What are Mutual Funds?
Most people link the words to the direct stock market; however, how many of us really understand the meaning of mutual funds? In this article, we will learn the concept of mutual funds for beginners.
Let get to know the meaning.
Okay, then what do you understand with the term mutual funds for beginners? You might wonder that it is sold at a place where you can put in your money, and the asset management company will double or make your money, maybe even three times over a period of time.
Well, how? What do they do? The answer here will be that they invest your money in stocks or the share market. Maybe you are partly right; however, let’s get to understand this better.
A mutual fund is a product offered by an Asset Management Company (AMC) to gather money from the investor in order to invest in different types of markets and securities, as per the investment objective agreed upon by the investor and the AMC.
This process helps the investor invest in the market with the help of professional fund manager services offered by the AMC.
The motive of a mutual fund is to direct the investor and help them in building or increasing their wealth by utilizing opportunities provided by a variety of stocks available in the market.
In this way, the AMC is able to collect a large sum of money from various investors to invest in different stocks.
The AMC basically collects different pools of money from investors; the pools of money are different because the investment objective and goal of each investor is different.
These pools of money are invested in different schemes. Investing in these schemes is buying an investment objective effectively.
How does it work?
- Step 1. The fund managers 1st come up with a common objective to start the fund.
- Step 2. The 2nd step is collecting money from the investors to invest in the fund
- Step 3. In this step, the money is either collected anytime or during a specific period depending on the type of fund, whether it is an open-ended fund or a closed-ended fund.
- Step 4. When the fund starts operating by law, the face value of its units has to be Rs 10/ per unit (the investment made into the scheme by each investor is translated into a number, and these numbers are known as units.) The true worth of the unit is called the NAV that is the net asset value of the unit.
- Step 5. Depending on the scheme, the fund earns either dividends or interest, which is either paid off to the investor or added to the value of the investment money.
- Step 6. The size of any mutual fund company is judged by its AUM that is the assets under management which is 1st accumulated by the investors when the scheme is launched. When the scheme performs well, the AUM goes up, whereas when the scheme is unable to perform, the AUM goes down. AUM is also going down when the scheme declares a dividend or when the investor buys back his units. Whereas if the scheme continues to receive money from the investor he the AUM will continue to rise; however, in a closed-ended fund, the scheme does not give an option to purchase the units once NFO is closed. You can still buy back your units from the stock exchange it is listed on.
Advantages of mutual funds for beginners have to offer
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Professional management
Mutual funds for beginners are designed by a professional fund manager who knows the market, its volatility and has expertise in handling your money in the volatile market.
The managers invest their money in the mutual funds based on their experience, research and your investment objective, making sure the investment process is followed as per the investment objective.
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Portfolio diversification
Investing in a single stock or a single bond exposes you to the risk of losing your money to the volatile market. The fund managers create funds in a way that your money is distributed amongst various stocks and bonds depending on your risk appetite.
This minimizes your risk and gives you the benefit of earning money from various stocks.
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Affordable investment
When it comes to investing in stocks, it is not possible for every individual to invest a number of thousands. Hence many people find investing in the market impossible due lack of capital.
Well, mutual funds for beginners gives an option of investing as less as Rs 500 into the scheme every month, which is quite possible by most of the people today. Investing Rs 500 monthly is much better than not investing at all.
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Easy withdrawal
Mutual funds for beginners gives an option of withdrawing the money from your fund anytime you wish to. If you have invested in an open-ended fund, you can directly withdraw the money from the mutual fund; however, if you have invested in a closed-ended fund, you can withdraw from either the stock exchange or when the window opens for withdrawal of that scheme.
A systematic approach (SIP, SWP, STP)
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SIP (Systematic Investment Plan):
Through this option, the fund gives you the liberty of investing into the fund monthly without doing any further paperwork; a fixed sum opted by you is directly debited by your bank account and credited into the fund.
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SWP (Systematic Withdrawal Plan):
The fund also gives you an option of withdrawing from your fund weekly, monthly, quarterly, half-yearly and even annually without extra paperwork and every time you need money, depending on your convenience.
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STP (Systematic Transfer Plan):
you can also transfer money from one fund to the other monthly by simply signing up a form to confirm when you would need the transfer, from which fund to which fund.
And the list of advantages never end, the reason is that mutual fund is a huge topic and it definitely does give you a lot of benefits and advantages you can maximize on.
