You are looking for an investment option, but have limited or less knowledge on investment options and where to invest. The best decision is to leave it to the experts.
A good and experienced investment advisor can help you with your investments and suggest you better options to maximise returns with minimum risks. But not everyone can afford to have the services of these expert advisors. In such situations, the best option to invest is to invest in Mutual Funds.
A Mutual Fund is a pool of funds, where many investors invest their money and this fund is managed by Expert and Highly Experienced Fund Managers, who have years of experience in managing such large funds. They invest these funds in different securities like stocks, bonds, money market instruments and other assets. These funds are created with an objective and the objective can be Growth oriented which have high risk, Balanced with normal risk and Debt based which has very less or limited risk.
The main advantage of investing in mutual fund is that, every investor small or big, get the access to professional Fund Managers and their expertise knowledge and skills. For any investor, it is difficult to create diversified portfolio and track each of their investment on regular basis. In mutual funds the funds are professionally managed and monitored with high expertise and as an investor, you can monitor your statements at any point and time.
The investment in Mutual funds is distributed in units and the investor gets the number of units allocated against their investment, the current value of investment is called as Net Asset Value (NAV) and profit / loss is calculated basis the units invested. For example if an investor invested, Invested Rs. 10000 on 1st June and got 100 units with NAV of Rs. 100 Per unit on 15th June the NAV is Rs. 110 the return on investment will be Rs. 1000 and total value will be Rs. 11000 but if NAV is Rs. 90 then the loss will be Rs. 1000 and total value will become Rs. 9000.
Types of Mutual Funds:
There are various types of mutual funds scheme, that can be classified with the objective of the investment, such as growth scheme, income scheme, balanced scheme etc. These schemes may be either open-ended or close-ended schemes. These schemes can be classified mainly as follows:
Growth / Equity Oriented Scheme:
The main objective of growth or equity funds is to provide capital appreciation over the period of medium to long-term. The investment in these funds is majorly done into stocks / equities. These funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.
Income / Dept Oriented Scheme:
The main objective of these funds is to provide regular and steady income to investors. These funds generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. These funds are less risky as compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.
The main objective of these funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and dept instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.
Money Market or Liquid Fund:
These funds are also similar to that of income funds and their objective is to provide easy liquidity, preservation of capital and moderate income. These funds are invested exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and interbank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.
These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or dept oriented schemes.
Index funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc. These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as “tracking error” in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.
There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchange.
Mutual Funds are comparatively safer mode of investment. They are managed by Expert Fund Managers who have great knowledge and experience in handling such funds. The risk associated with mutual fund is comparatively less as compare to investing in stock directly. Depending upon the objective an investor have and time period he want to invest in, he can choose the best suited funds from the vast array of mutual funds available. The investment can small and done on monthly basis or can invest an lumpsum amount also. The returns are subject to market risk and nature of mutual fund you have invested in.