Nitty-gritty of investing in mutual funds

‘Mutual Funds are subjected to market risks, read all scheme related documents carefully before investing’.

This one-line disclaimer is complex, intimidating and refrains us from considering the option of investing in mutual funds. Mutual funds are not as complicated as we think. On the contrary, mutual funds allow investors to invest in stock markets with taking much risk.
So, let’s begin with what is a mutual fund.

A mutual fund is a professionally managed investment fund that pools money from various investors to purchase securities. Further, it is an investment programme that trades in diversified holdings i.e. money is invested in bonds, equities, etc., by the asset manager. The fund has a clearly stated objective. The fund manager will build up the portfolio, make necessary amendments when required and keeps track of our investments. Another advantage is it is mandatory for the fund manager to notify the asset value daily though this depends and varies because of market fluctuations.

Based on the financial goal of an individual, he or she can decide on the amount to be invested Let us understand the concept of mutual fund with an example Suppose if you must travel from place ‘A’ to place ‘B’, you have the option of personal conveyance or public transport. Personal conveyance costs more, calls for ownership of vehicle, its maintenance, focussed driving and so on. Public transport falls cheaper on your pocket gives you more time to surf or read the newspaper and relatively stress free. So instead of an individual trying to consider the option of investing all by himself, trusting a professional would yield more returns with less risk.

How much to invest depends on your financial goal. You can start with as low as Rs 500 or even Rs 5000 per month.

When compared with share markets, mutual funds offer more liquidity, flexibility, transparency, professional expertise, etc

Based on a structure, mutual fund is classified as open-ended and close-ended.

Open-ended fund
H The investor can enter and exit at any time.
H They offer new units to the investors on a continuous basis.
H Offers liquidity with an exit load

Close-ended fund
H The investor can buy only when the IPO is issued.

H They have a fixed number of shares and are traded among investors on an exchange
H Investment can be redeemed after a fixed time in other words it has a lock in period. They can be redeemed at the prevailing NAV rate.

Relative advantage of holding an open-ended fund is its liquidity. If the fund does not perform well one can exit at any point of time. Open ended funds have relatively outperformed close ended funds. Further, purchase and redemption of mutual funds is based on net asset value (NAV).

NAV is a measuring tool for the performance of the scheme. Its value is imperative in purchase and sale of mutual funds because this decides the number of units. For instance, if NAV value of a fund is Rs 25 and the invested amount is Rs 25,000, the buyer would be getting 1000 units.

So, don’t get scared of mutual funds and start investing in them to reap benefits.

(The author is a homemaker who dabbles in stock market investments in free time)

Sneha Latha