Mutual Funds


Mutual Funds give investors an opportunity to invest in a professionally managed and diverse group of financial instruments at a reasonably low cost.

Reasons to Invest in Mutual Funds

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Reasons to invest in Mutual Funds:
 

Managed by pros who have the time and expertise to manage your money. 

Spread your risk by investing in diverse  financial instruments with Lower transaction costs than individual investors. 

Invest in small amounts, as little as Rs. 500 and it's easy to pull your money out of a mutual fund.

Ways to Invest

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Ways to invest in Mutual Funds


There are two ways to go about investing your money in a mutual fund:

 

Lumpsum: In this method, you invest an entire chunk of money in a mutual fund at once. If the value of the mutual fund rises after that, so does the value of your investment & vice-versa.

Systematic Investment Plan (SIP): In this method, you keep investing smaller chunks of money at regular intervals (usually monthly). So if you invest in a mutual fund through a SIP, you don't need to time your investment and you become a disciplined investor.

Points to Remember

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Before you invest in a mutual fund scheme, you should consider the following three points:

 

Investment Goals

Risk Appetite

Time Period for Investment

​Types of Mutual Funds

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Types of Mutual Funds

Mutual Funds are mainly classified into four broad categories namely Equity, Money Market, Bond Funds and Balanced Funds.

 

Equity Funds: Funds that invest in stocks represent the largest category of mutual funds. Generally, the investment objective of this class of funds is long-term capital growth with some income. There are, however, many different types of equity funds because there are many different types of equities.

Money Market Funds: The money market consists of short-term debt instruments, mostly Treasury bills. This is a safe place to park your money. You won't get great returns, but you won't have to worry about losing your principal. A typical return is twice the amount you would earn in a regular checking/savings account and a little less than the average certificate of deposit (CD).

Bond/Income Funds: Income funds are named appropriately: their purpose is to provide current income on a steady basis. When referring to mutual funds, the terms "fixed-income," "bond," and "income" are synonymous. These terms denote funds that invest primarily in government and corporate debt. While fund holdings may appreciate in value, the primary objective of these funds is to provide a steady cashflow to investors. As such, the audience for these funds consists of conservative investors and retirees.

Index Funds: The last but certainly not the least important are index funds. This type of mutual fund replicates the performance of a broad market index such as the BSE's Sensex or Nse's Nifty fifty.

Balanced Funds: The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation. The strategy of balanced funds is to invest in a combination of fixed income and equities. A typical balanced fund might have a weighting of 60% equity and 40% fixed income. The weighting might also be restricted to a specified maximum or minimum for each asset class.

Illustration

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Illustration on Mutual Funds

Mr. Shah's Mutual Fund Investment
 
Mr. Shah earns Rs. 40,000 every month. Out of this, he invests Rs. 10,000 in ABC Mutual Fund every month through a SIP for 1 year, but plans to keep his investment for 3 years.


Let's see how his investment pans out:

 

Month 1: NAV  - Rs. 10, Units Bought - 1000

Month 2: NAV - Rs. 8, Units Bought - 1250

Month 3: NAV - Rs. 7, Units Bought - 1428.57

Month 4: NAV - Rs. 11, Units Bought - 909.09

Month 5: NAV - Rs. 15, Units Bought - 666.67

Month 6: NAV - Rs. 17, Units Bought - 588.24

Month 7: NAV - Rs. 10, Units Bought - 1000

Month 8: NAV - Rs. 17, Units Bought - 588.24

Month 9: NAV - Rs. 20, Units Bought - 500

Month 10: NAV - Rs. 22, Units Bought - 454.55

Month 11: NAV - Rs. 25, Units Bought - 400

Month 12: NAV - Rs. 20, Units Bought - 500

So, at the end of his investment cycle, Mr. Shah holds 9285.36 units of ABC Mutual Fund through his disciplined approach to investing. Finally, at the end of 3 years, when Mr. Shah decides to redeem his investment, he finds that the mutual fund NAV is Rs. 25. At the time of redemption, the value of his investment is Rs. 2,32,134!
 
So we see that Mr. Shah invested Rs. 1,20,000 in total over a year. 2 years after he completed his investment through a SIP, he finds that the value of his investment is Rs. 2,32,134. That's a return of about 93% over 3 years!
 
Note: This is only an example. It is possible that the mutual fund could have lost value over the same 3 year period. The mutual fund performance is dependent on market performance. There are no guarantees in mutual fund investing.
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