What are Mutual Funds?
Mutual Fund is an investment tool that operates by collecting variable capital from different investors and investing that money to different stocks and the interest earned is shared among the investors. Here, the Mutual Fund firm is acting like a middle man between the share market fund and the investors. Not everyone is fully sound of the share market and the tricks due to which an investor experience loss, this can be reduced by opting for mutual funds. The investments made are done by Market experts who know their business hence reducing the risk factor associated with the market.
Why You Should Invest In Mutual Fund?
As an investor it is of utmost importance to get good returns out of your investment and therefore choose a tool that promises that. Mutual fund is one such tool used by many investors to create wealth. There are a lot of benefits for using mutual fund some of the benefit of mutual funds are listed below-
High Return on Investment
Mutual fund offers the investor High ROI by investing the money in various markets and many industries. It adequately manages the risk associated with the market condition and stock prices and returns your money with profit.
Manage By Professional Experts
A professional fund manager manages the funds of various investors with researches and experience regarding the market. Many investors who are interested in investing in market losses money due to lack of knowledge also this requires a lot of time to learn this skill of investing but Mutual Fund does not require you to be an expert in the investing.
Tax exemption is allowed in the specialized Scheme of Mutual funds known as ELSS (Equity-Linked Savings Scheme). It is a diversified equity fund that provides an opportunity to grow the investment and at the same time tax deduction as per the Income Tax Act, Section 80C of the year 1961.
Structured Withdrawal Plans
Mutual fund provides the investors with an option to withdraw the amount in a structured way on monthly, quarterly, half-yearly or yearly bases. This helps the investor to get a steady income and at the same time your money is invested in the mutual fund.
A Mutual Fund scheme is a scheme where your fund is combined with various other investors like you. At a given time not all the investments perform well therefore managing variety of investment can make your loss get covered hence, not becoming a burden in the shoulders. Another benefit of this is an ability to invest as low as Rs.500 on the stocks with SIP (Systematic Investment Plan). Now a day there are a lot of online platforms or Smartphone apps that allows the investors to invest in the mutual fund with just few clicks.
Types of Mutual Funds
Mutual fund are classified based on various aspect like Asset, structure and investment objective
Types of Mutual Funds Based on Asset
Money market Fund
Investment is made in the liquid assets like T-bill, CPs etc. It is considered to be safe for investing your money and you get a safe and steady return on investment
These funds are invested in the debt market like government bonds, debentures, and fixed income assets. It is a safer investment option and provides fixed returns.
Equity fund are high risk funds but provides high results. These fund option invests the money of the investor in the equity stock or share of the companies.
Balance fund are also known as Hybrid Funds as it invests in different assets. Both a debt and equity market has its low and high, this fund option balances the returns by investing to get higher returns.
Index funds are those funds that monitor the specific index like Sensex to manage the returns, the changes in the index is monitored for the returns.
Tax Saving Fund
This is specialized funds that provide the investor to exempt the tax as per the section 80(C) of Income tax Act, 1961. There is a higher risk involved but the return is also high.
Funds of Fund
These fund option invests the fund in other mutual funds and manages the return by analyzing the overall performance of the targeting fund.
Types of Mutual Funds Based on Structure
This investment option comes with the liquidity of the invested amount and therefore preferred by the investors.
Close End Funds
This type of funds has a maturity period and liquidity is often less as compared to the open-end and therefore, the fund is listed in the Stock exchange to liquefy the fund.
Types of Mutual Funds Based on Investment Objective.
These funds majorly invest the fund in equity stocks as it provides the capital appreciation. These are a risky investment but are considered ideal for the long term.
As the name suggest, Income funds are those funds that provide a steady and constant income to the investor.
In this investment option the fund are invested so that the scheme is liquid in nature. Usually, instruments like CP and T-Bills etc. are considered to invest the funds.
How to Invest in Mutual Funds?
Before investing in the mutual funds it is necessary for you to access few points that can affect your finance.
Why to invest?
The very first step of investing in mutual fund is to know why you want to invest in mutual fund, what is the objective. Campaigns started with no plan always ends in disaster therefore knowing your goal certainly help you in determining the situation after the investment is made.
