Introduction
Mutual funds are a good way to invest in the market without having to do the legwork of researching stocks and bonds.
There are two types of mutual funds: the first is actively managed and the second is passively managed. Actively managed funds rely on managers who buy and sell assets in the fund’s portfolio in an attempt to beat their benchmark index, whereas passively managed funds maintain a portfolio that is typically based on an index, such as the S&P 500.
The first thing you need to consider when choosing a mutual fund is whether or not you want it to be actively or passively managed. If your goal is long-term growth, then you should go with an actively managed fund because it can outperform passive funds. On the other hand, if your goal is long-term income with the little risk you should go with a passive fund.
Mutual Funds 101
1. What is a mutual fund?
Mutual funds are investment instruments that pool money from multiple investors and invest it in stocks, bonds, or other securities.
Mutual funds may be set up as open-ended funds with a stated date of maturity (e.g., 2025) or as closed-ended funds with a specified life cycle (e.g., 10 years). Mutual fund shares are available through brokers and financial advisers.
2. How does Mutual Fund Work
A mutual fund is a privately owned investment company. A mutual fund pools together money from many investors, and invests in stocks, bonds, and other securities to produce a diversified portfolio.
The first step to investing in a mutual fund is to choose the right type of funds for you. There are many types of mutual funds available so it's important to know which one will provide you with the best rate of return.
3. How to invest in mutual funds? stocks vs. bonds
There are many ways in which we can invest or deal in mutual funds.
- Through Broker
- Direct through our bank app
- Directly on the AMC website
Investors buy mutual fund shares in the fund itself or through a broker-dealer, rather than other investors. The price that investors pay per mutual fund is the total amount of each fund and any fees charged at the time of purchase, such as sales burdens. The price that investors pay per mutual fund is the total amount of each fund and any fees charged at the time of purchase, such as sales burdens. The Fund will normally send you the payment within seven days.
Mutual fund shares are "redeemable", you can sell half of your stake later or you can sell your entire share. They'll send you the payment within seven days
The investment in MF involves risks, performance and expenses, read the guidelines carefully.
You may also like
What is Mutual Fund and How Does it Work
How & Where to Invest Money | Basics of Stock Market For Beginners
How to get rich | 10 Tips That Guarantee Wealth
Active Income Vs Passive Income
Types of Mutual Funds
1. Index Funds
2. Bond Funds
A bond fund is a fixed portfolio of different types of bonds you can buy. This is useful when you don't have the time to invest and research many different individual bonds. These funds can package many different bonds, from high-risk bonds (high yield) to low-risk bonds (low yield). Whether or not you should buy one completely depends on how much risk you wish to take on as an investor.
For bonds, the risk is looked at as how likely are the borrowers to default on their loans. If the risk is high, the interest rates that the banks charge these borrowers are also high, meaning the amount of money you make (also known as yield) from the bond is also high. Government bonds are considered low risk because the Federal Reserve can print money. Some corporate bonds are considered a higher risk, as there’s more uncertainty they will repay. Therefore, when looking at the risk it may be worth your time to look at investments with a high yield.
How do you choose a good Mutual Fund?
We all know that mutual funds are good. But which mutual fund is better for you or me? We don't always know this. In this article, we will talk about the five points that you need to keep in mind while choosing the right mutual fund. And at the end of the article, I'll tell you something interesting if you have deposited money in a bank or FD, there is a type of mutual fund In which if you invest then you will get more returns than the bank and the risk is negligible.
How do we start an investment journey?
Usually, in India, most people start investing with the encouragement of friends. Like your friend called you one day and said "I have invested in mutual funds." "it gives good returns." "You too should invest." So the first trigger point is your peers.
Secondly, how do we choose the right mutual funds? We visit a random website, take a look at its past returns, and invest where the returns are high. Is this the right way to invest? not friends. This method is not correct at all. Because, yes, looking at past returns gives you an idea of its past performance. But if you are investing today then you will get returns in the coming days. And it is not difficult to find a good mutual fund through research. I am going to tell you about five factors by which you can choose the best mutual funds.
What are the factors to consider when choosing mutual funds?
Before investing, first, decide what your goal is. And then decide how to invest. After the target, other factors are duration and risk. If I talk about duration and risk, they revolve around the target. These three factors are intertwined. how? I'll tell you
1. Goal.
When we are young, we have academic goals and in college, we have career goals. Even when we are working, we have goals for the future. But friends, when it comes to investing, why do we forget to set goals? Where goals are very important, we don't miss our goals and invest anywhere. So whenever you invest in any mutual fund the most important thing is your financial goal. Which you would like to accomplish through your investment. And the remaining factors that I will tell you about, are all based on your goal.
The goal could be anything-- small or big. Like you want to buy a car after a few years you want to buy a house you want money for your kid's marriage or you want to retire after a few years. Or it could be that you don't have a goal. What do you do then? You have to invest your money somewhere so that your wealth will increase. This is what is called wealth creation.
2. Duration
Let's assume that I got a job today. I wish to own a car after three years. For that, I will need ten lakh rupees. So buying a car became my goal. Ten lakh rupees is my first financial target. When do I want to buy a car? three years later. So three years is my period.
3. Risk
The risk is, that when we invest money somewhere, the chances of its value going lower instead of higher. That is, if you invest Rs 100 then there is a possibility that it may go to 95 instead of 105. The chances of it going down and how much you can bear it is a risk. And the risk is personal for everyone. Risk and return are related to each other. If you want high returns you have to take more risks. On the other hand, if you take more risks you need not necessarily get more returns.
What are the fund's goals?
Let's see some goals in detail. Which mutual fund is to be chosen for which goal? Goal setting in a fund is very necessary.
