Mutual Funds often use jargon that investors find difficult to comprehend.
Steering away from complicated terms, we explain the basics of mutual funds - how they work, and how best they can serve as an investment tool.
So whether you are planning for your house, child’s education or marriage, your car or vacations, Mutual fund is a simple,
tax efficient and effective tool to invest for these goals. Besides, Mutual funds offer a wide bouquet of investment options –
equity schemes, fixed income schemes, money market schemes, hybrid schemes, ETFs etc. which you can choose as per your needs.
What is a Mutual fund ?
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The corpus of the fund is then deployed in investment alternatives (these could be equities, debentures / bonds or money market instruments.) that help to meet predefined investment objectives. The income earned through these investments are shared by its unit holders in proportion to the number of units they own.
Why should you invest in a Mutual Fund?
Investor who don’t have the time to study and monitor the market constantly, or the deep understanding of the financial market, a Mutual Fund offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost
What are the benefits of investing in a mutual fund?
Professional Management: Your money is managed by experienced fund managers using who are experts in their field, after much solid research and in-depth study.
Constant monitoring: Your investments are monitored on an ongoing basis for best returns.
Research: A through study is made before investing. Market conditions, global trends, industry growth predictions, sector future, Company profile, financials, growth potential … everything is considered.
Liquidity: Open-ended mutual funds are priced daily and are always willing to buy back units from investors. This means that investors can sell their investments in mutual fund anytime without worrying about finding a buyer at the right price.
Diversification: Mutual funds aim to minimize risk through diversification by investing in a number of companies across a broad section of industries and sectors. Through Mutual Funds, you can achieve diversification that would have otherwise not been possible.
Tax Efficiency* The dividends are tax-free in the hands of the investor.Also Investments for over 12 months qualify for long-term capital gains, which are currently exempt from tax. For Resident Indians there is no TDS on redemption of the units under the Indian Income Tax Act, 1961.
Transparency: Prices of open ended mutual funds are declared daily.Regular updates on the value of your investment are available.
Regulated industry: Mutual funds are registered with SEBI and they function under strict regulations designed to protect the interests of investors.
What are the different types of Mutual Funds?
Mutual fund schemes are normally classified on the basis of their structure and their investment objective.
By Structure
Open-ended Funds
Close-ended Funds
By Investment Objective
Growth Funds
Income Funds
Balanced Funds
Money Market Funds
Sectoral Schemes
Index Schemes
Investors have varying investment needs. To meet this, Mutual Funds offer various investment plans like.
Growth Option
Dividend is not paid-out under a Growth Plan and the investor realises only the capital appreciation on the investment.
Dividend Payout Option
Dividends are paid-out to investors under a Dividend Payout Option. However, the NAV of the mutual fund scheme falls to the extent of the dividend payout.
Dividend Re-investment Plan
The dividend accrued on mutual funds is automatically re-invested in purchasing additional units in open-ended funds.
Insurance Plan
These schemes offer insurance cover as part of the investment to investors.
Systematic Investment Plan (SIP)
Investors are given the option of giving post-dated cheques (or a direct debit of the bank account) in favour of the fund. The investor is allotted units on a pre-determined date specified in the Offer Document at the applicable NAV.