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A mutual fund is a professionally managed investment vehicle that pools capital from multiple investors to create a diversified portfolio of assets, including stocks, bonds, and other securities. This structure allows individual investors to access a wide range of investment opportunities without the need for direct management.
How Does a Mutual Fund Work?
Pooling Resources: In a mutual fund, investors contribute capital, which is subsequently managed by a fund manager. This collective investment enables the purchase of various assets, allowing investors to benefit from a diversified portfolio.
Professional Management: Mutual funds are overseen by professional fund managers who conduct thorough research and select investments aligned with the fund’s objectives. This expertise ensures that investors’ capital is managed effectively.
Diversification: Investing in a mutual fund helps mitigate risk by spreading investments across a variety of assets. This diversification reduces the potential impact of poor performance from any single investment, making mutual funds a prudent choice for many investors.
Liquidity: Most mutual funds provide a high degree of liquidity, enabling investors to buy or sell shares on any business day. This feature facilitates easier access to funds compared to other investment options, such as real estate or certain fixed-income securities.
Types of Mutual Funds:
Balanced funds:
Balanced funds are also called as hybrid funds with money invested in both stocks and bonds. These funds are ideal for those people who are looking for a mixture of safety, income, and modest capital appreciation.
Investors invest 60% of their assets in stocks and 40% in bonds maintaining balanced growth, moderate risk Read more.
ELSS funds:
ELSS funds meaning and What is ELSS fund: An Equity Linked Savings Scheme (ELSS) fund is an open-ended Equity Mutual Fund that helps you in tax saving and provides an opportunity for you to grow your money.
ELSS mutual funds are qualified for tax exemptions under section (u/s) 80C of the Indian Income Tax Act and people can claim the same by starting an ELSS fund and file ITR Read more.
Liquid Funds:
Liquid Funds are also known as the Debt mutual funds/ Short term funds/ ongoing funds in which the money you invest is invested in very short-term market instruments like government securities, term deposits Read more.
These kinds of funds give safe returns but low compared to other mutual funds.
Equity Funds:
Equity funds, Long-term funds also known as stock funds because of these funds, the full amount is invested in the stocks to provide high returns but with high risks.
Investing equity mutual funds is best for long-term goals like investing for retirement, children’s wedding, our house, own marriage or other long-term goals Read more.
Monthly Investment Amount: 10000
| EXPECTED RETURNS | 5 YEARS | 10 YEARS | 20 YEARS | 25 YEARS | 30 YEARS |
|---|---|---|---|---|---|
| 8.0% | 7.4 Lac | 18.3 Lac | 58.9 Lac | 95.1 Lac | 1.5 Cr |
| 10.0% | 7.7 Lac | 20.5 Lac | 75.9 Lac | 1.3 Cr | 2.3 Cr |
| 12.0% | 8.2 Lac | 23.0 Lac | 98.9 Lac | 1.8 Cr | 3.5 Cr |
| 15.0% | 8.9 Lac | 27.5 Lac | 1.5 Cr | 3.2 Cr | 6.9 Cr |
| 20.0 % | 10.1 Lac | 37.6 Lac | 3.1 Cr | 8.5 Cr | 22.9 Cr |
Difference between Regular and Direct mutual funds:
- As the name suggests Direct Funds are those mutual funds that you have bought directly from the mutual fund company through their website or application.
- But Regular Funds, are what you have bought through a broker or distributor, and In regular mutual funds company pays a commission to the intermediary that will not be deducted from your installments and then recovered as an expense from your Mutual Fund plan.
- When we compare the Direct and Regular Funds the expense ratio is higher for a Regular plan compared to a Direct.
Note: When are investing in Mutual Funds return you make on a direct plan is higher by approximately 0.5% for equity funds and approximately 0.2% for debt funds
Systematic Investment Plan [SIP] best way to invest money:
SIP means a Systematic Investment plan, It’s a way to invest a fixed small amount regularly in mutual fund schemes.
Whereas the lump sum investment means investing the entire money in one go/ one-time investment.
- SIP is very much similar to a Recurring Deposit (RD) in your banks.
- In SIP, an investor selects a period (1 year, 3 years or even perpetuity), intervals (weekly, monthly, quarterly, etc.) and amount.
- In SIP the amount will auto-debit from the investor’s bank account after every interval for a selected period.
- As retail investors’ participation has been increasing in mutual funds, SIP investment India is also gaining popularity amongst them.But still, most of the retail investors are still unaware/unclear about the Systematic Investment Plan (SIP).
- So, below we have explained the benefits of SIP.
Check these benefits of starting a SIP:
Rupee cost averaging in which an investor continues to invest a particular amount at fixed intervals regardless of the share price/NAV.
The investor receives more units when the NAV of a mutual fund scheme decline and fewer units when NAV of the scheme rises. Therefore, over a long period of time, the cost of units to investors will be significantly lower despite volatility.
By investing a particular amount at a fixed interval for a particular period of time, investors instill discipline in their character, which is essential for building wealth in the long term.