds available with different investment and return objectives. We must carefully read the offer document to ensure that the fund's investment objective matches our requirements. We should also ensure to invest in more than one fund to diversify our risk. Below are different types of Mutual Funds:
- Equities Fund - Underlying Investments are Shares (High Risk & High Returns Potential)
- Debt Funds (Bond Funds) - Underlying Investments are Bonds (Moderate Returns and Moderate Risk)
- Hybrid Funds - Underlying Investments are a mix of Shares and Bonds (High Risk and High Returns Potential)
- Money Market - Underlying Investments are Cash and Cash Instruments (Low Risk and Low Returns Potential)
Net Asset Value (NAV)
The value of the investment in the Mutual Fund is determined by the Net Asset Value (NAV), which is generally published in the newspapers or Mutual Fund's company website. In simple terms, this is the current pricing of a mutual fund used to evaluate our total investments' current valuation. For example, if we invested x amount in the Mutual Fund, our investment will be allocated several units per the current NAV after deducting the entry load. A simple formula to understand this is as following:
- Assuming entry load (Initial Commission) has been deducted, the number of units allocated per the formula.
- (Investment - Entry Load) / current NAV = No of Units allocated to us.
- These units may fluctuate every day based on the NAV declared every.
- It is always advisable to check the percentage of the expense that will deduct from your investment. The charges like entry load (initial charges), annual management charges, or exit (surrender) charges can be levied on the fund depending on the fund type. These expenses are generally called Entry Load (Charges at the time of investment) and Exit Load (Charges at Redemption).
Check Risk Profile
While it is good to have basic Mutual Funds knowledge, we may also choose to take a piece of advice from a financial adviser before investing our money in Mutual Funds. A financial adviser will gauge our risk profile by asking few questions, or he may request us to fill a questionnaire. Some of these are questions are given below:
- Are you familiar with Investing?
- What is your Investment Objective?
- If your investment outlook is long-term (more than five years), how long will you hold on to a poorly performing portfolio before cashing in?
- If, a few months after investing, the value of your investments declines by 20%, what would you do?
The main objective to check this is to ensure that we choose the correct investment product to accomplish our investment goals.
Check Fund Manager Profile before Investing
To choose the Mutual Fund diligently, it is also important for us to review the performance of the Funds Manager. Past returns do not necessarily guarantee future returns, it can, however, give us the required confidence to go ahead with the investment.
How to Invest?
Nowadays, it has become easy to invest in Mutual Funds Online. We can search for Mutual Funds companies on Google and start our investment process.
Quick Checkpoints for your Basics of Mutual Funds
1) Understand your risk profile by consulting a Financial Adviser
2) Choose the Mutual Fund Type (Equities, Bond, or Cash) as per your risk profile.
3) Consider the past returns (past returns are no indicator of future returns but can be helpful to analyze the performance of fund), Fund Manager's profile, Investment Objective.
4) Consider the charges applicable to the fund. Take your Financial Adviser's help if not sure.
5) Read the Mutual Funds' offer document carefully before investing
Please remember investing wisely is the only trick to gain good returns from Mutual Funds.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2014 BrillzLife by Param Arora