Q) What is a Mutual Fund?
A) A mutual fund is an investment – security type which enables investors to pool their money together into one professionally managed investment. Mutual funds can invest in stocks, bonds, cash and/or other assets. These underlying security types, called holdings’ combine to form one mutual fund, also called a portfolio.
Q) What are the types of Mutual Funds?
A) By Investment Objectives
- Large Cap
- Mid and Small Cap
- Equity Linked Savings Scheme
- Multi Cap
- Ultra Short Term
- Short Term
- Long Term
- Balanced Funds
Types of mutual funds
Open Ended – Debt/ Income, Money Market/ Liquid, Equity/ Growth, Index Scheme, Sectoral Scheme, Tax Saving, Balanced,
Close Ended – Capital Protection, Fixed Maturity Plans (FMPs)
Interval Funds – Operating as a combination of open and closed ended schemes, it allows investors to trade units at predefined intervals.
Q) Why should you invest in a Mutual Fund?
A) Mutual funds allow investors to pool in their money for a diversified selection of securities,managed by a professional fund manager. It offers an array of innovative products like fund of funds, exchange-traded funds, Fixed Maturity Plans, Sectoral Funds and many more. Mutual funds offer benefits like –
- Beat Inflation – Mutual Funds help investors generate better inflation-adjusted returns, without having to stress your brain. While most people let their savings ‘grow’ in a bank, they don’t realize that inflation may be cutting away its value.
- Expert Managers – Experienced Fund Managers handle the financial decisions based on the performance and prospects available in the market to achieve the best of the mutual fund scheme.
- Convenience – The ability to buy or sell a scheme on any business day and a lot of choices based on an individual’s goal and investment need, investors are free to live their course of life while their investments earn for them.
- Low Cost – Mutual fund offers low cost of investment. Most stock options require huge capital, which may not be possible for young investors who are just starting out.
- Diversification – Mutual funds help mitigate risks to a large extent by distributing your investment across a diverse range of assets.
- Liquidity – Investors have the advantage of getting their money back promptly.
- Higher Return Potential – Mutual funds have the potential to generate a higher return, as you can invest on a diverse range of sectors and industries.
- Safety and Transparency – Fund managers provide regular information about your investments and how they are doing in the market. They also tell you about the future prospectives.
Q) How to Invest?
A) Once you know what Mutual Funds are, here is how you should go about investing in them.
Asset Allocations – Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment time frame.
Short listing funds & types – compare different mutual funds on the basis of their past performance and investment philosophy. For this, you should refer to the shareholder reports.
Comparing Funds – once you have shortlisted your funds, you must compare them with other products of the same category to know what kind of growth can you expect.
Diversification – diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk.
Q) What are the things you should keep in mind before investing in a Mutual Fund?
A) there are few important things which affect your investment directly. ProsperX recommends you to keep the following aspects in mind while investing.
Asset Allocation – Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment time frame.
Short listing fund types – Compare different mutual funds on the basis of their past performance and investment philosophy. For this, you should refer to the shareholder reports.
Ultimate financial goals – Financial goals are targets, usually driven by specific future financial
Risk Profile – Risk profile refers to the potential of the investor of taking risks. One must know how much risk he can take while he invests in mutual funds.
Diversification – Diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk.
Q) What are Tax Saving Mutual Funds?
A) Tax saving mutual funds are just like any other mutual funds with the added bonus that investments made in them are eligible for tax benefits under section 80C. Most of the tax saving mutual funds are ELSS schemes and make investments in equity markets.
Benefits of Tax Saving Mutual Funds
There are lots of benefits to be gain from investing in a tax saving mutual fund. These are some of them:
- Investments are eligible for tax benefits up to Rs. 1.5 lakh.
- Long term capital gains are not taxed.
- These plans allow investors to invest on a monthly basis via an SIP
- The portfolios are kept diverse so as to minimize the risk of massive losses.
- If you choose not to withdraw the investment, it will continue to grow and turn into savings for a rainy day.
- While you may not be able to withdraw the principal, you can withdraw the dividends earned, even during the lock-in period.
- These mutual funds tend to offers only 3 years of a lock in period.
- Open ended – investments in these can be made all year around.
- The particular fund that an investor invests in is run by a qualified funds manager.
Q) Advantages of Investing in a Mutual Fund?
A) There is a list of advantages of investing in a Mutual Fund. A few of them are,
- Professional Management
- Diversification of Risk
- Choice of assets.
- Easy purchase and redemption
- Tax benefits
- High returns
- SIP options
- Flexibility – Fund switching.
Q) How to choose the right Mutual Fund?
A) There are four parameters one must be sure of before investing in a mutual fund for the desired growth of the investors. These are,
- Goal associated with the investment – Financial goals are targets, usually driven by specific future financial
- Know where your money is being invested – Mutual funds pool investors’ money to make investments across different securities as per a predefined investment strategy. It is important to know where your money is being invested to be at peace that your money is safe.
- Risk and return associated with the investment – The sole purpose of investing is to get returns out of them. Anyone who invests must know the risk involved in to be able to take an informed decision about his investment.
- Mutual fund fees, charges and net return – Before investing in mutual funds, investors should know the time frame till which exit load is charged. This time frame should be less than the time frame of goal for which the investment is being made.
Q) Terminologies used in Mutual Funds.
A) terms investors must know are.
AUM – Assets under management (AUM) is market value of assets that investment companies or financial institutions manage on behalf of investors
NAV – Net asset value (NAV) is value per share of a mutual fund or an exchange-traded fund (ETF) on a specific date or time.
LOAD – A Load fund is a mutual fund that comes with a sales charge or commission
Portfolio – A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, as well as their funds counterparts, including mutual, exchange-traded and closed funds.
ELSS – ELSS is a type of diversified equity mutual fund (MF), which is qualified for tax exemption under section 80C of the Income Tax Act.
Balanced Funds – Balanced fund is a mutual fund that generally keeps to a 50-50 mix of stock and bond investments.
Debt Funds – Debt fund is an investment pool, such as a mutual fund or exchange-traded fund, in which core holdings are fixed income investments.
NFO – NFO’ A security offering in which investors may purchase units of a closed-end mutual fund. A New fund offer occurs when a mutual fund is launched, allowing the firm to raise capital for purchasing securities.
SIP – SIP works on the principle of regular investments. It is like your recurring deposit where you put in a small amount every month. It allows you to invest in a MF by making smaller periodic investments (monthly or quarterly) in place of a heavy one-time investment