A mutual fund is a type of investment vehicle that pools money from investors and invests it in stock market-linked financial instruments like stocks and bonds to generate returns. The portfolio of the fund is its total holdings.
Significance of Mutual Funds?
To give you a better idea, a mutual fund is a trust that collects funds from a group of investors with a common investment goal. The money is then invested in stocks, bonds, money market instruments, and other securities. Each investor owns units, a portion of the fund’s holdings. After deducting certain expenses, the income/gains generated from this collective investment are distributed proportionately among the investors by calculating a scheme’s “Net Asset Value or NAV.”
Mutual funds are managed by an experienced fund manager who is in charge of asset allocation and risk management while attempting to maximise investment returns. Each investor owns a unit of the fund, representing their share of the fund’s holdings. Any income generated by the collective investment is distributed to the investors in proportion to the units or shares they own.
How are Mutual Funds Priced?
Mutual funds are relatively flexible. You can quickly determine which stocks are included in a mutual fund by searching online. Many financial websites list the funds that are held. The price of a share, also known as a unit, is posted on these websites, and you can easily find it if you use an online discount broker.
Mutual fund India trades may incur several charges and fees. Some funds charge a sales charge or load, fees paid to buy or sell fund shares, similar to paying a commission on a stock trade. These can be upfront payments (front-end load) or fees paid when you sell shares.
The net asset value of a mutual fund is the simplest way to determine its price. A mutual fund’s net asset value (NAV) is the total value of its assets, less all liabilities. Many mutual fund use this number to determine the price for selling fund units. You usually do so at the NAV when buying and selling mutual fund.
How are returns calculated?
Any investor needs to understand how to calculate mutual fund returns to compare and select the best fund. Mutual fund are typically aimed at long-term investors because they provide consistent growth while protecting you from market volatility.
A mutual fund can be purchased in two ways. You can invest in a lump sum or establish a Systematic Investment Plan (SIP) for regular investments. Whether you are investing in mutual funds with a lump sum, a SIP, or a combination of the two, you will want to invest in mutual fund that can provide expected returns.
It is critical to remember the initial investment and redemption dates when calculating mutual fund returns. Before the dates, ensure to keep your account filled with the money required. On the given date of every month, money will be deducted from your account for SIP. Therefore, the best mutual fund for SIP will keep adding. Anyday if you want to take out that money urgently, you can contact your investment manager who will help you do so!
Types of mutual funds
Understand the various types of mutual funds available in the market to make an informed investment decision.
- Equity Funds: The most common type of mutual fund is equity mutual fund. As the name implies, equity funds invest primarily in equity or stocks. They can be further classified based on their characteristics, such as Large-Cap Funds, Mid-Cap Funds, Small-Cap Funds, Focused Funds, or ELSS, among others. Invest in equity funds if you have a long time horizon and a high-risk tolerance.
- Debt Funds: Debt mutual fund are considered less risky than equity funds because they invest in securities with fixed income and maturity dates, such as government securities, corporate bonds, and treasury bills, and are not affected by market fluctuations.
- Liquid Funds: Liquid mutual fund are ideal for short-term investments because they invest in instruments with a maximum maturity of 91 days.
- Hybrid Funds: Hybrid mutual funds are an integration of equity and debt funds, with different asset class combinations depending on the fund’s objective.
- Index Funds: While most funds attempt to increase in value and must be actively managed, index mutual fund simply track a market index and are thus passively managed.
- Tax-saving Funds (ELSS): Equity-linked savings schemes are mutual funds that primarily invest in corporate securities. However, they qualify for tax breaks under Section 80C of the Income Tax Act. They have a three-year minimum investment horizon.
- Fixed-maturity funds (FMF): These funds invest in debt market instruments that have the same or similar maturity period as the fund. A three-year FMF, for example, will invest in securities with maturities of three years or less.
- Pension Funds: Pension funds invest with the goal of providing consistent returns over a long period of time. They are typically hybrid funds that provide low returns but have the potential to provide consistent returns in the future.
DSP mutual fund is one of the leading asset management companies, offering a diverse range of mutual fund schemes in the equity, debt, and hybrid categories, as well as international fund of funds, exchange-traded funds, and closed-ended funds.
FAQs
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What is a mutual fund?
A mutual fund pools money from individual and corporate investors and invests it on their behalf in equity shares, government securities, bonds, call money markets, and so on, and then distributes the profits.
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Why should I choose to invest in a mutual fund?
Mutual funds offer cost-efficient access to expensive stocks. Also, they diversify an investor’s risk by investing in a diverse range of assets.
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How do I invest money in Mutual Funds?
One can invest by approaching a registered Mutual fund broker or the respective Mutual fund offices in that town/city. An application form must be completed with all pertinent information and a check or demand draft for the amount to be invested.
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What kind of return can I expect from mutual funds?
Investors must understand that mutual funds are primarily medium to long-term investments. However, mutual funds tend to outperform most other avenues of investment in the medium to long run while avoiding the risk of direct investment accompanied by professional fund managers
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