Basics of Mutual Funds | How to start investing in Mutual Funds?

What is a Mutual Fund?

A Mutual fund is an investment house where investors come together to pool their funds. The fund manager then invests the pooled-in funds in equities, bonds, real estate, gold, and other asset classes to generate higher returns. The gains/losses incurred from such investments are mutually divided among the investors in the ratio of their investments. This is also why it is called ‘Mutual’. Let me explain the basics of mutual fund with an example.

For instance, you and your friend invest INR 2000 and INR 1000 in a mutual fund. And the gains obtained from the total investment after a month is INR 1500. This is split in the ratio of their investments– 2:1. Which means, you will end up with INR 3000 and your friend with INR 1500 after a month. This idea, when replicated at a larger scale with thousands of investors coming together, is termed a mutual fund.

Why Mutual Funds?

• Managed by Experts

The whole job of fund managers is to safeguard the wealth of investors. Your portfolio is managed by these experts who conduct extensive research and due diligence on buying & selling of stocks. These seasoned finance experts who are skilled in managing investments, decide where and when to invest in equities, debt, gold, and other asset classes. 

• Higher Returns

As the adage goes “Don’t put all your eggs in one basket”, mutual funds diversify their investments into different financial instruments. This strategy of diversification has played a vital role in driving the popularity of mutual funds. The fund manager spreads your investment across a cross-section of stocks from companies of different industries. Hence, when one industry doesn’t perform well, the gains from other sectors can offset the losses from the adversely performing sector.

• SEBI-Regulated

Mutual funds are regulated by Securities and Exchange Board of India (SEBI), whose main objective is to protect the interests of investors, promote their development and regulate the securities market. It is also SEBI that approves an Asset Management Company to manage funds by investing across industries.

• Affordability

You can start investing in mutual funds with as low as INR 100.

• Liquidity

Liquidity implies the ease of converting an investment into cash. Liquidity is higher in Mutual Funds. This means, you can sell your investments and pull out the money anytime.

Categories of Mutual Funds

Mutual funds are categorized based on the asset class they invest in. Here are the categories:

Equity Mutual funds

Equity mutual funds invest a major chunk of their funds in stocks. It is best suited for investors seeking long-term growth as it could be volatile in the short-term. High risk, higher returns. Further, Equity Mutual Funds are categorized into different categories based on the market capitalization of the stocks they invest in. 

*invests across stocks of different sectors and segments of the market.

Debt Mutual funds

Debt mutual funds invest their assets in corporate or government securities like T-bills, Corporate bonds, commercial papers, government securities, and other market securities. This is a lower-risk asset when compared to Equity. Low risk, low returns. They are classified into different categories based on the duration of their investment period. 

Hybrid Mutual Funds

Hybrid Funds offer you the best of both worlds. A mix of Equity & Debt. High returns from Equity when the markets perform well and regular income from Debt to cushion the tailwinds when markets go south. The fund manager also invests in Gold & international equities, depending on the investment objective. Since your portfolio becomes diversified, the risk of losing money decreases.

How to Invest in Mutual Funds?

• SIP

Systematic Investment Plan (SIP) is a mode of investment that offers you the option to invest a fixed sum at regular intervals. Instilling discipline in investors, it allows investors to make regular & automated investments periodically. 

• Lumpsum

A lump sum mode of investment is when investors make a bulk one-time investment. Unlike SIPs, this is invested in one-go!

If you’re someone with little to no time to research & identify the right stocks then mutual funds are a good option. You can consult a financial advisor to choose the right mutual fund for you.