A beginner’s guide to Mutual Funds
The definition of a mutual fund is an investment programme funded by shareholders and professionally managed to make trades in diversified holdings. That definition might seem a bit confusing at this point, so let’s understand some mutual fund basics to develop our understanding of what these investment tools really are.
How Mutual Funds Work
There are three basic categories of mutual funds that you should know about in order to gain a better understanding of the basics of mutual funds in India. They are known as equity funds (stocks), fixed-income funds (bonds), and money market funds. While these three categories cover specific types of mutual funds, they generally work the same way. There are three ways that a mutual fund can bring in money.
- Dividends on stocks and interest on bonds are earned, eventually funding the investor in the form of a distribution.
- A fund that sells securities increases in price, resulting in a capital gain. The gains are then given to investors as distributions.
- Fund holdings may increase in price but remain unsold by the fund manager, making their shares more valuable. These shares can later be sold for profit.
It is important to have an understanding of how mutual funds work before you jump into your investment. Bajaj Finserv offers a number of useful online tools to help you further understand the ins and outs of your investment in their Mutual Funds Programme.
Types of Schemes
The types of mutual funds schemes that you can invest in may seem endless, but they normally fall under two different categories. The first is an open-ended mutual funds scheme, which allows investors to buy or sell shares at any time, without a fixed maturity date. Some examples are:
- Debt/Fixed Income Scheme: Investing in debt instruments or government securities.
- Money Market/ Liquid Scheme: Investing in short-term debt instruments.
The second category is a closed-ended mutual fund scheme, which has a pre-determined maturity period and only allows investment during an initial launch period. A few types are:
- Capital Protection Scheme: Investing in high-quality, fixed income securities.
- Fixed Maturity Plans: Investing in debt instruments that mature with the maturity of the scheme.
A vital part of understanding mutual funds involves familiarising yourself with these schemes. Bajaj Finserv provides quite a few varieties of Mutual Fund schemes.
Planning Your Investment
You select your scheme and are ready to begin investing, but how do you know when and where to invest? Here are some specific mutual fund investment strategies to help you proceed.
- Wing-it Strategy: Investing without using a specific strategy in mind. This is generally considered the riskiest method of investment.
- Market-timing Strategy: Investing and leaving sectors or markets at specific times. This usually implies that you will buy shares at a low cost and sell them when they reach a higher value.
- Buy-and-hold Strategy: Holding onto an investment after buying in, then remaining through the ups and downs of the market before selling.
- Performance-weighting Strategy: Holding onto investments, but occasionally revisiting your fund portfolio to make adjustments.
Of course, when you work with a financial institution, you generally will not have to worry about deciding on a strategy, since they will employ trained professionals to manage your funds. Bajaj Finserv offers highly skilled professionals who possess considerable expertise, resources, and experience to manage your mutual funds.
It is extremely important to understand a few mutual fund disclaimers before making your investment. The market will always have its highs and lows, which can affect your mutual fund’s performance. Keep in mind that no investment is ever guaranteed to bring in the amount of profit you might be looking for.