Mutual fund is increasingly getting popular since last few months. Mutual funds are a fund that invests investors’ money in various companies. Since the investment is in a set of companies, any upside or downside in a few companies is compensated by the reverse in other companies. This is what makes mutual funds attractive. It makes sense for individual investors to invest in mutual funds.
Investment rationale in mutual funds
As explained earlier mutual funds invest in a set of bonds and stocks depending on type and target investors of the fund. It essentially minimizes the risk because of investment in various assets. Any fluctuation in one or few assets is usually offset by reverse gains and losses in other set of assets which are part of mutual fund.
As explained earlier mutual funds invest in a set of bonds and stocks depending on type and target investors of the fund. It essentially minimizes the risk because of investment in various assets. Any fluctuation in one or few assets is usually offset by reverse gains and losses in other set of assets which are part of mutual fund.
Let me illustrate with an example. Say XYZ equity fund invests in approximately 40 companies. The possibility of shares of all the firms going down at the same time is very remote unless there is huge disaster in the economy. Hence if XX bank goes down, YY bank can go up and compensate for the loss in XX bank. Similarly if the whole banking sector goes down, IT sector can come up to reverse the loss because of banking sector.
Secondly, mutual funds are professionally managed by fund managers whose appraisals depend on how the fund performs. Hence it is equivalent to having a highly competent fund manager with very low cost. At the same time, it must be remembered that mutual fund returns are subject to market fluctuations. No matter how competent a fund manager is, if there is retrospective tax on few large companies, the whole market will go down and take every stock down.
There is also tax advantage of mutual fund investments. Tax saving mutual funds, also known as ELSS (equity Linked Saving Scheme) provide tax advantage and the investment is tax exempt as long as it falls under the limit.
Finally, mutual funds provide immense flexibility. The investment can start with even Rs 2000. Even though this money may not buy a single share of some companies, you can still buy a fund that invests in those companies. The flexibility and ease of investment is what separates mutual funds apart.
Variety of mutual funds is immense
Mutual funds are categorized by mainly risk exposure.
Variety of mutual funds is immense
Mutual funds are categorized by mainly risk exposure.
Equity funds – These funds have maximum risk exposure as their returns depend on market’s performance. They invest is in various companies and sectors to mitigate any company or sector specific risk. As given earlier, BSL frontline equity fund invests in various sectors. Investors with high risk appetite and longer investment horizon (8-10 and more years) can go for pure equity funds. The upside of these funds is that the returns are generally better in long term.
Balanced fund – Balanced funds invest in both equity and debt in specified proportion to ensure the risk exposure to market is brought down. The debt proportion is relatively less risky than the equity portion. This means overall low risk for investors. An example can be taken as HDFC balanced fund which invests in debt and equity. Investors will medium risk appetite and medium term (2-5 years) horizon can go for this fund.
Debt funds – These funds invest in Government debts or debts by companies. Essentially it means that when investors buy these funds, they are giving loan to companies and Government and they would receive interest (returns) regularly on their lending and also the principal at the end of the tenure. Investors with low or no risk appetite can for this. The risks are low and so is the return.
How to invest in mutual fund
To invest in mutual funds, you first have to get your KYC verified. KYC means “Know Your Customer”. You can walk down to any fund offices or contact a mutual fund advisor to get you a KYC form. Once you get the form, fill the details, get few photographs, get the address and identity proof and submit the form. The KYC takes few days to verify. Once this is done, contact you advisor and fill the form of mutual fund. You are ready to go.
How to invest in mutual fund
To invest in mutual funds, you first have to get your KYC verified. KYC means “Know Your Customer”. You can walk down to any fund offices or contact a mutual fund advisor to get you a KYC form. Once you get the form, fill the details, get few photographs, get the address and identity proof and submit the form. The KYC takes few days to verify. Once this is done, contact you advisor and fill the form of mutual fund. You are ready to go.
Once KYC is done, you can invest in any fund. This means even if you get your KYC done by a fund office, you can use the same KYC for other funds. You don’t have to go for multiple KYC.
As far as mode of investment is concerned, you can go for either lump sum amount or SIP (Systematic Investment Plan). In SIP, you invest a fixed amount every month in a mutual fund of your choice. This continues till you ask mutual fund house to discontinue. The investment happens automatically through your bank account. The advantage of SIP is that it saves you from market fluctuations. Any fall in price of fund (also known as NAV, Net asset Value) enables you to buy more and any rise in price gets you capital gain. It is advisable to invest via SIP.
You can buy mutual funds from the fund houses office or contact any mutual fund advisor to guide you. You can also do it through your demat account if you have one.