Where are most of your investments concentrated? As typical Indians, most of us tend to keep it invested in gold and silver. If not for these options, we generously put our money into real estate even when the amount for real estate is big.
Where is another place we can put our money? What is an investment choice that gives us flexibility and ease of investing? No questions asked – it is Mutual Funds. But how do you invest in these ever-evolving mutual funds? That is what we are here to tell you about.
What is a mutual fund?
A mutual fund is nothing but a collection of investments that are professionally managed by the Fund Manager. It’s a trust that accumulates funds from a group of people who have similar financial goals and invests them in stocks, bonds, and more.
After subtracting appropriate fees and taxes, the income/profits created by this collective investment are dispersed proportionately among the participants by determining a scheme’s “Net Asset Value” or NAV. Simply put, a Mutual Fund is a collection of money that is contributed by a large number of people.
The most important aspect is that you get to invest in mutual funds online.
Before we learn how to invest in mutual funds, though, let’s understand the kinds of funds.
Types of mutual funds
Mutual fund plans can be ‘open-ended’ or ‘closed-ended,’ as well as actively or passively managed.
a) Open-Ended Funds: An open-end fund is a mutual fund scheme that is accessible for subscription and redemption throughout the year (similar to a savings bank account, where money can be deposited and withdrawn on a daily basis). An open-ended plan is indefinite and has no maturity date.
b) Close-Ended Funds: A closed-end fund is only available for subscription during the original offer period and has a defined maturity date (similar to a fixed-term deposit). Closed-end fund units can be redeemed only at maturity (premature redemption is not authorised). As a result, after the new fund offer, the Units of a closed-end fund are mandatorily listed on a stock market and traded on the stock exchange like other equities, allowing investors who choose to exit the scheme before maturity to sell their Units on the exchange.
c) Activity Managed Funds: An actively managed fund is a mutual fund plan where the fund manager “actively” manages the portfolio and continually analyses it, determining which stocks to buy/sell/hold and when based on professional judgment and analytical study. The ultimate goal of active fund managers is to maximise returns and outperform the scheme’s benchmark.
d) Passively Managed Funds: A passively managed fund, on the other hand, simply replicates or tracks a market index. In a passive fund, the fund manager remains inactive or passive in the sense that he/she does not use his/her judgment or discretion to determine which stocks to buy/sell/hold but simply replicates/tracks the scheme’s benchmark index in exactly the same proportion. Index funds include Index Funds and all Exchange Traded Funds. The fund manager’s job in a passive fund is to merely duplicate the scheme’s benchmark index, i.e., to earn the same returns as the index, rather than to outperform the scheme’s benchmark.
How to Invest in mutual funds?
Step 1: Choose Your Fund
The first and arguably most crucial decision you must make is whether you want to outperform the market or try to imitate it. So, choose the fund that you can make the best out of.
Step 2: Budget
Aside from the needed initial commitment, consider how much money you have to invest comfortably and then select an amount.
Step 3: Select Your Buying Spot
You’ll need a brokerage account to invest in shares, but there are a few options with mutual funds. If you contribute to an employer-sponsored retirement plan, you’re probably already invested in mutual funds.
You can also purchase funds directly from the fund’s developer. You can also obtain cash through a traditional financial counsellor, albeit this may incur additional costs.
Step 4: Consider the Fees
The cost ratio of a fund isn’t always evident (you may have to read the prospectus to find it), but it’s well worth the effort to understand because these costs can eat into your gains over time.
Step 5: Manage Your Portfolio
After you’ve decided which mutual funds to purchase, you’ll need to consider how to manage your investment. One option is to rebalance your portfolio once a year in order to keep it in accordance with your diversification strategy.
What are the perks of investing in mutual funds?
Mutual funds have benefits of its own, and they are:
Managed Professionally: Mutual funds are monitored and managed by experienced fund managers, who decide where and when to invest the pooled funds. Investments are made by attentively monitoring market developments and conducting extensive research.
Diversification: When you invest in a mutual fund – your fund manager will invest your money in a variety of securities. Logic suggests that there is minimal probability that all instruments will not reach their full capacity. It is also feasible that if one instrument performs worse than the other, they will balance each other out, reducing your risks and making your investment safer.
Liquidity: The ability of an asset to be turned into cash is referred to as liquidity. Consider the following scenario: you have an emergency and want cash but do not have sufficient dollars in your bank. It is not feasible to sell property or obtain a loan immediately. However, with mutual funds, you have the option of withdrawing your money immediately. Mutual fund investments are regarded to be highly liquid assets that could be quickly converted to cash when needed. However, you should ask your fund manager if your mutual fund could be paid out instantly, as some funds have a lock-in period.
Simplicity: Unlike stock market investments, which may be fairly sophisticated, mutual fund investing is rather easy. All you have to do is go to a bank or a non-banking financial organisation, and they will open up a mutual fund account for you right away. From the convenience of your own home, you may also open a mutual fund account. You can begin investing by utilising online accounts or even mobile applications after your Know Your Customer (KYC) documents have been validated.
Investing in mutual funds is instant and easy. There is not much you would have to do other than have access to some good and strong internet. I hope you went through this article and that it helped you get started with investing in mutual funds.