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Understanding Mutual Funds (Investment! Investment! Investment!)

06 Feb,2023 05:28 PM, by: Posy Lui
5 minute read Total views: 746
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In this time and age, relying solely on savings may not be a favourable step to ensure future financial safety. The money in your savings bank account sitting idly may also not serve the purpose of a secure future in the long run. But, there is a promising way to boost your financial security with the intent of earning better returns that is- INVESTING.

Why is Investing a Better option?

Investing allows you the benefits to grow and prosper your wealth assets while ensuring your present and future financial security by generating inflation-beating returns.

 A good investment plan also provides you with the possibility to meet your financial goals such as repaying your debts, purchasing a car or a house, generating emergency funds, etc.

 

Investing like a Pro

There are several different investment options available, which can come across as risky and complex, from stocks and bonds to real estate and money market accounts, etc. Whereas your choice of investment options is a hit-or-miss opportunity, it may or may not guarantee positive financial returns from your investments.

But, fret not! There is a safer and more convenient way to get full advantage of the investment opportunities available out there by pooling your money into a vehicle, i.e a mutual fund.

 

What is a mutual fund investment?

Mutual Fund is a variety of investments that comprises a group investment from multiple shareholders who share a mutual investment goal to generate returns by investing in stock market-affiliated financial sectors such as stocks, bonds, money market, and other assets. The combined ownership of the fund is known as its portfolio, which entitles the shareholders to receive income and capital gains.

 

Mutual funds are one desirable investment alternative for personal stocks, bonds, or assets, which grants the investors to keep shares in high-end portfolios they may not have been able to have the money for as individual investors. It is a convenient investment option to diversify your portfolio.

Investing in stocks may certainly generate some favourable income, but it would instead be safe and steadier to invest in a mutual fund. As the market value of assets owned by the mutual fund increases or decreases, so will the significance of the shares owned by the investors accordingly. The returns may be average but the risk will be lower than that of investment in stocks.

Mutual fund investment is also deemed flexible because you can begin or quit investing as per your interest and desire.

 

Brief Layout of Mutual Funds

In India, all the constituent parties involved in the mutual funds operate based on the rules and regulations enacted by the Securities and Exchange Board of India (SEBI) to regulate and facilitate the development of the securities market, as well as to safeguard the revenue of the investors.

 

A mutual fund is involved various stakeholders but the root structure framed by SEBI is three-tiered:

  1. Sponsor -The Sponsor is the promoter of the mutual funds.
  2. Trustee -The Trustees are the guardians of mutual funds and protectors of investors' interests.
  3. Asset Management Company (AMC) -The AMC is the money/investment/fund manager who manages the assets of the investors.

 

Categories under Mutual Funds

Mutual funds are classified into two categories, in broad: Open-ended and closed-ended funds.

In the open-ended mutual fund category, investors can invest and bail their equity at any moment with full liberty, whereas closed-ended funds do not provide you with this option. In closed-ended funds - once you invest your funds, you can withdraw the money only at its maturity.

 

Furthermore, SEBI has broadly classified open-ended mutual funds based on asset classes into equity, debt, and hybrid funds.

 

Equity Funds are one of the schemes under mutual funds that mainly focus on investing in company stock based on market capitalization. It is then further categorized into several factions such as large-cap, mid-cap, small-cap, and index funds, etc according to how they are managed or where they invest. The term large-cap refers to the companies ranking from 1st to 100th, and mid-cap from 101st to 250th and from 251st onwards all fall under small-cap companies, as per SEBI’s market capitalization.

 

Debt Funds are one of the schemes serving under mutual funds which focus on investing in fixed-income insurances such as corporate bonds, government bonds, banking & PSU, and other debt-related tools to produce a steady income. SEBI classifies debt funds based on the duration and quality of debt instruments. Out of various types of debt funds, you can choose any sort at your convenience. Debt funds offer rather safe investment options that have the potential to boost your wealth.

 

Hybrid Funds are one of the schemes under mutual funds that allow investing in more than one asset class and are classified by SEBI based on asset allocations. The investors in this category mostly prefer to invest in a combination of both equity and debt securities -i.e hybrid funds, but some may choose to invest in gold or real estate, etc. These types of funds help lower the portfolio risk when investing in asset classes with low equivalence.

 

How investors get a return from mutual funds

Most likely, your returns will depend on the type of mutual funds your fund manager invests in.

Let's get you to understand the three fundamental ways to observe the returns on your investments:

 

The Capital - If you had invested in a mutual fund with securities that have recently increased in its value, then that will be distributed among the shareholders as capital.

The Shares - If the mutual fund's value you had invested in has increased in price and value, you can sell some or all of your shares for a fair share of profit.

The Dividends and interest - Every earning you acquire throughout the year is paid out in the shape of a bond's interest, or a stock's dividends. It's up to you to either accept them as capital or further reinvest in additional shares.

 

The Rewards of Investing in Mutual Funds

Mutual funds can help:

  1. Stabilize your asset allocation and diversify your portfolio at a low cost
  2. Incur limited investment obligations.
  3. Provide growth opportunities when the market amplifies.
  4. Cater for you with minimum expenses through professional management by providing an expert as a fund manager, who decides when and where to invest your money.
  5. Assist in safeguarding your portfolio when the market faces downturns.
  6. Reduce the risk of other active holdings.
  7. Enjoy outstanding convenience and flexibility.
  8. Provide you with reliable and transparent investment by updating and disclosing the Portfolio details monthly.

 

With such privileges available in the market which require minimal investment and optimistic returns, several new and upcoming investors have opted to invest with mutual funds as one can begin investing with a small amount. So, are you up for hopping into the mutual funds' vehicle?

 

 

Disclaimer: The opinions expressed in this article are those of the author's. They do not purport to reflect the opinions or views of The Critical Script or its editor.

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