Introduction to Mutual Funds
What are Mutual Funds?
A mutual fund is an investment which gathers money from people and hands it to a professional fund manager. This money is further invested in a combination of assets such as stocks, bonds or other securities so as to build your wealth in the long run.
Example:
Suppose you and 9 of your friends contribute 1,000 rupees each. Through this, you will now have 10,000 rupees. You entrust this money to someone who is an expert (the fund manager), who in turn buys a mixture of investments, some in shares of companies, some in government bonds and part of it in other sorts of investments. In this manner, you will obtain diversification and professional management, although you invest a little.
In simple terms
The asset is mutual funds, which are the investment buckets. Your money and the money of other people are placed in one bucket, and a financial guru takes on the responsibility to decide how to invest that cash in a sensible way. It is one of the simplest means to begin to invest, and it is relatively similar due to the experience in the financial sphere.
Key Takeaways
- Mutual funds are investment instruments that are professionally managed causing it to be easily accessible to new investors because it collects the money of many investors and invests in a diversified portfolio.
- Mutual funds come in different forms- equity, debt, hybrid, ELSS, etc., which are appropriate under different goals, levels of risk and time frames.
- You may invest in the form of SIP/ lump sum depending upon your financial capability and market conditions. SIP is awesome when it comes to consistency, and lump sum is effective when you have a spare cash.
- Make your investments as per your financial objectives and risk tolerance so that you know which one is the most appropriate fund and stay invested confidently.
- Any charges such expense ratio, exit load, and transaction fees may influence your total returns in the future, therefore, you should be aware of it.
- You can trade or sell mutual fund quite easily online, yet beware of lock-in periods, sale charges and market conditions.
- Revisit your investments regularly, be patient and never succumb to market fluctuations in the short term because consistency in the long term will give you a better outcome.
Why invest in Mutual funds?
Mutual fund investment is among the methods where one can maximise his or her money in the most convenient and efficient way, particularly as a first timer in the investment world. So, this is why mutual funds have become a favourite of so many:
1. Professional Management
Qualified fund managers with the skills on the trends in the market, as well as in the selection and management of assets, manage your money. Their experience works to your benefit as you do not have to follow the markets.
2. Diversification
Mutual funds put money in a combination of securities such as stocks, bonds, etc. This helps to diversify your risk, thereby, although one of your investments may do badly, others can counteract it.
3. Cost-effective and Reachable
You do not require a huge amount in order to start off. SIPs enable you to invest as low as 500 rupees per month, and this makes it quite convenient to invest even for the salaried and novice investors.
4. Flexibility and Variety
Mutual fund schemes are available in an expansive variety to suit your investment objectives and risk tolerance to be determined including growth, stability, balance and many others, and equity funds, debt funds, and hybrid funds.
5. Liquidity
Open-ended mutual funds are ones in which you can redeem your investments at any time they are needed. This provides you with flexibility in case of a need or a change of financial goals.
6. Tax Benefits
Certain mutual funds, such as ELSS (Equity Linked Saving Schemes), provide tax deduction on the income tax as per Section 80C of the Income Tax Act. With tax deductions, you are able to save on taxes by accumulating wealth.
7. Open and controlled
SEBI (Securities and Exchange Board of India) has put in place rules to govern all mutual funds in India so as to protect the investors, maintain transparency and follow uniform reporting norms.
Mutual funds are an easy and safe method of investing, so that your investment earns money. Depending on whether you need financial gain through long-term, short-term, or tax-saving funds, mutual funds offer a realistic and managed course to financial growth.
Understanding Mutual Funds
Building a profile for mutual funds:
A personal investment profile should be established before one invests in mutual funds. This assists you in selecting your funds based on your financial objectives, risk appetite and the investing period. That is how you can create a powerful mutual fund investment profile:
1. Identify Your Money Target
Begin by determining your reasons for investing. Are you saving to buy a home or retirement and/or paying for the education of a child, or just to acquire wealth in the long run?
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- Intermediate objectives (3 years-15 years): Low-risk debt or liquid funds would be preferred.
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- Medium-term objectives (3 years, 5 years): Take into account balanced or hybrid funds.
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- Long term (over 5 years): equity mutual funds have a higher prospect of returns.
2. Know Your Risk Appetite
Evaluate your comfort level with market fluctuations.
