MUTUAL FUNDS, SAHI HAI!

Mutual Funds are a form of pooled investments where a single portfolio contains multiple investment funds. It is referred to as an asset management firm (buy-side firm) and pools money from investors to further invest it in stocks, shares, bonds, short term securities, money market instruments and other assets. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates.

The price of a mutual fund is represented by it’s NAV (Net Asset Value). Net Asset Value is the total net value of the assets in the fund divided by the number of shares issued. The value of a mutual fund company depends on the performance of the securities it decided to invest in. Mutual funds can be purchased and redeemed at current NAV, which unlike shares don’t fluctuate during market hours but are updated at the end of each trading day.

• Mutual funds are a popular choice among investors as it can easily be purchased at a minimal amount of Rs 100 and hence is affordable for every kind of investor unlike hedge funds.

• It provides small investors the access to professionally managed portfolios at low price.

• Diversification benefits can’t be ignored. Investing in different securities within a portfolio helps to reduce the overall risk. The average mutual fund holds over a hundred different securities, which means mutual fund shareholders gain important diversification at a low price.

• Mutual funds can be redeemed easily at the current NAV and hence provides liquidity benefits.

• Mutual funds are subject to specific requirements by SEBI, making it more transparent and safer than hedge funds.

• There are different types of Mutual funds available for all kinds of investors with different investment objectives and returns with benefits of SIPs as well.

Investors can earn through mutual funds in three ways:

• Dividend : Income is earned in the form of dividend or interest on bonds with an option of reinvestment from the mutual fund company. A mutual fund usually pays all the income generated to the investors over the year.

• Capital gains :If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.

• Increased NAV : If the market value of a fund’s portfolio increases, after deducting expenses, then the value of the fund and its shares increases. The higher NAV reflects the higher value of your investment.

A mutual fund will classify expenses into either annual operating fees or shareholder fees. Annual fund operating fees are an annual percentage of the funds under management, usually ranging from 1–3%.

Mutual Funds are basically classified as Money market funds, Bond mutual funds, stock mutual funds and ETFs. Money market funds, as the name suggests, invest in short term securities and provide interest income with a low risk. Bond funds invest in fixed income securities differentiated by credit policies, maturities, issuers, etc. Stock mutual funds can be managed actively or passively. Passively managed suggest replicating the performance of chosen benchmark index whereas actively managed aims to outperform such benchmarks. ETFs are close ended funds traded just like equity, in the stock markets. SIP plans are also available to help you develop savings habits.

Before you invest, don’t forget to read the prospectus and the additional shareholders report required to be maintained by mutual fund companies as a regulation of SEBI.