Updated: Oct 27, 2022
Mutual fund is a financial instrument that pools money from different investors. After that, the combined funds are invested in assets such as listed company stocks, corporate bonds, government bonds, and money market instruments.
As a shareholder, you are not the actual owner of the company equities that mutual funds buy. However, you equally split any gains or losses with the other pool investors. This is how a mutual fund and the word "mutual" are related.
Professional fund managers make the investment selections with the assistance of a group of research experts. In exchange, each distinct scheme levies fees on the investor of the scheme for things like fund administration costs, operation costs, distribution costs, investor awareness costs, etc. The Securities & Exchange Board of India (SEBI) has set limitations on the costs that may be billed to each specific scheme, though. Additionally, by investing in mutual fund schemes, investors typically gain access to expert fund management at relatively cheaper fees.
According to each person's selected investment horizon and risk tolerance, mutual funds are quickly becoming a favored option for achieving their financial goals. By physically submitting the application form at the Official Points of Acceptance, online via the mutual fund house's website or mobile app, or through other digital means made available by Registrar & Transfer Agents, etc., investors can invest in various mutual fund schemes.
How Mutual Funds work?
Investment in mutual funds is straightforward. You make an investment in a fund made up of several assets. You need not take the chance of putting all your eggs in one basket. Additionally, there is no longer the hassle of monitoring market changes. The management of the funds, market monitoring, and research are handled by the mutual fund house. Because of this, mutual funds are a very well-liked investing choice for all kinds of individuals. The Asset Management Company is in charge of managing a mutual fund (AMC). Investment in mutual funds begins with the combining of funds from several participants. The combined funds are carefully allocated among a variety of asset types, including stock, debt, money market instruments, and other funds. As a result, you benefit from diversification, the tried-and-true market maxim.
Additionally, your money is invested in things you couldn't otherwise afford, like government bonds. The best thing about mutual funds is that the fund manager and a team of experts choose all the investments to create a portfolio. The investments are done in accordance with the mutual fund's stated aim.
You can outperform the returns of conventional investment vehicles, such as a bank savings account and fixed deposits, with the help of expert and seasoned fund management. For your investment into the pooled fund, you receive units as an investor. The price changes of the underlying assets affect the portfolio's worth. The Net Asset Value, which is used to calculate the portfolio value, is equal to net assets divided by the quantity of outstanding units (NAV). Higher NAV signifies profits, and lower NAV shows portfolio value losses.
Types of Mutual Funds:
In India, mutual funds are divided into various groups according on the asset classes they invest in. Based on asset class there are 3 types of mutual funds:
Ways to invest in Mutual Funds: -
1. SIP: Systematic Investment Plans (SIPs) require the investor to make recurring investments of a certain amount of money. This particular sum is immediately taken out of the investor's bank account. It doesn't consider market timing.
2. Lump Sum: This type of investment enables the investor to make a single, large purchase of any number of units. This approach is typically adopted to generate additional wealth and liquidity. The lump sum approach makes advantage of the market timing strategy.
Which is better SIP or Lumpsum?
We've all been hearing this question for a long time. Making a decision is difficult. Each one has advantages of its own. The cash flows are the primary distinction between SIP and lump sum mutual funds. In a SIP, one invests on a regular basis rather than once in a large sum. There is no restriction prohibiting a SIP investor from making a lump sum investment when there are extra money available.
SIP assists in "Rupee cost averaging," which lowers average investment costs by spreading out investments over time. As a result, investments made through SIP in mutual funds are least affected by market volatility. SIP encourages the necessary investing discipline. SIP lowers the average cost of investing because they give you extra units when the market is down. Long-term returns are higher due to this.
Investors who want to invest in debt mutual funds for the short term do well with lump sum mutual fund investments. SIP investments in debt mutual funds serve no purpose. Since the suggested investment horizon for debt funds is fewer than three years, it is preferable to invest in debt mutual funds all at once.
Does that imply that one cannot make a lump sum investment in mutual funds or equity funds? No, definitely not. Lump sum investments may be made in equities mutual funds. Any unanticipated profits, asset sale profits, or extra funds might be invested in the market to generate a return on them.
SIP vs. lump sum cannot ever be an option. Since they complement one another, there is always a "and" between them. A single sort of investment choice cannot be selected by an investor alone. Lump sum or SIP mutual fund investing each have their own advantages and are suitable for various investors at various periods. One must, however, be aware of the distinction between SIP and lump sum. Therefore, it is usually advised to start investing early in order to benefit in the long term from the power of compounding.
To earn returns on your investment, it is advised to choose an investment choice (SIP or one-time investment) based on your financial objectives.