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- Low-risk players: Keep it to debt funds or liquid funds, or conservative hybrid funds.
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- Moderate-risk investors: You might want to consider a balanced fund or a large-cap equity fund.
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- Risk-seeking investors: There are greater returns but also greater volatility, which can be realised by small-cap and sector-specific equity funds.
3. Choose your Investment Horizon
How many years will you invest? Market fluctuations are better taken up with longer time spans.
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- Less market exposure: select short-term funds.
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- Long period: Select wealth-creating equity-based funds.
4. SIP or Lump Sum:
The option is yours.
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- SIP (Systematic Investment Plan) is fine to invest a little regularly and have discipline.
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- A lump sum is appropriate provided that you have money to spare and when market timing is favourable to you.
5. Take Your Tax Bracket
In case tax saving is a priority, ELSS funds come to the rescue under Section 80C. In addition, look into the tax on capital gains of various funds.
6. Examining Historical Experience and Learning: Evaluating Previous History and Learning
Begin by investing in low-risk funds and mutual funds, or index funds, especially when you are new at this. You can equally take your time to experiment a bit deeper as you build your expertise.
7. Review Regularly
The profile of a mutual fund is not permanent. You should reconsider it at least once a year or in case your goals, income or market conditions alter.
Learning the important terms related to mutual funds
This is the basic and short answer on how to learn the jargon of mutual funds, especially when you are new to it:
1. Net Asset Value (NAV)
The price of a mutual fund per unit is. It varies on a daily basis depending on the value of assets of the fund in the market.
2. Systematic Investment Plan (SIP)
A possibility to invest an amount of money regularly (e.g., monthly) into a mutual fund – excellent in terms of disciplining investing.
3. Expense Ratio
The percentage annual cost that a mutual fund will take to run your money. The less, the better.
4. Assets Under Management (AUM)
Assets Under Management are the aggregate sum of the market value of all the financial assets under the control of a financial institution, be it a mutual fund, a hedge fund, a portfolio manager, etc. It consists of stocks, bonds, real estate, among other investments. AUM can be equated as a measure of the size, popularity and credibility of a fund.
5. Equity Fund
A mutual fund invests largely in stocks. In general, more risk, more reward.
6. Debt Fund
Invest in fixed-security instruments such as bonds. It is appropriate in the case of conservative investors seeking stability.
7. Hybrid Fund
It unites both debt and equity. Weighs between risk and gain.
8. Load (Entry/Exit Load)
There is a fee that will be charged whenever you purchase (entry) and sell (exit) mutual fund units. Numerous funds have been made no-load.
9. Redemption
It is the procedure of selling your mutual fund schemes and retrieving your capital.
10. Lock-in Period
The period during which the investment is not subject to withdrawal without penalty. Tax-saving ELSS funds (3 years).
11. Equity Linked Savings Scheme (ELSS)
Mutual fund tax savings with a 3-year liquidity period. An investment can enjoy tax savings under section 80C.
12. Fund Manager
This person is the expert who decides where the mutual fund is to invest the money.
13. Riskometer
A graphical indicator on the mutual fund documents provides the level of risk, i.e., low to very high.
14. IDCW
IDCW(Income Distribution cum Capital Withdrawal) is a mutual fund option in which the investor gets periodical payments on the profits from the fund. These dividends are not at all times assured and will have the effect of lowering the NAV of the fund once coughed up.
Types of Mutual Funds
Equity mutual funds are the mutual funds that deal with the company stocks and are suitable for long-term development. They are subject to greater risk but are faced with greater returns.
Debt mutual funds are those that are invested in fixed-income securities such as bonds and government securities. They are also appropriate for conservative investors who want higher returns but lower risk.
The hybrid mutual funds involve mixing equity and debt investments in order to obtain a balance between the risks and returns, with moderate risk-takers being most suited.
Open-ended funds will enable you to invest or take out money at any time. They are very liquid.
Close-ended funds are those funds which mature in a predetermined time, and the investor can only invest in them during the launch period.
The interval funds cannot be purchased or sold at any price that the investors may wish to do but at intervals determined by the fund house.
Growth funds’ main goals are long-term capital appreciation, and they do not typically provide regular payouts.
Income funds are concentrated on generating returns regularly in terms of interest or dividends.
Tax-saving funds (ELSS) will also provide you with tax savings under section 80C with a 3-year lock-in period.
