Mutual Fund

Mutual Fund Investments

Making mutual fund investing is one of the most favored ways to create wealth, especially for beginners who want to have exposure to financial markets. Mutual funds are a collection of stocks and bonds managed by investment professionals. If you are planning to start investing in mutual funds be prepared to take these important broad steps – having necessary documents in hand, knowing the purpose of investment and selecting the right mutual fund schemes.

Know your purpose of investment

The purpose of doing an investment should be well defined – buying a car, buying a home, child education planning, wedding planning, retirement planning, etc. Even if you don’t have any goal, you should be clear on how much wealth you are targeting to create and in what time frame.

Keep documents handy

Every transaction you make needs to be well documented. The first thing you need is to become KYC compliant. This is nothing but a due diligence of your personal details like the submission of the address proof, your photograph, date of birth certificate and your PAN card. Gautam added that you need to fill up the form of respective scheme where you are going to make your investments. If you have a PAN card, you are qualified to invest in Mutual Funds. “An Aadhaar card can make account/folio creation easy through completely paperless e-KYC, else one-time paper KYC process can also be done,” he said.

Services includes

  • Risk factor should always be considered
  • Selection of scheme and mode of investment
  • Do not only chase past performance of a fund
  • Select while the option
  • Have a balanced portfolio as per your age

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Why Mutual Fund?

Investing in a mutual fund is like an investment made by a collective. An individual as a single investor is likely to have lesser amount of money at disposal than say, a group of friends put together. Now, let’s assume that this group of individuals is a novice in investing and so the group turns over the pooled funds to an expert to make their money work for them. This is what a professional Asset Management Company does for mutual funds. The AMC invests the investors’ money on their behalf into various assets towards a common investment objective.

Services includes

  • Pool their investible surplus funds and collectively invest in instruments / assets for a common investment objective.
  • Optimize the knowledge and experience of a fund manager, a capacity that individually they may not have
  • Benefit from the economies of scale which size enables and is not available on an individual basis

Why One should invest in mutual funds?

  • Reason 1: They are investments instruments which are capable of giving high returns . An average mutual fund scheme returns easily beats inflation in longer run and a good scheme can give far superior returns.
  • Reason 2: Our Mutual Fund industry is one of the best regulated industry in the world. They are governed by the strict guidelines layed down by SEBI(Securities & Exchange Board of India).
  • Reason 3: Investments decision of a Mutual Fund is taken by their AMCs and Fund Managers. They are experts who make investments decisions after doing intensive research and analysis of a company & industry. (Individuals generally don't have time and resources to do research hence best option is to let MF manage your investments)
  • Reason 4: This industry is highly liquid. Even more liquid than stock markets. Payments are generally made through cheques or in some cases they are directly credited to your bank accounts , If your bank is allowing RTGS & electronic clearing and mutual fund AMC is providing such facility.
  • Reason 5: Investments are diversified into many companies & sectors. Which make our investments safer and consistent growth prospects. Diversifying is usually not done by small investors , for such a actions one requires lots of funds.
  • Reason 6: Tax treatments- Governments encourage investments in capital markets and has given many tax sops. Under i) 80(c) investments done upto one lakh in specific mutual funds schemes which is called ELSS(Equity Linked Saving Schemes.) are exempt from tax. ii) Any units held for more than one year if redeemed is treated under long term capital gain tax which is zero percent currently i.e. the whole profit is tax free. If one plans to redeem before one year then he has to pay tax of only15% on the profits.

Tenor refers to the 'time'. Mutual funds can be classified on the basis of time as under:

  • Open Ended funds These funds are available for subscription throughout the year. These funds do not have a fixed maturity. Investors have the flexibility to buy or sell any part of their investment at any time, at the prevailing price (Net Asset Value - NAV) at that time.
  • Close Ended funds These funds begin with a fixed corpus and operate for a fixed duration. These funds are open for subscription only during a specified period. When the period terminates, investors can redeem their units at the prevailing NAV.

Asset Classes

  • Equity funds These funds invest in shares. These funds may invest money in growth stocks, momentum stocks, value stocks or income stocks depending on the investment objective of the fund.
  • Debt funds or Income funds These funds invest money in bonds and money market instruments. These funds may invest into long-term and/or short-term maturity bonds.

What Does Compound Annual Growth Rate - CAGR Mean?

  • The year-over-year growth rate of an investment over a specified period of time.
  • The compound annual growth rate is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered.