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Benefits of investing in Mutual Funds
Investing in mutual funds was never this easy
Fund managers do the all research, pick the right investments, and monitor fund performance so that you don't need to.
Mutual Funds invest your money across a wide range of securities and industries. This level of diversification protects your investments to a degree from market-related volatility.
Mutual Funds offer great flexibility through dividend reinvestment, systematic investment plans and systematic withdrawal plans.
Mutual Funds are available for nearly any type of investment, market strategy, or financial goal.
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All you need to know about Mutual Funds
A mutual fund is a system of pooling money from various investors with common investment goals. This money is then invested across different asset classes, including equities, bonds, money market instruments, etc.
Such a distribution makes an investor portfolio risk averse as it becomes impervious to sector-specific market shocks. Should there be underperformance by the pharmaceutical sector, the metals sector would remain unaffected by the development and protect investors from making losses.
Each investor is in possession of the units based on the quantum of investment made.
What is a unit of Mutual Fund?
New mutual funds are launched through a New Fund Offer (NFO). Based on the amount you invest; you are allotted a certain number of units of mutual fund. Your investment is divided such that at least one unit of each security comes together to make one unit of mutual fund. The number of units of each security is decided based on the distribution of your investment money.
E.g., Let us say you invested INR 1,00,000 in mutual funds with INR 10,000 in Security A, INR 20,000 in Security B, INR 30,000 in Security C, and INR 40,000 in Security D.
1 unit of your mutual fund portfolio will consist of 1 unit of Security A, 2 units of Security B, 3 units of Security C and 4 units of Security D.
How are Mutual Fund gains calculated?
The gains generated from this pool of mutual fund investments are distributed uniformly amongst the investors minus the expenses by calculating a scheme's Net Asset Value (NAV). NAV is the per share value of your mutual fund portfolio.
NAV = (Total Asset Value - Total Liability Value) / Total number of unitholders, where,
Total Asset Value is the total market value of all securities comprising the mutual fund inclusive of profits. This value is calculated at the end of each trading session as the closing price of each security fluctuates every day. The Total Asset Value can also include liquid assets such as cash, dividends, etc.
Total Liability Value includes all borrowings for investment, other fees & charges, etc.
Broadly, there are three main kinds of mutual funds to invest in - equity, debt, and hybrid. This classification is based on their underlying assets.
Equity mutual funds, as the name suggests, invest in stock markets. These funds can be further classified to invest in shares of large-cap, mid-cap, or small-cap companies. There are equity mutual funds that invest in specific sectors like IT, pharma, auto etc. There are three kinds of equity funds:
- Thematic or sectoral mutual funds: These funds focus on sector-specific investments, which means that it is a less diverse portfolio. Such an investment comes with an elevated risk as well since it is prone to sector-specific shocks.
- Focused funds: This fund lays emphasis on investment in organizations having a certain market capitalization (m-cap). The m-cap is specified when the investment scheme is announced. A maximum of 30 stocks can be invested in through focused equity funds.
- Contra funds: These funds deploy a strategy wherein fund managers purchase underperforming stocks with a positive outlook. The objective is to create maximum value in the long term by purchasing securities when they are cheap and not performing.
Debt mutual funds
usually invest in debt instruments with a maturity period of one to three years. These are investments made in fixed income securities such as government bonds, treasury bills, corporate bonds, commercial papers, etc. Debt funds that focus on investments in government securities are called Gilt Mutual Funds.
Debt-based securities are assigned a rating which allows investors to identify the risk of default by the issuer of the securities. Fund managers typically choose securities with a higher rating which indicates minimum risk of default by the issuer.
However, mutual fund investments need not remain focused only on high-quality securities. Low quality securities are high-risk investments but offer commensurately high rewards too. A good mix could strike the right balance.
Hybrid mutual funds are a combination of both the above types of mutual funds i.e., equity as well as debt. The quantum of investment in equity and debt varies depending on the proportion of investment. A hybrid fund can either be debt-oriented or an equity-oriented fund depending upon the risk appetite of the investor.
The objective a hybrid mutual fund investment is to strike a balance between regular income and wealth expansion. Depending upon the market performance, fund managers may choose to make buy or sell decisions to ensure value creation.
Mutual Funds are designed for both - the short-term and the long-term, depending upon your investment horizon and goals. There are various schemes to invest in for a few days to a few weeks to a few years. Ideally, equity funds are most suited for the long-term, while debt mutual funds cater to investors with a short-term investment horizon.
There is no 'right' mutual fund to invest in. It depends on how much wealth you are targeting within the investment horizon on your mind.