Liquid Funds: Low-risk, short-term and duration-orientated debt funds, which are opted for when there is a short-term objective or surplus money which needs to be parked.
Mutual Funds vs Direct Equity
Mutual funds are funds which are professionally managed and into which money belonging to different investors is pooled to invest in a portfolio of stocks or bonds, or other securities which are diverse in nature. They suit best those who do not want to take an active role in the management of their money, since it is the responsibility of the fund manager to buy, sell, and conduct research. Due to the diversification, mutual funds mitigate the risk they take and are relatively safe investments, especially for a novice or an investor who may lack the necessary time or skills to follow the market.
Direct equity is, however, the investment in individual company shares. It provides high returns, but due to the chance of fluctuation in the market, it is riskier, as the returns have to be faced by the investor himself or herself. Direct equity needs good market knowledge, research and frequent monitoring of company performances, which makes it more desirable to the experienced investor who is actively interested in the investment decision.
Active vs passive mutual funds
Active funds are managed by professional fund managers as they make active choices of what stocks or securities to buy and sell with the objective of beating the market or benchmark index. The following monies entail additional research, regular trading and increased management expenses. They mostly rely on the expertise of the fund manager.
Passive mutual funds, including index funds, do not actually make any effort to outperform a market index (e.g., Nifty 50 or Sensex) but merely track it. They are less likely to buy and sell and are associated with cheaper fees but are not likely to be cost-effective and stable in the long term.
Getting Started with Mutual Funds
Things to consider before buying a mutual fund as a beginner
The investing horizon, risk tolerance, and financial objective must be well-aware among the novice before participation in a mutual fund. The appropriate type of fund should be selected depending on the purpose which is whether it is to be used to achieve long-term growth, regular income or benefit of taxes. The other thing to focus on is the track record and cost of funds as well as expertise to manage the fund.
Things to consider:
- Your investment goal (growth, income, tax-saving)
- Risk tolerance (low, medium, high)
- Investment horizon (short, medium, long term)
- Type of fund (equity, debt, hybrid)
- Past performance and consistency
- Expense ratio (fund management cost)
- Lock-in period (if any)
- Fund manager’s experience and credibility
- Option to start with SIP for disciplined investing
Risk-tolerant and investment goals
The risk tolerance concerns how you and are prepared to ride with the value of your assets. Being ready and willing to accept short-term highs and lows, possibly to gain more in the long term, might bring you down as someone risk-tolerant. A low risk tolerance should also apply to you when you value stability and do not want to lose large amounts of money.
Your Investment objectives are the particular aims that you have with the investment, such as in retirement, purchasing a home, financing education and earning a continuous income. Your objectives assist in guiding you on the risk tolerance that must be taken and appropriate mutual funds that you can invest in. As an illustration, lower-risk debt funds might be required in a short-term goal, and options with higher-risk equity funds might be available in a long-term goal.
How to invest in Mutual Funds
To invest in mutual Funds, you need to start identifying what your financial goals are, how much risk you are willing to take and how much you can invest. After asking yourself these questions, you will be able to select a fund, and thus you can start investing either by a lump sum(one-time investment) or you can choose to invest through SIP(Systematic Investment Plan) if you want to contribute regularly
Steps to invest in mutual funds:
- Complete your KYC using PAN, Aadhaar, and bank details
- Choose a mutual fund platform (like the AMC website, app, or third-party portal)
- Select a fund based on your goal and risk tolerance
- Decide the SIP amount and investment frequency (monthly is common)
- Set the start date and enable auto-debit from your bank account
- Track your investments regularly and make changes if needed
How to invest in mutual funds through a lump sum investment?
Investing in mutual funds through a lump sum means investing a large amount of money at once, rather than in smaller regular installments. It is suitable for investors who have a sizable amount of idle funds and are confident about current market conditions.
Steps to invest through a lump sum:
- Complete your KYC using PAN, Aadhaar, and bank details
- Choose a trusted investment platform (AMC website, app, or broker)
- Select a mutual fund scheme that aligns with your goal and risk profile
- Enter the amount you want to invest and select the payment mode
- Transfer the funds through net banking or UPI
- Monitor the fund’s performance periodically and stay invested for your desired time horizon
How to sell mutual funds?
Redemption is the act of selling mutual funds or in other words, withdrawing an investments. It may be done both online or offline and under normal circumstances it is not complex provided your KYC and bank information are recent.
