A few important things to know about Mutual Funds
A Mutual Fund (MF) is a relatively safe way to invest in the stock market. It provides the investor with the services of investment experts and also provides a flexibility that might not be possible while creating an individual portfolio.
What is a Mutual Fund?
A mutual fund is set up like a trust and is managed by an Asset Management Company (AMC). After collecting funds from various investors and pooling them, the AMC makes various investments using this cash pool. Gains and losses from the investment are shared by the investors on the basis of the amount they’ve invested.
Understanding the Game
You buy units issued by the MF. A unit represents the extent of ownership an investor has in the mutual fund. The number of units you own determines how you share in the earnings and liabilities of the fund.
The Net Asset Value (NAV) of the fund determines the value of a unit. The NAV is calculated using a few simple steps,
- The current market value of all the investments made by the AMC is added up.
- Then, the expenses incurred are calculated.
- The expense is deducted from the total market value.
- This result is divided by the total number of units in the MF, giving you the value of a single unit.
Remember that, the NAV is calculated daily by the AMC, so it can keep changing. When investing, you should know that mutual funds usually have their own eligibility criteria. For more info, check out the Bajaj Finserv website, particularly the section on Mutual Funds Eligibility Criteria.
Types of Mutual Funds
Mutual funds vary on the basis of their stated objectives which have to be clearly defined in the offer document. Here’s a look at a few common MF objectives,
Growth Scheme: In a mutual fund whose defined goal is capital growth, funds are mostly invested in equities. This gives your investments the best chance to grow quickly, although you will be exposed to a fair degree of risk.
Income Funds: This kind of mutual fund is invested mostly in bonds, government securities, money markets and debentures. The main aim here is to generate a steady income for investors, and reduce risk. This is a good option for retired individuals who want to generate a steady income to meet their regular expenses.
Money Market Funds: The money is invested in money market securities to generate income. Money market securities are essentially IOUs issued by governments, financial institutions and large corporations. These instruments are very liquid and considered extraordinarily safe. Because they are extremely conservative, money market securities offer significantly lower returns than most other securities. Although the risk is minimal, these investments are usually made over the short term, and sometimes offer high yields.
Balanced Funds: This is a combination of growth and income funds. The money is invested in bonds and other fixed income instruments. A portion of the funds is also invested in equities to increase opportunities for quick capital growth.
There is another classification of mutual funds made on the basis of flexibility.
Closed-End Funds: A closed-end fund has a defined period of maturity, and has a fixed number of units to offer investors. Units can be purchased only during a particular period known as the New Fund Offer period. However, these funds are listed on the stock exchange and can be bought like equity shares.
Open-End Funds: These funds do not have a definite maturity period and units can be bought or sold at any time, at the current NAV of the fund. Most mutual funds are open-end funds, which are not listed on the stock exchange. Bajaj Finserv has a fabulous selection of Mutual Funds for you to choose from, especially if you’d like to invest in the stock market without too much risk.
Why Invest in a Mutual Fund?
Pooling of Funds: A Mutual Fund enables investors to maximize the profits from their investment by pooling the units invested in by numerous individuals. This large pool enables the fund to be utilized to provide maximum benefits for the investors.
Managed by Professionals: The fund is managed by an Asset Management Company that employs professionals experienced in the stock market to make intelligent investments.
Diversification of Investment: A diversified investment portfolio reduces risk by spreading the investment over many different types of securities. This might be impossible to do for the average investor. By using the large pool of investments, a Mutual Fund is able to provide this benefit to investors.
Regulated: The Security and Exchange Board of India (SEBI) regulates the operations of Mutual Funds in India. Besides this, Mutual Funds are governed by a Board of Directors who ensure that the interests of the investors are protected.
How to Invest in Mutual Funds
There are many ways to invest in a Mutual Fund. You can fill in a common Mutual Fund Application Form with the company you’d like to invest with. Alternatively, you can invest in a Systematic Investment Plan (SIP). Bajaj Finserv provides a truckload of advice on choosing the right SIP.
When you have funds that you’d like to place in a safe, high-yield financial scheme, mutual funds are usually the best way to go. Apply for Mutual Funds now to make a smart investment.