Mutual Fund Investment in India – Your Very Own Guide

Mutual fund investment scheme had been present in India since 1963. The Unit Trust of India was the first Indian Government-controlled financial company which had operated and managed the Mutual funds in India. And soon after that, other financial institutions also started offering Mutual Fund investment plans.

In the starting of 1987, only a few banks like State Bank of India, Punjab National Bank, and Canara Bank started offering such schemes. But nowadays, many new financial companies like Axis Bank, ICICI, HDFC, Reliance etc. are attracting people with their new schemes to save money.

Today in this article, we will learn about the details of Mutual funds investment, and how the market affects the Mutual funds’ investment in India. This article will be your very own Mutual Fund Investment guide, which will help you come in terms with various terminologies. 

Types of Mutual Fund

It is quite difficult to understand the terminology ‘Mutual Fund Investment’ and hence difficult to know how to invest in a mutual fund for beginners. But don’t worry. This article is intended to make you aware of this scheme only.

There are various types of mutual funds in the market which a person can select according to one’s needs. An investor should be careful while choosing them and be aware of short-term, mid-term and long-term plans. Also, he needs to keep in mind the amount he wants to invest. The Mutual funds are mainly of three types.

Equity or Growth fund

This type of Mutual Funds invest in equity and gives a higher return. It is best for long-term investment which contains large cap, mid cap, and small cap funds and also has some multi-cap funds. You can save tax with Equity or Growth funds.

Bond/Fixed Income Funds

These type of funds invest in securities such as commercial papers, bank certificates of deposits, government securities or bonds, treasury bills, and debentures. They are considered relatively safe. 

Hybrid Funds

This is a combination of equity and fixed income scale. It is very balanced and offers great wealth creation potential by investing in pension plans, monthly income plans, balanced funds etc.

You can select one of them according to your need and financial status. Before selecting them you should look for a tax saving scheme also.

Tips for Beginner

The mutual fund is an investment company which merges money from investors to buy the securities. It totally depends upon the stock market. First-time mutual fund investment, without knowing the imperfection and uncertainty of the market, may be very unsafe for an investor. So he should have to be aware of every single in and out of the Mutual Funds Investment scheme before filling an application form.

1. The first thing to do: 

The aspiring investor has to first decide what kind of policy he wants to build, that is, the right asset allocation. Asset allocation is a way of how to invest your money in different investments with proper synchronization of various asset classes.

According to a popular rule of asset allocation, depending on the age of the investor, he should keep a certain percentage of the portfolio in debt instrument. The age, occupation, and the number of dependants are the major factors with which investors should familiarize themselves before investing. The younger you are, the riskier will be your investment.

2. How to find a right fund for yourself: 

The next step is to choose the right fund. The fund should be chosen according to the investment philosophy and consistency of the returns. For selecting a suitable fund, an investor should consider the following facts.

  • In how much time you need money?
  • What are your financial requirements?
  • Are you investing for retirement? Or for child education?
  • How much you know about the stock market risks?
  • If you are not satisfied with the particular asset class, you should go for the other.

These factors have a great impact on your funds and returns. If you are an experienced holder of stock market business, then equity funds are the best. But for a beginner, diversified fund and specialty fund are the most suitable.

Be in touch with your investment after filling up the application form and writing out a cheque. Look for a qualified advisor who can advise you from time to time about the ups and downs of the stock market. There are other sources also to collect information about your investment.

-> Newsletters and Factsheets

MF publishes all the detail of the portfolio monthly in the Fact Sheets and quarterly in the Newsletters. Apart from this, one can take help from the AMFI (Association of Mutual Fund in India) as well. AMFI publishes daily and historical NAV and other schemes. Newspaper is also a good source of information about the Mutual Fund Investment.

The Mutual Fund Investment in India

Despite being present in the market for a long time, only 10% of the households have made the mutual fund investments till date. According to AMFI and Boston Analytics, people have shown less interest in Mutual funds investment due to lack of proper information on how mutual fund investment works and what are the stock market risks.

