Mutual Fund is a new-age investment option which suits the investment needs of different types of investors. Known for their high return yielding capability, this market linked instrument comes in various shapes and sizes. No matter what your financial goals are, including at least one fund in your portfolio can help you realize the desired investment returns. If you’re a first time investor, it helps to get a few tips before beginning the investment journey. Lets begin with learning more about how Mutual Funds work followed by a section that will help you in making it a successful deal.
What is a Mutual Fund?
It is a privately managed fund administered by an AMC (Asset Management Company) where like minded investors come together and contribute monies in their personal capacity to create a pool. The consolidated funds are carefully invested by a Fund Manager into handpicked financial instruments available in the market such as company stocks and public bonds. Based on the amount invested by the individual, a fixed number of units are allocated to the folio.
Each unit carries a certain variable value known as NAV (Net Asset Value), which when multiplied with the units helps in ascertaining the asset value held by the individual investor. As individuals, we have the benefit of getting access to professional management of our hard earned money instead of directly investing into the market. It also reduces the risk for the investor since any fall in the value of stocks will be distributed proportionally among all the investors in the fund.
Benefits of Investing in Mutual Funds:
- Owing to the variety of Mutual Funds available, an individual gets to choose from a wide range of options depending on the financial goals. He/she is free to choose from open or closed ended fund as per the requirement.
- It suits both short and long-term investment goals where an individual can choose to remain invested for a specific term.
- There is a definite reduction in the risk associated with market performance since the funds are professionally managed.
- The investor can also look forward to flexibility in terms of switching between equity-debt or a healthy mix of both, depending on the available options.
- The annualized returns offered by Mutual Funds are quite high when compared to traditional instruments such as Fixed Deposits, Savings Account, etc.
- Since the fund is managed by a Fund Manager appointed by the AMC, little intervention is required from your end in managing the folio. It is administered by the company and all you’re required to do is buy the units and monitor them at regular intervals.
Prominent Tips to Invest in Mutual Funds:
Keep Personal Goals in Mind
Since investing in Mutual Funds is a mid-long term deal, the term chosen should sync with your financial goals so that funds are available for access just before the event. Let's say, you’ve planned to buy a house 4-5 years down the line, staying invested into the fund for the same duration will help you in being nearly self- sufficient.
Choose the Profile/Mix Carefully
There is a plethora of fund options available in the market today. Right from the ones which invest heavily in blue chip companies to exclusive options which invest in specific segments of the industry such as Banking. An AMC may also offer you a mix of debt vs equity and give you the flexibility to rejig the allocation as per your needs. It's paramount to choose the fund carefully after due consideration of the risks involved.
Study the Fund
Investing in an MF involves considerable amount of money and therefore, a good amount of research should go into carefully choosing the fund. To aid this purpose, you may choose one of the umpteen resources available online to study the performance and yield over the last couple of years. Comprehensive information will be made available on the website of the AMC with regard to the performance of the fund.
Consider Systematic Investment Plan (SIP)
The best and the most recommended way to start your investment journey would be through a SIP. Here, it works just like a loan where you pay a fixed amount each month into the fund in exchange for a certain number of units, depending on the NAV. The only difference is that you’re clearing a debt in the loan whereas in MFs you’re building an asset over a fixed term. The most pleasing part of SIP is that it comes with a lock- in period which ensures financial discipline.
Once invested, they keep yielding returns over a period of time and do not require routine monitoring. On the flipside, it makes sense to monitor the performance once a month or so to gauge the sellability of the units held. Routine monitoring can help you sell/redeem when the value is high.
GST rate of 18% applicable for all financial services effective July 1, 2017.