What is a Mutual Fund?
A mutual fund is a pool of money collected from many investors to invest in stocks, bonds,
money market instruments, and other assets. These funds are controlled by professional
portfolio managers who make investment decisions on behalf of the fund’s investors.
Why invest in mutual fund ?
1. Diversification: By pooling money from multiple investors, mutual funds provide diversification,
reducing the risk associated with investing in individual securities. This diversification helps
spread risk across various assets, industries, and geographies.
2. Professional Management: Mutual funds are managed by experienced professionals who
conduct research, analyze market trends, and make investment decisions on behalf of
investors. This expertise can be particularly valuable for those who lack the time or knowledge
to manage their own investments.
3. Liquidity: Most mutual funds allow investors to buy and sell shares on any business day at the
fund’s current net asset value (NAV), providing liquidity and flexibility for investors to access
their money when needed.
4. Affordability: Mutual funds typically have lower investment minimums compared to individual
stocks or bonds, making them accessible to a wide range of investors. Additionally, many
mutual funds offer systematic investment plans (SIPs), allowing investors to contribute small
amounts regularly.
5. Transparency: Mutual funds must regularly share details like what they invest in, how they’re
doing, and their fees. This gives investors clear insight and holds the funds accountable.
Mutual funds can also be categorized based on their maturity period, which refers to the
duration for which you plan to hold the investment. Here are the main types:
1. Open-Ended Funds : These funds do not have a fixed maturity date. Investors can buy and
sell units at any time, and the fund continuously issues and redeems units based on investor
demand. Open-ended funds provide liquidity and flexibility to investors.
2. Close-Ended Funds: Close-ended funds have a fixed maturity period, typically ranging from
a few years to several years. Investors can buy units only during the initial offer period (IPO) and
cannot redeem them directly with the fund until maturity. However, these funds may be listed on
stock exchanges, allowing investors to trade units after the IPO.
3. Interval Funds : Interval funds combine features of both open-ended and close-ended funds.
They offer periodic intervals (e.g., quarterly or semi-annually) during which investors can buy or
redeem units. Outside of these intervals, the fund operates as a close-ended scheme.
Types of mutual fund
1. Equity Funds : These funds primarily invest in stocks, aiming for long-term capital growth.
They can focus on specific sectors (like technology or healthcare) or invest across various
industries. Equity funds carry higher risk but also the potential for higher returns.
2. Bond Funds : Bond funds invest in various types of fixed-income securities, such as
government, corporate, or municipal bonds. They aim to provide investors with regular income
through interest payments while preserving capital. Bond funds vary in risk depending on the
types of bonds they hold.
3. Money Market Funds : Money market funds invest in short-term, low-risk securities such as
Treasury bills, certificates of deposit (CDs), and commercial paper. They aim to provide stability
and liquidity, making them suitable for investors seeking minimal risk and easy access to funds.
4. Balanced Funds : Also known as hybrid funds, balanced funds hold a mix of stocks and
bonds to provide investors with both growth and income. The asset allocation can vary, with
some funds maintaining a consistent balance between stocks and bonds, while others may
adjust based on market conditions or investment objectives.
5. Index Funds : Index funds aim to replicate the performance of a specific market index, such
as the S&P 500 or the Dow Jones Industrial Average. They typically have lower expenses
compared to actively managed funds because they passively track the index’s performance
rather than relying on active management.
6. Sector Funds : These funds focus on specific sectors or industries, such as technology,
healthcare, or energy. Sector funds allow investors to target their investments in areas they
believe will outperform the broader market. However, they can be riskier due to their
concentrated exposure to a single sector.
7. Specialty Funds : Specialty funds invest in particular asset classes or follow specific
investment strategies. Examples include real estate funds, which invest in real estate
investment trusts (REITs), and socially responsible funds, which consider environmental, social,
and governance (ESG) factors in their investment decisions.
8. Target-Date Funds : These funds are designed to align with a specific retirement date,
gradually adjusting their asset allocation to become more conservative as the target date
approaches. They typically offer a diversified portfolio of stocks, bonds, and other assets,
making them suitable for investors with a long-term investment horizon.
Mutual funds typically offer different plans to cater to various investor needs. Here are some
common types:
1. Direct Plan : Investors buy directly from the mutual fund company, bypassing distributors or
brokers. These plans often have lower expense ratios compared to regular plans.
2. Regular Plan : Investors buy through intermediaries like brokers or financial advisors. The
expense ratios might be slightly higher due to distribution fees.
3. Growth Plan : Investors opt for growth plans when they aim to accumulate wealth over the
long term. Any profits made are reinvested into the fund.
