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Mutual Fund: Ultimate Guide To Invest [2021]

mutual fund investment guide

In simplified terms, when a large number of individuals pool in their money to invest, it forms a Mutual Fund. It is a trust which collects money from individual investors who share a common investment objective.

Professional Fund Manager (PFM) manages your funds by investing in diverse areas. He may invest in equities, bonds, money market instruments and other securities that he deems fit.

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Each investor is an owner of units, which represent a portion of holdings of the fund. You earn as a proportionate amount of gains generated out of these investments minus the cost of expenses incurred.

This makes Mutual Fund as one of the most viable investment options for the common man. It offers you the opportunity to invest in a variety of professionally managed securities at a relatively low cost.

What is a Mutual Fund?

A Mutual Fund is a professionally administered trust. It actually manages savings of retail investors like us as singular or one entity.

They may invest in stocks, bonds, short-term money market instruments and commodities such as precious metals. Investors in a Mutual Fund share a common goal.

The investment objective of the fund, coupled with the investment spread over different and diverse asset classes. They aim to maximize the gain and also offset the potential losses if any.

A common man like us is a retail investor and is advantaged in a Mutual Fund by having stake only a small amount. He can access seasoned finance professionals to manage his investment.

Your lack of knowledge or time is not a hindrance in reaping the benefits of complex investment decisions. Moreover, you need to pay a relatively small fee.

What is a Mutual Fund set up like?

There are three basic components in a Mutual Fund set up. They are:

  • Sponsor or sponsors: The promoter of a company establishes a trust as the sponsor. Registration with the Securities and Exchange Board of India (SEBI) is mandatory.
  • Trustees: They are the holders of the property for the benefit of the unitholders. Trustees oversee and direct the operations of the AMC (Asset Management Company). They also monitor mutual fund performance and compliance of SEBI regulations.
  • AMC (Asset Management Company): It is a body approved by the Securities and Exchange Board of India (SEBI). They are the investment managers of the fund, apart from undertaking the day to day operational activities of the fund. It includes interacting with the customers, marketing and sales of the Mutual Fund to Invest in India.

Types of Mutual Funds

The variety of investment options offered by Mutual Funds is very wide. What you choose will be determined by your risk appetite, financial goals, and time projections.

Funds based on maturity period:

  • Open-ended funds: They offer investors the flexibility of time and liquidity. As an investor, you can redeem your units on Net Asset Value (NAV) on a continuous basis.
  • Close-ended funds: At the time of launching an investor can subscribe to this fixed term of maturity like 3 to 6 years.
  • Interval funds: This is a hybrid of open and close-ended funds. Though they are essentially close-ended funds, by dint of being traded in stock exchanges. However, they become open to sale or redemption at prevailing NAV.

Funds based on investment objective:

  • Equity Growth Fund: By investing here, you are putting your money in stocks aimed primarily at long-term capital appreciation. Equity Fund invests around 65% of their corpus in equities or equity related instruments. The focus of the investment is on a wide range of industries and sectors. It is suitable for you if you have a high-risk appetite and a long-term goal.
  • Debt Income Fund: Here 65% of the investment is made in fixed income securities. It may be corporate debentures, bonds, government gilt securities, and money market instruments. They are less volatile than equity funds.
  • Balanced Fund: It is a combination that is deemed to provide steady, stable returns as well as capital appreciation. 60% of the fund is invested in equity and 40% in debt instruments such as bond and debentures.
  • Money Market Liquid Fund: If your aim is capital preservation with a moderate income, this would be choice fund. The investments are made in safe short-term instruments. It may be in Treasury Bills, Certificates of Deposits a commercial paper of fewer than 91 days. This fund is ideal for a corporate and industrial investor.
  • Gilt Fund: The investments are exclusively directed toward government securities. The returns depend on fluctuations in rates of interest.

Other Funds:

  • Tax Saving Fund: Equity Linked Savings Schemes (ELSS): This is a fund with a lock-in period of 3 years. The investment is focused on equities and suits those with high-risk appetite and long-term capital growth goal. You are provided with a rebate in your income tax as per provisions of the IT Act, 1961.
  • Index Fund: Here the fund is attached to any particular index such as the BSE, NIFTY or the S&P. The performance is dependent on the results of the index and weight assigned to such stocks.
  • Sector-specific Fund: A Specific sector of industry is chosen for investment such as banking, FMCG or Pharmaceuticals. The returns are therefore dependent on the overall performance of these sectors. The funds can be spread over different companies within the sector. The risk is higher in this fund.

How do Mutual Funds Operate:

Mutual Funds trade in securities after thorough market research and understanding. It sets investment objectives when a scheme is launched and this is how mutual funds work. The investments are directed at the set objectives, risk perception, and time profile to ensure:

  • Long-term capital growth
  • Regular monthly income
  • Steady returns.

An equity fund’s focus is to invest in shares and stocks to ensure long-term capital growth, as compared to debt fund investments. Debt funds are concentrated in government securities and corporate bonds. It ensure steady returns at a lower risk.

In India, the legal framework is governed by the Mutual Funds Regulations, 1996. It is a trust in a structure comprising of Sponsor, Trustee and an Asset Management Company (AMC) under the overall supervision of SEBI.

Advantages of Mutual Fund:

  • Size benefit: You can hold units with a small investment and a low fee that would not have been possible otherwise.
  • Easy trade: With a Mutual Fund you are in a position to trade in stock exchanges with relative ease through a Mutual Fund.
  • Professional Management: Mutual Funds being a professionally managed entity give a small common investor the benefit of seasoned financial methods.
  • Rookie investor: Mutual Funds have come as a boon to young individual novice investors who are averse to manage their money actively.
  • Freedom of choice: It gives you as an investor to research and selects a fund manager of your choice with a distinctive style to your liking.
  • Diverse portfolio: The risks are greatly reduced due to the mixing of investments and assets within a portfolio.

Disadvantages of Mutual Funds:

Mutual Funds do carry some inherent disadvantages which need to be factored in by you.

  • Fluctuating Returns: Being market-driven, your returns are always prone to fluctuate depending on the performance of your securities at the exchanges.
  • Cash: Due to the continuous flow of funds in and out of the Mutual Fund, it is always required to keep some provision of cash compulsorily. It is a fund that is idle.
  • Costs: The cost of operations of Mutual Funds reduces the amount of payout you are to receive.
  • Opacity: There is an apparent lack of transparency in the way the funds are managed. In fact, it is dependent on the acumen of the fund manager.
  • Evaluation blues: The research and comparison of funds are very complex and difficult for a layman.

What is Mutual Fund SIP in India?

For you, as an individual investor, a Systematic Investment Plan (SIP) is one of the best modes of accessing a Mutual Fund. You invest a small sum monthly which is redirected to your chosen Mutual Fund.

It is known to give you reasonably good returns. SIP Mutual Fund also provides easy liquidity with the flexibility of redemption fully or partly at any time of your choice.

Best Mutual funds:

Funds that beat the benchmark repeatedly year after year are the best Mutual Funds. Among the top performing funds in the year 2018 are:

  • IDBI Equity Advantage Fund
  • L&T Dynamic Equity Fund Growth
  • JM Dynamic Debt Fund Regular – Growth
  • Axis Long Term Equity Growth
  • Tata Hybrid Fund Regular Growth

Bottom Line:

Mutual Funds in India are well regulated by SEBI which protects your interests and an investor. This has made Mutual Funds one of the safest modes of investment that also ensures a steady and handsome return.

Since standard information is shared with you, you are well informed about the quality and quantity of your investment.


Published on: Dec 27, 2018

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