Mutual Funds have become a common and preferred platform of investment in today’s rapid and dynamic economic environment. It aids us in our financial planning and liquidity requirements to meet our short and long term goals. In a country like India, where people mostly focus upon wealth & asset creation, mutual funds thus play an important role. But, before going forward, let’s discuss what exactly are mutual funds?
Introduction To Mutual Funds.
Mutual Funds are a pool of investments made by a group of people at large possessing the common investment objective and having similar type of risk exposure. They are run and managed by professional fund managers. Each person invests in the form of units in proportion to the total contribution made by him and the value of these units is referred to as Net Asset Value (NAV). There are a lot of mutual fund schemes available in market and depending upon individual to individual, they can opt for the following types of schemes:
- Equity Funds: Such type of funds invest in stocks and other equity related instruments. They are the most common and favorable form of investment. They carry a great degree of risk , however, the returns expected from such funds are also high.
- Debt Funds: They are also known as fixed income funds. They provide guaranteed money to investors at specific intervals of time. Bonds, Debentures, Fixed deposits are some of the investments that these funds undertake.
- Money Market Funds: If your goal is to have short term liquidity, then you must opt for money market funds. The investment duration for such funds is usually from 91 days to 365 days.
- Hybrid Funds: Also known as asset allocation funds, these funds invest in a blend of asset classes(equity, debt ) in a certain proportion. Therefore, investment in such funds can provide guaranteed income from debt along with equity exposure.
But , why should one go for Mutual Funds? Here is the reason “why”
Benefits Of Mutual Funds:
- Diversified Portfolio: One of the main reasons why someone should be attracted towards mutual funds is due to their diversified nature. Since mutual funds are based on concept of money pooling, the investment risk is minimized by allocating funds to different segments within an asset class. For example: equity funds may invest in stocks of different sectors so that the risk investment in one specific stock can be offset by the other one.
- Professional Approach: Mutual Funds are products of Asset Management Companies (AMCs). They hire professional fund managers, who have their own research teams that work to provide good investment returns for their customers.
- Economy: Someone planning to make investment with mutual funds might save a lot of cost . A Systematic Investment Plan (SIP) offers flexibility to make payment in installments rather than lumpsum. This eases financial burden on the part of investor
- Regulatory Framework: All Mutual Fund Trusts are regulated By Securities And Exchange Board Of India. So, chances of illegal and malpractices are negligible.
Selection of appropriate fund for investment is also an essential aspect and thus which type of fund to opt for, one needs to keep into consideration these things that can impact his/her investment decision.
Before you choose Mutual Funds; these factors play vital role:-
- Risk Appetite: A person’s capability of taking risk is of utmost priority that can impact his investment decision. Equity funds, as discussed earlier, carry heavy probability of risk, and thus be only convenient for people with risk taking ability whereas debt and market funds are for risk averse investors.
- Age: Age also plays an important role in deciding exposure to different assets. A youth investor would definitely be inclined towards lucrative returns, so will have more focus on stock investments via equity , whereas a retired or old age personnel would lay more weightage upon fixed income sources ( debt ) to sustain their lives and this impacts their investment choices.
- Inflation: inflation cannot be ignored as it plays a crucial role in performance of a mutual fund. Make sure the fund you invest in have the necessary attributes required to beat inflation.
- Investment Goal And Matching: There’s an investment objective that every scheme follows. Make sure that you are well versed of this objective and that it match your investment style so that your goals are fulfilled.
- Expenses: One needs to be fully aware of expense ratio and entry /exit loads while making an investment. This helps in making an effective decision.
Whether to opt for Systematic Investment Plan (SIP) or Lumpsum Payment depends upon the financial situation and belongings of an investor. Systematic Investment plan can be started from as low as Rs 500. However, one should carefully understand the risk profiles associated with every mutual fund and then make a uniformed investment decision. After all, it’s your hard earned money that requires utmost care and attention.