Beginners Guide to Mutual Funds

Mutual funds are a good way for investors to start investing. They offer professional management, a mix of different investments, and fund options to meet personal goals. This guide will now include 10 more important points to give a better understanding of mutual funds.

1. What are Mutual Funds?

A mutual fund gathers money from several investors and invests it into the stocks, bonds, and other assets. It avails small investors an opportunity to utilise professional fund management, thereby diversifying their investments.

Main Ideas:

Unit-Based Investment: Investors purchase units in the fund. Each unit represents a proportion of what the fund owns.

Mutual funds in India are supervised by the Securities and Exchange Board of India (SEBI) to safeguard investors.

Types of Funds: There are stocks, loans, mixed, and sector-specific funds created for various investor needs.

2. Building a Portfolio of Mutual Funds

A portfolio is a mix of mutual funds that are designed to meet your financial objectives while balancing the risks.

Key Points:

Risk-Adjusted Returns: Look for the funds that offer you the best return relative to the level of risk you're willing to bear.

Asset Allocation: Spread your investments among stocks, bonds, and cash to have a balanced portfolio.

Diversification of Sectors: Avoid over-concentration in one sector or asset class to minimise losses during market downturns.

3. Investment in Mutual Funds

There are many ways of investing; it has become so much more accessible with digital platforms like the Shoonya app.

Main Ideas

Direct plans have lower costs compared to variable plans since they never involve payment to distributors.

Investment Horizon: Choose funds based on your investment duration – short-term, medium-term, or long-term.

Reinvestment Option: Use dividend reinvestment plans to boost your returns over time.

4. Key things to keep in mind

Knowing the details of mutual funds helps you in making the proper choices.

Main Ideas:

Systematic Withdrawal Plan (SWP): Helps in regular withdrawal of a stated amount from your mutual fund investment thereby offering a steady cash flow.

Index funds and ETFs track the market indexes such as Nifty or Sensex. The cost is low because the management is passive.

Exit Strategy: Plan your exit based on market performance, your financial goals, or fund performance.

5. Learning the Jargon

Knowing the terms used in mutual funds is quite important for intelligent decisions.

Other Rules:

AUM (Assets Under Management): It is the total value of investments that the fund manages. The higher AUM usually means the fund is popular.

Benchmark: A standard (e.g., Nifty 50) to measure the fund's performance.

Standard Deviation: Indicates the fund's volatility; a higher standard deviation suggests higher risk.

List of All AMC Mutual Funds in India

Here is the updated list of the best companies in India and AMCs:

• HDFC Asset Management
• ICICI Prudential Mutual Fund
• SBI Mutual Fund
• Aditya Birla Sun Life Mutual Fund
• Axis Mutual Fund
• Franklin Templeton Mutual Fund
• UTI Mutual Fund
• Kotak Mahindra Mutual Fund
• DSP Mutual Fund
• Mirae Asset Mutual Fund

Frequently Asked Questions (FAQs)

Q1: Can mutual funds guarantee returns?

Since mutual funds are susceptible to other market risks, they do not promise any returns.

Q2: What is an ELSS fund?

It is an equity-linked saving scheme (ELSS), which happens to be one type of tax-saving mutual fund with a three-year lock-in period.

Q3: How do dividends from mutual funds work?

Earnings can be distributed to unit holders as dividends. Dividends are taxed in accordance with the applicable laws.

Q4: What would NAV do with my money?

NAV is that price for one unit of a fund. For example, when you invest your money, it becomes unitised at the NAV.

Q5: Are SIPs preferable to lump sum investments?

SIPs are preferred for their disciplined approach and ability to average out market fluctuations, whereas lump-sum is ideal for investing large amounts during market lows.

Tax benefits: The tax deductions under ELSS funds go up to ₹1.5 lakh under Section 80C of the Income Tax Act.

Role of Fund Managers: The knowledge and experience of fund managers have significant influences on the performance of the fund.

Liquid funds invest in safe options that can be easily liquidated into cash and thus are perfect for short-term goals.

Alpha and Beta: Alpha measures the excess return relative to the benchmark whereas Beta quantifies the sensitivity of a fund to market movement.

New Fund Offers (NFOs): These are new mutual funds. Check their goals and the reputation of the fund company before investing.

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