Understanding Mutual Funds: A Beginner’s Guide to Investing
Mutual Funds is one of the most popular investment vehicles among Indian investors and it’s popularity is only growing day by day.
If you are a new investor who’s curious about mutual funds, then this guide is just for you.
Here we’ll discuss everything you need to know about mutual funds starting from when did they start in India, how do mutual funds work, who regulates the mutual funds, and to how to invest in mutual funds.
Let’s start by simplifying what Mutual Funds are & how do they work.
What are Mutual Funds & how do they work?
Mutual fund is a professionally run fund which pools in money from multiple investors who share a common investment objective, and then invests the money into different instruments including equity and bonds.
Every Mutual fund is managed by a Asset Management Company which hires a Fund Manager who is primarily responsible for picking the right set of assets that go into building a MF scheme.
Let’s understand with an example.
ICICI Prudential AMC started a FMCG mutual fund with an objective to generate long term capital appreciation through investments in securities of FMCG companies and have hired a fund manager to pick the right set of FMCG securities to achieve the objective.
Now if you as an investor are optimistic for the growth of Indian FMCG sector, then you can invest in the fund and enjoy long term capital gain.
Because mutual fund is managed by professionals and invest in multiple assets, they offer instant diversification and low risk.
That’s why majority of the investors prefer to invest in stocks via mutual funds rather than directly investing in stocks..
History of Mutual Funds in India?
India’s first mutual fund was establishment in 1963, namely, Unit Trust of India (UTI) and are regulated and supervised by SEBI to protect the interest of the investors.
Where do Mutual Funds invest your money?
Mutual Funds invest your money in various securities depending on it’s goals.
Debt funds invest only in debt instruments.
Equity funds invest only in equity of various companies.
Hybrid fund invests in both debt and securities.
Active vs Passive Mutual Funds
Mutual Funds can be actively managed or passively managed.
An actively managed fund is where the fund manager has to decide which asset to include and take out from the scheme. Types of actively managed mutual funds are
- Equity mutual funds
- Debt mutual funds
- Hybrid mutual funds
On the other hand, passively managed funds map the movement of an index. Here the fund manager have to make minor changes to make sure the scheme has all stocks in same proportion as the index. Types of passively managed mutual funds are
- Index Fund
- ETFs
SIP vs Lumpsum
Apart from selecting the schemes, you can also choose how you want to invest in Mutual Funds.
Every investor spends a lot of time deciding whether they should invest through SIP or lumpsum.
Lumpsum investment is where you pay the whole amount at once, whereas an SIP requires you to make payments in regular intervals.
How to analyze mutual fund to select the right one?
Analyzing mutual funds is crucial to select the right one for your investment goals. Here are some important factors to consider when analyzing mutual funds:
- Investment objective: The first thing to consider when analyzing a mutual fund is its investment objective. This objective should align with your investment goals. For example, if you are a conservative investor, you may want to look for a fund that aims to preserve capital and generate income.
- Performance: Past performance is not an indicator of future results, but it can provide insight into how the fund has performed over time. Look for a fund that has consistently outperformed its benchmark index and its peers over a long period of time.
- Fees: Mutual funds charge fees and expenses that can impact your returns. Look for a fund with low fees and expenses, such as a low expense ratio.
- Fund manager: The fund manager plays a critical role in the performance of the fund. Look for a fund with an experienced and successful fund manager who has a track record of making good investment decisions.
- Asset allocation: Mutual funds can invest in a range of assets, such as stocks, bonds, and commodities. Look for a fund that has a well-diversified portfolio that aligns with your investment goals and risk tolerance.
- Risk: All investments carry some level of risk. Look for a fund that has a risk level that aligns with your risk tolerance. You can determine the fund’s risk level by analyzing its historical performance and comparing it to its benchmark index and peers.
By considering these factors, you can analyze mutual funds to select the right one for your investment goals. It’s important to do your due diligence and research the fund thoroughly before making any investment decisions.
