Mutual funds are increasingly becoming the popular choice of investors to build their wealth. If you are a new investor looking to understand mutual funds, this article can help you understand the basics and get started.
What is a mutual fund?
Mutual funds refer to a pool of money accumulated by various individual investors, companies and other organisations aimed at saving and making money through their investment. The corpus is used to invest in different asset classes.
What are the types of mutual funds?
Mutual funds can be broadly classified into three types – equity funds, debt funds and balanced funds also known as hybrid funds. Equity funds invest in equity stocks or shares of companies. Debt funds also called as liquid funds invest in government securities and other fixed-income assets. Balanced funds are a mix of debt funds and equity funds.
Net asset value
The NAV of mutual funds is the value at which the mutual fund shares or ‘units’ can be purchased and redeemed. The NAV is derived by dividing the total cost of the securities in your investment portfolio by the total amount of the outstanding shares.
How beneficial is investing in a mutual fund?
Mutual funds offer several benefits which make it one of the most lucrative investment options. You can let professional fund managers manage your money and find suitable investment offers to yield higher returns on your investments.
How to get started with mutual fund investment?
Investment needs vary from one individual to the other. A good starting point can be to analyse your financial goals and match them with your investment horizon to aim for the best returns. Study the different mutual fund options available and select the one which meets your investment goals.
Know your risk of investing in mutual funds
Higher the returns, higher is the risk factor involved. Equity mutual funds have a higher risk factor as compared to debt mutual funds. Depending on your risk tolerance, you can select the right mutual funds and invest in them.
Diversification is key
It is recommended not to place all your eggs in one basket. Even if you are an aggressive investor, it is an excellent idea to diversify your portfolio with funds that carry a low risk. For instance, you may want to invest in three or four funds as a starting point to build an ideal portfolio. [1]
Know your loads
Some costs are associated with buying and selling mutual funds. For example, exit load is a fee charged by your asset management company at the time of exiting or redeeming a scheme. Sometimes, it is levied if you exit the fund before the lock-in period expires.
Know your expenses
There are other expenses which are deducted by fund houses such as total expense ratio. This is an annual fee which is charged by the fund managers for maintaining your investment portfolio. This expense varies based on the size of the net assets of your mutual fund scheme.
Past performance is crucial
Before you invest in mutual funds, you may want to review the past performance of the debts for more extendedperiods, such as five and ten years. You may also compare its performance with other funds in the same category before you decide to invest.
Conclusion
Mutual funds can offer you many advantages. However,
it is recommended before investing, tospend a considerable amount of time
understanding the basics of investing to make sound decisions.
[1] https://economictimes.indiatimes.com/wealth/invest/what-is-the-ideal-number-of-mutual-funds-you-should-have-in-your-portfolio/articleshow/67690821.cms