What are Mutual Funds, and How to Invest in Them?

Every month when your salary is credited then you keep some part of that salary as savings. You keep some money for your later use, maybe for emergency or if you want the house or car, you save for that.

What are the ways to save?

One simple way is that you keep your salary as it is in the bank and it gets collected. It’s a very bad way because such money loses its value.

Inflation is increasing in our country and due to that, the price of commodities is increasing too. So, the value of your money keeps decreasing every year by 4-5% according to the inflation rate. People invest the money so that they don’t lose their value kept just lying.

There are different places to invest. Our country has mainly 4 places for investment.

1. Savings account

2. FD or Fixed Deposit

3. Gold or jewellery – People buy gold or jewellery with their money

4. Real estate – People buy properties, or land or house.

Some people who want to take more risks also invest in the stock market which is another way to invest your money.

Every Investment has 3 Things:

1. Return

2. Risk

3. Time

  • Return means how much per cent of profit are you earning through the investment, this is normally seen in percentage. if our inflation rate is 4% then you should see that your profit return is more than at least 4% otherwise there is no point in investment.
  • Risk means how risky it is to invest, what is the chance of losing all your money in that investment.
  • Time means for how long are you investing. So the basic risk here is that if the time is more, the risk is more then the returns will also be more. If you want more return percentage on your investment then you will have to take more risk and should invest for a longer period.

Which types of Investment are best?

Saving accounts have the minimum risk and there is no restriction too. You can save or take the money out at any time. But the return we get here is also very less, only 4% whereas our inflation rate in the last few years has been 4-5%.

A fixed deposit is also a less risky option but it has a time limit before we can’t take the money out. Hence the return is also a bit more, somewhat 7-8%.

Gold and jewellery these days have a significant risk, their prices fluctuate a lot If you are going to see the history then you will know that until 2012 the prices were consistently increasing. If you would have invested prior to 2012 then you would have got a good return here. But after 2012 there have been a lot of ups and down but they have maintained a level, hence there’s not a much profit.

Investment in the properties and real investment has low to moderate risk. You can see India’s housing prices in the last few years. It has come up and down a lot. In the quarter of March 2011, it has touched the return rates of 30% and in March 2018 latest quarter then it gives just 5% return rates.

One of the disadvantages of investing in housing is that it needs a lot of capital, you need to have lacs and crores of rupees to invest. So this is a disadvantage.

In the stock market, you can get a lot of returns here but also losses. The risk of investing in the stock market depends on the stock where you are investing. You need to have a good knowledge of the performance of the stock and how the stock market works basically.

You shouldn’t be investing here if you don’t have this knowledge. So these are a few main types of investments that I have told you but

There are some other types of investments too:

  • Government bond
  • Corporate bonds
  • Cryptocurrency & Bitcoins
  • And many many more

A general well-known advice is that friends you should never invest your money only in one place. You should invest at different places so that if there’s any crash then you will not have to bear the overall loss. It’s a very less chance of everything crashing altogether like, gold, properties and even the stock market.

As this happens rarely Chances are that if one thing crashes then you can get profit from the other. This is called diversification, you have to invest in different places.

What are Mutual funds?

Mutual funds are a special kind of investment through which you can invest in different types together. You can do a diversified investment by investing in one place.

Asset Management Company (AMC) starts mutual funds. Basically, you give your money to Asset Management Company and many people like you do so. That company invest all the money collectively in different places.

They have appointed experts and with their suggestion, they invest the money. They invest money at different places and the return rate they get collectively from these different places out of that some small per cent of 1-2% is kept as a profit by the Asset company and the rest you get back as per that return rate.

HDFC, HSBC, ICICI, Aditya Birla, Reliance, and TATA, are a few examples of companies and banks that have started their own asset management company.

All the companies start different kinds of mutual funds in large numbers. For example, ICICI has started more than 1200 mutual funds.

How risky are your mutual funds and what is the return depending on the mutual funds that you are investing in?

Mutual funds can give a return rate of 4% and also of more than 30% too. It can be of zero risk and also of high risk to. Because all this depends on where the asset management company is investing your money. If that company is investing in stocks then it will be riskier and you will get more returns and if it’s investing in the government bonds then it will be less risky.

Types of Mutual funds

Different types of Mutual funds depend on the basis of the investment done by AMC people.

We can divide this into the 3 categories:

1. Equity Mutual Funds

2. Debt Mutual Funds

3. Hybrid Mutual funds

What are Equity Mutual Funds?

In Equity Mutual Funds, your money will be invested in the stock market. So naturally in this type of Mutual fund generally the risk is more and also the return. In the stock market which kind of company are you investing,

  • if it’s a big company then it’s called a Large Cap Equity Fund.
  • If it’s a small company then it’s called a Small-cap and
  • In the same way Mid Cap equity Funds.

