Mutual Funds Basics

When mutual funds agents comes to your door or meet you in office to explain you benefits of investing in mutual funds then most of you find the language simply inconceivable to your mind. The reason is the complicated terms, to which we are generally not familiar. So to make it comprehensible for the investors, the article here tries to explain the basics of mutual funds, how they can benefit you as an investment tool, how they work and the best ways to invest in mutual funds. To understand it in simple language, whether you want to save for your child’s education or marriage, buy a vehicle for yourself on go on a vacation in future or planning to build or buy a house, mutual funds always act a helping hand. Mutual funds are tax efficient, effective and simple tools in which you can invest to fulfil all your future dreams. The investment offers are very wide in mutual funds – from fixed income schemes, equity schemes, money market schemes to hybrid schemes and ETFs, etc. It gives you options to choose as per your personal requirement.

What is Mutual fund?

Mutual funds are basically professionally managed savings that allows investors to invest some part of their savings into securities like bonds, stocks, short-term money market instruments and products like precious metals. The common financial goal of all mutual funds investors is to grow their savings/money for future requirements or to meet financial needs whenever they arise. While investing in mutual funds their money is invested in multiple asset options according to their investment goals. Mutual funds allow small investments as compared to other investments options, which give the investors a choice to allow finance professionals take control over their money, even if the size of the investment is very small in few thousand rupees.

Mutual funds are joint or collective investment tools that are evidently managed by expert funds managers or tracked silently by the index or industry. The money invested in mutual funds ar4e well distributed amongst various commodities to compensate possible losses. With mutual funds as one of your investments in your portfolio, you get attractive savings options to manage passively without paying unmoved attention and high fees from investors. Investors who lack time and understanding to make decisions on more complex and traditional investments, mutual funds has very tempting investment plans for them. So when you decided to put your money in mutual funds, you decide to allow you portfolio managers to make all necessary decisions on your behalf.

Benefits of investing in mutual funds:

Professional Management

If you lack time or do not have understanding to manage your own portfolio then investing in mutual funds is the best thing you can do. In mutual funds the money you invest is managed by funds managers who are finance professionals. Mutual funds investments allow you to get services from professional fund managers, availing which as an individual investor would be expensive otherwise.

Diversification

With mutual funds investments, you get benefits of diversification of your investments across various commodity and companies. You have the opportunity to invest in wide range of assets and industrial sectors. Therefore, without investing huge sum of money that is required to make an individual portfolio, your investments in mutual funds help you gain profits from the benefits of investing in diverse industrial and commodity sectors and asset allocation.

Liquidity

There is no strict restriction to take out your money unless there is pre-specified lock-in period to withdraw your money, if by any chance you need it for your personal purpose. Mutual funds are very popular as liquid investments. Your money is available to you to meet your need anytime, subject to exit load, if there is any. In general, people require just few days to withdraw their money and as the mutual funds policies are linked to the banking system, most of the time funds are transferred directly to the bank account of mutual funds holder.

Flexibility

Investors has the ease and flexibility to invest in wide range of schemes offered by mutual funds for their benefits. There is a choice of systematic investment plan (SIP) in which one can invest at regular intervals and withdrawals too are available to investors in open-ended schemes. The flexibility and convenience offered is optimum. Investors can invest or withdraw money, depending on the interest, comfort and requirement

Low transaction cost

You have to pay lower transaction costs for mutual funds due to economies of scale. Whatever benefits it gets is transferred to investors of mutual funds. These benefits are not available to individual investors who directly enter the market.

Transparency

Mutual funds investors are kept updated with fact sheets, annual reports, scheme offer documents, whatever is associated to the market and schemes.

Well regulated

In India, mutual funds are regulated and monitored by the securities and exchange boards of India that is SEBI in short. SEBI is an enterprise that is responsible to protect investors’ interests. Funds, whichever it may be are registered with SEBI and there is a absolute transparency imposed. It is compulsory for mutual funds to provide standard information about the investments to the investors. Additionally, there is also a requirement of disclosing information about the specific investments made by the schemes and the size of investments done in every asset category.

Risks involved in investing in mutual funds

It is known and we hear mutual funds ads say, ‘mutual funds investments are subject to market risk’. What does that mean? And what is it so? What makes mutual funds prone to risk factors? In matters of investments risk is when the invested money does not give any return or instead of giving expected profits, it starts giving loss, means the value of the invested money declines. As we know, mutual funds invest in various types of stocks or fixed income securities, on the basis of the objective it has. Accordingly, based on the underlying portfolios, different schemes have different risk factors. The value of mutual funds general decline over a time period and the reason could be economic amendments or several other factors that affects the market as a whole. Besides, if the government comes up with new rules and regulations that might affect some industrial sectors or a part or a group of industries, it can affect the value of mutual funds. All these factors can influence the performance of mutual funds.

Risk and Reward

The diversification of funds provided by mutual funds eases the risk by compensating losses influenced by some securities with profits from some other securities. If we see the other factor, this could restrict the benefit possibilities that one gets by investing in single security.

Lack of Control

There is no scope of investors to determine the accurate set of a fund’s portfolio at any given time, nor is there any scope of direct influence by the investors on the purchase of securities by the fund managers.

It is difficult for investors to choose from the wide range of mutual funds to add to their investment portfolios. But holding a good mutual fund in portfolio is always a win win for the investor. There is varying difference in individual’s choice, requirement and potential to invest. You should always choose the mutual fund that offer diversification. Also keep a check in the fees and loads that has to be paid along with funds quality in general. It is advisable to evaluate, study the past performance, and quality at large.

Identifying Goals and Risk Tolerance

Before you plans or do investing, it is always a good idea to find out why you think you need to invest. Knowing you financial goals is very important, what exactly it is – a long term or a short term? Where exactly you plan to use your money – in your daughter’s marriage, studies, building your house or simple retirement plan? Objective of your investment is very essential because it helps in building a right funds portfolio for you.

Money market funds are good options if plan is to save money for short-term goals. Bonds are best choice for goals that are neither too short nor too long for the investors. And if the goals are long term then investing in stock funds may take you a long way.

Risk tolerance is a big factor, which should not be ignored at all. What is your appetite of risk tolerance? Can you manage dramatic swings in fund values? If yes, then go for stock funds than bond funds. And if you can’t take the risk or get impatient seeing the dramatic swings then bond is the option for you. Money market funds have the least risk and best for investors who can’t afford to take financial risk.

Moreover, you should know how much amount you want to invest, how much risk capacity you have, whether you are prepared to invest huge amount at one go that is lump sum or wish to invest bit by bit in short intervals and also if you want to save tax by making investments in mutual funds.

How You Find Mutual Funds?

In this age of Internet finding mutual funds is nothing difficult. You cam find several in fact almost all the mutual funds companies are having online visibility. Simply search on the web and find the one that best meets your financial goals. You may find many brokers and agents who work on the behalf the banks and mutual funds companies. But agents and brokers will deduct their fees from your investment. So be careful, do proper studies before you decide to invest in mutual funds.

How You Can Make Funds Purchase?

You can purchase mutual funds through banks, insurance agents, brokers or financial planners. But all the middlemen will charge fee for the service. Otherwise you can buy direct from the fund company or many no-load funds too can be purchased. Some no-load mutual funds are sold through brokers too.