Mutual Fund Sahi hai?

Good Things come to those who wait!

Remember how as teenagers everyone from your group of friends contributed money to buy a cake/gift? When it comes to mutual funds, we don’t just buy the cake and give it to our friend. We purchase units of a fund and wait for it to increase its value and give us profits. In simple terms, a mutual fund is an establishment where many people contribute some money in an investment vehicle and then, the mutual fund company appoints a manager to manage the money by investing it in various investment opportunities with potential profits. While investing in mutual funds  a professional is hired by the company to take apt decisions for your money. Such a professional is called a mutual fund manager.

You are beyond comparison, Mutual fund aren't

Expense Ratio/ Management expenses :In simple terms, the portion that a mutual fund agency takes out for their profit is called Expense Ratio. This Expense Ratio consists of the charges of legal advisors/auditors who guide us through SEBI compliances, marketing and distribution expenses, etc. A mutual fund manager buys and sells funds daily so, a portion of annual rate of expense ratio is deducted on a daily basis. Mutual fund with low expense ratio is mostly preferred by the investors. 

Loading charges :Mutual fund companies generally charge a fee whenever an investor joins or leaves a scheme which is referred as ‘load’ and these charges are called loading charges. It is taken as a percentage of the amount invested in the mutual fund. Entry Load is simply a percentage of fees levied on the purchase of a mutual fund scheme, and Exit Load is a fee charged from an investor for exiting or leaving a scheme or the fund of company.

Market Cap :Market capitalization or market cap is the value of a company based on the value of its traded outstanding shares. These indicate the size of the companies in which the fund invests. A mutual fund is categorised by a market cap like small, mid and large cap.

  • Large Cap – Large Cap Mutual funds are equity funds that invest primarily in the top 100 companies of India. Ideal for goals which are at least 5 years away. These companies are some of the biggest brands in our country, and most Indians use their products daily.
  • Mid Cap –Mid cap mutual funds are the kind of equity funds that tend to invest in mid-sized companies in India. Suitable for aggressive investors with 7+ years’ investment horizon. These funds are invested in some of the fastest growing funds in India.
  • Small Cap – Small Cap mutual funds are equity funds that invest in small companies of India. These are exposed to high risks due to the lack of financial strength to withstand tough market conditions. While they can deliver fantastic returns, small cap companies are incredibly volatile; you can see losses in short to medium term.  

Find your way towards mutual fund,either directly or indirectly!

“Awareness is the key ingredient of success”.

To invest in the mutual funds, one can either go for the regular mutual funds or the direct mutual funds. Once, you make a decision of buying a regular mutual fund investment plan, money is deducted from your investment amount as expense ratio which leaves you with lower returns in comparison with direct mutual funds. But, it is good for people with very low knowledge about mutual fund to consult before investing money directly in mutual funds. Direct plans are cheaper and translate into higher returns for investor compared to regular plans. The difference between the expense ratios of regular to direct plans is approximately 1%. 

Don’t we just love options? Know your Options well, Invest Smartly!

It is imperative to carefully evaluate your options irrespective of whether choosing “your better half” or the better mutual fund. According to SEBI, there are five types of mutual funds:

  • Equity Oriented Fund– Equity oriented mutual funds mainly invest money in stocks. Stocks are observed to be riskier than bonds which makes equity fund riskier than any fixed deposit fund. There are types of equity funds that also allow you to save tax while you invest for your long term goals. Equity Linked Savings Scheme (ELSS) is a fund which has a diversified investment into various financial instruments which reduces risk while ensuring you better return than traditional options.
  • Debt Oriented Fund – A debt oriented mutual fund is a mutual fund scheme that invests in fixed income instruments, such as corporate debt securities, Government bonds, etc. which offer capital appreciation. This type of fund can provide you with capital gains and high yield at maturity.
  • Hybrid Mutual Fund – Investing in these types of fund can provide you with some profits each from equity and debt. These funds are available in various proportions; one of such is a balanced fund which is an allocation between debt and equity in 50:50 ratios.
  • Solution Oriented Fund – SEBI has recently introduced a mutual fund scheme which is considered as a beneficial plan for those who desire to achieve a specific long term goal like retirement or child’s education planning. These funds also provide some advantages on tax deduction policies. 
  • Other Funds – While people discover options for investment in mutual funds, one of the most likable or popular options are liquid funds due to their reputation of being the safest among other options. The most interesting part of this investment option is that the loading charge is pretty less.

Do Indians ‘mutually’ agree about mutual funds?

If one would casually ask an Indian about mutual funds, we would get a typical answer from majority people as “Yeah obviously I know about them”. Although, upon further asking if they would invest into a mutual fund scheme not breaking any stereotypes, this would be their answer  –“Mutual fund investment? No! That’s very risky. Also, I can get my FD at any point of time”. Unaware of the fact that same is the case with mutual fund. Thanks to this very infamous TV advertisement which goes like – “Mutual funds are subjected to market risks, read all scheme related documents carefully”. This word ‘risk’ eats up all the good things, profit related advantages and potential amount of audience who might have wanted to invest in the funds. Indians are comfortable and much familiar with terms such as Insurance, fixed deposits etc. 

We are your myth busters!

  • Myth No. 1 –Buying a Top-Rated mutual fund scheme will ensure better returns: Equity funds are considered to be riskier than any fixed deposit fund. So just buying a top rated equity fund without having much knowledge about stocks could land you in trouble and so is the case with any investment.
  • Myth No. 2 – You can only invest in a mutual fund if you are rich :Mutual funds allow you to start investing for as low as Rs.1000 (lump sum) in a liquid fund and Rs.500 for a monthly SIP. Therefore, you don’t need to have a large sum in order to start investing.
  • Myth No. 3 – One can only invest in a mutual fund if they are experts :Mutual funds are not as complicated as they might seem initially to an investor. Also, there is a fund manager to help you grow your money without your intervention, which makes it easier than any other securities market. 
  • Myth No.4 – Investing in a mutual fund means investing in the stock market :Stocks are not the sole financial instrument where mutual fund companies invest. The portfolio of fund companies is mostly diversified in different financial instruments and companies issuing these instruments.
  • Myth No.5 – Mutual funds are only for the long term plans :Mutual funds offer both short term as well as long term plans. You can choose a liquid fund for short term plans and any other debt or equity fund for long term plans as well.
  • Myth No.6 – Money is not safe in mutual funds. There is always some risk involved :There are risks involved in every investment plan if you don’t invest wisely. Mutual fund is no different.

Fact check! Make sure you are not making the above mentioned mistakes.

“Hope for the best, but prepare for the worst”. While investing in mutual funds, you should always keep this in mind. Whenever you plan to invest in a mutual fund you should always check or compare the expense ratio. But never make a decision solely based on the expense ratio. Fund manager profile and past performance are the other two vital aspects that need to be considered while choosing a fund for investment. The most important fact that we should keep in mind while investing in mutual fund is, it being regulated by SEBI which ensures reduces the chance of fraud. So, don’t just invest in mutual funds for the sake of earning profit, but also invest for security of your hard-earned money.

Team Investoday