A mutual fund pools your money along with that of several other investors and invests this money, depending on the type of mutual fund you choose. It invests in different stocks if you choose equity or equity diversified mutual funds, in bonds or fixed income securities, if you choose debt mutual funds and a mix of equity and debt if you choose a balanced mutual fund.
The Company which manages the mutual fund is called an AMC or an asset management Company. An AMC may manage several mutual fund schemes.
The money you and several investors invest in the mutual fund, is managed by a professional called a fund manager, appointed by the AMC. Fees are paid to the fund manager for managing your money, which is deducted from the money, you invest in the mutual fund.
The activities of the AMC are regulated by SEBI (The Securities and Exchange Board of India). You have to pay money when you enter and exit a mutual fund scheme, called the entry load and exit load.
Mutual funds invest in stocks of different Companies across sectors. This reduces risk through diversification.
Invest small amounts systematically in mutual funds, through SIP. You are always invested in the stock market and profit in bull markets.
You have a professional fund manager managing your investment. You don't have the headache of buying and selling stocks.
You get tax deductions on your salary, if you invest in an ELSS. You also get the benefits of compounding.
Open ended schemes: They don't have a fixed maturity date. Investors can buy and sell units of mutual fund, at any time within market trading hours.
Close ended schemes: These schemes are open for investment only for a short period of time. You have to invest within this time frame. The close ended schemes are listed on a stock exchange. You can buy and sell units on the stock exchange through a broker just like stocks.
You have the total market value of all the assets of the mutual fund portfolio such as Cash, Securities, Shares, Bonds, Liquid Assets, Dividends to be received and interest accrued. You have the liabilities, which is money owed to its creditors or investors redeeming their money. There will be certain expenses accrued over time yet to be paid.
Net Asset Value is basically the difference between these assets and liabilities divided by the outstanding units. The outstanding units are those which are taken up by the investor.
You can directly invest in the asset management Company. You do not invest through agents and Distributors. A mutual fund scheme has to affix the word "DIRECT" in the scheme name.
In case of SIP, on a specified date a fixed amount as specified by you, is deducted from your bank amount. The amount debited is then invested in a particular mutual fund scheme of your choice, at fixed time periods such as the first day of each month. Many AMC and fund houses provide the online option for your SIP investments.
Equity Diversified mutual fund: The mutual fund looks to invest in a wide variety of companies. These may be small to medium sized companies or even large companies. These companies may be spread across sectors and industries. These may be into oil and gas, pharmaceuticals or infrastructure. Investment across sectors and Companies reduces risk in investing.
Sectoral Mutual Funds: A Sectoral fund is a mutual fund which basically invests in stocks of a particular sector. It remains focused on the stocks of a particular business. These may be the Technology, Financial services, Telecommunications, Metals and Mining, Healthcare and Pharma, Real Estate and Infrastructure, Power, Oil and Gas, Shipping, Airlines Industry, Banking, FMCG and so on.
An index fund is basically an equity fund, that mirrors or replicates a particular stock market index such as the CNX Nifty also called Nifty 50 or the S&P BSE Sensex. An index fund which tracks the S&P BSE Sensex will invest only in the thirty stocks which this index comprises of. The proportions of investment in each stock will exactly match with the weight of the stock in the index. All the fund manager has to do is to follow and replicate the index he tracks and invest in all the constituent shares in the same proportion or ratio as the index.
As the name suggests, ELSS invests the whole corpus in equities. Proportions as high as 80-90% in equities are found in an Equity Linked Savings Schemes. It is a special kind of mutual fund that qualifies for tax benefits.
Lock in: ELSS has a 3 year lock in. You cannot touch your money in the ELSS for 3 years.
"EEE" means exempt exempt exempt. The ELSS enjoys a deduction under Section 80 C of the income tax act, up to INR 1.5 Lakhs a year. You can invest a maximum amount of INR 1.5 Lakhs a year in an ELSS and avail a deduction under Section 80 C of the income tax act on the full amount invested.
The money accumulates with time (if the value of the ELSS increases) and no tax is charged on this amount. The money you withdraw on maturity after 3 years is tax free.
As per SEBI rules the level of risk in a mutual fund is denoted through colors.
Blue : Your principal is at low risk.
Yellow : Your principal is at medium risk.
Brown : Your principal is at high risk.
Equity Mutual Fund that invests principally in stocks is called an Equity Mutual Fund. They are also called as Stock Mutual Funds. By purchasing equity (stock) an investor becomes an owner in a corporation with the right to share in any future profits by the company.
The objective of Equity Mutual Fund is growth through capital gains (profit that results from selling a capital asset, such as stock, where the amount realized exceeds the purchase price) and/or dividends (distribution of profits). Equity Mutual Funds performance is linked to the performance of the stock market.
The investor as a share holder of the company also needs to take the risks involved with it. These kinds of mutual funds are suitable for the kind of investors who are willing to take the risks involved and who are aware of the market conditions. Basically Equity Mutual Funds are more suitable for seasoned investors. For an investor investing in Equity Mutual Funds, timing the entry is crucial also equally important is the exiting time. Also picking up the right type of Equity Mutual Fund is very important too.
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Growth Funds : In this the investment is mainly done in equity stocks of fast growing companies. High expected growth and risk go hand in hand
Large Cap Funds : Large-cap schemes usually invest 80 per cent or more funds in large companies. This gives stability as stocks of large companies are usually less volatile than that of mid- and small-cap companies. A diversified portfolio of top 50-100 companies makes a safer for first-time investors.
Mid Cap Funds : As the name suggests they are funds that invest in mid-cap companies. These funds share similarities with aggressive growth funds
Value Funds : Investment of these funds is mainly in equity stocks whose current valuation does not reflect some of the underlying proposition
Equity Income Funds : Equity Income funds are the funds with the objective to provide a more portion of total return through income and primarily invest in stocks that yield above the average. The yield is referred to as dividend yield
Index Funds : Index funds are portfolio of securities which have been specifically designed to represent the characteristics and attributes of a chosen target index. A fully replicated index fund is one which has all the stocks in the same proportion.
Sector Funds : These are the funds wherein the investment is done in specific sector such as FMCG, petroleum, telecom, IT, Pharma, etc. They have limited diversification, with relatively narrow range. The risk is more in this fund. We recommend sector funds to only those investors who have some knowledge or background about the respective sector or keep a disciplined track of the sector in question.
Tax Saving Mutual Funds : Also known as equity-linked saving schemes (ELSS) , these are the favourites of most retail investors. The reason is that the investment is eligible for tax deduction under Section 80C of the Income Tax Act. These are diversified equity funds with a three-year lock-in and are the first choice of many first-time mutual fund investors.
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