Fund means money collected from people, a mutual fund is a fund. Where money is collected from many people, the company that manages this fund is called an asset management company.
A fund manager is appointed for every mutual fund scheme.
Fund managers invest people’s money according to the goals and objectives of that mutual fund scheme and the profit that comes from that investment is distributed among the people who had invested in this fund.
In return for managing that fund, the asset management company charges some fee, which is called the expense ratio.
ICICI Prudential Assets Management Company, SBI Mutual Fund, Motilal Oswal Assets Management Company, etc. are all asset management companies.
SBI Mutual Fund has more than 70 mutual fund schemes such as SBI Magnum Balance fund, SBI Bluechip Fund, SBI regular savings fund, etc.
So when you invest in mutual funds, you invest your money in such a scheme.
Asset Classes in Mutual Funds
Your money in mutual funds is mainly invested in two asset classes
- Debt
- Equity
Debt Mutual Fund
In Debt Mutual Fund your money is invested in debt instruments such as government securities, treasury bills, debentures, etc. These are also called debt instruments.
Because the government or companies take money from the investor through these instruments and in return give them interest. So the mutual funds which invest in debt instruments are called debt mutual funds.
There are many types of Debt Mutual Funds.
Read Also: Bonds and Debentures – Explained
Equity Mutual Fund
In equity mutual funds, your money is invested in the stock market. There are also many types of equity mutual funds.
A fund manager is appointed for every mutual fund. So if it is an equity mutual fund then which stock to buy, which to sell, when to buy, and when to sell all these decisions are taken by the fund manager in that fund.
Therefore, the performance of equity mutual funds largely depends on the skills and expertise of the fund manager. Therefore, it is very important to know the skills and expertise of the fund manager before investing in mutual funds.
Ways to Invest in Mutual Funds
There are 2 ways to invest in mutual funds
- Lump-Sum
- SIP
Lump-Sum
Lump-Sum Investment means investing your money all at once.
SIP (Systematic Investment Plan)
SIP (Systematic Investment Plan) means to invest some specific amount regularly every month or every quarter like RD (Recurring Deposit).
A fixed amount is kept in RD every week or every month. Similarly, through SIP, you can invest a specific amount every month or every quarter in a mutual fund.
In SIP mutual funds usually use an auto-debit facility. So if you have started a monthly SIP of ₹ 1000 on the 1st of every month, then ₹ 1000 will be deducted from the bank account on the 1st of every month and will be invested in the Mutual Fund scheme.
Nowadays you can start SIP even with ₹ 500.
Read Also: What is ETF (Exchange Traded Fund)
NAV (Net Asset Value) in Mutual Funds
Just like a company’s shares, there are units of a mutual fund scheme and just like the price of a share is known by its share price, similarly, the price of a unit is known by its NAV (Net Asset Value).
For example: Let’s say there is a mutual fund scheme named ABC whose NAV is ₹10 i.e. the price of one unit is ₹10. So if you invest ₹ 1000 in the ABC Mutual Fund scheme then you will get 100 units of ABC Mutual Fund.
So if next year the NAV of ABC mutual fund scheme goes from ₹ 10 to ₹ 13 and you sell your 100 units at a NAV of ₹ 13, then after selling your units you will get ₹ 1300 which means 30% profit will be available.
If you start SIP on the 1st of every month, then whatever will be the NAV of that mutual fund on that day you will get units on that NAV.
Read Also: What is Bond and How to Invest in the Bond Market?
Exit load in mutual funds
Many mutual funds impose an exit load if you sell units of equity mutual funds before 1 year. Exit load is usually a 0.5% to 2% fine, which is called exit load.
Entry load in mutual funds
A few years back, mutual funds also had an entry load. When investors used to invest in a mutual fund, they had to pay some fees even while investing, which was called entry load.
Capital market regulator SEBI banned entry load in 2009, hence mutual funds no longer impose entry load.
When a company sells shares to the public for the first time, it is called Initial Public Offering (IPO).
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NFO (New Fund Offer) in mutual funds
Similarly, when a mutual fund scheme is launched, its New Fund Offer (NFO) comes. The offer documents of any mutual fund scheme are published before the NFO is announced.
The offer document contains many details like goals, objectives, risk and rewards, benchmark, loads & expenses, etc. of that mutual fund.
You will find the offer document of any mutual fund scheme on the website of that mutual fund. Before investing in any mutual fund scheme, you must read its offer document.
If you want to invest directly in the stock market, but do not have the time to analyze the company or do not have the expertise to do the analysis, then equity mutual funds can be the best option for you.
Read Also: What is NFO in Mutual fund and NFO vs IPO | New fund offer
And you can take advantage of the expertise of a mutual fund manager. If you want to invest in mutual funds, then it is not that you have invested in any mutual fund.
There are different types of mutual fund schemes that have different risks & rewards.
So here you have to analyze the expertise, objectives, risk & rewards, expenses, etc of that fund manager and then you should invest in the mutual fund scheme which matches your investment goal.
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In Debt Mutual Fund your money is invested in debt instruments such as government securities, treasury bills, debentures, etc. These are also called debt instruments. So the mutual funds which invest in debt instruments are called debt mutual funds.
There are 2 ways to invest in mutual funds
1. Lump-Sum
2. SIP
Just like a company’s shares, there are units of a mutual fund scheme and just like the price of a share is known by its share price, similarly, the price of a unit is known by its NAV (Net Asset Value).
Many mutual funds impose an exit load if you sell units of equity mutual funds before 1 year. Exit load is usually a 0.5% to 2% fine, which is called exit load.
A few years back, mutual funds also had an entry load. When investors used to invest in a mutual fund, they had to pay some fees even while investing, which was called entry load. Capital market regulator SEBI banned entry load in 2009, hence mutual funds no longer impose entry load.