What is a Mutual Fund?
A mutual fund is a type of investment vehicle where money from many investors is pooled together. This collective amount is then invested by a professional fund manager in stocks, bonds, government securities, and other financial instruments.
In simple words, fund works like a common pool where several people contribute their money, and an expert manages that pool by investing it smartly. The profits (or losses) are then shared among the investors in proportion to their investments.
How Do Mutual Funds Work?
Pooling the Money: Mutual fund companies launch various schemes. When people invest in these schemes, their money is collected in one common fund.
Managed by a Fund Manager: This money is then invested by a professional fund manager in different shares, bonds, or other assets, depending on the fund’s strategy.
NAV (Net Asset Value): Net Asset Value (NAV) represents the value of a mutual fund. It is determined by dividing the total value of the fund’s assets by the number of units. If the fund performs well, the NAV increases, and investors earn profits.
Types of Mutual Funds
1. Equity Mutual Fund
These funds mainly invest in the stock market. Funds involve a higher level of risk, but they have the potential to provide better returns in the long term.
2. Debt Mutual Fund
These funds invest in government bonds, fixed income instruments, and other low-risk assets.Fund are considered less risky and offer steady, though moderate, returns.
3. Hybrid Mutual Fund
Hybrid funds offer a balanced approach to investing by combining both equity and debt instruments, providing a mix of risk and return.
4. ELSS (Equity Linked Savings Scheme)
These are funds designed for tax savings. Investments in ELSS qualify for deductions under Section 80C of the Income Tax Act and come with a 3-year lock-in period.
Benefits of Investing in Mutual Funds
- Professional Management: You don’t need to pick stocks or track the market expert fund managers do it for you.
- Diversification: Your money is invested across various companies and sectors, which lowers the overall risk.
- Low Entry Point: You can start investing with as little as ₹100 or ₹500 through SIPs (Systematic Investment Plans).
- Liquidity: Most open-ended mutual funds can be sold anytime, and the money is credited to your bank account within days.
- Transparency: All fund-related information is available on fund house websites and monthly factsheets.
- Tax Benefits: ELSS funds offer tax savings under Section 80C of the Income Tax Act.
What is SIP?
SIP stands for Systematic Investment Plan – a method of investing a fixed amount at regular intervals (usually monthly) in a funds.
For example, if you invest ₹1000 every month via SIP, and the fund gives you an annual return of 12%, your investment could grow to more than ₹2 lakhs in 10 years.
Is Mutual Fund Investment Risky?
Yes, mutual funds are subject to market risks because they invest in instruments like shares and bonds. However, if you invest with a long-term horizon and choose your funds wisely, the risk gets minimized.
Also, the professional fund managers and diversified portfolio help manage the risk more effectively than direct stock investment.
How to Invest in Mutual Funds?
- Through AMC (Asset Management Company): You can invest directly through the websites of reputed mutual funds companies like HDFC, ICICI, SBI, Axis, etc.
- Via Third-party Apps: You can use platforms like Zerodha Coin, Groww, Paytm Money, ET Money, etc., to invest conveniently.
- Through Banks: Many banks offer mutual funds investment services to their customers.
Things to Check Before Choosing a best Fund
- Past performance of the fund
- Experience of the fund manager
- Expense ratio (management fees)
- Fund’s portfolio composition
- Your investment goal and time horizon
Disclaimer: The investment tips and opinions given here are the personal opinions of experts. These are not the opinions of Riskydollar or its team. Riskydollar advises all readers to consult a certified financial advisor before making any investment.