1. First Goal
Let's talk about the first goal. I want to buy a car after three years. My target period is three years. Which mutual fund should I choose for three years? Here always remember this rule: if you are investing for less than three years try to invest more in debt funds. The risk is less in debt funds. although the returns are also less, but not very much. But if you want to invest for a short period of time, you should invest in debt funds. If you want to buy a car after three years for six lakh rupees. From now on you have to invest 15,000 every month.
As I told you, if your investment horizon is less than 3 or 4 years, then you should invest in debt funds. If the average return of debt funds is just 7% and if you invest, from today, 15,000 rupees every month in debt funds in which the average return is 7%, your goal will be achieved in three years. You will get an investment value of six lakhs. If you want to invest for a very short tenure, you can choose liquid funds.
Similarly, the options are ultra short term, low duration, short term, midterm, long term, and gilt funds. It is not necessary that you make only short-term investments in debt funds. If you want to take a very little risk and make investments in the long term then you can use debt funds for investment.
In the end, the special type of fund is called a gilt fund. A gilt fund is a special type of fund that invests only in government securities. For example, government bonds, municipal bonds, and state governments bonds. So it is relatively safer. In the last year, gilt funds have given more than 12% returns.
2. Second Goal
Suppose my second goal is that I want to buy a house in ten years. So my target is ten years, and my duration is ten years. When the tenure of your investment exceeds three years then there is a special case of Mutual Fund which we call Equity Mutual Fund. The specialty of equity mutual funds is that though your risk-taking capability should be more you get more returns. So, when your tenure is more than three years, you should balance your portfolio between debt mutual funds and equity mutual funds.
To explain it in simple words, if you like to take more risk, then you should buy more equity mutual funds instead of debt funds. If the tenure is the same but your risk appetite is less, then you should buy more debt funds than equity.
Let's see the example calculations for the second goal.
I want a house ten years from now. Its cost will be 50 lakh rupees. If from today I invest Rs 25,000 every month, as I told you our tenor is ten years then I will invest in debt as well as equity. If my overall return is 10% from both, then my investment goal will be achieved. my investment value will reach 50 lakh rupees after ten years using which you can fulfill the dream of buying a house.
Like I said different types of debt funds there are different types of equity mutual funds too. Like
Large-cap mutual fund: If we start from large-cap funds, large-cap equity mutual funds are the mutual funds that invest in large-cap companies. Large-cap companies like Reliance and Kotak Mahindra Bank are the big companies. So large-cap mutual funds that invest in equities have lower risk when compared to mid-cap and small-cap funds, and so are the returns.
Small-cap mutual fund: Likewise, small-cap mutual funds are those that invest in small-cap companies or small companies.
Mid-cap mutual fund: Mid-cap companies then these companies, are neither too big, nor too small there is a little more risk of investing in these companies and sometimes they give good returns as well.
Multi-cap mutual funds: There are some companies that invest in all three categories is called Multi-cap mutual funds
3. Third goal.
Imagine that I am 28 years old now. I want to retire after 32 years from now. When I retire I need money that can take care of my basic needs. So guys now my period is 32 years. When the duration becomes 32 years or longer as I mentioned there are types of equity mutual funds: small, mid, and large-cap. So if we talk about the longer term, my risk appetite is a bit bigger, and I can take more risks. In that case, the investment I made inequities I can invest more in small-cap or mid-cap rather than large-cap. This way I can balance my overall portfolio as I invest some money in small-cap, some in mid-cap, some in large-cap and some in debt funds so that my overall portfolio is diversified, the risk is more and I get more returns.
Let's see it in detail.
As I told you that I want to retire after 32 years, and I need Rs 5 crore to retire to meet my basic needs. For that, I have to invest in both debt and equity. If my tenor is 32 then it is high enough so I can invest in small-cap and mid-cap equities. If I take more risks, I can expect more than 10%, and I can expect 12.5% returns. If I invest 12,000 every month on debt and equity in the future, for which I expect only 12.5% returns in the next 32 years my money will become five crores.
Conclusion:
Past performance: How have your mutual funds performed in the past? As I told you in the beginning, past performance doesn't tell you about future performance but it tells you about the fund manager's capabilities how the market was in the past, how other mutual funds performed, and how your mutual funds performed. You should always compare the past performance of your fund with other mutual funds in the same category. If I want to invest in mid-cap funds and want to see the returns of the last three years, compare the returns of other mid-cap funds in comparison, the returns are good, the fund is relatively better. If it doesn't do well, the fund hasn't performed well.
let's talk about the last point. Expense Ratio. You may know that when you invest your money, it goes to an asset management company that will invest it in debt or equity on your behalf. He also has the expenses of running the company. This they take from your money so that they can run their business. We call this the expense ratio. Typically, the expense ratio ranges from zero to 1.5%. So whenever you think of investing, do not forget to check the expense ratio. The higher the expense ratio, the higher will be your expenses as an investor. The less it is, the better it is for you. As I told you, to choose a good mutual fund, you have to look at its past performance and compare it with the category average and also, the expense ratio and profile of the fund manager are very important in choosing a good mutual fund. There are many websites that apply where you can know all these details very easily. A mutual fund can be with other mutual funds.
In the beginning, I have said if you have kept money in banks, in a savings account, or FD, there is a better investment option, where risk is very less, almost negligible. but you get better returns. And that is liquid funds. If you invest in liquid funds, you get around 7% returns. As I said their lots of websites or apps where you find multiple options of investing in different liquid funds. In some liquid funds, you can withdraw by just clicking absolutely free of cost. If your money is in a savings bank, it is of no use, then invest in liquid funds. If ever the need arises, you can make a one-click withdrawal to transfer it to your savings bank through the app or website which you are operating.
