Mutual funds have become one of the hottest financial techniques for the money-grain hungry person wanting to grow their wealth.
Mutual funds have a fantastic, easy method through which the investor accesses diversified portfolios of stocks, bonds, amongst other securities. These are handled by professional asset managers.
Thus, they are perceived to be relatively safer compared to an individual equity investment. Whatever the motive-be it retirement saving, a house down payment, or a child’s education fund-these monies help you achieve the targeted goals.
We would thus take you through a whole article about mutual funds; that means, how to invest in them, the various types it can have, its pros and cons, along with some of the key performance indicators to have while evaluating it in general, and thus, in India, a mutual fund could be a super ideal tool in planning for a child’s education.
You would find it as a very holistic, all-inclusive mutual funds and how you must not go wrong in the time of investment.
What is a Mutual Fund?
A mutual fund, in the simplest words, is money collected from diversified investors. These investors are then put to use for the sake of investment of the fund into diversified asset stocks, bonds, and other securities. It is a pool of money invested by people with the help of professional fund managers or management teams for the management of investing in a great variety of assets such as stocks and bonds.
Mutual fund: For example, in mutual funds, an investor makes a purchase of shares within the mutual fund. Any share represents proportional claims on whatever assets are owned by mutual funds. Investment in shares and an undertaking in mutual funds goes through ups and downs based upon various assets’ performances within the mutual fund. Investment to the shareholders of the mutual fund is returned to them in the form of capital appreciation and dividends as their earning on the investments made in the fund.
How to Invest in Mutual Funds
Not really hard to invest in mutual funds. Many ways are there to do that. Here’s the step-by-step guide for investing in mutual funds:
1. Assess Your Financial Goals
Goals are essential before investing in a mutual fund. Which retirement, children’s education, or simply paying off a mortgage? That way, you will find your mutual fund. 2. Know Your Mutual Funds
There are thousands of mutual funds one can opt for, and each has a different kind of investment objective and strategies. It is always important to do research on the funds and consider factors such as kind of asset class they have invested in, stocks, bonds, real estate, among others, risk profile, historical performance, and fees.
2. Choose Right Mutual Fund
Based on your goals and the research, you choose one suitable mutual fund, depending on the risk that you are ready to face along with the duration that you are handling. In case it’s a long-term growth where you are investing, then nothing will be better than equity-based funds. However, if it is a short duration investment and you’re also not quite aggressive in taking the risk then do well with a bond or even hybrid fund.
3. Open an Investment Account
The way one gets registered and opens an account in their brokerage firm, bank or mutual fund company would also get them to invest in a mutual fund. A major part of the ones stated above allow online application in easy investing. Out of the few mentioned the most popular Indian companies to make mutual funds easier include Groww, Zerodha, and Upstox.
4. Mode of Investment
You can invest in mutual funds either through a lump sum investment that you make once or by SIP wherein you pay fixed amount every month, and so on. SIP is one of the best long-term wealth creation strategies where one makes consistent, small investments.
5. Monitor Your Investment
After investing, it is very much essential to track the performance of your mutual funds at periodic intervals. This will give you a better idea about whether the fund is meeting your financial objectives or whether you need to change.
Types of Mutual Funds
Investing in mutual funds is distinguished in various forms at length according to an investment objective and strategy. Following is some of the possible main types of mutual funds that one should know:
1. Equity Mutual Funds
These funds invest mainly in stocks and are apt for investors with high risk tolerance and those seeking long-term growth. The very first near qualification of these mutual funds is that they should give protection against higher return potentials. Therefore, the volatility to be associated with them will be very high. The categories within this fund would include large cap, mid cap, small cap, and sectoral funds.
2. Debt Mutual Funds
Debt funds invest money in fixed-income instruments, mostly government bonds, corporate bonds and other debt instruments. This makes them less risk-prone as equity funds but simultaneously lesser returns cause this fund to be quite suitable for conservative investors awaiting steady returns. They constitute bond funds, corporate bond funds as well as liquid funds in the list.
3. Hybrid Mutual Funds
Hybrid funds combine investment in equities and debt-exposing instruments to provide a mixture of growth and income. Hybrid funds are typically those with a profile of offering both growth and income through investment in equities and fixed income. Ideally, they are suitable for risk-averse investors who seek a diversified investment strategy. Such examples include balanced funds, aggressive hybrid funds, as well as conservative hybrid funds.
