Mutual Fund – All you need to know about this care taker!
Many of us might be earning a decent revenue regularly to fulfil our present needs and goals. But, how about future? Do we know how much money we need for future? It is always a difficult task to plan or decide. This is when we think of different investment opportunities and Mutual Fund always comes first in the list along with Equity Investments.
What is Mutual Fund?
Mutual Fund is a professionally managed fund, that collect money from many investors and invest on their behalf. Usually, the money is invested in Equity and Debt. Mutual funds are ideal investment options for those, who do not know much about investments.
Fees and Expenses:
There are certain charges incurred by the investor who holds the the mutual fund. Running a fund involves cost like, share holder’s transaction cost, advisory fees, marketing and distribution expenses etc. Funds pass along these charges to the investors in different ways.
Structure of Funds:
Open ended fund: Open ended fund is a collective investment scheme, which can issue and redeem shares at any time.
Closed ended fund: Closed ended fund is an investment model, which is based on issuance of fixed number of shares that are not redeemable from the fund.
Here are some of the fund categories suitable for first time investors:
Balanced Fund: These are the hybrid funds which invest in both equity and debt. The investment portions are diversified between industries and sectors to avoid concentration of risk in one place. Equity oriented balanced funds usually have 65% or more funds in equity and remaining in debt. Debt portion minimises the risk which is very important for one time investors.
Large cap funds: It makes it safer for the new investors to have a diversified investments in top 50 or 100 companies based on the market capitalisation. It is always believed that large cap equities are less volatile when compared to mid cap and small cap equities. These funds invest more that 80% funds in equities of large companies.
Index Funds: These funds exactly replicate an index. In this investment model, funds hold stocks in the same proportion as they weigh in the index. This means no risk for fund managers. They track the NIFTY or the SENSEX and hence, always are large cap diversified funds.
Tax saving funds: Many times you would have heard about Equity-linked Savings Schemes (ELSS), this is nothing but the another name for Tax saving funds. This fund is most favourite among the retail investors since it has tax exemption under section 80C of the Income Tax Act. These funds come with three year lock in period.
Monthly Income Plans: This is a very good option for those who would like to save constantly for retirement without much risk. That means, under this model, your 80-85% of the funds are invested in debt and the remaining in equity which makes it almost no-risk funds. To avoid uncertainty in payment, one can opt for systematic withdrawal option by choosing the frequency and quantum of payments.
Why Mutual Funds?
- Diversified investment: Mutual funds always offer diversified investments. That means, the risk is not concentrated in one area
- Liquidity: Shareholders with open ended fund are allowed to sell their unit on a regular basis I,e. end of each trading day. This offers a very good liquidity for funds
- Regulations: The mutual funds models are regulated by Government body thereby offering “no risk” of fraud
- Investment Management: Mutual funds are professionally managed investment funds. That means, the fund’s investments are supervised by the qualified portfolio managers
- Tax saving: There are also such funds where the investments are exempted from tax under section 80C of Income Tax Act
Why not suitable for all?
- The return on funds are subjected to market risk. That means, there is always a risk associated with your investment. The ones who do not like to take risk at all, then mutual funds are not for them
- Expensive: The investors are required to pay certain fee (management fees) in different forms. It could be in the form of reduction in units or any other forms and might not be suitable for those who wants to invest for short term.