A mutual fund is an investment which permits all investors to access a well-diversified portfolio of equities, bonds or other securities wherein each investor has a share in the surplus or deficiency of the fund. The allotted units are issued and can be redeemed as required. The fund's Net Asset Value(NAV) is ascertained each day.
The mutual fund companies receive your money and invest it in the financial markets. It is a suitable mechanism for people who wish to invest but scared of the complexities involved in the markets. The beauty of mutual funds is then only when a person with an investible surplus of a few thousand rupees can invest and realize same returns as anyone else.
Mutual Funds can be open-ended and closed-ended. But most people acknowledge all mutual funds to be open-ended, while considering closed-ended funds in another category.
Open-Ended Funds: These funds are issued and redeemed their shares at any time. They are sold off at the prevailing NAV from and to the mutual fund, on any business day round the year. It generates a high degree of liquidity to investors.
Closed-Ended Funds: These funds come up with a fixed maturity period. An investor has the provision of buying these funds only when New Fund Offer(NFO) gets released in the market. Afterward, the redemption of units is possible only at their fixed maturity date. These funds can readily be liquidated by investors through buying and selling them on the exchange where they are listed.
Load: This is a form of an expense which is collected from an investor as a percentage of their total investment made towards the fund purchased or sold, referred to as a load. These are the charges required to be paid by an investor in order to float, operate and regulate a fund. Entry load and exit load are the charges levied on the investors to enter(purchase) the scheme and exit(redeem) the scheme. Entry load now-a-days are not applicable on any mutual fund schemes whereas exit load varies from 0.50%-3% depending on the holding period by investors.
Benefits of Investing in Mutual Funds India:
Small Investments : Even with small denominations as low as few thousand rupees can be used for investment, which is invested across the markets.
Professional Management : The professional experts from financial industries manage the money collected in a mutual fund. They assess the markets for selecting best pick investments that reap better returns to investors.
Risk Diversification : An investor with a small amount of money can only be able to invest in one or two stocks/bonds, thus increasing risk. However, a mutual fund will diversify the risk by investing in several sound stocks or bonds. A fund usually invests in companies across a broad range of industries, so this leads to spreading of risk.
Transparency : Mutual funds provides a complete picture of the investments made by their several schemes and the proportion invested in each category of asset. The information is acquired by the investors in order to assess the right pick for themselves in order to help them achieve their financial goal.
Liquidity : Open-ended funds generate liquidity once it gets sold to mutual funds at NAV based prices based on their exit loads whereas closed-ended funds can be sold on the stock exchanges where they are traded.
Choice: The funds can be selected from a vast category of mutual fund schemes. This allows the investors to select the best pick as per their risk and return expectations.
Systematic Investment Plan:
It is a type of investment scheme provided by several mutual fund companies. An investor can invest a small amount at regular intervals (weekly,monthly, quarterly) into their chosen mutual fund. For a retail investor, SIP provides a disciplinary and passive approach to investing for creating wealth in the long-term. Here, the power of compounding rule works well for building wealth. Since the amount is invested periodically (often on monthly basis), it also minimizes the impact of market volatility.
Benefits of SIP over Lump-sum investment:
The returns realized through mutual fund investment can be achieved in the following ways:
Dividends: The dividends are earned by the unit- holders through mutual funds. The dividends are distributed from the income generated through dividends on stocks and interest on other instruments.
Capital Gains : Investors derive capital gains on mutual funds. If the fund sells appreciated value of securities, it earns capital gains. These capital gains are distributed by most of the funds to investors.
Profit from higher NAV: The NAV of the fund increases if there is an increase in the value of fund's assets. This way, investors can make the profit by selling back their units to the fund house.