Introduction
Do you have extra cash you would like to invest but don’t have time to manage investments directly? Perhaps it’s time for mutual funds. A mutual fund is an investment that pools money from a large group of investors and then invests in various financial instruments, such as stocks, bonds, or other securities. Professional managers will handle all of these investments, so you have nothing else to worry about while your money does its job.
Here’s what we’ll cover in this blog:
- What are mutual funds?
- How do they work?
- How much return can you expect?
- How to invest in mutual funds?
- What are the risks involved, and how do you manage them?
What are Mutual Funds?
A mutual fund is a diversified, professionally managed investment scheme that pools money from various investors to buy a variety of assets or a diversified portfolio. Assets can range from equities to bonds to other market instruments. Mutual funds will therefore be a perfect way to diversify investments and, due to that, reduce the risk by comparison with directly investing in individual securities.
There are several kinds of mutual funds:
- Equity Mutual Funds : Mostly invested in stock and are likely to get better returns but carry higher risks
- Debt Mutual Funds: Its investments mainly focus upon fixed income securities such as bonds. They are less risky as compared to equity funds, though generally their returns are lower.
- Hybrid Funds: Balances the risk with a reward by bringing both equity and debt instruments
How Do Mutual Funds Work?
The amount invested in a mutual fund is pooled with contributions from many others. Now, the fund manager-a professional-will use this pool of funds to invest in a diversified portfolio of assets. The idea is to generate returns for investors through the assets and based on the timing of the purchase. Therefore, since the value of assets increases, so is the value of your mutual fund units, which implies yielding your returns on investment.
You can invest in mutual funds in one of the following two ways:
- Lump Sum: Invest one time in a mutual fund.
- SIP (Systematic Investment Plan): Invest regularly through an amount as low as ₹ 500 as a fixed sum every month or quarter or any other periodicity.
How Much Return Can Mutual Funds Offer?
Returns depend on the type of mutual fund as well as market performance. On an average:
- Equity Mutual Funds: Average long term returns range from 12% to 15% p.a. with considerable volatility in the short run.
- Debt Mutual Funds: Average long term returns are around 6% to 8% p.a. and are much safer but usually do not give equity-like returns in the long run.
The actual returns would depend on the fund manager’s expertise, the market conditions, and the asset allocation strategy used in the fund.
How to Invest in Mutual Funds?
Investing in mutual funds is quite simple and totally online. Here’s a step-by-step process:
- Complete KYC : Ensure your KYC (Know Your Customer) process is completed using your PAN card and address proof.
- Select a Mutual Fund Platform: Groww, Zerodha Coin, Paytm Money and even bank’s services are some of the places where you can select this as they have a trusted place.
- Select the Fund: based on your objectives, risk degree, and time horizon, choose an equity, debt, or a hybrid fund.
- whether you want to start SIP or invest in one go.
- Start Investing : Once you choose the fund and amount, click on “invest,” and your money will begin working.
Minimum Investment Amount
One can invest in mutual fund via SIP by investing ₹500 a month. But in lumpsum investment one needs a minimum amount of ₹1000 to ₹5,000 as per the chosen mutual fund.
Charges and fees associated with Mutual Funds
Mutual funds are very convenient but do come with certain costs:
- Expense Ratio: It is the cost of running your money annually, which the fund house charges for managing your investment- between 0.5% and 2%.
- Exit Load: In cases where you withdraw your money within a period-mostly one year-some one-year funds can impose an exit load of 1% on the withdrawn amount
How Risky Are Mutual Funds?
Every investment carries some level of risk, and it is not an exception. Here are the main ones:
- Market Risk: Your investment in a mutual fund may go down or up with the prevailing market situation. In equity funds, if the market drops, this would mean that there’s a loss.
- Credit Risk: If a debt fund holds upon defaulting of bonds, then the value of the fund shall decline. This time, you would suffer losses.
- Risk of Inflation: If inflation rates rise steeply, then it decreases your real returns.
- Investment in Mutual Funds: You have to keep in your mind that investment in mutual funds incorporates market risk, and your invested capital might face some dip in the short term. But long-term investments do have a positive outcome and reduce the negative effect of short-term fluctuation in the market.
How to Minimize Risk for Mutual Funds?
You can reduce risks:
You can make your portfolio diversified by diversifying in different asset classes and types of funds.
Select the type of fund that suits the risk appetite. For example, an investor having a longer horizon, such as the young one, would want more equity exposure whereas the retiree would be comfortable with debt funds.
Regular SIPs help time-average market volatility
Are Mutual Funds Also Invincible to Losses?
There is always a possibility of loss, including with equity mutual funds, simply due to market fluctuations. Debt funds are safer but can still lose their value when the bonds default or the interest rates rise. You should hence examine your risk tolerance level before even investing.
Conclusion
Mutual funds can be a great way to build wealth over a period of time. Diversification, professional management, and the potential for strong returns make them a strong investment avenue. However, like any investment, mutual funds do come attached with a risk. Hence, you should always be well aware of which kind of mutual fund to invest in, the risk-reward profile, and how it aligns with your financial goals before you decide to invest. Regular SIP investments in well-researched funds can help you in achieving financial success in the long run.
Kick-start your mutual fund investment journey with Tech Talks World and have a look at some more tips and insights into growing your wealth! You can also ready latest article on Reliance power share price surge.