Procedure to sell mutual funds:
- Access the site of the facility in which you purchased the mutual fund (AMC site, application or broker section).
- Visit your portfolio or holdings page.
- Choose the mutual fund that you wish to sell.
- Decide whether to choose full units or a certain amount of money
- Get the redemption request confirmed.
- Most funds can be paid to your linked bank account between 1 and 3 working days.
Tip: Be aware of the exit load or lock-in period when you redeem an existing fund, particularly ELSS or recently purchased funds.
Mutual Fund Returns and Costs
How do I earn money from mutual funds?
There are two key ways through which you earn from mutual funds:
1. Capital Gains:
As your mutual fund units see a rise in value, you are able to sell (redeem) your units at a higher price than the one you had purchased them with. The margin is your profit. To take a simple case, you purchase a unit at a unit price of 100 rupees and sell it later at a price of 130 rupees, your capital gain on each unit becomes 30 rupees.
2. Dividends:
Certain mutual funds share some of their earnings with the investors in the form of a dividend. These are normally in instalments and will be partly credited to your bank account in case you select the option of getting the dividends.
The kind of mutual fund you are investing in, the duration you remain invested and the performance of the market and the funds management determines your actual returns.
Mutual fund charges and fees
There are some charges and fees associated with a mutual fund that an investor is advised to be aware about, which can reflect in the returns. The fund house will deduct most of these on your behalf and you do not tend to be charged on all of them every time.
Typical charges and fees common to mutual funds:
Expense Ratio: The Fee that the fund charges annually to invest your money. It includes management, administration and operational costs. It is usually between 0.5 to 2.5 per cent.
Entry Load: A charge on the purchase of a fund. This is no longer charged in most of the mutual funds in India.
Exit Load: A term that is imposed when you get back your investment at a stipulated time (typically 1% in case one redeems the investment in the first year).
Transaction charges: Depending on the amount invested, individual fund houses might impose a set up charge (approximately 100150) if you invest an excess of 10,000.
Tax on Gains: Capital gain tax will be levied should you sell units, though it is not an expense made by the fund. The rate is also determined by the holding period and type of fund (equity or debt).
These charges are important to understand in choosing low-cost funds and maximising your net returns.
Strategies and Tax Planning
Mutual fund investment strategies
Mutual fund investment strategies enable you to invest your financial assets in line with your objectives and expectations of the market and your risk tolerance. The appropriate selection of strategy helps you receive the optimum returns according to the levels you feel comfortable with, as well as your time horizon.
Typical shared-fund investment approaches:
SIP (Systematic Investment Plan): To accumulate wealth in the long term, SIP or a fixed amount of money is invested regularly to minimise the timing risk.
Lump Sum Investment: Perhaps a high denomination of money, once in a market scenario, which is low, or you have surplus money.
Goal-Based Investing: Select funds on individual purposes such as retirement, educational or purchase of a house with corresponding time durations.
Asset Allocation: Mix between equity, debt and hybrid funds to find an optimal risk-return trade-off.
Risk-Based Strategy: Debt or hybrid funds are suitable for conservative investors; equity or sector-oriented funds to aggressive investors.
Core and Satellite Strategy: Incorporate equity funds that have stable long-term funds as the core and have high-risk and high-reward funds as the satellite in order to increase returns.
Tax-Saving Instruments: ELSS (Equity Linked Savings Scheme): It is possible to operate a tax saving option in ELSS (Equity Linked Savings Scheme), capital readiness under ~ Section 80C and create long term wealth.
How to Minimise Liability in a Mutual Fund Investment
Investments with mutual funds, as a rule, provide limited liability to the investor, which would entail that you would risk losing a certain amount of money that you invest. Yet, to minimise the risk of losing your money and damaging your capital, you may take into account the following alternatives:
1. Select LI Limited Liability Investment Vehicles
As far as investment is concerned, invest in SEBI-registered Asset Management Companies in the form of mutual funds. These are controlled, and they have limited liability by default.
2. Diversify Your Investments
It is better not to put all your money in one fund or sector. Intensify the diversification of stock, bond as well and combined funds to better address the risks in a market.
3. Invest in SIPs (Systematic Investment Plans)
The SIPs also enable you to save your investment gradually, minimising the chances of buying the stocks when their prices are too high. This plan encourages sensible investing as well.
