If you want to get better returns in the long term, then investing in equity can be a better option. You can invest in equities either directly (through demat and trading accounts) or through mutual funds. But the general public especially new investors should avoid direct investment in equities. For them, mutual funds can be a better way to invest in equities.
What is mutual funds ? Types of mutual funds.
What is mutual funds ?
A mutual fund is a company that collects money from different people, which it invests in stocks, bonds and other financial assets. All these combined holdings (stocks, bonds and other assets) of that company are called portfolio of that company. Each mutual fund is managed by an asset manager.
There is a very good and easy way to earn money from mutual funds. It is not necessary that you have thousands of rupees to invest in this. Rather, you can also invest in it at the rate of only Rs 500 per month.
From today's post, we will know what is the difference between them and after all, what is this mutual fund and how can we safely invest in it?
Types of Mutual Funds
There are many types of Mutual Funds. We can divide them into 2 categories. First type of Mutual Funds on the basis of structure and second type of Mutual Funds on the basis of asset.
A) Types of Mutual Funds on the basis of Structure
1. Open ended mutual fund
Open Ended Funds = In this scheme, investors are allowed to sell or buy funds at any point of time. There is no fixed date or period to buy or sell funds in this.
These funds provide liquidity to the investors, hence they are very much liked by the investors.
2. Close ended Mutual Funds
This type of plan has a stipulated maturity period and investors can buy funds only during the fund tenure. And such funds are also included in the share market. After this they are also used for trading.
3. Interval Funds
This type of Mutual Funds is made up of both open ended funds and close ended funds. In this, the facilities of both the funds are primed.
It allows investors to trade funds at pre-determined intervals. And trading of funds can be done on that fixed period.
It was talked about the type of Mutual Funds on the basis of the structure, now we will talk about how many types of Mutual Funds are taken on the basis of asset.
B) Types of Mutual Funds by Asset
1. Debt funds
Debt Funds = The risk to the investor is very less in this type of funds. Investors invest in debentures, government bonds and other fixed income which are safe investments.
Debt funds provide fixed returns. If you want a stable income then this fund is for you. If the investor's earnings from the funds are more than 10,000 then the investor will have to pay tax.
2. Liquid Mutual Funds
Liquid Funds = This is also a safe option to invest. Liquid funds invest in short term debt instruments. Therefore, if you want to invest for a short time, then liquid funds can be your choice.
3. Equity funds
Equity Funds = If you want to get long term profit then Equity funds are for you. These funds invest in the stock market. These types of funds also involve risk, but the returns from them are more than others.
4. Money Market Funds
Such funds provide reasonable returns for the investors in the short term. It is invested in safe places.
5. Balanced Mutual Funds
Equity fund and debt fund get a mixed benefit in this type of fund scheme. Funds accumulated in this type of mutual fund are invested in both equity and debt positions.
These types of funds give investors stability in income on the one hand and on the other hand they also give impetus to income growth.
Apart from these funds, there are many types of funds, but these are the main and most used funds.
Who is Professional Fund Manager?
The work of managing the fund is done by a professional person who is called a Professional Fund Manager.
The job of a professional fund manager is to look after the mutual fund and make more profit by investing the fund money in the right place. If put in simple words, its job is to convert the money invested by the people into profits.
There are a few things you need to know before investing in mutual funds.
Why invest and for how long invest in mutual funds ?
Before investing, it should be clear in the mind that what is the investment being made for? You are investing for retirement or for higher education of child, for house or for daughter's marriage etc…etc. If one wants tax exemption under 80C, then he should choose a tax saving fund which has a lock-in period of three years. Having a clear goal helps in deciding the investment period.
Risk wise asset allocation in mutual funds.
You can choose the asset class according to the risk. You can take more risk if you start investing from the age of 25-30 years or even earlier. Equity funds are better for such aggressive investors. At the same time, starting investments at the age of 40-45 can take a little (moderate) risk. It is necessary for them to invest in both equity and debt funds. But investors in the age group of 50-55 can take very little risk. Such conservative investors should invest only in debt funds.