4. Index Funds
These are index funds, tracking the performance of a particular index, such as Nifty 50 or Sensex. They usually charge less in fees than actively managed funds and are perfect for those who want to gain exposure to the broad market with lesser cost.
5. ETFs
ETFs are like index funds, except that they are traded in the stock market like common stocks. They track particular indexes or sectors but tend to charge a management fee lower than index funds. Trading ETFs allows traders to buy or sell at any given time of the day through the quoted market prices.
6. Sectoral Funds
Sectoral funds invest their money in a particular sector of the economy, such as IT, drugs, or banking. These investments are highly concentrated and bear a higher risk. Still, if the given sector does improve, they may return by a shot, possibly larger sums.
Advantages of Investing through Mutual Funds
1. Diversification
Mutual funds automatically diversify since they invest in different assets. Mutual funds will assist you to invest your money in various forms of securities through pooling from different investors, therefore decreasing the risk of their portfolio to become too dependent on some specific stock or bond.
2. Professional Management
Mutual funds are run by experienced professionals who can analyse markets, decide which investment to do, and determine on behalf of the investor. Thus, it leaves the obligation off the investor’s back to manage his/her portfolio.
3. Liquidity
Mutual funds are liquid in nature; this means you can buy and sell shares quite conveniently. All funds have a facility whereby you redeem your units on any business day at the current NAV.
4. Cost Efficiency
Generally, mutual funds will allow you to begin with a small amount in most cases and also permit you to start through its SIP facilities. That way, it easily enables many investors to get into the capital even at small amounts.
5. Transparency
Because of the regulation that the government has placed, mutual funds will always keep you updated on your holdings and a scorecard showing how it performed during that quarter and all other material information.
A mutual fund can be followed with monthly updates in the form of a sheet or detailed report.
Disadvantages of Investing in Mutual Funds
1. Fees and Expenses
Mutual funds charge a management fee and other fees, which include the expense ratio, and these decrease your overall returns. Actively managed funds are relatively expensive compared to passively managed funds, such as index funds.
2. Market Risk
Mutual funds invest in the stock market or other financial products. So, their performance depends on the market. This simply means that if the market is volatile, your investment’s value will drop.
3. No Control Over Investments
You have no say in which securities the mutual fund buys or sells after investing in it. The decision to make the right investment choice is left to the fund manager.
4. Risk of Underperformance
Sometimes, mutual funds are a bad performer, especially during a bearish market. Not even the best experience of the fund manager can guarantee that there will be no risk of underperformance in actively managed funds.
Understanding and Analysing Mutual Fund Performance: Key Metrics and Indicators
To analyse mutual fund performance, some key metrics need to be taken into account:
1. Net Asset Value (NAV)
NAV stands for the price of one share of a mutual fund.. This expense ratio to find out that may be computed by adding a mutual fund’s total assets value to outstanding shares in total worth. In other words, the NAV changes its values time to time according to the daily performance by underlying assets of the mutual fund.
2. Expense Ratio
The expense ratio is the amount of the assets in the fund that is paid toward operational costs. The smaller the expense ratio, the better it is because this implies that a greater percentage of returns is being brought back to the investor.
3. Risk-Adjusted Returns
The measures include Sharpe ratio and Sortino ratio. Such ratios can measure returns based on the level of risk that has been taken in the fund. These ratios thus present a measurement that could compare the fund with respect to providing returns based on the level of risks used.
4. Alpha and Beta
Alpha is a measure of how the fund performed in comparison to its benchmark. Beta essentially refers to the arrangement that would represent the relative risk of a fund with respect to the overall market. A positive alpha is that the fund has exceeded its benchmark.
5. Standard Deviation
The higher the standard deviation, it is stated that the fund has a high-risk level. It allows an investor to know the level at which the returns from the fund differ from its average return for a given period. This means that the greater the standard deviation, the greater the fluctuations from the returns from the funds and indicates more uncertainty while performing the fund; instead, low standard deviation indicates more constant returns from the funds with lower volatility levels.
Plan Your Child’s Education in India with Mutual Funds
The cost of education has increased these days in India. This is leading parents to start making plans long before their child’s future education. Even mutual fund investments can support your funds for your child’s higher education. This is possible in the following ways:
1. Start Early
When you start early and allow your investments to grow over a period, you start investing in mutual funds and get compounding returns. That means the earlier one invests, the more extended his or her money gets to grow because it is all about the power of compounding. A person also has a higher chance of taking risks owing to having more of the time horizon to see things play out in his favour rather than against his wishes, hence offering an opportunity for more returns.
