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Mutual funds decoded: Find your perfect match today!

A mutual fund is a professionally managed investment scheme that collects money from a number of investors and invests it across different asset classes like stocks, bonds and other securities.
12:33 PM Apr 03, 2024 IST | GK Web Desk
mutual funds decoded  find your perfect match today
Source: Flickr Author: “InvestmentZen"/www.investmentzen.com
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Mutual funds offer a great way for investors to gain exposure to the stock market without having to pick individual stocks. By investing in a mutual fund, you are essentially pooling your money with other investors and investing it across different companies and sectors based on the fund's stated objective. Here is a detailed guide to help you understand mutual funds better and choose the right type of fund for your investment goals.

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What is a mutual fund?

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A mutual fund is a professionally managed investment scheme that collects money from a number of investors and invests it across different asset classes like stocks, bonds and other securities. Mutual funds are run by asset management companies (AMCs) that appoint fund managers to manage the invested money. The key advantage of mutual funds is diversification - by investing in several companies across different sectors, you reduce risks associated with investing in individual stocks. Mutual funds allow small investors to participate in equity markets, which would otherwise be difficult to access directly.

Types of mutual funds

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There are various types of mutual funds tailored to meet different investment goals and risk profiles. Let's understand the main categories:

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  • Equity funds - Equity funds primarily invest in stocks and are ideal for long-term goals and wealth creation. They come in different styles like large cap, mid cap, small cap, sector/thematic funds based on market capitalization and investment focus.
  • Debt funds - Debt funds invest in fixed income instruments like bonds, gilts, debentures and focus on capital preservation. The major categories include liquid/money market funds, gilt funds, corporate bond funds, dynamic bond funds.
  • Hybrid funds - Hybrid funds maintain a mix of both equity and debt, aiming to balance growth and capital protection. Categories include aggressive hybrid, balanced hybrid and conservative hybrid based on their equity allocation.
  • Solution/concept funds - These are thematic funds focusing on specific sectors/themes like banking, technology, healthcare to benefit from their potential upside.
  • International funds - These funds invest overseas, mainly in the US, European and Asian markets to provide diversification beyond India.
  • Gold funds - Gold ETFs and funds invest directly in gold bullion or gold company shares to provide portfolio diversification.

What is a mutual fund investment?

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A mutual fund investment refers to allocating money in different mutual fund schemes based on your financial goals and risk tolerance. Here are some key points about mutual fund investments.

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  • Select fund type - Choose between equity, debt or hybrid funds based on investment horizon and risk profile. Long-term goals suit equity, short-term debt funds.
  • Select individual funds - Compare options from different AMCs and pick the most suitable fund based on stated objective, past performance, and expense ratio.
  • Invest via an SIP - Starting a systematic investment plan (SIP) is one of the best ways to invest in mutual funds. It allows locking in units at average market prices.
  • Redeem proceeds - Redeem or exit your investment after the preset time horizon to materialize goals like child's education, marriage etc. You can also switch between funds.
  • Monitor performance - Track the fund's NAV movement and portfolio periodically to gauge success against market indices. Rebalance if required.
  • Stay invested for long term - Mutual funds are best suited for long-term goals of 7 years or more to maximize wealth creation potential of equity markets.

Benefits of mutual fund investments

Some key benefits of investing in mutual funds include the below.

  • Professional management - Leaving stock picking to experienced fund managers who research companies thoroughly.
  • Diversification - By investing across sector and company size, funds reduce stock-specific risks compared to individual stocks.
  • Low cost - Mutual funds are much more affordable for small investors compared to direct equity investment.
  • Convenient paperwork - No hassles of demat account, trading account, settling transactions yourself.
  • Exposure to equity - Mutual funds offer participation in Indian and global markets without large capital outlays.
  • Regular income option - Debt and some hybrid funds offer monthly/quarterly dividends to supplement your cashflows.
  • Transparency - Fund details, portfolio, performance are readily available for investors to monitor and track.

Systematic investment plan

A systematic investment plan (SIP) is one of the most effective ways of investing in mutual funds. It allows investors to invest a small, fixed amount regularly in a mutual fund scheme. The fixed amount gets deducted directly from your bank account on a pre-defined date each month. This rupee cost averaging helps investors purchase more units when prices are low and fewer units when prices are on the higher side, thereby improving average cost per unit.

With a long-term SIP of 15-20 years in equity funds, one can create handsome wealth to achieve big ticket goals like retirement, child's education etc.

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