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Mutual Fund

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What is Mutual Funds?

A Mutual Fund scheme, as the name suggests, is a shared fund that pools money from multiple investors and invests the collected corpus in stocks, bonds, short-term money-market instruments, other securities or assets, or a combination of these investments. The investments are in accordance with the investment objectives as disclosed in the offer document. Therefore, an equity-oriented mutual fund scheme will invest predominantly in a set of stocks.

A mutual fund is required to be registered with the Securities and Exchange Board of India (SEBI) before it can collect funds from the public.

How do Mutual Funds Work?

Mutual funds issue units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders. The combined securities and assets the mutual fund owns are known as its portfolio, which is managed by a qualified investment professional, also known as a Fund Manager. Each unit an investor holds represents a portion of the portfolio. The value of the units held fluctuates with respect to the underlying value of the portfolio. The value of each unit is represented by the Net Asset Value (NAV) of the fund.

The organization that manages the investments is termed as the ASSET MANAGEMENT COMPANY (AMC). The AMC employs various employees in different roles who are responsible for servicing and managing investments. The AMC offers various products (schemes/funds) in mutual funds, which are structured in a manner to benefit and suit the requirements of investors. Every scheme has a portfolio statement, revenue account, and balance sheet.

What is a Mutual Fund NAV?

In simple words, NAV or net asset value is the market value of the securities held by the scheme. Since the market value of securities changes every day, the NAV of a scheme also varies on a day-to-day basis. The NAV of the fund is used to judge its performance.

Types of Mutual Funds

Tenor: Tenor refers to the 'time'. Mutual funds can be classified on the basis of time as under:

  • Open ended funds: These funds are available for subscription throughout the year. They do not have a fixed maturity. Investors have the flexibility to buy or sell any part of their investment at any time.
  • Close Ended funds: These funds begin with a fixed corpus and operate for a fixed duration. They are open for subscription only during a specified period. When the period terminates, investors can redeem their units.

Asset class:

  • Equity funds: These funds invest in shares. They may invest money in growth stocks, momentum stocks, value stocks, or income stocks depending upon the scheme's investment objectives.
  • Debt funds or Income funds: These funds invest money in bonds and money market instruments. They may invest into long-term and/or short-term maturity bonds.
  • Hybrid funds: These funds invest in a mix of both equity and debt. They generally invest at least 65% of their assets in equities and roughly 35% in debt instruments.
  • Real asset funds: These funds invest in physical assets such as gold, platinum, silver, oil, commodities, and real estate.

Investment Philosophy:

  • Diversified Equity Funds: These funds diversify their equity component of their assets under management across varied sectors.
  • Sector Funds: These funds are expected to invest only in a specific sector, such as banking stocks.
  • Index Funds: These funds replicate the index, say BSE Sensex or NSE Nifty.
  • Exchange Traded Funds (ETFs): These are open-ended funds traded on the exchange, priced continuously during trading hours.
  • Fund of Funds: These funds invest their money in other funds of the same mutual fund house or other mutual fund houses.
  • Fixed Maturity Plan (FMP): These funds are similar to income/debt schemes and offer a fixed return over a period of time.

How to Invest In Mutual Funds?

As a newbie, you may be wondering about how and which mutual fund schemes to invest in. With innovations in technology and investor-focused regulations, you can invest in mutual fund schemes in multiple ways.

But before you embark on the journey of investing in mutual funds, you need to complete your KYC (Know Your Customer) formalities. KYC is a prerequisite for investing in mutual funds.

KYC For Mutual Funds

The Government has appointed the Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI) to establish a central KYC registry, which simplifies the process of complying with KYC procedures.

Documents required for KYC:

  • CKYC form
  • Recent passport size photograph
  • Proof of Identity
  • PAN Card Copy
  • Proof of Address

Fill up the form and attach attested copies of your documents. Once verified, your KYC will be registered.

Mode of Investment in Mutual Fund:

  • Lumpsum: When you want to invest a significant amount in a mutual fund at one go.
  • SIP: An option to invest small amounts periodically, encouraging regular investments.

Advantages of Investing in Mutual Funds:

  • Diversification: Spreading investment across multiple securities reduces risk.
  • Professional management: Managed by professional fund managers with expertise.
  • Transparency: Scheme Information Documents provide details about holdings and performance.
  • Liquidity: Redeem investments on any business day at the NAV of that day.
  • Tax Savings: ELSS mutual funds qualify for tax benefits under section 80C.
  • Choice: Many options to invest in mutual funds based on your needs.
  • Cost-effective: Lower costs due to pooled investments.
  • Return on Investment: Potential for higher returns over the long term.
  • Well Regulated: Regulated by SEBI for investor protection.

Simply put, a Mutual Fund is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.