Invest in Mutual Funds only after knowing the Basics

Nutan Gupta

23 Jan 2017

Mutual funds have become a popular investment over the last few years. Mutual funds give an investor a lot of exposure to different sectors and industries without letting him pick an individual stock. Mutual fund is an appropriate investment option for a common man as it offers a diversified and professionally managed portfolio of securities at a relatively lower cost. However, it is very important to know the basics before investing in a mutual fund, which will help you make better investment decisions.

What are the different types of mutual funds?

Mutual fund schemes vary based on their structure and investment objective. - By Structure

Open-Ended Mutual Funds

An open-ended fund is the one which is open for subscription throughout the year. An investor can buy and sell the units anytime as per the net asset value (NAV) at that time. Also, these funds do not have a fixed maturity period.

Closed-Ended Mutual Funds

A close-ended fund is the one which is not open for subscription throughout the year. An investor can invest in such funds only during the new fund offer (NFO). Thereafter, they can buy and sell the units after the fund is listed on the Bombay Stock Exchange (BSE).

- By Investment Objective

Growth Mutual Funds

Growth funds are for investors who want to invest for a longer period of time. These funds aim to provide capital appreciation over medium to long term. Majority of the corpus of such schemes is invested in equity.

Income Mutual Funds

As the name suggests, the aim of income funds is to provide a regular income to its investors. These schemes usually invest in fixed income securities like bonds and government securities. As these funds invest in fixed income securities, risk is lower than that in a growth fund.

Balanced Mutual Funds

A Balanced funds aim to provide both growth and regular income to its investors. These funds invest a part of their earning in both equity and fixed income securities. These funds are ideal for investors who are looking for a combination of regular income and growth.

What are the different plans that mutual funds offer?

Mutual funds offer two investment options - growth option and dividend option.

Growth Option in Mutual Fund

Under the growth option, all profits made by the fund are invested back into the scheme. An investor does not receive any intermediate payments in the form of bonus and dividends. An investor gets returns only on selling the units, which is determined by the net asset value (NAV) of the scheme. Under growth option, the NAV of the fund increases over a period of time which helps in capital appreciation, thereby giving you more returns.

Dividend Option in Mutual Fund

Under the dividend option, an investor receives regular income at periodic intervals in the form of a dividend. In this option, whenever the NAV of the fund reaches a certain level, the fund distributes the profit to its investors as dividend. Hence, the NAV of the fund does not change drastically at the time of selling the units. Also, the power of compounding is less in the dividend option.

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Invest in Mutual Funds only after knowing the Basics

Nutan Gupta

23 Jan 2017

Mutual funds have become a popular investment over the last few years. Mutual funds give an investor a lot of exposure to different sectors and industries without letting him pick an individual stock. Mutual fund is an appropriate investment option for a common man as it offers a diversified and professionally managed portfolio of securities at a relatively lower cost. However, it is very important to know the basics before investing in a mutual fund, which will help you make better investment decisions.

What are the different types of mutual funds?

Mutual fund schemes vary based on their structure and investment objective. - By Structure

Open-Ended Mutual Funds

An open-ended fund is the one which is open for subscription throughout the year. An investor can buy and sell the units anytime as per the net asset value (NAV) at that time. Also, these funds do not have a fixed maturity period.

Closed-Ended Mutual Funds

A close-ended fund is the one which is not open for subscription throughout the year. An investor can invest in such funds only during the new fund offer (NFO). Thereafter, they can buy and sell the units after the fund is listed on the Bombay Stock Exchange (BSE).

- By Investment Objective

Growth Mutual Funds

Growth funds are for investors who want to invest for a longer period of time. These funds aim to provide capital appreciation over medium to long term. Majority of the corpus of such schemes is invested in equity.

Income Mutual Funds

As the name suggests, the aim of income funds is to provide a regular income to its investors. These schemes usually invest in fixed income securities like bonds and government securities. As these funds invest in fixed income securities, risk is lower than that in a growth fund.

Balanced Mutual Funds

A Balanced funds aim to provide both growth and regular income to its investors. These funds invest a part of their earning in both equity and fixed income securities. These funds are ideal for investors who are looking for a combination of regular income and growth.

What are the different plans that mutual funds offer?

Mutual funds offer two investment options - growth option and dividend option.

Growth Option in Mutual Fund

Under the growth option, all profits made by the fund are invested back into the scheme. An investor does not receive any intermediate payments in the form of bonus and dividends. An investor gets returns only on selling the units, which is determined by the net asset value (NAV) of the scheme. Under growth option, the NAV of the fund increases over a period of time which helps in capital appreciation, thereby giving you more returns.

Dividend Option in Mutual Fund

Under the dividend option, an investor receives regular income at periodic intervals in the form of a dividend. In this option, whenever the NAV of the fund reaches a certain level, the fund distributes the profit to its investors as dividend. Hence, the NAV of the fund does not change drastically at the time of selling the units. Also, the power of compounding is less in the dividend option.

Have Referral Code?