Exploring Mutual Funds: An In-Depth Investment Handbook
When you think of investment avenues in India, mutual funds are easily one of the most common ones. However, for many, investing in mutual funds can be daunting. If you are among those who are yet to enter or have just entered the world of mutual funds, this guide is for you.
This post shall simplify the art of wealth creation by investing in mutual funds and making it more accessible and rewarding.
What Are Mutual Funds?
Mutual funds are a type of investment where a group of investors pool their money to buy various assets like stocks, bonds and money market instruments. This pool of investment is managed by professionals called fund managers. The unitholder (investor) participates in the fund’s profit or loss.
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Imagine Nikhil invests in an equity-based mutual fund scheme along with Vaidya and many other investors. He receives proportionate units in exchange for the money invested. The fund manager buys various stocks (depending on the fund’s objective) from this pool of money. If the fund earns profit, Nikhil will gain based on his contribution. Similarly, he may face a loss against the number of units he holds.
Benefits of Mutual Fund Investing
Investing in mutual funds can help build wealth, especially if you are looking for an easy investment vehicle. Some of the benefits include:
- Diversification: Investing in mutual funds automatically diversifies your portfolio. Even if you choose to invest in an equity mutual fund, you are not exposed to a single stock, thus minimising your risk.
- Professionally managed: Investing in financial instruments requires good knowledge, skills and experience of the corresponding market. However, mutual funds are professionally managed, taking away the responsibility to decide what, when and how much to buy or sell.
- Liquidity: Mutual funds are famed to be highly liquid assets, meaning that they can be converted to cash easily and with lower turnaround time.
- Convenience and simplicity: Buying or redeeming mutual funds is easy through online trading sites, and there are various channels available to choose from. Moreover, you can start investing in mutual funds with an amount as low as ₹500.
Types of Mutual Funds
There are various types of mutual funds available, and you can choose depending on your requirements. We can divide mutual funds scheme based on:
Structure:
- Open-ended
- Close-ended
- Interval
Investment objective:
- Growth
- Income
- Capital protection
- Tax saving
Asset class:
- Equity
- Debt
- Hybrid
- Multi-asset
Speciality:
- Sector
- Index
- Fund of Funds
- International
- Real estate
- Exchange Traded Funds (ETFs)
Mutual Funds Diversification Strategies
Although mutual funds do offer diversification, it is essential to not put all your hard-earned money in a single mutual fund, or similar funds. Diversification, in a literal sense, means to speak risk by investing in assets that are not exactly correlated.
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You can diversify our mutual fund investments based on the following:
- Asset class: Invest in various asset classes like equity, debt, and money market instruments, depending on your risk appetite and time horizon.
- Sector or themes: Further, do not restrict your equity mutual funds only to certain sectors or themes.
- Market capitalisation: Again, for equity funds, diversify your investments in large, mid and small-cap funds.
- Duration: Diversify your debt funds between liquid or longer-duration funds.
Building a Mutual Fund Portfolio
Are you looking to build a robust mutual fund portfolio? Here’s a step-by-step guide.
Step 1: Determine your investment objectives and do the risk profiling.
Step 2: Diversify your portfolio between equity, debt and hybrid funds.
Step 3: Decide the percentage of funds to be allotted for each asset class based on your goals and risk tolerance.
Step 4: Monitor and review your portfolio periodically. Portfolio rebalancing helps you to stick to your plan and maintain desired asset allocation.
Conclusion
Mutual funds are a smart way to get started with investing in the stock market. You can easily purchase or redeem mutual funds through trading sites with a few clicks. So, embark on this financial journey now!
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