If you belong to that group of people whose knowledge of mutual funds is limited to the fuzzy disclaimer at the end of advertisements, this is a good place for you to start.
With the overwhelming supply of advertisements on mutual funds and investment, it is absolutely natural to feel confused. Especially if you belong to an unrelated field or industry, or simply do not understand investment as much as you would like to, here are the basics that will get you started on the journey to becoming savvier.
What is a Mutual Fund?
A mutual fund is like a melting pot for your money, where it comes together with money from many other investors like you. The sum collected from several individuals is then collectively managed by a professional fund manager from an Asset Management Company (AMC). S/he manages this money that you and other investors have entrusted with them, with the goal to ensure higher returns to the investor. The fund manager will charge you a relatively small sum as a fee, which is known as Expense Ratio.
Depending on the size of your investment in a mutual fund, you get shares of that particular mutual fund. Your returns are calculated based on your shares. There are different types of mutual funds available. But mainly, these are of three types: Equity Funds, Fixed Income Bonds, and Hybrids.
How to Invest in Mutual Funds?
There are no fixed rules when it comes to investing in mutual funds. It can be done by various means.
- You can invest through intermediaries like financial brokers, advisors, and agents.
- You can also do it directly, offline or online.
Nowadays the paperwork required is minimal and hassle-free. Mostly all you need is your PAN card number and complete the Know Your Customer (KYC) process which helps to verify your identity.
There are two ways of investing in mutual funds:
- You can make a large investment at once, also known as lump sum investment.
- Sign up for SIP. A Systematic Investment Plan (SIP) allows an investor to invest money systematically on a regular basis over a period of time.
If you are a beginner wondering how much you will have to invest on a regular basis, by using SIP calculator.
What makes mutual funds attractive?
- The diversification in mutual funds is unlike any other investment option. The fund manager may use the money to invest in different stocks in various industries. It gives you the added security of not putting all your money on a single platform.
- Mutual funds are a low cost and a viable choice of investment for everyone. No matter how small your pay scale is, you can start with leftover sums of money.
- Apart from that, mutual funds are managed by an expert who understands the various trends in the stock market. Thus, the manager supplies the knowledge and skills that you may lack.
- Another attractive feature of mutual funds is that they are flexible. They are fairly easy to buy and redeem. This is known as liquidity, the ease at which something can be bought and sold.
Finally, keep in mind that most of the investment pundits out there agree that having an end goal is quite important before you start investing. It gives you focus and keeps you on track.
Sneha R.