4. Dividend Plan : Investors in this plan receive periodic payouts from the mutual fund’s profits,
typically in the form of dividends.
5. Dividend Reinvestment Plan (DRIP) : Instead of receiving dividends in cash, investors
choose to reinvest them back into the fund to purchase more units.
6. Systematic Investment Plan (SIP) : Investors contribute a fixed amount at regular intervals
(weekly, monthly, quarterly) into the mutual fund, allowing for disciplined and gradual
investment.
7. Systematic Withdrawal Plan (SWP) : Investors receive a fixed amount at regular intervals by
redeeming units from their mutual fund holdings, providing a steady income stream.
8. Balanced Plan : This type of plan invests in both equity and debt instruments to provide a
balanced portfolio with potentially lower risk compared to pure equity funds.
9. Index Plan : These funds aim to replicate the performance of a specific market index, like the
S&P 500 or Nifty 50, by investing in the same stocks or securities in similar proportions.
10. Sectoral Plan : Investors target specific sectors or industries with these funds, allowing them
to capitalize on potential growth opportunities within those sectors.
Each plan has its own features and benefits, so it’s essential for investors to understand their
investment goals and risk tolerance before choosing a plan.
Considering this point before buying mutual funds
1. Define Your Investment Goals : Determine your financial objectives, whether it’s long-term
wealth accumulation, retirement planning, or saving for a specific goal like buying a house or
education.
2. Understand Your Risk Tolerance : Assess how much risk you’re comfortable with. Different
mutual funds carry varying levels of risk, so choose funds that align with your risk appetite.
3. Research and Select Funds : Conduct thorough research on different mutual funds,
considering factors like past performance, fund manager experience, expense ratios, and
investment philosophy.
4. Diversify Your Portfolio : Spread your investments across different asset classes, sectors, and
geographic regions to minimize risk. Diversification reduces risk by spreading investments
across various assets.
5. Consider Expense Ratios and Fees : Look for mutual funds with low expense ratios, as high
fees can eat into your returns over time. Also, be aware of any entry or exit fees associated with
the fund.
6. Review Fund Performance : Evaluate a fund’s historical performance, but remember that past
performance is not indicative of future results. Focus on consistency and long-term returns
rather than short-term fluctuations.
7. Check Fund Manager Credentials : Research the fund manager’s track record, experience,
and investment approach. An adept fund manager can greatly influence the performance of a
fund through their expertise and experience.
8. Assess Tax Implications : Understand the tax implications of investing in mutual funds,
especially regarding capital gains taxes on distributions. Consider tax-efficient investment
strategies to minimize tax liabilities.
9. Monitor Your Investments : Regularly review your mutual fund holdings to ensure they
continue to align with your investment goals and risk tolerance. Regularly adjust your portfolio to
ensure it aligns with your target asset distribution.
10. Seek Professional Advice if Needed : If you’re unsure about which mutual funds to invest in
or need personalized guidance, consider consulting a financial advisor or investment
professional for expert advice.
To buy mutual funds in India, you typically follow these steps:
Step 1 – Choose a Fund : Decide which type of mutual fund you want to invest in based on your
investment goals, risk tolerance, and investment horizon.
Step 2 – Select an Asset Management Company (AMC) : Research and select a reputable AMC that
offers the type of mutual fund you’re interested in.
Step 3 – KYC Compliance : Complete your Know Your Customer (KYC) verification by providing
necessary documents like identity proof, address proof, and PAN card to the chosen AMC or a
KYC registration agency.
Step 4 – Select a Fund and Plan : Choose the specific mutual fund scheme and the plan you want to
invest in (e.g., growth, dividend).
Step 5 – Fill Application Form : Fill out the mutual fund application form provided by the AMC, including
details like investment amount, plan, and payment method.
Step 6 – Payment : Make the payment for your investment through cheque, demand draft, or online
payment modes as per the instructions provided.
Step 7 – Submit Documents : Attach the required documents along with the application form, such as
identity proof, address proof, and PAN card copy.
Step 8 – Fund Allotment : Once your application is processed and payment is received, the mutual
fund units will be allotted to you at the prevailing Net Asset Value (NAV) of the fund on the day
your investment is accepted.
Step 9 – Receive Statement : You will receive a statement confirming your investment, usually via
email or physical mail, which includes details like the number of units allotted and the NAV.
Step 10 – Monitor Your Investment : Keep track of your mutual fund investment’s performance
periodically and consider reviewing your investment strategy based on changes in your financial
goals or market conditions.
Always seek advice from a financial advisor or conduct extensive research before making
investment choices.