In today’s world, there’s always a lot of speculation about the type of investment you need to make for wealth creation or for your wealth to grow at a steady rate. The problem that each one of us face is the lack of information in the market about the right kind of investment that will eventually go on to build our financial status.

Each one of us at some point in our life recently have heard about mutual funds or have seen banners and advertisements regarding the same. So, what are mutual funds and how do you invest in them? These are some questions that we thought would be of relevance to you so we went ahead and demystified all your doubts. So, stop scratching your head and read away.

What are mutual funds?

A mutual fund is a professionally managed investment fund that pools money from multiple investors to purchase securities. These investors can be retail or institutional in nature. Mutual funds have advantages and disadvantages compared to direct investing in individual securities. These fund investments are managed by professional fund managers who have precise knowledge of the industry through ample amount of research and are a part of the crux in the market.

What are the different types of mutual funds?

Primary structures of mutual funds include open-end funds and closed-end funds, while there are other types of investment funds which exist in the market as mentioned below

Open ended funds:

Many investments are not on a single product but on a collection of products. Just like we all love to keep different types of shoes and clothing in our wardrobes, these mutual funds function in the same way by investing in a collection of stocks and bonds to comprise the whole fund. These types of funds are available for subscription and repurchase on a continuous basis and they do not have a fixed maturity period and are usually not listed on the exchanges.

Closed ended funds:

Closed ended funds raise a fixed amount of capital through an IPO (Initial Public Offer) and have a fixed maturity period. These funds are then listed and traded like stocks on a stock exchange to provide investors an exit route before the maturity date. It only issues a set number of shares and although their value is also based on the NAV (net asset value), the actual price of the fund is affected by supply and demand, allowing it to trade at prices above or below its real value.

Money market funds:

These are investment funds which are considered to be the safest type of investment. In this type of fund, the money is invested in short-term instruments, although the investor may not earn huge returns on this one but it is still considered to be a safe place to put your money as the principal amount is not affected by the fluctuations in the market. Examples of money market funds are Commercial Paper, Treasury bills from the government and Certificate of Deposits.

Fixed income funds:

These investment funds as the name suggests are the ones which gives returns on a regular basis on fixed intervals. The prime focus of this investment fund is to bring money into the fund through interest on a regular basis. The money is invested into government bonds and corporate bonds that can yield high returns, however investment into government bonds is considered to be safer than the corporate ones.

Equity funds:

As the name suggests these are those investments funds that invest in the stock market. These funds are considered as high yielding funds with high risk factor where the investor invests with a pre-requisite knowledge of losing money as returns depend on market fluctuations, therefore they have bigger possibilities when it comes to return on investment which is generally higher than fixed income funds. Here the investors have the option of choosing a stock that interests them. Examples of equity funds are growth stocks which don’t pay dividends, income funds which pay large dividends, value stocks, large-cap stocks, mid-cap stocks and small cap stocks. An investor also has an option of investing in a combination of all these.

Balanced funds:

Balance funds are the kind of investment funds which invest in a combination of equity and fixed income securities. This strategy makes these funds unique as they can churn out higher returns against the risk of losing money. The idea is to divide the money among different types of investment. The type of investment these funds put money into can be of aggressive or conservative in nature, while the former holds more securities and less bonds while the latter holds lesser equites than bonds. Balanced funds tend to have more risk than fixed income funds but less risk than any equity investment.

Index funds:

This investment fund is a type of mutual fund with a portfolio that is designed to track and match the performance of a market index such as the standard poor(S&P500). The value and return on the fund invested depends solely on the rise or fall of the market index. This strategy provides the investors with a lot of market exposure and low fund management cost as fund managers have to replicate the performance of the particular market index so the extra cost of research in the stock selection process is cut down. It also becomes easy for the investors to strategise their investment as they too depend on the performance of the market index and no extra cost is involved.

Specialty funds:

Specialty funds are the type of mutual funds that focuses on equity investing within a specific industry. These funds are commonly referred to as sector funds because the investment is directed towards a specific sector. The most common sectors include energy, financial services, healthcare, real estate, technology and utilities.

Funds-of-funds:

As the name suggests this a type of investment fund that invests in other mutual fund schemes. The idea is to invest in a portfolio of other investment funds rather than directly investing money into the stock market, bonds or other securities. This makes it easier for the investor to put his money in a particular scheme as the asset allocation stands out to be much better and safer than equity.

What are Mutual Fund Returns?

The most important factor while choosing a type of fund to invest is the kind of return you can earn on it. All mutual funds provide 1 year/ 3 year/ 5 year returns information. It is important to compare these returns with the overall market returns and also returns of other mutual funds in the same category to get a better understanding of which mutual fund suits you better.

