WHAT ARE MUTUAL FUNDS, TYPES AND HOW TO INVEST IN THEM?
- Posted on November 30, 2019
- Investing
- By admin admin
According to Investopedia, a mutual fund is a
type of financial vehicle made up of a pool of money collected from many
investors to invest in securities like stocks, bonds, money market instruments,
and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce
capital gains or income for the fund's investors. A mutual fund's portfolio is
structured and maintained to match the investment objectives stated in its
prospectus.
Investing in a share of a mutual fund is not
similar to investing in shares of stock. Unlike stock, mutual fund shares do
not give its holders any voting rights. This is the reason why the price
of a mutual fund share is referred
to as the net access value (NAV) per share, sometimes expressed as
NAVPS. A fund's NAV is
derived by dividing the total value of the securities in the portfolio by the
total amount of shares outstanding.
Types
of Mutual Funds
There are several kinds of mutual funds
categories, that represent the kinds of securities they have targeted for their
portfolios and the type of returns they seek.
1. Equity Schemes: Equity schemes invest in the stock market. Therefore, the risk
level of equity funds are higher than debt and hybrid funds. Investors who want
to invest in equity funds must make sure that their risk appetite coincides
with the particular fund. Equity funds are broadly divided into three
categories on the basis of market capitalization, which is calculated on the
basis of multiplying the outstanding shares that a company offers with the
current market price of a share. These are:
·
Large Capital Funds: Top 100 companies in terms of market
capitalization
·
Middle Capital Funds: 101st- 250th companies in term of market
capitalization
·
Small Capital Funds: 251st company onwards in terms of market
capitalization
2. Debt Schemes: Debt funds invest mostly in money market securities,
corporate bonds, government bonds, etc. These type of funds are ideal for
investors who are conservative in their investment approach. There are over 15
categories under this scheme.
3. Hybrid Schemes: Hybrid
schemes, a mix of both kinds of investment, invest in equity, as well as debt instruments,
investments and hence, moderate the risk level. This is also a reason why hybrid
funds are extremely popular in the mutual fund industry.
How to invest in mutual
funds
Investments
can be made directly with a mutual fund or the services of a mutual fund
advisor is hired. If you are investing directly, you will invest in the direct
plan of a mutual fund scheme. If you are investing through an advisor or
intermediary, you will invest in the regular plan of the scheme. Investing
directly requires that visit the website of the mutual fund or its authorized branches
with relevant documents. The advantage of investing in a direct plan is that
you save on the commission and the money invested would add sizeable returns
over a long period.
The major reasons why
people invest in mutual funds are for diversity (which curbs risk), simplicity
and tax efficiency.
Modes of mutual funds investment
Lump sum: these
investments allow the investor to purchase the number of units he wants at one
go and is usually chosen to create extra wealth and liquidity. It takes into account
timing of the market.
Systematic Investment Plan (SIP): here, the investor invests a specific
sum of money at regular intervals. This specific amount is directly deducted
from the investor’s bank account. It disregards the timing of the market.
Some simple steps on how to invest in mutual funds
·
Being KYC verified is a must before your transaction can be
approved.
·
After completing the KYC, investing in the mutual fund can begin.
·
Investment can be through
an AMC directly, or a mutual fund investment platform.
·
Investing through a digital platform is ideal as the mutual fund investment
process can be completed free of charge. Also, it is paperless.
· While choosing a mutual fund, bear in mind certain parameters before narrowing down on the fund you want to invest in. These parameters can include ideal investment duration, risk appetite, and so on.
Be the first to comment!
You must login to comment