MUTUAL FUND-DECODED-CS ROHIT KUMAR

What is Mutual Fund?

Mutual Fund is one of the best avenues for investors to increase their wealth. If you are new to this term, then let me help you to understand this term in a simple way.

The word mutual fund has two words; one is mutual (held in common) and the second word is fund(money). So, in simple language Mutual Fund is money collected by many investors and held in a common pool. The money so collected is further invested by the Fund Manager in various securities such as equity shares of different companies, debentures, Government Securities and so on.

WHY SHOULD YOU INVEST IN MUTUAL FUND?

You must have come across many people who invested DIRECTLY in shares of the listed companies and wiped out their whole money. The simple reason for such loss is that shares traded on stock market are volatile in nature because share price of a company depends on so many factors such as:

•  Company performance
•  International Market
•  Economic conditions & Policies, Political environment and so on.

To track these factors is very difficult for a person who does 9 AM to 6 PM job and has no financial literacy. So, My advice would be to stay away from direct investment in stock market.

So, if stock market is not a cup of tea for you, then what else is left for you to invest. Maybe you are thinking about some traditional investment opportunities such as FD, RD, PF etc. Though they are safe investment options but can not give you high return. So, you are left with only Mutual Fund if you want to earn a high return with safety. You may agree with me once you understand how mutual funds work.

How Mutual Funds Works?

Unlike directly investing in stock market, Mutual fund is an indirect method to invest in stock market. Mutual Fund is a very good tool to minimize risk through diversification. 

Fund manager of a mutual fund does not invest only in one share rather he invests your money in shares of various good companies which are operated in various sectors.

When your money is invested in such a way then there are lesser chances that your investment is completely eroded because share price of all companies will go down simultaneously is quite rare. 

For example, when INR depreciates in relation to Dollar, then you may find that the stock price of few companies goes down but stock price of IT companies (Infosys, Wipro, etc) goes up. Therefore, such diversification is inherent in the investment strategy of fund manager.

A fund manager has a team of professionals who are experts in making investment strategy to [1]assure you good return with the [2]safety of your principal amount.

Hope, now you have understood why Mutual Fund Sahi hai!

Types of Mutual Funds:

Mutual funds can be classified on a various basis, but we will discuss here on the basis of liquidity:

1. Liquid Funds: Such type of Mutual funds offers investors to redeem units of Mutual Funds any time because there is no lock-in period. So, if you have idle cash and want to earn money through money then you may invest in liquid Mutual Funds to park your excess cash which you may withdraw anytime.

2. Equity-linked Saving Scheme (ELSS): Such Mutual Funds offers you a better return (around 15% to 20% annually) than liquid funds besides tax advantage under section 80C of Income Tax Act, 1961. But, the only problem with ELSS is that your money is locked for 3 years; it means you can not withdraw you money before completing 3 years from the date of investment.

Few mutual funds (ELSS) which you can buy:

1. Axis Long Term Equity Fund [ELSS]
2. DPS Tax Saver Fund [ELSS]

How to decide which mutual is best:

It might be possible that two or more mutual fund schemes offer you the same return then it might be difficult for you to decide in which to invest. If this is the case then you must look at the Expense Ratio. The expense ratio is a percentage which fund house deduct while calculating Net Asset Value[NAV] per unit. This expense ratio is deducted by fund house because it has to incur various expenses to manage the whole funds. These expenses can be:

1. Salary to Fund Manager [which may be in crores]
2. Salary to the analysts, a research team.
3. Promotional expenses and commission paid to intermediary who helps fund house to sell its mutual fund unit
4. Other administrative expenses.

So, now you must have understood that you must go for that mutual fund which has lower expense ratio. Normally, expense ratio varies from .50% to 2.5%.

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[1] Not 100% guaranteed

[2] Not 100% guaranteed