Mutual Funds concept is widely known amongst retail and corporate investors. Mutual Funds give their investors an option to park money in various financial products like equity, debt, gold, real estate etc.
You must have heard about investing in Mutual Funds unlimited times. You might be knowing the meaning of Mutual Funds and how they work. But let us understand the concept and functioning of a Mutual Fund in further detail.
If you are an existing investor in Mutual Fund, you can skip this chapter and can head to next chapter if you want to.
So, Let’s Begin.
Few Myths about Mutual Funds:
- Mutual Funds invest in Equity Market
- Mutual Funds has no Risk
- Mutual Funds are for Long Term Only
- SIP is Better than Lumpsum Investment
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Let me tell you that all the above mentioned statements are wrong. If you have any misconceptions about mutual funds please erase them all before reading it further.
Mutual Funds is just a platform or vehicle, through which we can park our money in various streams like Equity, Debt, Ultra Liquid Debt, Gold, Real Estate etc.
The companies who run any kind of Funds are known as Asset Management Companies or AMCs. In India we have various companies like Axis Asset Management Company. Mirae AMC, SBI AMC, Nippon India AMC, HDFC AMC, ICICI Prudential AMC, Quant AMC, Parag Parikh AMC, L&T AMC, Kotak Mahindra AMC etc. You will find a complete universe of Fund Management Companies.
Meaning of Mutual Fund:
Let us first understand why we call it as Mutual Fund in a simple language:
Mutual – means where various small investors park their money at one place
Fund – means when various small investors make a pool.
Now, that collective arrangement of money in a particular pool is known as Mutual Fund. It’s important to understand few more things about Mutual Fund:
- Who makes this arrangement of Fund?
- AMC Company
- Who manages all these corpus of money?
- Every AMC Company appoints a Mutual Fund Manager.
- Is this Fund Manager Qualified?
- Yes, every fund manager have enough experience and qualification in Finance, so that we can manage money to earn returns.
- How does fund manager invests all money?
- Depends on the theme of the fund may be into equity or debt or gold or etf
- Do Mutual Fund Companies Charge Investors?
- Yes they do charge some percentage of your investment which varies between 1- 2% p.a.
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Now, the most important question arises that when I invest my money into Mutual Fund, what do I get in return as a proof of investment?
- Any person after getting its KYC done, can invest in mutual fund
- He/She can invest online or through physical mode by filling a form and can pay using Bank Cheque.
- Once he invests in any Mutual Fund, he/she gets Mutual Fund Units.
- Every Mutual Fund have its own NAV or Price per unit.
- If I want to invest Rs. 1000 in any particular Mutual Fund having NAV of Rs.20, so I will get 50 Units of that Mutual Fund.
- When I invest money in mutual fund, I will be allotted with Units as mentioned above.
- For each and every investment in any mutual fund, a different Folio No. gets generated for every investor.
- You can check the mutual fund units in your folio on that respective AMC website by Logging as investor using your PAN No.
- You will also get notification about allotment of Units over your mail in a PDF form which includes all kind of information.
What is the difference between Lump sum Investment and Systematic Investment Plan (SIP)?
- Lumpsum Investment means you have invested all your money in one go in the fund or funds in part.
- SIP means you have opted to invest in mutual fund on a monthly basis in small amounts. For eg. If you have opted to invest Rs. 1000/- p.m. in any scheme of a mutual fund, its known as SIP.
Now, again the following questions must be arising in your mind:
- For how many months can I invest in SIP?
- You can invest till your lifetime, there is no as such limit, you can select the period of SIP while applying in any particular Mutual Fund.
- Should I withdraw the funds that I have invested through SIP after 2-3 years?
- No, you should not withdraw the funds in between, unless there is an emergency of funds.
- What is the ideal time for SIP Investment?
- Ideally, you should keep your SIP active for 10-15 years
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Further, there are the following terminologies that we should be knowing while investing in any Mutual Fund:
- NAV: It stands for Net Asset Value. In simple words, it denotes per unit price of any mutual fund scheme. For eg. If NAV of Axis Blue chip Fund Growth scheme is Rs. 40, it means you can buy 1 unit of this fund for Rs. 40/-
There is a complete formula to calculate it, but we do not need to go in much detail for our investment purposes.
- Entry & Exit Load: It means when you invest in mutual funds, there are some charges that you need to pay, generally on the exit which is known as Exit Load.
Generally when we invest in mutual funds, we invest for long term, say, for more than a year. We do not invest in mutual fund with an intention to withdraw within 12 months from the date of investments. In case we do that, AMCs charge us an exit load ranging from 1-1.7%.
Most of the mutual Funds, do not charge entry load in general. Earlier they used to charge it but now AMCs only charge the exit load.
- Inception Date: It refers to the starting date of any mutual fund scheme.
- Diversification: It means segregating money into different stocks of different sectors. This is to be done to avoid dependence on any particular sector or stock to earn uniform returns.
- Portfolio: It means basket of securities. When we invest our money in various Financial Instruments, this overall basket of FIs is known as Portfolio of Investment.
- Expense Ratio: Almost every Mutual Fund Company charges some expense ratio for the management of the fund. It generally varies between 1-3% on the amount of fund under management.
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