First of all Mutual Fund is the term about which you heard a lot but not understood fully. If you are going to invest in mutual funds then it is necessary to know about it.
Mutual funds are subject to market risk is the line which you heard a lot on TV or other places.
But nobody tells you Why it is risky and how to invest in mutual funds with lesser knowledge about it.
Around you, Most people do not know how to invest in it and if they know then it is difficult for them to choose the right Fund.
Here we discuss mutual funds in detail.
Firstly, If you are a newbie then it should be clear in your mind what the mutual fund is.
What is Mutual Fund?
Mutual Fund is a fund managed by managers or investment firms. It is the pond of money collected from its investors and further diversified in investments of money market, assets, shares, bonds, securities, etc.
This definition will clear your basic thought about mutual funds. Now discuss the concept of the mutual fund.
Concept of Mutual Fund
The first mutual fund in the world was introduced in Europe in the 1770s by Adriaan Van Ketwich.
Mutual Funds are like mediators between the investors and investments(bonds, stocks, assets).
Every mutual fund has managers and the managers operate the fund and try to generate gains or profits for you.
Mutual Funds basically give power to you by professionally managing or diversifying your portfolio at a low price.
So here It is important for you to understand the terms used in mutual funds before going further.
Terms used in Mutual Funds
NAV (Net Asset Value)
NAV is the price of a unit of a mutual fund and it is like the stock price in the share market.
It is calculated by subtracting total assets minus total liabilities and divided by outstanding shares of an ETF or MF.
It is calculated at the end of each trading day.
AMC (Asset Management Company)
AMC is a firm that invests the pool of money of a fund into bonds, stocks, securities, etc.
Basically, AMC charges fees for its service at the fixed percent annual rate. In most cases, it is 1% of the total value and it is paid monthly.
It depends on the AMC or Fund Manager how much to charge for the fund but in most cases, it is between 1% to 5%.
For example, if you invested 10,000 through an AMC then you have to pay fees of 100 in a year.
It is a strategy used in mutual funds that manage risk and reward in a fund.
Asset allocation is a process in which your investment portfolio is diversified into equity, fixed income, real states, securities, etc.
It is an option in which your profits or dividend earned are reinvested in the fund instead of being paid out to you.
In the growth option due to compounding, you get benefits in the long run.
You do not get taxed until you redeem your fund.
This option is for those who want regular cash flows. In this fund profits or dividends are paid to investors.
Its NAV is lesser than the growth option because its dividends are not reinvested and compounding does not affect it.
So I personally do not prefer it because in the long time period you get less benefit.
But it give you payment when any company in the portfolio pays a dividend.
SIP (Systematic Investment Plan)
It is a tool that is used to invest a fixed amount at regular intervals of time.
Most people use SIP on a monthly basis investment plan and you can set your own SIP time like weekly or quarterly.
SWP (Systematic Withdrawal Plan)
SWP is the same as SIP but it is used to withdraw money at regular intervals.
It is mostly used as retirement plans. Mutual Funds basically allow you to use this as timely Payouts like a pension or monthly salary.
It can be good for long-term perspective like invest for 30 years and withdraw for next 30 or more years as per your plan.
It is the commission or fee paid each time when you buy or sell the mutual fund.
I use Zerodha for my share trading and mutual funds. There are a lot of other players but I trust Zerodha because I am using it for a long time.
Now the question left is how to choose the right fund.
There are some points to remember while you are investing in a mutual fund.
Setting goals for yourself is very important. You can check the past performance of the mutual fund.
If the fund is new that you can check the history of the AMC or the fund manager.
First of all, consider the point that why are you investing in the mutual fund.
When you have a clear mind about your goal then do your own research and only then invest because it is your hard-earned money.
So from my point of view do not go with tips only then you can earn good returns.
If any mutual funds are closed then your money will be refunded at the current NAV value or otherwise it will transfer to another AMC.
All funds are under the surveillance of SEBI, So do not think you lost your money it is only possible when the market crashes.
But there are fewer chances for that because AMC takes care of that.
So enough for this post.