A beginner’s guide to mutual fund investment
The cost of living, real estate, medical and education cost are on all-time high. You might be worried that with the current investments of FDs, PPF and other risk-averse investments, will you be able to build a corpus big enough to fund your family’s financial needs. Investing directly in stock market might not seem a good idea due to the market’s volatile nature. So, if you don’t want to take very high risk and want to earn good returns on your investment, mutual funds are definitely a perfect buy for you.
Mutual funds are investments wherein large number of people pool in their money and this money is invested by experts called as the fund manager. Basically, the responsibility of the fund manager is to manage the portfolio and its trading activities. The money can be invested in equities, bonds, debentures, government securities etc.
Banks and financial institutions offer investments in mutual funds. SEBI monitors the mutual funds investment on a regular basis. To prevent investors from fraud/embezzlement, the SEBI forms policies and procedures which should be followed by mutual fund houses.
Mutual funds are broadly categorized into 3 types:
- Equity based mutual funds
Mutual funds which invest entire funds of the investors in the stock market are equity based mutual funds. The return on investment of these funds depends on the performance of the market. Though the equity funds are high in risk but they have the ability to generate high returns.
- Debt based mutual funds
As the name says, these mutual funds invest the investor’s funds in government bonds/securities and fixed income securities. Debt based funds are low in risk as well as return. This fund is more suited to people who want to enjoy a fixed income without any risk to their investments.
- Balanced mutual funds
Balanced funds provide a balance to the investment by investing both in debt markets as well as equity markets. Generally, 65% of the money is invested in equity markets and the rest is investment in debt market. Balanced mutual funds help the investor enjoy the benefits of opportunity from investing in equities as well as bring stability of the investment by investing a part of the total investment in debt market.
Mode of Payment
Payment can be made in two ways i.e Lump-sum payment or SIPs
Lump-sum payment is one-time payment for buying a mutual fund. SIP is an acronym for systematic investment plan in which the investor pays a fixed amount of money at frequent intervals generally monthly. If you want to invest in debt securities which are low in risk and low in return, go for lump-sum payment mode and if you wish to invest in equities fund, go for SIPs.
NAV
NAV is the price per unit of the fund which helps you know the performance of the fund. At the time of investing in mutual fund, the investor is allotted units as per the NAV of the fund. Suppose, you invest Rs.10,000/- in fund XYZ, wherein the NAV was Rs.20/- per unit. So, as per the NAV, you will be allotted 500 units of the mutual fund.
Types of investing options:
Ideally, there are two types of funds. The open ended funds and the close ended funds.
- Open-ended funds
In case of open-ended funds, the investor can put money and withdraw money as and when he wants. This is because there is no limitation on the number of units which can be issued by mutual fund.
- Close-ended funds
In close-ended funds, the investor cannot withdraw money as and when required. There is a lock-in-period imposed on such funds. Generally, mutual funds companies have a lock-in-period of 3 years while offering a close-ended scheme to the general public.
Entry and exit load
Entry load is charged as the time of investing of investing in mutual funds and exit load is charged at the time of withdrawal of funds. Now-a-days, mutual fund companies provide free entry load and an exit load of 1%, if the money is withdrawn before the stipulated time frame.
Documents required for investing in a mutual fund are:
You have to submit your bank account, PAN card and KYC (Identity proof and Address proof) documents. A recent passport size photograph of the investor has to be provided with the application form of mutual fund.
