There is a lot of discussion about mutual funds these days. Even if someone is not investing in mutual funds, he is definitely mentioning it. But, as much as it is attracting some people, it is scaring them as much. The line spoken ‘Mutual fund investment is subject to market risks…’ has a significant contribution in increasing this fear. Investing in mutual funds can be the right option for good returns. But still many people do not know what mutual fund schemes are? And how to invest in them?
Actually, in mutual funds, money is taken from many people and deposited at one place. The money collected from investors is then invested in stocks, bonds, money market instruments and other types of securities. Mutual funds are managed by asset management companies (AMCs). Each AMC generally has several mutual fund schemes. Every person investing in a mutual fund gets a proportionate share of the profits, losses, income and expenses of the fund. In simple words, investing money in mutual funds is like buying a small slice of a big pizza.
There are many types of mutual funds
There are many types of mutual funds like Equity Funds, Debt Funds, Balance or Hybrid Funds and Solution-Oriented Funds. Equity funds invest the money taken from investors in the stock market. Debt funds invest in fixed income instruments such as treasury bills, corporate bonds and government securities. There is stability in debt funds. Also, they are less affected by market fluctuations. If an investor wants less risk then debt fund is a very good option for him.
Balanced or hybrid fund is a mixture of equity and debt funds. This is for such investors who want to take advantage of the stock market but do not want to take risk. Those who want to deposit funds for a specific goal like retirement, children’s higher education and marriage etc. can invest money in solution oriented funds. Such funds may have a mix of equity, debt and hybrid funds.
How to invest?
You can invest lump sum money in mutual funds and can also invest through Systematic Investment Plan (SIP). There are two ways to invest in mutual funds: direct and regular. Under the direct plan, you can start investing online by directly visiting the website of the mutual fund. At the same time, you can also invest money through advisor, broker or distributor. In direct investment you have to pay less charges to the fund house. Meaning the expense ratio is less. The expense ratio is higher in the regular plan. Direct plan is suitable for those who are familiar with online investing and fund selection. But, not for those who are not much aware of these things.
Fees are charged, tax on earnings
Investment in mutual funds can be started from Rs 500. You have to pay various charges when investing in mutual funds. Also mutual funds are subject to short term capital gains (STCG) and long term capital gains (LTCG) rules.
Can you lose all the money?
Being market linked, mutual funds are subject to risk. Because of this, there remains a risk of loss of the original amount invested. However, looking at the performance of mutual funds so far, it can be said that the chances of losing all your money are less.
When can you sell?
Most mutual funds are open ended, meaning you can exit them at any time by selling the investment made in these funds. Yes, some funds are also closed ended, that is, they have a lock-in period. You cannot sell the fund during that period. At the same time, some schemes are locked-in for some time, but after that they become open-ended. Like tax saving ELSS whose lock-in period is 3 years. After this period, the fund becomes open ended.