MUTUAL FUNDS: THE RISK WORTH TAKING

There are many questions and doubts whenever you think of investing your money and that is totally understandable and inevitable as one cannot be impulsive when it comes to investing their life savings. Today’s India is a beehive of financial activity, offering different types of investment opportunities covering a wide spectrum of investment avenues. You can simply keep cash at home or opt to invest in Insurance plans, Mutual funds, Fixed deposits, PPF, small savings accounts, and many more.

Each of these investment avenues has its own characteristics and it is up to you to decide where to invest money and utilize these avenues in a way that they can help you to achieve your financial goals. While you do this, remember to keep in mind your need for liquidity, wealth creation, parallel sources of income, the safety of capital, and life insurance.

BEGINNERS AND MUTUAL FUNDS 

When it comes to beginners, Mutual funds are a very popular investment. It offers you the benefit of investing indirectly into stock markets through the expertise of professional managers. Being occupied with your job, or business, you might not get the time to follow the stock market and make any direct investments. This is the part where mutual funds can prove beneficial. You have a number of choices such as equity mutual funds, debt mutual funds, balanced funds, and other such instruments. 

Mutual funds provide opportunities to take care of liquidity, income, growth, and safety. You also have plans based on your income and growth options, moreover, you can select an option that suits your financial goals and risk-taking abilities.

UNDERSTANDING MUTUAL FUNDS

A mutual fund is an investment where many investors put their money to earn returns on their capital over a period. This structured fund is managed by an investment professional known as a fund manager or portfolio manager. It is his/her duty to invest the money in different securities such as bonds, stocks, gold, and other assets and seek to provide potential returns. The gains (or losses) on the investment are shared collectively by the investors in proportion to their contribution to the fund.

Mutual funds are often classified by their principal investments: money market funds, bond or fixed-income funds, stock or equity funds, or hybrid funds. Funds may also be categorized as index funds, which are passively managed funds that track the performance of an index, such as a stock market index or bond market index, or actively managed funds, which seek to outperform stock market indices but usually charge a higher price. Primary structures of mutual funds are open-end funds, closed-end funds, and unit investment trusts.

MUTUAL FUNDS AND ASSETS

There are various types of Mutual funds in India based on investing in particular kinds of assets.

• DEBT FUNDS

Debt funds invest in assets like government securities and corporate bonds. These funds aim to offer reasonable returns to the investor and are considered relatively less risky. These funds are ideal if you aim for a steady income and are averse to risk.

• EQUITY FUNDS

Contrasting debt funds, equity funds invest your money in stocks. Capital appreciation is an important objective for these funds. But since the returns on equity funds are linked to market movements of stocks, these funds have a higher degree of risk. They are an appropriate choice if you want to invest for long-term goals such as retirement planning or buying a house as the level of risk comes down over time.

• COMMODITY MUTUAL FUNDS

These are mutual funds that invest in raw materials, agricultural products, or precious metals like gold, silver, energy sources like oil and natural gas.

• HYBRID FUNDS

Hybrid funds invest in a mix of both equity and fixed-income securities. Based on the allocation between equity and debt (asset allocation), hybrid funds are further classified into various sub-categories.

MUTUAL FUNDS AND STRUCTURE 

Mutual funds are also based on structure. Primary structures of mutual funds are open-end funds, closed-end funds, and unit investment trusts.

• OPEN-END FUNDS

An open-end fund (or open-ended fund) is a collective investment scheme that can issue and redeem shares at any time. An investor will generally purchase shares in the fund directly from the fund itself, rather than from the existing shareholders. The term contrasts with a closed-end fund, which typically issues at the outset all the shares that it will issue, with such shares usually thereafter being tradable among investors.

The price at which shares in an open-ended fund are issued or can be redeemed will vary in proportion to the net asset value of the fund and so directly reflects its performance.

• CLOSED-END FUNDS 

A closed-end fund (CEF) or closed-ended fund is a collective investment model based on issuing a fixed number of shares that are not redeemable from the fund. Unlike open-end funds, new shares in a closed-end fund are not created by managers to meet demand from investors. Instead, the shares can be purchased and sold only in the market, which is the original design of the mutual fund, which predates open-end mutual funds but offers the same actively-managed pooled investments.

• UNIT INVESTMENT TRUSTS 

A unit investment trust (UIT) is an exchange-traded mutual fund offering a fixed (unmanaged) portfolio of securities having a definite life. Unlike open-end and closed-end investment companies, a UIT has no board of directors. A UIT is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 and is classified as an investment company. UITs are assembled by a sponsor and sold through brokerage firms to investors.

WHY MUTUAL FUNDS?

Mutual funds are a safe investment if you understand them. Investors should not be worried about the short-term fluctuation in returns while investing in equity funds. You should choose the right mutual fund, which is in sync with your investment goals, and invest with a long-term horizon.

Before you invest, it is advisable to do your research and read more about mutual funds. There are several types of mutual funds suitable for different kinds of investors such as aggressive, moderate, and conservative.

One of the biggest mutual fund benefits is that you have the opportunity to earn potentially higher returns than traditional investment options offering assured returns. This is because the returns on mutual funds are linked to the market’s performance. So, if the market is on a bull run and it does exceedingly well, the impact would be reflected in the value of your fund. However, poor performance in the market could negatively impact your investments. Unlike traditional investments, mutual funds do not assure capital protection. So do your research and invest in funds that can help you meet your financial goals at the right time in life.

HOW TO INVEST?

These days, investing in mutual funds has become easy. You can even do it right where you are sitting. Following are the steps you can follow to begin your investment journey:

• Decide and fix an investment goal

You really need to do this as it helps you decide how much you can set aside towards investing. Your investment should have a definite purpose.

• Choose the right fund type

Mutual funds are a vast concept to understand. You can take experts’ advice to understand different mutual fund types. 

• Shortlist and choose one mutual fund

There is an infinite number of fund schemes available. You need to thoroughly analyze and compare them to pick the right investment scheme.

• Invest in multiple mutual funds

If you are a risk-taker and wish to diversify your portfolio, consider investing in more than one mutual fund. 

• Keep KYC (know your customers) documents up-to-date

KYC is a government regulation to identify and verify the identity of a person to prevent money laundering. Always keep your KYC updated. 

• Activate Internet Banking

Investments in mutual funds via net banking are an easy and straightforward process. Although, mutual funds allow investments through debit cards and cheques as well. 

• Seek advice from a financial advisor

As mutual funds can be complex to understand, seeking advice from a financial advisor can do wonders. 

TO WRAP UP

Investing in mutual funds is one of the easiest paths to achieving your financial goals on time. But before you invest, take a proper amount of time to go through the different fund options. Don’t invest in a fund just because some acquaintance of yours has invested in it. Analyze your goals and invest accordingly. If required, you can approach a financial advisor to help you make the right investment decisions and achieve your financial goals.