Mutual Funds Distribution in India

Mutual fund investment is divided into various channels like Corporate Distributors, Individual Distributors, Post Offices and Banks. These channels are further divided into two types.

  • The channel which sells funds with low expense ratio, but charges from the customers on their own.
  • Another which sells funds with high expense ratio and get paid back with a commission, and don’t charge any fees from the customers.

The Benefits of Investing in Mutual Fund In India

Mutual Fund investment has shown excellent results by attracting many investors from major cities of India because the people of major cities are well aware with the terminology of Mutual Funds. Here are some benefits of investing in mutual funds in India.

Diversification

People enjoy the benefits of asset diversification through Mutual Fund investment. Diversified portfolios contain the type of instruments from low to high risks, such as bonds, stocks, international securities, etc. The ongoing performance of one fund can be equalized by the performance of other funds in the portfolio. The diversified portfolio gives you a big return by lowering the risk.

Liquidity

Another big advantage of mutual funds is the ability to invest and take back. Investors have the advantage of taking back their money if the Mutual funds are based on Net Asset Value at that particular time. But you should watch out for the exit load which may apply on some funds. However, redeeming your investment is not good unless you achieve your goals. Before redemption, you should discuss it with a qualified advisor.

Flexibility

Unlike other investment instruments, the mutual funds do not contain zero lock-in-period. But it depends upon the kind of fund you have invested. You can redeem your Mutual Fund investment whenever you want. There are some funds which have a lock-in period of 3 years and they are the great way to save tax.

Higher return potential

Mutual funds are known for higher returns than other investment instruments.  Unlike traditional investment instruments, Mutual funds invest in the market-linked instruments and have a low risk of appetite and give FD-beating returns. Equity funds are giving between 11 to 15% for 10 years. So investing in the equity funds helps them to earn big returns.

Well managed and secure

Mutual funds are managed by the qualified managers who guide the investor properly. They keep eyes on the stock market and track the performance at regular intervals to give the best service to the investors. They also suggest the best Mutual Fund investment plans according to their needs. The mutual fund in India is directed by the Government Department called SEBI. SEBI ensures the transparency and security to the people. So its safe to invest in the Mutual fund after knowing all its factors.

Risk of Mutual Funds in India

Every good proposal has some advantages and disadvantages. Mutual funds also have some risks which every beginner should know before investing. Here are some most expensive risks which you should know. Before you go ahead with your Mutual Fund Investment Plans, make sure you are well aware of the risks. 

Higher Exposure to Equity Risk

Equity Funds have been able to give higher returns to the investors because of the increase in the susceptibility to the volatile equity. Sometimes, this scheme puts investors at a great loss.

Debt Holdings

If the fund has long duration bonds and the interest rates rise, an investor can lose value.

Interest Rate Risk

As the interest rate increases, the price of bonds gets down. Lowering the price of bonds means you will lose your investment value. You have to be careful about interest rate and investment as per the interest rate movement.

Credit Rate Risk

Mutual Fund bonds are directly related to debt instruments and they are calculated according to some factors like safety, liquidity returns, and quality. If the quality of the debt instrument decreases, you can lose your money. So before investing you should be careful about the parameters like these.

Inflation Risk

Your Mutual Fund investment go into the risk as the inflation rate goes high. The inflation rate has the direct impact on the stock market.

Opportunity Loss

For achieving a higher return, investors invest in the right equity fund and debt fund rather than money market fund. This may cause a big loss to the investors.

Volatility Risk

If the market is changing frequently, you will also see the fluctuations in the NAV value. If the stock loses the values, it will directly impact on NAV and cause it to decrease.

Performance Risk 

In this kind of risk, the ROI in equity funds is low when the market is not doing well. But this can be saved if the fund manager manages the portfolio very well.

Concentration Risk 

This means that the risk is higher if a large portion of the portfolio is in just one sector or one stock. If this happens and the stock underperforms, the losses would be huge. 

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