What Is A Mutual Fund? Know Everything Before Investment – Complete Information

Do you want to step into the investment world, but are afraid of the complications of the stock market? Are you looking for a way where your money is managed professionally and you can earn good returns? If yes, then Mutual Fund can be a great option for you. This article will help you understand every aspect of mutual funds, so that you can take an informed decision.

What is a mutual fund?

In simple words, the mutual fund makes a large fund by collecting money from many investors. This fund is then invested in equity, bonds, government securities or other asset class by Fund Manager. The fund manager is an experienced professional who has a deep understanding of the market.

You buy a unit of mutual funds, and manage your money professional. This means that you do not need to choose stock or keep a constant watch on the market.

How does mutual funds work? (How Mutual Fund Works?)

Collection of Money: Asset Management Company (AMC) collects small amounts from various investors.

Investment by Fund Manager: The money deposited is managed by an experienced fund manager. The fund manager invests in various financial instruments (such as shares, bonds etc.) depending on the input objective of the fund.
Construction of portfolio: Fund manager invests in various types of securities and creates a diverse portfolio, which reduces the risk.
Allocation of units: When you invest in mutual funds, you are allocated the units of the fund based on the net asset value (NAV). Nav is the value on which you buy or sell a unit of funds.
Benefits and Loss: When the value of securities invested by funds increases, the NAV of the fund also increases, and you benefit. Similarly, the NAV decreases when the price decreases and you may suffer losses.
Return: Investor gets returns based on fund performance, which can be in the form of dividends, capital gains or an enlarged NAV of the unit.

Types of Mutual Funds

Based on Asset Class:

1. Equity Funds: These funds mainly invest in shares. They are more likely to return, but the risk is also high.

Large Cap Funds: Investment in shares of big companies.
Mid Cap Funds: Investment in shares of middle -sized companies.
Small Cap Funds: Investment in shares of small companies.
Sectoral/Thematic Funds: Investment in a particular industry or theme (eg IT, Pharma, Infrastructure).
Flexi Cap Funds: Freedom of investing in all market capitalization companies.

2. Debt Funds: These funds mainly invest in certain income means like bonds, debentures, government securities. They have a lower risk than equity funds and the return is also stable.

Liquid Funds: Investment for a very short time (up to 91 days), good for emergency funds.
Ultra Short Duration Funds: Investment for 3-6 months.
Corporate Bond Funds: Investment in bonds issued by companies.

3. Hybrid Funds: These funds invest in both equity and date, causing a balance between risks and returns. They are also called balanced funds.

Agrassive Hybrid Funds: More allocation in equity.
Conservative Hybrid Funds: More allocation in date.

4. Gold Funds: These funds invest in gold, often through Gold ETF. They run with the price of gold.

5. Real Estate Funds: These funds invest in real estate properties.

Based on the structure (based on structure):

Open-Ended Funds: You can buy or sell them anytime. The number of units in these is unlimited.
Closed-Ended Funds: They are released for a certain period and can be purchased only during the new fund offer (NFO). Can be redeemed on maturity only or can be sold on stock exchange.
Interval Funds: They are a mixture of open-ended and close-ended funds. You can buy or sell them only at certain intervals.

Benefits of Investing in Mutual Funds

Professional Management: Experienced fund managers manage your money, who have deep knowledge of the market.
Diversification: Your money is invested in many different shares or bonds, which reduces the risk. The principle of “not keep all your eggs in a basket” applies here.
Affordable: You can also start investing with small amounts like ₹ 500 through SIP (Systematic Investment Plan).
Liquidity: In open-ended funds, you can withdraw money by selling your units anytime (some exit loads can apply).
Convenience: It is easy to invest and track. You can invest online or through broker.
Transparency: Mutual funds are regulated by Sebi (Securities and Exchange Board of India) and regularly publish their holdings and performance information.
Tax Benefits: Investing in some equity linked Savings Scheme (ELSS), tax exemption under Section 80C of the Income Tax Act.

How to invest in mutual funds?

It is very easy to invest in mutual funds. You can follow these methods:

Understand your investment requirements: First, assess your financial goals (such as buying a house, retirement, child education), risk tolerance (how much risk you can take) and investment horizon (how long you want to invest).
Select the right fund: Select equity, date or hybrid fund according to your requirements. Check the previous performance of funds, expenses ratio, the experience of the fund manager and the reputation of AMC.
KYC (Know Your Customer) Process: To invest in mutual funds, you have to complete the KYC process. This includes documents like PAN card, Aadhaar card and bank details.
Choose the way of investment:

SIP (Systematic Investment Plan): This is a disciplined method where you invest a certain amount every month. It is considered to be the best way to create money for long periods as it gives the benefit of the average cost of the rupee.
Lumpsum Investment: When you invest a large amount together. This can be beneficial when the market is low.

Invest: You can invest directly from the AMC website, through a bank, a broker or online investment platform (eg Zerodha Coin, Groww, Kuvera).
Track your investment: Review your fund performance regularly. You can track your portfolio on AMC website or on investment platforms.

Risks associated with mutual funds

Although mutual funds provide many advantages, they also have some risks:

Market Risk: The performance of the fund depends on the market move. The decline in the market may reduce the value of your investment.
Fund Manager Risk: Fund manager’s wrong investment decisions may affect the display of funds.
Interest Rate Risk: In debt funds, changes in interest rates can affect bond prices.
Liquidity Risk: It can be difficult to sell units in some funds (such as closed-ended funds).
Concentration Risk: If the fund is focused in only a few shares or sectors, then those shares or sectors can cause major damage.

Conclusion

Mutual funds are a powerful investment tool for those who want professional management, diversification and convenience. They can help you achieve your financial goals, whether it is to save for retirement, make funds for children’s education or just increase your property.

However, before any investment decision, it is important to consider your risk tolerance and financial goals. If necessary, consult a financial advisor so that you can choose the most suitable mutual funds for yourself. Remember, “Mutual fund investment is subject to market risks, read all the documents related to the scheme carefully.”

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