What are the benefits of investing in mutual funds?

There are a lot of factors that affect your investment process while comparing mutual funds with one another. We have listed out few important benefits for you:

1. Risk Diversification: Mutual funds help investors diversify unsystematic risks by investing in a diversified portfolio of stocks across different sectors. Hence mutual fund risk is much lower than individual stocks

2. Smaller Capital outlay: With a much smaller capital outlay than other equity investments, there’s a lot more diversity in the portfolio of stocks so it stands out as a beneficial ownership for the investor

3. Investment expertise: Mutual funds are managed by professional fund managers who have a lot of expertise while they manage your funds and give you an experienced layout of investments wisely to get favourable returns for you

4. Variety of products: Mutual funds offer investors a variety of products to suit their risk-taking ability and investment objectives

5. Disciplined investment: Mutual funds encourage investors to invest over a long time, which is essential to multiplying your returns. Systematic investment plans encourage investors to invest in a disciplined manner to meet their long-term financial objectives

What are the charges related to mutual funds?

There are different types of charges which may apply when you invest in a particular plan:

Entry Load:  Entry load refers to the fee charged to the investor while entering a scheme or joining the company as an investor.

Exit Load: Exit load refers to the fee charged to the investor while exiting or redeeming a scheme.

One Time Charge: This charge is paid once while initiating an investment as a transaction charge.

Recurring Charge: This charge is levied on the investor monthly/quarterly/annually to maintain their portfolio, marketing and to provide advisory on their investment.

Management Fee: This fee is charged by the fund manager for his management services.

Account Fee: This charge is levied by a few Asset management companies (AMCs) if minimum balance criteria is not maintained, this amount is then deducted by from the portfolio of the investor.

What are tax saving funds?

These funds invest in other funds. Similar to balanced funds, they try to make asset allocation and diversification easier for the investor. This is an equity diversified fund and investors enjoy both the benefits of capital appreciation, as well as tax benefits.

Below we have listed some tax saving funds to invest for you:

1. Kotak Tax Saver ELSS:

Investment Objective: Enables investors to avail income tax rebate and generates long term capital appreciation from a diversified portfolio.

Launch Date: 23/11/2005

Fund Family: Kotak Mutual Fund

Lock-in Period: 3 years

Top 3 Holdings: Finance, Energy, Capital Goods & Engineering

Return %:

1-year: 6.82%

3-year: 11.33%

5-year: 17.26%

Minimum Investment: INR 500

2. Motilal Oswal Long Term Equity Fund:

Investment Objective: Generates long-term capital appreciation from a diversified portfolio of equity related instruments.

Launch Date: 21/01/2015

Fund Family: Motilal Oswal Mutual Fund

Lock-in Period: 3 years

Top 3 Holdings: Finance, Banks, Auto

Return %:

1-year: 6.93%

3-year: 14.25%

5-year: N/A

Minimum Investment: INR 500

3. Tata India Tax Savings Fund:

Investment Objective: Provides income distribution and also pays importance to capital appreciation.

Launch Date: 31/03/1996

Fund Family: Tata Mutual Fund

Lock-in Period: 3years

Top 3 Holdings: Finance, Consumer goods, Energy

Returns %:

1-year: 14.55%

3-year: 12.06%

5-year: 21.42%

Minimum Investment: INR 500

4. HDFC TaxSaver (ELSS)(G):

Investment Objective: Generating capital appreciation and income from a portfolio, compromising predominantly of equity and related instruments.

Launch Date: 31/3/1996

Fund Family: HDFC Mutual Fund

Lock-in Period: 3years

Top 3 Holdings: Banks, Finance, Oil & gas

Returns %:

1-year: 14.55%

3-year: 10.08%

5-year: 17.54%

Minimum Investment: INR 500

5. Reliance Tax Saver (ELSS) funds:

Investment Objective: Catalyzes long-term capital appreciation from a portfolio that is invested in equity and related instruments.

Launch Date: 21/09/2005

Fund Family: Reliance Mutual Funds

Lock-in Period: 3 years

Top 3 Holdings: Banks, Industrial Capital Goods, Automotive

Returns %:

1-year: 8.56%

3-years: 9.21%

5-years: 21.59%

Minimum Investment: INR 500

All these queries are the most commonly occurring in an investor’s mind, we hope that the information in the above blog was sufficient for you to understand the whole process.

We thank you for going through our blog, we at creditkaro believe in bringing you accurate information for all your queries regarding all kinds of financial products. We hope you got significant amount of information related to mutual funds investment. We wish to bring you more such content in the future, till then invest wisely!