Mutual Funds – Path for all goals, as the name seems pool of money or fund, collected from investors and is invested according to certain investment objectives. The contributors and beneficiary of the fund or pool of money are the same class of people i.e. investor. As the pool of funds held by investors mutually is the mutual fund. Today there are more than 500 products in mutual fund. It’s a pool investment vehicle, where units represent investor‘s portion of the total investment. Depending on goal professional fund manger oversee these funds, instead of investing in single stock or bonds mutual fund provides platform to invest in diversified portfolio. One can start investing in mutual fund with very small amount and appropriate for small investors.

How Do They Work? Mutual Funds – Path for all goals

When an investor invests in mutual fund, he buys units of the fund and each unit is known as NAV (Net Asset Value). NAV is calculated by total value of the fund assets divided by the number of units outstanding and is published daily. The NAV is dynamic and changes every day based on the performance of the underlying asset, if the price of the assets raises the NAV also increases and vice-versa. Investment in mutual fund – path for all goals is subject to market risk, the value of underlying asset may reduce which negatively impacts the NAV. If a person invests in mutual fund, then that person hold partial ownership of the fund in form of unit. Mutual funds are of two types actively managed and passively managed. Fund Manager are the decision makers regarding which are to hold or which one to sell it helps the schemes to generate capital appreciation. Fund Manager may choose such securities based on the scheme investment objectives. Active Fund diversify investment portfolio across various asset class, which need in depth analysis as a result fees are higher and cost of transaction is even much more. Such fees and transaction cost may affect the return on investment. Passive Managed Fund is an instrument tracks a market index, to determine what to invest. The proportion of each share in the scheme‘s portfolio would also be the same as the weight assigned to the share in the computation of the said index. Performance of such funds is just like the performance of Index. Such schemes have low running cost. Profits on mutual fund attracts tax under the source of Income head “Capital Gain”, it could be short term capital gain or long term capital gain however it is applicable at the time of redemption. If profits are booked within a period of one year it is short term capital gain and if profits are booked after one year it is long term Capital gain. Tax rates are different for short term and long term capital gain.

Investing in Mutual Fund – Path for all goals

There are two modes of investing in mutual fund

S-I-P (Systematic Investment Plan) – Path for all goals

A fixed amount is invest regularly in any mutual fund – path for all goals is S-I-P, and is similar to Bank’s recurring deposit. Regularly or regular interval means, as per the investor’s preference it could be daily (working days), weekly, monthly, semi annually or annually. One can start with an investment as low as ₹ 500/- each month. By providing bank standing instructions (a standing instruction is a fixed order you give your bank to automatically transfer a set amount of money on a chosen date) to debit the amount on each interval. S-I-P is the way to enter into the world of investment easily with a very small amount for a long term. If the horizon is for long term, by investing regularly investment can grow sue to compound interest as the returns are reinvested.

Lump Sum Investment – Path for all goals

When an investor invest a significant sum of amount on any particular mutual fund – path for all goals scheme in one go it is lump sum investment, it is similar to Bank’s fixed deposit. Instead of regular investment, you put the entire amount to work from the beginning and giving it exposure immediately. Since the entire amount invested, outcomes vary more with market movement compared to SIPs.

Mutual Fund – Based on Asset Class – Path for all goals

Three main categories are:

Equity Mutual Funds

Equity mutual fund – path for all goals allocate assets to stock or equities of public limited companies, equities fund are further subdivided into large cap, Mid Cap and Small Cap depending upon the market capitalization. Again these funds are classified into active fund and passive fund, a fund manager is involved in active fund to select stocks based on market analysis whereas in passive fund tracks a market index like SENSEX, NIFTY. Equity mutual funds are suitable for that investor willing to navigate the ups and downs of stocks lead by market for higher long term return.

Debt Mutual Funds

Debt mutual funds – path for all goals invest in fixed income instrument like corporate bond, government securities, corporate debenture, and money market instruments. Such fund offer liquidity by generating regular income through interest payment and are considered less risky in comparison to equity mutual fund. It will be the best option for conservative investor seeking stable income with low risk.

Hybrid Funds

A combination of equity and debt fund is hybrid fund, these funds are designed to balance risk and return offering diversification across the asset classes. Further it is sub-categories in different equity-debt allocation like aggressive hybrid fund, conservative hybrid fund and balanced hybrid funds. Investor seeking both safety and growth may opt for such hybrid funds.

Conclusion

One can start investing in mutual fund with very small amount and appropriate for small investors. Depending on goal professional fund manger oversee these funds, instead of investing in single stock or bonds mutual fund provides platform to invest in diversified portfolio. There are two modes of investing in mutual fund SIP (Systematic Investment Plan) and Lump sum investment. And there are three main categories Equity Mutual Funds, Debt Mutual Funds and Hybrid Mutual Fund.

Disclaimer

This blog is for general informational and educational purposes only and does not constitute financial, investment, tax, or legal advice. The information is based on publicly available sources and market understanding at the time of writing and may change due to global developments. Past performance of markets during geopolitical events does not guarantee future results. Readers are encouraged to conduct their own research and consult qualified professionals before making investment decisions. Finance with Prakash does not provide any assurance regarding outcomes based on this information