4. Stay away from Sector-Specific or Thematic Funds
Such finances are quite volatile. You should avoid going into the sector unless you know the industry in and out, and then perhaps you can invest in diversified funds.
5. Make sure you read the Offer Document
Before investing in a fund, make sure you are aware of its goal, risk level, lock-in term, expense ratio, and exit charge. This is to make sure that you do not find yourself in a compromising position because of hidden dangers.
6. Keep a check on Fund performance
Your investments need to be reviewed once a year. A fund that constantly underperforms its peers or benchmark should be swapped.
7. Know your Risk Profile
Invest according to your risk tolerance. Conservative investors are supposed to look at debt or balanced funds, whereas aggressive investors can look at funds that invest in equity.
8. Do not Buy and Sell Often
This may even result in higher expenses due to exit loads, taxes, as well as lost advantages in compounding. Unless there is a strong reason to sell off, stay long-term.
9. Tax-Efficiency Driven Fixed Return Assets
Equity mutual fund holdings are subject to reduced capital gains tax in case of long-term possession. Section 80C also offers a tax rebate to Equity Linked Saving Schemes (ELSS).
10. Seek the Whitelisted Advice of a SEBI-R Registered Advisor
A certified advisor has the ability to assist you in picking adequate funds, dealing with risk, and remaining in compliance with the regulations.
Best tax-saving funds
Such mutual funds are known as ELSS (Equity Linked Saving Schemes) as they are the best tax-saving funds.
These are a kind of equity mutual fund that mainly invests in stocks and is tax-deductible under section 80C of the Income Tax Act, up to the limit of 1.5 lakhs/annum. The ELSS funds are placed with a 3-year lock-in period, which is the least in comparison to any other options of tax-saving investments, such as PPF or NSC.
They suit best to those investors who are targeting to avoid paying tax and at the same time want to create long term capital growth by having a share of equity.
Recommendations
Best mutual funds to invest in India
Some of the best mutual fund stocks in India can be selected based on the combination of research, analysis of your financial goals and analysis of the performance of funds. As opposed to direct stocks, mutual fund stocks are the actual portfolio of equity stocks in a mutual fund scheme (particularly an equity mutual fund). To make an informed choice, here is how to do it:
1. Clarify Your Objective of Investment Objective
What you need to have clarity before picking the right mutual fund stock is to have a target:
- Wealth creation
- Retirement planning
- Tax saving
- Regular income
This assists you in determining whether to invest in an equity fund, a debt fund or a hybrid fund.
2. Test Your Risk Profile
A varied risk is attached to mutual funds. Are you the safety-prone investor? Go check on big-cap funds. In case you are ready to tolerate volatility to gain better returns, consider mid-cap or small-cap funds that invest in aggressive mutual fund stocks.
3. Check Performance of Funds
Check how this fund performed over the last 3-5 years in comparison with its index and with peers. Although the past performance does not guarantee future gains, some of the funds which consistently perform well tend to have great mutual fund stocks over market cycles.
4. Portfolio holdings look at it
Check which securities the mutual fund is investing in. Most attractive mutual fund stock selections are usually stable blue-chip firms or high-growth potential young business firms. A diversified portfolio is an indication of good performance.
5. Expense Ratio
Having a lower expense ratio implies that there is an increased amount of your money that is. Always put this against similar types of funds.
6. Track record of the Fund Manager
With experience and expertise, a fund manager is better placed to decide which mutual fund stocks to purchase or to shun.
7. Fund Type
- Large Cap Funds: Buy many 100 listed stocks. Sherer, rate Increment.
- Mid /Small Cap Funds: Buy sizeable firms. Superior risks and rewards.
- Multi-Cap/Flexi-Cap Funds: It is diversification by market caps.
Well done on completing the blog!
Commencing the process of learning about mutual funds is one of the most accessible yet useful tools for creating long-term wealth.
Also, either one wants to have a retirement plan or a dream house or simply wants to increase the savings, the mutual funds are a flexible as well as diversified way of achieving it, according to the degree of risk the person can take and according to needs.
When you are new, you could start with some of the best mutual funds in india such as Mirae Asset Large Cap Fund, Axis Bluechip Fund or Parag Parikh Flexi Cap Fund. These have faired well and are a perfect long-term investment whereby the investor wants stability accompanied by growth.
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