Big company doesn’t have many risks as compared to the smaller ones but big companies won’t have a growth rate as high as it can be for the smaller companies. So risk and return both are less in the big companies.

ICICI prudential blue-chip fund is an example of a large-cap equity fund. If you invest here for a year then after a year your expected return is 11.7% but if you invest for 5 years then your expected return can be 19.7%. As I’ve told you earlier, the more time you invest in, the more return you can expect.

But one thing keeps in mind is that this is an expected return, not a guaranteed return, it still depends on the market since the mutual fund has given such a performance in history that doesn’t mean that will perform the same way in the future.

It still depends on the stock market so it will have risk, especially because it’s an equity mutual fund and investment is on the stock market. So don’t just look at the returns rate and invest.

Different Types of Equity Mutual Funds

1. Diversifies Equity Funds

Here the investment is done in the large, medium, and small-cap or it’s done in different companies.

2. Equity Linked Saving Scheme (ELSS)

This is a special type of Equity fund where you can save your taxes. You can save the tax on its profit. The fund manager purposely invests in such places where there’s a high return and also has high risk. IDFC Tax advantage is an example of an ELSS fund with the expected returns of 11.3% within a year.

3. Sector Mutual Funds

Here specifically such companies are invested on which belongs to a big sector like the Agriculture sector. All the companies which are under the agriculture sector, they are invested on logistic or transport sector, so there. One example of this is UTI transportation and logistics funds.

These funds are riskier since all the investment is done in one sector so if the sector is going down everything depends on that.

4. Index fund

Index Funds are passively Managed funds that are no agent of AMC is looking at where to invest the money here. These are passively managed which is according to the market’s rate’s up and downs they too go up and down by looking at the price of Sensex and Nifty varies.

What are Debt Mutual Funds?

These are those mutual funds that are invested in the debt instruments. Debt instruments are bonds, debentures, and certificates of deposits.

What are bonds?

Sometimes if the Government needs money and it’s not getting that through the budget then the government borrows money from the people and takes loans from the people. It is called bonds.

You can invest here, give it to the government and the government will return you the money after a fixed interest.

Types of Debt Mutual Funds

1. Liquid funds

Liquid funds are those mutual funds that can be easily and quickly converted into cash. Liquid means that actually, It’s not the liquid to drink. In economics, the liquid is something that can be easily converted into cash. This thing can be converted into cash within a day or two.

But it has a very low risk, such low that you can basically consider this as an alternative to the savings account. Asset liquid fund is one such example where you will get a return of 7.1% in a year.

2. Gilt Funds

These are those funds where Investments are done on the Government issued bonds. So technically it has zero risk because it’s never possible for the Government to not return your money. Mostly the interest rate can fluctuate.

3. Fixed Maturity Plans

This can be considered as an alternative to Fixed deposits, FD because it has very low risk just like FD and it is done for a fixed time. For a specific time investment is done here and you can’t take the money before that.

What are Hybrid Mutual Funds?

Basically, it’s a mixture of debt and equity mutual funds. Some people want to invest in the stock market but don’t want to invest all the money there and also invest some amount in the Debt instruments, so hybrid mutual funds are for them.

If most of the money is invested in a Debt fund then it will be called the Balanced Savings Fund. Approximately the ratio is 70:30 which means 70% of your money is in the low-risk debt funds and 30% is in the equity funds.

And if it’s the other way, 70% is in the equity funds at the higher risk, then it is called a balanced advantage fund.

Pros and Cons of Mutual Funds

Advantages of Mutual Funds

  • The biggest advantage of mutual funds in comparison to other investment is that it is already diversified. Your risk gets very low due to diversification because you are not investing in one place so if one thing crashes so it won’t affect your money.
  • In comparison to the stock market, gold, and real estate. Mutual funds are less risky however the exact risk depends on the mutual fund that you are investing in.
  • One more good advantage is that it is affordable, you don’t have to invest a big amount altogether. You can use SIP and invest a small amount every month.
  • All the investment of the mutual funds is done by a professional expert or a fund manager who decided where to invest and where to not. It’s again a big advantage that an expert is working for you.

Disadvantages of Mutual Funds

  • You give your money to an unknown person, you don’t know how it’s going to perform. However, he is an expert but you can’t trust 100% that an expert will be right all the time.
  • But the biggest disadvantage that used to be for the mutual funds earlier is that the agents used to take a lot of commissions for investing in the mutual funds. They say that gives us the money we will invest for you in the mutual funds and deduct a lot of commissions for themselves.

Hope you get a lot of valuable information on what is mutual funds, How to invest in them, and what are different types of Mutual funds.

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