Did you know that you could become a crorepati investing in mutual funds (MF) in a decade or less? At Groww, we share insights on how a right amount of regular investment can help you increase your assets and make them stronger. By simply investing 20,000 INR per month you can get a return of approximately ₹1,00,00,000 in 15 years.
Upon hearing the jargons of the capital market, most of us take a step back. We recall the advice of our elders of saving and investing only in fixed deposits, jewellery, and property but not in mutual funds, stocks, bonds, etc. We often consider investing in MF risky, which it actually is not when compared to other forms of investment such as stocks or equity. MF investments are safe and secure. On platforms like Groww, we serve our investors with every single detail for a better understanding. The dashboard is full of features like performance, top holdings, and so on.
Below are the few points which can help you understand about mutual funds, how they behave in the market and what strategy you should follow while investing.
In this article
What are Mutual Funds?
In very simple terms, a mutual fund is you hiring an expert to invest your money. Every mutual fund has one or more fund manager. Fund managers are selected based on their knowledge in the domain a certain mutual fund wants to invest in. There are various types of mutual funds which are detailed below.
For example, an equity mutual fund will have an equity expert. These experts invest or manage your money in return for a small fee. A mutual fund distributes the entire investment amount in small units (called units). Investors can buy these units instead of buying stocks directly.
Mutual Funds don’t require massive investments at once:
Generally, with stock markets, people intend to invest an enormous amount of money to get better returns, whereas, in the case of MFs, there’s no limit on how much you can invest. At Groww.in, under the Explore tab, you can see a list of MFs starting with an investment of just 500 INR.
Categories in Mutual Funds:
There’s no denying that each MF in the market comes with a purpose defined by the types of assets it invests into and returns it offers over a period. Division of mutual funds is into following categories:
A. Balanced Fund
B. Debt Funds
C. Equity Funds
D. Money Market Funds.
Note: The term “asset classes” defines a group of securities which behave similarly in the market. There are mainly three asset classes in the capital markets namely: Stocks or Equities, Bonds, and Cash equivalents.
As the name suggests, Balanced Fund is a category of MFs where the distribution of equity and debt funds are balanced out in such a way that the returns do not cause much loss to the investors.
For example, consider a fund composed of a higher percentage of equity funds and a lower proportion of debt funds, which are more stable than the previous security. In case the stocks aren’t performing well; debt could help cover the losses with a steady return.
Debt Funds on the other hands are very stable and are composed of bonds, government funds, and fixed income resources. These are somewhat equivalent to fixed deposit; however, the returns on debt funds are higher than what banks offer on FDs.
Equity Funds: If you want high returns in a short period, you should explore Equity Funds. Under its umbrella, the investment is only made in the stocks/equities of various companies. However, while investing, one should be cautious as with higher returns, comes higher risk.
If you ever thought of creating a bank account for just for saving your money, then why not invest the money in money market funds. These funds invest in liquid instruments which are very stable and are quickly converted into hard cash. The risk associated with such resources is minimal and are very safe for saving your hard earned money.
Investment goals also divide mutual funds into the following categories:
A. Pension Funds
B. Fixed Maturity Funds
C. Growth Funds
D. Income Funds
E. Liquid Funds
F. Tax Saving Funds
Pension Funds are targeted towards a very long term investment in balanced funds so as to have the right amount of returns at the time of investor’s retirement. As I explained earlier as well, Pension Funds have investments in equity and debt so as to balance out the risk and provide higher returns.
Fixed Maturity Funds or FMF invest in the debt and money market instruments with a fixed maturity period depending on the fund. This is compared to the Fixed Deposits where there’s a minimum locking time and withdrawing money before maturity attracts a penalty.
Income Funds invest in the fixed incoming instruments as earlier explained in the Debt Funds. These funds are ready to go for people who do not have in-depth knowledge of the market and are not looking for very high returns. Under normal market conditions, income funds provide an excellent capital protection along with good returns to the investors.
Growth Funds: In the capital market, whenever we associate growth with an instrument, the risk level increases. Same is with the Growth Funds. Under this fund, money is primarily invested in equity/stocks of companies.
Tax Saving Funds: They primarily make investments in equities and help the investors reduce the amount of tax payable under the Income Tax Act. Returns on these funds are usually high. As always, with high yields, the risk is also very high.
Liquid Funds: These funds are ideal for short term goals. Liquid funds are considered a safe place to store money to earn very average returns but with low risk. These funds invest in short-term or very short term investments.
Mutual Funds based on the structure:
We have talked about how some mutual funds have maturity or locking period, which if breached attracts a penalty in different forms. Each of them is divided into following categories:
A. Open-Ended Funds.
B. Close-Ended Funds.
C. Interval Funds.
Open-Ended Funds (OEF): These funds are available for purchase and redemption throughout the year. There is no maturity period, neither do they attract any fee for selling units before time. Investors can invest as much as they want depending on the prevailing NAV or Net Asset Value. (NAV is discussed later in the article). However, since they are actively managed by a fund manager who decides where the investment should go, it attracts some fees. One major advantage OEFs have for investors is the ability to invest and redeem the money at any time of year without any penalty or bond fee.
Close-Ended Funds: In these funds, the purchase can only be made during the initial offer, and the investor has to wait till the fund’s maturity. Also, there’s no provision for selling the units back to the mutual fund; you will have to sell them back in the stock market at the available price.
Index Funds (IF): IFs club properties from both the structures into one single entity. IFs allow repurchasing of the funds from the existing unit holders without any change in the provision on selling purchased units.
NAV, Expense Ratio, Load, etc. in Mutual Funds
An NAV or Net Asset Value is nothing but the total market value (after taking out all funds related expenses.) of all the shares held in the portfolio divided by the number of units available. So basically its NAV = (Value – Expenses) / No. Of Units.
NAVs are very fundamental of loss and gains in the mutual funds. Whenever there is an increase in profit on the funds, net asset value grows without any change in the allocated units, thus determining that there are earnings on the investment and vice-versa.
The final market value is calculated by deducting the expenses required to maintain a fund. The term Expense Ratio defines total operating expenses divided by the total value of assets under management (AUM). AUM is the total market value of the property that an investment or financial institution manages on behalf of an investor, company or a firm.
To distribute the expenses, some Assets Management Companies (AMC) have sales charges, exit and entry duties/loads to compensate for distribution costs. This load helps AMCs compensate the expenses for distribution charges, pay for salaries, etc.
Exit and Entry load: As the name suggests, entry load is charged when an investor makes an investment in the mutual fund. It is the percentage added to the prevailing NAV at the time of investment.
On the other hand, the exit load is charged at the date of redemption, and its value depends from fund to fund. All the money that is deducted in the form of the sales charge, exit and entry load goes directly to the AMC, not the mutual fund.
Why Invest in Mutual Funds?
Mutual Funds Sahi Hai – Investing in mutual funds can help you attain good returns in the long-term. At Groww, we have created portfolios which help you chase your dreams with easy savings and good yields. This isn’t the case with your normal fixed deposit or regular savings bank account. There’s no doubt that FDs are more stable, but the returns are so low that it’s almost impossible to gain returns in time. On the other hand, mutual funds help you GROWW.
For any queries, you can comment down below or talk to our support team through our website, email (firstname.lastname@example.org) or WhatsApp (+91 91088 00604). And as always, read the scheme related documents carefully before investing.