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Mutual funds -The ultimate beginner’s guide

People have a strong desire to achieve financial freedom. They strive to achieve it at any cost. The investment goals could be saving for their retirement, ensuring children’s education, creating an emergency fund, making a beautiful place to live, so on and so forth. Though there are many paths to achieve a safe and sound financial future, one of the most easiest and operational ways of achieving this is by investing in mutual funds or (MF)s.

For many, Mutual Funds are complicated or intimidating. Let us simplify it to the basic level so that it is easily understood.

Mutual funds the ultimate guide

In simple words, mutual funds are a pool of money (fund) from investors who share a common investment objective. The pooled money is managed by fund managers. Mutual fund managers decide the investment avenue of the fund based on the objectives and risk appetite of the fund.

When we purchase a mutual fund our money is put together with other’s money. Stocks, bonds, or other assets are bought with this money. All the investors are allotted units of mutual funds. The value of each mutual fund unit is equal to a part of the underlying stocks. Any dividends earned by the stocks are distributed among the mutual fund holders.

What is a mutual fund port folio?

The right way of investing in mutual funds is to create a mutual fund portfolio. A portfolio is a collection of mutual funds selected judiciously to meet the investment goals and the risk appetite of the investor. 

Please note that the investment inside a particular fund or the portfolio of a mutual fund cannot be controlled by the investor. The fund manager who is an expert in the field creates a portfolio for you keeping in mind the objectives of the fund.

Types of mutual funds

Generally speaking, there are four broad types of mutual funds: 

(those that invest in stocks)

(Fixed income funds)

(Money Market Funds)

(Balanced or hybrid funds)

Stocks vs mutual funds

Even though mutual funds are similar to stocks but they have some unique features which make them stand out. A mutual fund offers shares or units to the investors but it is not transacted in exchanges like Nifty or Nasdaq.

A stock is a part of the ownership of a company while mutual funds are a group of assets that may include stocks or bonds or other modes of investments.

How the value of a mutual fund is determined.?

The value of a mutual fund is calculated by the fund’s net asset value (NAV ). NAV of a mutual fund is obtained by dividing the total net assets of the fund by the total number of units issued.

To get the total net assets of a fund, subtract any liabilities from the current value of the mutual fund’s assets and then divide the figure by the total number of units. Naturally, when purchased for the same amount, lower NAV will give more number of units and higher NAV will give less number of units. 

Buying 100 units in a mutual fund with value Rs 50 is the same as buying 25 units in a mutual fund with a value of Rs 200. The value of the investment will remain the same in both cases, which is Rs 5,000. The NAV of a mutual fund shouldn’t be used as a measure of the performance of a fund. The fund’s performance is best analyzed by its total growth in a given period of time.

Investing in mutual funds pros and cons...

Five points to remember before investing in mutual funds

Mutual fund investment is riddled with numerous perceptions, myths, and opinions, and investors are likely to get lost in this maze. Instead of just following mutual fund investment tips from various sources, it is better to check some facts. Only then, you would be able to say, mutual fund Sahi hai!

Here are five things that you need to consider and know…

1. Planning makes perfect

Investing in mutual funds is an important financial decision. For example, if you are investing through a systematic investment plan (SIP), every month (or quarter) a certain amount will be deducted from your account and invested into the fund. Hence, it is important to plan out the expenses, and ensure that on a fixed date every month, there is sufficient balance in your account for the mutual fund.

2. Who is the Fund Manager?

A check over the experience of the fund manager may ensure that you have given your hard-earned money in competent and deserving hands. A fund manager with expertise in finance and ethical history will be an ideal candidate.

3. Watch out for the AUM

Assets under management(AUM) is the total market value that the fund holds, combining the value of the asset, and capital. Higher AUMs indicate better investment inflow, quality, and management experience on behalf of a fund house.

4. Be cautious with expense ratios.

Expenses of a mutual fund affect returns in a great way. An expense ratio shows how much money is being spent on administrative costs compared to how much is being invested. So the higher the expense ratio, the more money is being siphoned off in fees instead of ending up in your pocket.

5. Investment horizon and market timing

One crucial factor to consider while making mutual fund investments is deciding your investment horizon ie how long you have to stay invested in mutual funds. The strategies have to be fine-tuned based on the period of investment.

When is the best time to invest in mutual funds... while the market is soaring or when it is sinking?
mutual fund investments

Actually, it is both. Investing in mutual funds is all about discipline and practice. Irrespective of the market fluctuations, mutual funds tend to provide decent growth over a period of time. It is quite proven that when you invest a fixed amount regularly, say in a SIP, the same investment buys more investment when prices are low and less when they are high.

Thus, an investor, stay put irrespective of whether a bull is running amok or a bear is bringing the things down.

Taxation in mutual funds

Just like income from the sale of any other investment, mutual funds are subject to taxation. Fund gains can be classified as short-term and long-term gains as per the table provided below

Equity< 12 months> = 12 months
Balanced< 12 months> = 12 months
Debt< 36 months> = 36 months

Long Term Capital Gain (LTCG) Tax on redemption is exempted up to Rs.1 lakh. If LTCG is more than 1 lakhs, the applicable tax is 10% without indexation

Short-term capital gains are taxed @ 15%

Top mutual funds in India

  • ICICI Prudential Focused Bluechip Equity Fund
  • Aditya Birla Sun Life Small & Midcap Fund
  • Tata Equity PE Fund
  • HDFC Monthly Income Plan – MTP
  • L&T Tax Advantage Fund
  • SBI Nifty Index Fund
  • Kotak Corporate Bond Fund
  • Canara Robeco Gilt PGS
  • DSP BlackRock Balanced Fund
  • Axis Liquid Fund

Final word...

Though mutual funds are subject to market risks, it is evident that mutual funds are a great option for investment, especially for beginners. A little research on mutual funds and its opportunities can help you become an oracle, allowing you to attain financial freedom at a lower risk than the stock market.

Ashin S Anish

Mr. Ashin S Anish is a financial market analyst, certified from the Indian School of Business. A certified Money manager from the University of California, Irvine, Cybersecurity tools, and cyberattacks specialist certified by IBM, Certified in Artificial Intelligence from deep, Certified in Portfolio and Risk Management from the University of Geneva and Certified in Microeconomics Principles by the University of Illinois. He is also an avid money manager who believes that you have to be agile as a monkey with money matters...

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