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How Mutual Funds Invest Your Money? Research Team | Posted On Friday, December 15,2017, 06:21 PM

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How Mutual Funds Invest Your Money?



Mutual funds really took off after demonetization. Equity mutual funds have been doing great in the past year. As you and other citizens rush to invest in mutual funds, have you ever wondered, how mutual fund managers invest your money?

You must be familiar with  systematic investment plans, popularly called SIPs, which allow you to invest small sums of money regularly, say once each day, month or fortnight in a mutual fund. You can invest as less as Rs 500 a month in mutual funds through an SIP.

The monthly equity SIP flows into the mutual fund industry, today stand at over Rs 5,600 Crores. It was just Rs 3,500 Crores a year ago. With all this money flowing into mutual funds, you got to ask yourself this question, What are mutual fund managers doing with all this money?  How are they investing so that you get profits?

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How Mutual Funds Invest Your Money?

Why is it so important to learn how mutual fund managers invest your money? Simple...How mutual fund managers invest your money today determines, how much you will get tomorrow.

1. How mutual fund managers invest your money?

After demonetization, mutual funds have given much higher returns compared to FD's and even small saving schemes like PPF, NSC, Postal schemes and so on. As you and other investors pumped money into mutual funds over the last year, aiming to get returns much above inflation, fund managers are in a dilemma. How to invest all this money?

Stock prices of most reputed Companies have really gone up over the last year. There are few investment opportunities left for mutual fund managers to chase. If the fund manager purchases stocks when prices are high, there is very little room for profit.

So how are mutual fund managers investing your money? Take a look at the portfolio of the 20 largest equity schemes in India. Mutual fund managers are adding (buying additional stocks) of the same Companies they currently hold. As the prices of these stocks rise further, fund managers keep adding them to the portfolio.

Mutual fund managers are putting the fresh money you invest, in stocks that are already part of their portfolio, even though prices of these stocks are rising. Fund managers are comfortable investing new money in existing stocks, which have already been thoroughly checked by their investment teams.

SEE ALSO: How to choose the best mutual funds?

2. Mutual funds have stopped accepting new investments

Is it possible that you want to invest your money in a mutual fund and the mutual fund refuses your money? You might not believe it, but it's true. There are some conditions under which, a mutual fund may refuse to accept your money. Let's say a reputed mutual fund invests most of your money in stocks of mid-cap and small-cap Companies.

If the mutual fund keeps adding new money from you and other investors, it could be risky as small-cap and mid-cap stocks are highly volatile. It could also be difficult to invest in these stocks, as they are not as liquid as large cap stocks.

So what do mutual funds do? Mutual funds have to protect future returns for their investors and also their reputation. So they refuse to accept new investments.

Take a look at Mirae Asset Emerging Bluechip fund, which tries to tap into the value of mid and small sized Companies. Mirae Asset Emerging Bluechip fund has stopped accepting lump sum investments and has even restricted SIP investments. You can invest in the SIP of Mirae Asset Emerging Bluechip fund, only on the 10th of each month with the investment capped at Rs 25,000.

SEE ALSO: How to link mutual funds with Aadhaar?

You have learned what mutual fund managers do with your money and the role they play in making you rich. How they manage the mutual fund to protect its integrity and returns. Mutual fund managers have a responsibility towards you and other investors and strive to protect and increase your hard earned money. Be Wise, Get Rich.

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