What are Mutual Funds?
Mutual Funds pool the money of several investors and invest this in stocks, bonds, money market instruments and other types of securities.
Mutual funds are considered as one of the best available investments as compared to others,
they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund,
investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own.
But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns
Why should I invest in them?
Banks are assumed to be the safest investments by most people but for those
who consider inflation seriously, investing in Mutual Funds is the right choice.
Investors feel secure as their funds are managed by qualified
fund manager who have a dedicated
team of market researchers to analyse various schemes and then make informed decisions.
Mutual funds offer investors an opportunity to diversify across
assets depending on their investment needs.
The availability of funds when required is a big attraction as investors
can sell their mutual fund units
on any business day and receive the current market value on their investments within a short time period.
The option of investing in various industries provides for higher returns in long terms.
An investor is provided with updated information about his investment portfolio
along with the details of where the money is invested at regular intervals. SEBI regulations also
ensure that investments are managed in an efficient manner.
What is SIP?
SIP stands for systematic investment plan. As the name suggests, it inculcates the habit of saving in you by
auto-debiting certain fixed amount from your bank
account at pre determined intervals(e.g. Weekly, monthly, quarterly etc)
How it works?
You need to give post dated cheques or opt for auto debit form your bank account on pre- determined dates.
Certain amount will be auto debited depending on your options chosen
E.g. you choose to invest for 6 months; monthly basis for 10,000 then 10,000 will be auto-debited for 6 months
Long term goals can be achieved without investing lumpsum using SIP
How does Mutual Fund work?
Common Terms - Mutual Funds
Net asset value NAV represents the market value of each unit of a fund or the price at which investors
can buy or sell units. The NAV is generally calculated on a daily basis, reflecting the combined market value of the shares,
bonds and securities (as reduced by allowable expenses and charges) held by a fund on any particular day.
Debt Funds help bring stability to your investment portfolio since they are lower in risk as compared to
Equity Funds, yet riskier than Liquid Funds and their aim itself is to generate steady returns while preserving your capital.
These would typically invest in government securities, NCD, CDs, CPs bonds and other fixed income securities as well as lend money
to large organisations or Corporates, in return of a fixed interest rate. Therefore, investing in Debt Mutual Funds would be ideal
if youâ€™re looking at a potentially higher return than Liquid Funds over a medium term time horizon, between 3 to 24 months.
It is the price you pay when you invest in a scheme and is also called "Offer Price". It may include a sales load.
It is the price at which a Mutual Funds repurchases its units and it may include a back-end load.
This is also called Bid Price.
It is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity.
Such prices are NAV related.
Sales Load / Front End Load
It is a charge collected by a scheme when it sells the units.
Also called, â€˜Front-endâ€™ load. Schemes which do not charge a load at the time of entry are called â€˜No Loadâ€™ schemes.
Repurchase / 'Back-end' Load -
It is a charge collected by a Mutual Funds when it buys back / Repurchases the units from the unit holders.
WHAT ARE VARIOUS TYPES OF MUTUAL FUNDS
A common man is so much confused about the various kinds of Mutual Funds that he is afraid of investing
in these funds as he can not differentiate between various types of Mutual Funds with fancy names.
Mutual Funds can be classified into various categories under the following heads:-
(A) ACCORDING TO TYPE OF INVESTMENTS :-
While launching a new scheme, every Mutual Fund is supposed to declare
in the prospectus the kind of instruments in which it will make investments of the funds collected under that scheme.
Thus, the various kinds of Mutual Fund schemes as categorized according to the type of investments are as follows :-
(a) EQUITY FUNDS / SCHEMES
(b) DEBT FUNDS / SCHEMES (also called Income Funds)
(c) DIVERSIFIED FUNDS / SCHEMES (Also called Balanced Funds)
(d) GILT FUNDS / SCHEMES
(e) MONEY MARKET FUNDS / SCHEMES
(f) SECTOR SPECIFIC FUNDS
(g) INDEX FUNDS
B) ACCORDING TO THE TIME OF CLOSURE OF THE SCHEME :
While launching new schemes, Mutual Funds also declare whether this will be an open ended scheme
(i.e. there is no specific date when the scheme will be closed) or there is a closing date when finally the scheme will be wind up.
Thus, according to the time of closure schemes are classified as follows :-
(a) OPEN ENDED SCHEMES
(b) CLOSE ENDED SCHEMES
Open ended funds are allowed to issue and redeem units any time during the life of the scheme,
but close ended funds can not issue new units except in case of bonus or rights issue. Therefore,
unit capital of open ended funds can fluctuate on daily basis (as new investors may purchase fresh units),
but that is not the case for close ended schemes. In other words we can say that new investors can join the scheme
by directly applying to the mutual fund at applicable net asset value related prices in case of open ended schemes but not in
case of close ended schemes. In case of close ended schemes, new investors can buy the units only from secondary markets.
Open ended schemes are like savings Bank account where in you can withdraw your money and yet the account
stays active whereas closed ended schemes are like Fixed Deposit
where you cannot withdraw money which you receive only when the scheme matures.
C) ACCORDING TO TAX INCENTIVE SCHEMES:
Mutual Funds are also allowed to float some tax saving schemes. Therefore, sometimes the schemes are classified according to this also:-
(a) TAX SAVING FUNDS
(b) NOT TAX SAVING FUNDS / OTHER FUNDS
(D) ACCORDING TO THE TIME OF PAYOUT:
Sometimes Mutual Fund schemes are classified according to the periodicity of the pay outs (i.e. dividend etc.). The categories are as follows :-
(a) Dividend Paying Schemes
(b) Reinvestment Schemes
A mutual fund is a financial instrument that collects money from several investors like you, and invests
it in various investment options like shares, bonds, etc. This fund is managed by experts.
Depending on where your money is invested, mutual funds can be classified into three types: Equity,
Debt and Hybrid. Equity mutual funds invest in shares of companies listed on the stock exchange. Debt mutual funds invest
in bonds of reputed companies and government bonds. Hybrid mutual funds invest in both, shares and bonds.
A mutual fund company collects money from many investors, and invests it in various options like
shares, bonds, etc. This fund is managed by professionals who understand the market well, and try to
achieve growth by making strategic investments. Investors get
units of the mutual fund according to the amount they have invested.
Some of the major benefits on investing in a mutual fund are:
- Professional management
- Variety of schemes and types
- Tax benefits
NFO stands for a New Fund Offer. When a new fund is launched for investors,
it is known as a NFO. A NFO could also be the launch of additional units of a close-ended fund.
A Systematic Investment Plan (SIP) is a convenient method of investing in mutual funds. Under this plan,
an investor contributes a fixed amount towards the mutual fund scheme at regular intervals, and gets units at the prevailing NAV.
Investing in SIP offers two major benefits: - You can start investing with a small amount -
You can average out your investment, as SIP involves buying units at different points of time and at different NAV levels
Under a Systematic Withdrawal Plan (SWP), an investor redeems a fixed number of mutual fund units at regular intervals.
NAV stands for Net Asset Value of a mutual fund. This is basically the price of one unit of a mutual fund.
Mutual fund companies have to declare the NAV of their funds at least once a week.
However, most companies declare it at the end of every working day.
A gilt fund is a kind of mutual fund that invest your money only in government securities.
These funds are considered to be safe as they bear no default risk.
Open-ended funds can be bought and sold at any time; they have no fixed tenure.
You can buy units of close-ended mutual funds only when a mutual fund company launches the fund.
Once you buy them, you have to hold your investment for a fixed tenure.
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