A Beginner’s Guide to Mutual Fund Investment

The cost of living, real estate, medical and education cost are on all-time high. You might be worried that with the current investments of FDs, PPF and other risk-averse investments, will you be able to build a corpus big enough to fund your family’s financial needs. Investing directly in stock market might not seem a good idea due to the market’s volatile nature. So, if you don’t want to take very high risk and want to earn good returns on your investment, mutual funds are definitely a perfect buy for you.

Mutual funds are investments wherein large number of people pool in their money and this money is invested by experts called as the fund manager. Basically, the responsibility of the fund manager is to manage the portfolio and its trading activities. The money can be invested in equities, bonds, debentures, government securities etc.

Banks and financial institutions offer investments in mutual funds. SEBI monitors the mutual funds on a regular basis. To prevent investors from fraud/embezzlement, the SEBI forms policies and procedures which should be followed by mutual fund houses.

Mutual funds are broadly categorized into 3 types:

1. Equity based mutual funds

Mutual funds which invest entire funds of the investors in the stock market are equity based mutual funds. The return on investment of these funds depends on the performance of the market. Though the equity funds are high in risk but they have the ability to generate high returns.

2. Debt based mutual funds

As the name says, these mutual funds invest the investor’s funds in government bonds/securities and fixed income securities. Debt based funds are low in risk as well as return. This fund is more suited to people who want to enjoy a fixed income without any risk to their investments.

3. Balanced mutual funds

Balanced funds provide a balance to the investment by investing both in debt markets as well as equity markets. Generally, 65% of the money is invested in equity markets and the rest is investment in debt market. Balanced mutual funds help the investor enjoy the benefits of opportunity from investing in equities as well as bring stability of the investment by investing a part of the total investment in debt market.

Mode of Payment

Payment can be made in two ways i.e Lump-sum payment or SIPs

Lump-sum payment is one-time payment for buying a mutual fund. SIP is an acronym for systematic investment plan in which the investor pays a fixed amount of money at frequent intervals generally monthly. If you want to invest in debt securities which are low in risk and low in return, go for lump-sum payment mode and if you wish to invest in equities fund, go for SIPs.

NAV

NAV is the price per unit of the fund which helps you know the performance of the fund. At the time of investing in mutual fund, the investor is allotted units as per the NAV of the fund. Suppose, you invest Rs.10,000/- in fund XYZ, wherein the NAV was Rs.20/- per unit. So, as per the NAV, you will be allotted 500 units of the mutual fund.

Types of investing options:

Ideally, there are two types of funds. The open ended funds and the close ended funds.

1. Open-ended funds

In case of open-ended funds, the investor can put money and withdraw money as and when he wants. This is because there is no limitation on the number of units which can be issued by mutual fund.

2. Close-ended funds

In close-ended funds, the investor cannot withdraw money as and when required. There is a lock-in-period imposed on such funds. Generally, mutual funds companies have a lock-in-period of 3 years while offering a close-ended scheme to the general public.