Mutual Funds are the buzzword when it comes to investing in the stock market. The popular advertising campaign, ‘Mutual Funds Sahi Hai’ has fueled a lot of interest for mutual funds but not many people know what a mutual fund is and how it works. Investing in mutual funds is easy, and with minimum investments being Rs. 500, it is the most convenient way to invest in the stock market and gain from the increases there.
Here is a handy guide for those looking to understand the basics about mutual funds.
What is mutual fund?
A mutual fund is a collective fund where people pool their resources together. Different investors invest money in a fund. The fund takes the money so collected and invests it in different assets. The growth of these assets is represented as a growth in the value of a mutual fund.
For example, an equity mutual fund invests a majority of its funds in different types of equity shares. A debt mutual fund, on the other hand, invests in different debt instruments. Hybrid mutual funds invest partly in equities and partly in debt instruments.
The increase in the value of assets that the fund invests in is translated into an increased Net Asset Value [NAV] or price of the mutual fund. For example, if an investor invests in an equity mutual fund at the price of Rs. 50 per unit and the price increases to Rs. 52 in a few months. The investor has gained Rs. 2 per unit of the mutual fund.
A mutual fund could prove less risky than investing directly in the stock market, especially for beginners.
You can get investment advice from Kotak Securities to help you make the right choice. Now that you have an idea about what is mutual fund, you can make the right investment decision.
How can you invest in mutual funds?
There are two ways to invest in a mutual fund:
- Systematic Investment Plan [SIP]
- Lumpsum investment
In a Systematic Investment Plan, a certain decided amount is invested every month in the mutual fund. The benefit of investing regularly is that the cost gets averaged over a longer period of time. More units are purchased when the price is low and less units when the price is high. Thus, the results are averaged out and this could result in a lower cost per unit and higher gains.
A lumpsum investment is when a one time investment is made in the particular mutual fund. You could also benefit from lumpsum investment as mutual funds are known to fetch you substantial returns. Returns that have the potential to beat inflation better than most other investment avenues.
If you are wondering what is mutual fund investment, you now know the types. You can accordingly make an investment decision.
How mutual funds work
As discussed earlier, mutual funds India gather resources from a pool of investors. These resources are invested in different assets. Depending on the type of mutual fund, the income earned by the fund on its assets is either
- Distributed to the investors as dividend income [Income plans of mutual funds]
- Reinvested in the mutual fund to grow the investment [Growth plans of mutual funds]
Mutual funds work on the principle that collective funds can grow more than individual investments. Since mutual funds are professionally managed, the investment decisions are researched, leading to a higher chance of growth for the investors.
Mutual funds also offer the investors liquidity. It is easy to sell these fund units at any time and exit from the scheme. Since these funds can be converted to cash at any point of time, they are preferred investments.
Investing in mutual funds is very convenient. Open your demat account today with brokerage firms such as Kotak Securities and invest in a mutual fund and watch your money grow. Mutual funds India are ‘sahi hain’ indeed.