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A Layman’s Guide to Mutual Funds

mahindra-finance-author

by Mahindra Finance

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June 30, 2023

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4 mins read

Mutual Funds may sound complicated but are easy to understand. It's a lucrative platform where you can safely invest your money. Let us dive into its basics and discuss numerous Mutual Fund Instruments to help you invest in mutual funds.

What is a Mutual Fund?

Doing away with the technical jargon, let us consider this simple example: You have surplus money, but you have no idea where or how to use it. So, you appoint an expert who knows about money matters. This expert takes your money and invests them proportionately in various shares, bonds and fixed deposits. The expert accumulates the income (interest or income) earned from these various investments, and after deducting some charges, the expert gives the income to you.

Here, you are the investor. The expert, who pools and manages your money, is a Mutual Fund. And since your money gets invested in numerous 'baskets', the risk is relatively less than investing in only one form.

Mutual Fund acts as an intermediary. It is a financial company that collects money from persons desirous of investing. The money is then invested as a diversified portfolio in the form of equity shares, debentures and other kinds of financial securities. The money invested is represented by units. So you hold your investment in terms of units. The income or returns accrued by such Mutual Fund companies is distributed evenly amongst the investors after deducting certain charges by calculating an instrument's 'Net Asset Value' or NAV.

You can invest in mutual funds like Canara Robeco Mutual Fund, DSP Mutual Fund, Aditya Birla Sun Life Mutual Fund, SBI Bluechip Mutual Fund, Axis Mutual Fund, etc.

Mutual Fund Instruments:

Following are the Instruments in a Mutual Fund:

  • Equity-based Instruments - These are instruments that invest only in equity shares and other equity-related instruments.
  • Debt-based Instruments - Those instruments that carry fixed rates of interest income.
  • Hybrid Instruments - These instruments are a mixture of the above two (Equity and Debt)
  • Money-based Instruments - They have a short term maturity and are easily redeemable in the market.

Based on the Maturity Period, these instruments can be:

i. Open-Ended:

Blue-Chip stocks

This scheme allows you to buy or sell Mutual Fund units at any point in time. Funds under this scheme have no fixed maturity date. You can sell or buy units based on the net asset value of the fund. The NAV fluctuates daily based on the prices of the shares and bonds in the market.

No limitation is there on the number of units that can be issued under an open-ended scheme. One can invest in these funds through systematic investment plans (SIPs).

In SIPs , you can choose a fixed amount, say Rs 2000, and invest it monthly or quarterly. This amount is deducted from your chosen bank account at the start of every month or quarter. It is a less risky investment plan. Since you invest a small amount periodically, you don't feel the burden to invest huge money at one go to start your Mutual Fund Investment. You can use the SIP calculator, which is a simple tool available free online that helps estimate returns you may earn through SIP.

ii. Close Ended:

If you have enough surplus money and planning for a long-term investment, close-ended is the way. You can invest your money through a New Fund Offer in the market. This New Offer remains in the market for a period of thirty days. They have a fixed lock-in period. For example, when you invest in a three-year closed-ended scheme, you have a fixed number of units. You can redeem/sell them at the expiry of three years.

Since you are bound by the lock-in period, you do not fall prey to risky investments. By staying committed to the long term mutual fund, the returns/profits are comparatively maximum as compared to Open-ended ones.

So, if you are interested in markets, stocks, and all things financial, you can plan to invest in Mutual Funds. As it provides a diversified portfolio, it is less risky than other forms of investments and, if planned correctly, can provide profitable yearly returns.

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