Simply grab on to the right ones to make sure you make the most out of the opportunities available in the market and increase the worth of your money.
Now let’s know what you never knew about mutual funds for beginners.
1. No control over your money
If you know anything about the stock market or anything about different stocks where you can maximize your money, you would never want to invest in a mutual fund.
The reason being here is that you cannot control your money. The fund manager will invest in the stocks and the market as per his experience and as per the objective of the mutual funds; however, maybe you know better, and maybe you could have done better with the money you invested.
2. Huge investment cost
Every investor has to bear the cost of investment in the mutual funds stock. Cost of buying and selling in the market, taxes applied on the trading, marketing, distribution, managing, etc., of the fund, are borne by the investors.
These costs are applied in small percentages; however, you are pulled back on the returns you could have received on your money, to cover up on that percentage takes a long time and patience.
3. Immense choice can confuse you
There are more than 45 AMCs offering you more than 2000 mutual funds benefits. No one has so much time to go to so many fund houses and then go through their offer documents to choose a suitable fund that matches your objective precisely.
Oh yes, a few options are very good as you would defiantly want to look at a few options before you give your money to someone; however, a lot of choices can confuse you.
The AMCs have a number of mutual funds benefits to offer you, you want equity, debt, liquid, and they have it all; however, which one is right for you is the question.
4. Investing through an advisor could charge you extra
Since entry load has been stopped completely by SEBI, the companies cannot pay commission to their brokers separately; however, entry load was mandatory for all investors irrespective of them investing directly or through a broker.
SEBI came up with a rule of different NAVs for people investing directly without charging them the marketing and advisory expenses and separated for people investing through brokers.
The NAV differs by a few percentages where people coming in directly without a broker for investment benefit with a higher NAV and people coming in by a broker suffer a little loss for the broker commission is charged to their investment to pay to the agents. Hence investing directly is more beneficial than investing through a broker.
5. Top performed funds are also the most under-performed funds
Performance is never constant in the market; it always works in a cycle. For example, a fund that has been the one of the best 10% performing funds in the market for one year has also been the most under-performed fund the very next year.
The market is a cycle as it is very volatile. Not one segment, not one company is always simply performing well. Each industry each company has its good and bad times.
This is where and how the mutual funds also perform and don’t. Hence most of the time, investing in top-performing mutual funds for beginners don’t work to your benefit.
6. Index funds are managed extremely actively
Index funds are mutual funds for beginners that are similar to a particular index; they are passive funds that have set benchmarks and offer a return in line with the market.
A review of the last 20 years’ market performances has noticed a trend wherein the index funds have given a return of 10% to about 30% of all the mutual funds stock. Therefore investing in an index fund is always much beneficial than investing in the other mutual funds stock.
7. Investments in ETF’s is better than other mutual funds for beginners
ETF’s or Exchange Traded Funds are structured differently than other mutual funds for beginners. The difference is that the shares of the other funds can be bought at the end of the day NAV.
However, ETF’s can be bought and sold the entire day, that is, any time of the day through major exchanges only. And ETF’s also make lesser capital gain events for the investor of this fund.
8. Excessively diversified
Mutual Funds for beginners are a mixture of investments in different companies, industries, and security types like equities, bonds, debentures, etc., with the motive of diversifying or reducing the risk that comes with investing in a single company or industry or security.
However, the funds are a bit too diversified. This means each Rs 10 is broken into a number of paise and invested in different companies depending on the objective of the fund. Investing directly into the stock market gives you an idea as to where have you invested your money directly.
9. Taxes
Besides the taxes that you avail of on exiting your mutual funds for beginners within a short span, you also pay taxes on the trading that your fund manager does in buying and selling securities for you. These taxes are implied on your NAV.
10. All mutual funds for beginners do not give the tax rebate
No mutual fund except for an ELSS fund helps you in saving your taxes. The others, in fact, incur a tax cost that is deducted out of your NAV, pulling your NAV down by a particular percentage, which is one major disadvantage you wouldn’t want to get into. ELSS funds also have a lock-in period of 3 years which means you cannot withdraw your money for 3 years.
Takeaway
Mutual funds for beginners are very good options to invest in as a startup to invest in the stocks, and if you have a small amount to invest in, mutual funds stock is the best way to make money in the growing market.
Well, if you know even a little about researching the stock market, the advice will be to invest in it directly as there are a number of disadvantages involved with the management of mutual funds stock for investing directly into securities can fetch you much better returns.
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