2. The right mutual fund
In a long-term horizon like that of education, equity and hybrid can be selected for horizon and the type of investments desired by the individual. The very good method of regularly adding to build up the corpus is through SIP. A person whose child may study 10-15 years hence may afford to take little more risks with the money lying in the equity funds of MFs as they yield much better return in the longer horizon on an average. Hybrid or debt funds could be a better choice for balancing the need for risk and stability when periods are short.
3. Tax Benefits
To get tax benefits under Section 80C of the Income Tax Act, a portion of mutual funds is called ELSS. It will do alone to assist you in saving your child’s education. The LTCG tax fund that helps cut down on your tax saves the cut and makes way for more money being invested into this goal, along with, most investments for ELSS face a very better LTCG tax and therefore the majority of planning done by parents for children’s education can be seen happening through investments into this particular category.
CONCLUSION
As a good investment option for earning money and long-term finance planning, mutual funds hold promise; optimization of your portfolio based on investment with the right kind of mutual fund, its merits and demerits together with an analysis of all the key performance metrics comes into the picture. Along these lines, for Indian investors, mutual funds also cater for planning life goals such as educating one’s child.
While there are a host of advantages in mutual funds investments, such as diversification, management by professionals, and costs of relatively low rates, the funds also pose several risks-including market fluctuations and fees. Hence the importance of careful research, the use of a financial advisor, if need be, and staying the course about your strategy. It is not possible to create a future with just both in terms of finances, as such future will be secure because mutual funds exist.
Frequently Asked Questions
1. What are the 4 types of mutual funds?
The four heads on a major classification basis under which mutual funds can be placed are equity mutual funds, debt mutual funds, hybrid mutual funds, and index funds. The major source of investment of equity mutual funds is stocks. Such a stock usually has heightened investment growth along with increased risk. This kind of debt mutual fund invests in bonds and other fixed-income securities with relatively steady returns along with lower risks. Hybrid mutual funds are investments in both equities and debt providing good balancing between the two- a balanced mix of risks and returns. An index fund is a passive investment under which one invests in replication of a specific market index like Nifty 50 or Sensex and relatively fee light as well, which is most suited for long-term exposure to the market with very few costs.
2. What is meant by mutual fund?
we can say that it has been an investment pool money, collected from multiples of investors collectively and invested in a diversified base of asset classes such as stocks, bonds, and other securities. All the funds have professional asset managers handling them, making all decisions on behalf of the investors probably from interest. You invest in a mutual fund, and you effectively own a proportionate share in all the assets contained in that fund. That’s how easily you can get diversified exposure to different kinds of investments.
3. What is the best mutual fund?
One considering investing in India could consider some excellent mutual funds. Some of them are SBI Blue-chip Fund, HDFC Equity Fund, Axis Long-Term Equity Fund, ICICI Prudential Corporate Bond Fund and Mirae Asset Emerging Blue-Chip Fund. Selection between these funds, however has to be made according to an investor’s goals, risk appetite, and investment period “What best suits them always differs from person to person. Hence, it always is wise to do some kind of homework or ask advice from a financial advisor to find the best, according to your financial goals.”
4. How to buy mutual funds?
There are pending ways to invest in mutual funds. For example: you can directly go to the website of a mutual fund house and apply online as well as complete all the required procedures of KYC. You can invest directly on the web platforms through Groww, Zerodha, Upstox, and ET Money, making investment in a mutual fund pretty hassle-free from home, if you are unsure which funds to choose; you could even consult with a financial advisor who would guide you to the right direction for such options, according to your specific goals.
5. Which is the safest mutual fund?
The low-risk fixed income securities, be government bonds, corporate bonds, or treasury bills, are put as the investment into debt mutual funds. Liquid funds are termed the safest-all forms of debt funds-as they do only short-term investing as this definition implies. Government bond funds, which have their money invested in the securities issued by the government, are not very risk-prone either. Of course, corporate bond funds are a bit little riskier than the government bond funds, but more preferable than equity funds, of course. Of course, while those funds above are the safe investment funds, no investment, of course, is foolproof. Always make the evaluation for your risk, then invest.