Investment in the Market is risky as it is provides you the high return for the amount of risk you can take. High returns means high risk and low returns means low risk but, risk is always involved.
Where to invest?
Market is flooded with various schemes and an investment option that promises to make your investment higher. Choosing one is sometime overwhelming therefore, you should read the scheme related document. Now a day you can also use online platforms to invest in mutual funds like Paytm Money, SBI Capital etc.
How Mutual Funds Are Regulated in India?
Mutual Funds are regulated by the SEBI (Security Exchange Board of India) under the SEBI Act 1992. The act was passed by the Parliament to regulate and develop the growing needs of the security market. It was further refined in the year 1995, 1999 and 2002 to meet the needs of the developing markets.
Who Are Mutual Fund Manager And Why It Is Important?
When choosing to invest in the Mutual Funds, it involves the building and maintaining the portfolio of securities. The fund manager is the one who buys or sells the securities and the decision related to the security transaction is done by the fund manager.
There are two types of investment management-
- Active Fund Management
- Passive Fund Management
Active Fund Management
Active Funds has a potential to outperform the market indexes and therefore, the risk is much higher. Active Fund fees are also higher than passive since it requires active participation. The reward is high in this fund strategy by the risk is also high.
Passive Fund Management
Passive Funds are managed by a defined strategy by matching the performance of the Specific Market Index. These fund management strategy does not require having a profound knowledge of investing. Since, these funds are managed passively the fees associated with these types of funds are low.
Fund Manager Responsibilities
Fund manager has to invest money of the investors in the right market and earn profit for the investors but the fund manager has to do more than that. The following are the duties of a Fund Manager-
- Complying with the regulation set by SEBI
- Protecting the wealth of the investors
- To ensure that the document are on time and in accordance with the law
- To monitor the performance of the funds
Charges Associated With Mutual Funds in India
Mutual funds are managed by the AMC (Asset Management Company) which has a fund manager with a team of financial analyst who aims to make your money increase. The management of the funds requires having a fee for the service offered by the AMCs.
SEBI Guidelines for Charges of Mutual Fund
SEBI has a mandatory TRE limit set on all the equity and debt fund as mentioned in the table below-
Average Net Assets per Week
Limit for Equity Schemes
Limit for Debt Schemes
Up to Rs. 100 Cr
100 to 300 Cr
300 to 600 Cr
On the balance assets
Types of Charges of Mutual Funds
One-Time Charges are the charge that has to be paid when starting the investment.
Load is commission fee for the fund management. The AMC collets the fee before or after the investment is made these are referred as Entry and Exit loads
Entry Load-Paid when the investment is made, not all schemes have this fee.
Exit Load– Paid when you are selling the fund before the maturity period. After maturity period the exit load is invalid. This fee is set to keep the investor in the scheme.
This is the fee that an investor has to pay in periodic bases like daily, annually or quarterly bases.
Management Fee is the fee charged for paying the fund manager to maintain your portfolio and to manage your funds.
If you fail to maintain the minimum balance set by the AMC then these charges are coined on the investor.
Investor can switch between the mutual fund schemes with a price called Switch Fee.
This is the fee that AMC charges for marketing, printing and mailing. This way the investor keep informed about the funds.
Long-term capital gains which are held more than one year are not taxable and the Short-term capital gains which are held for less than one year are taxable.
Investor does not need to pay any tax for the Dividends. However, the fund house pays a Dividend Distribution Tax (DDT) of 28.8% of debt funds. For the Equity mutual funds there are no DDT taxes.
Mutual funds are an investment tool that invests the investor money on the market. Investing in the market is risky in nature but since it is managed by the professionals therefore, it is considered safer than the Stock Market investment.
Mutual funds comes with the risk factor, higher the return the higher the risk similarly the lower the return lower is the risk but there is always a risk involvement in the Mutual Funds.
I’m Shiv Kumar, a graduate with a passion for finance, marketing, and technology. My journey into finance started with a desire to understand money management and investing.
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