According to Investopedia, a mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Investing in a share of a mutual fund is not similar to investing in shares of stock. Unlike stock, mutual fund shares do not give its holders any voting rights. This is the reason why the price of a mutual fund share is referred to as the net access value (NAV) per share, sometimes expressed as NAVPS. A fund's NAV is derived by dividing the total value of the securities in the portfolio by the total amount of shares outstanding.
Types of Mutual Funds
There are several kinds of mutual funds categories, that represent the kinds of securities they have targeted for their portfolios and the type of returns they seek.
1. Equity Schemes: Equity schemes invest in the stock market. Therefore, the risk level of equity funds are higher than debt and hybrid funds. Investors who want to invest in equity funds must make sure that their risk appetite coincides with the particular fund. Equity funds are broadly divided into three categories on the basis of market capitalization, which is calculated on the basis of multiplying the outstanding shares that a company offers with the current market price of a share. These are:
· Large Capital Funds: Top 100 companies in terms of market capitalization
· Middle Capital Funds: 101st- 250th companies in term of market capitalization
· Small Capital Funds: 251st company onwards in terms of market capitalization
2. Debt Schemes: Debt funds invest mostly in money market securities, corporate bonds, government bonds, etc. These type of funds are ideal for investors who are conservative in their investment approach. There are over 15 categories under this scheme.
3. Hybrid Schemes: Hybrid schemes, a mix of both kinds of investment, invest in equity, as well as debt instruments, investments and hence, moderate the risk level. This is also a reason why hybrid funds are extremely popular in the mutual fund industry.
How to invest in mutual funds
Investments can be made directly with a mutual fund or the services of a mutual fund advisor is hired. If you are investing directly, you will invest in the direct plan of a mutual fund scheme. If you are investing through an advisor or intermediary, you will invest in the regular plan of the scheme. Investing directly requires that visit the website of the mutual fund or its authorized branches with relevant documents. The advantage of investing in a direct plan is that you save on the commission and the money invested would add sizeable returns over a long period.
The major reasons why people invest in mutual funds are for diversity (which curbs risk), simplicity and tax efficiency.
Modes of mutual funds investment
Lump sum: these investments allow the investor to purchase the number of units he wants at one go and is usually chosen to create extra wealth and liquidity. It takes into account timing of the market.
Systematic Investment Plan (SIP): here, the investor invests a specific sum of money at regular intervals. This specific amount is directly deducted from the investor’s bank account. It disregards the timing of the market.
Some simple steps on how to invest in mutual funds
· Being KYC verified is a must before your transaction can be approved.
· After completing the KYC, investing in the mutual fund can begin.
· Investment can be through an AMC directly, or a mutual fund investment platform.
· Investing through a digital platform is ideal as the mutual fund investment process can be completed free of charge. Also, it is paperless.
· While choosing a mutual fund, bear in mind certain parameters before narrowing down on the fund you want to invest in. These parameters can include ideal investment duration, risk appetite, and so on.