Portfolio Diversification.
It is important for a new investor to diversify the portfolio. The portfolio should contain all types of assets. In general, there is a fall in one asset at a time and a rise in the other. For example, if there is a fall in equity, then there will be a rise in gold, but every asset has a period of ups and downs. As such, diversification of assets reduces risk in the long run. This diversity is even more necessary in times of great ups and downs. Diversity is important even within an asset class. For example, large cap, mid cap and small cap, within equity, there should be all kinds of funds.
Take care of liquidity/emergency.
Before investing, check that you do not want a lump sum amount in the near future. If one needs money every month, quarter or half yearly for the education of his child, then he should also keep liquid or ultra short term funds in his portfolio.
Total Expense Ratio and Exit Load.
The investor should also know the total expense ratio and exit load of his fund. The fees that mutual fund companies charge investors for managing the fund is called the Total Expense Ratio (TER), whereas mutual fund houses levy exit load when you redeem your investments before a certain period. If the expense ratio of a fund is high, it will affect the returns in the long run. But this should not be the sole criterion for fund selection.
performance and Return Of mutual funds.
It is important to see the past performance of the fund in which you are going to invest. Must see the performance of at least 3 to 5 years. However, there is no guarantee that a fund which has given better returns in the last 3 years will give similar returns in future also. Be sure to check the asset size (Asset Under Management) of the fund in which you are going to invest. Also, if there is understanding, one can also pay attention to important parameters like Standard Deviation, Sharpie Ratio, Beta to better know the past performance of a fund.
Investment Methods in mutual funds.
-SIP or Lump Sum
If you are a new investor then it would be better for you to start investing through SIP (Systematic Investment Plan). Investing through SIP has the advantage of averaging. When the market is down, you get more units of the mutual fund for the same investment while you get fewer units during the bull run. Yes, if you are sure about the timing of the investment, then you can invest in lump sum. But it is very difficult for common man and investor.
Direct or Regular There are two ways of investing in mutual funds, direct or regular. Under the direct plan, you can start investing online directly by visiting the company's website. Another way is through an advisor, broker or distributor. In direct investment, you have to pay less charges to the fund house. Meaning the expense ratio is less. But the expense ratio is higher in the regular plan. Direct plans are suitable for those who are familiar with online investment and fund selection. But not for those who are not much aware of these things.
Top 5 Mutual Funds giving good returns
- SBI Small Cap Fund :-
SBI small cap fund has given an average return of 27.44 percent in 5 years.
-Canara Robeco Emerging Equities Fund :-
Canara Robeco emerging equities fund has given an average return of 25.75 percent in the last 5 years.
-Mirae Asset Emerging Bluechip Fund:-
Mirae assest emerging bluechip fund has given an average return of 25.36 per cent in the last 5 years.
-Reliance Small Cap Fund :-
Reliance small cap fund has given an average return of 24.99 percent in the last 5 years.
-ICICI Prudential Banking and Financial Services Fund :-
ICICI prudential banking and financial services fund has given a return of about 23.20 percent.
What is the role of SEBI in Mutual Funds?
Mutual Funds are registered under SEBI (Securities and Exchange Board of India) which regulates the market in India. The work of keeping investors' money safe in the market is done by SEBI. It is ensured by SEBI that any company is not cheating with the people.
Mutual Funds have been present in India for a very long time, but even today people do not know much about it. In the early times, people had the impression that Mutual Funds are only for the rich class.
But this is not the case at all and in today's time this perception seems to be changing. The trend of people has increased towards Mutual Funds. In today's time, Mutual Funds are not only for the rich class.
Rather, any person can invest in Mutual Funds at the rate of only 500 ₹ every month. The minimum amount to invest in Mutual Funds is Rs 500.
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