Investment in mutual funds is the most talked about topic in finance in recent times. There are varied financial vehicles where you can park your money and earn a handsome return after several years. Mutual fund is one of them that allows you to invest and redeem the savings after a specific period. A lot of people in India hesitate to invest in a mutual fund purely for the reason it is subject to market risks. Some are eager to invest but still do not know how to go about it.
If you look forward to investing in mutual funds, it is important to be well informed about how it works and what works best for you.
What is a mutual fund?
A mutual fund is one of the investment options whereby it pools the money from various investors and invest in stocks, bonds and other types of securities. It gives access to small and individual investors to invest in professionally managed portfolios. The losses and profits are shared by each investor.
Common terms in Mutual Funds
As a beginner it is essential to know the complete meaning of some of the terms related to mutual funds.
NAV – Net Asset Value: It is the value of each unit of a mutual fund scheme on any given business day.
Rupee Cost Averaging: Investing at a fixed sum at regular intervals irrespective of the unit price of the mutual fund. By doing so the risks of the mutual fund units go down.
Exit load: It is charged when the investor redeems the mutual fund
Open end fund: it is the scheme that is open to repurchases on a continuous basis
Total expense ratio: It is the annual charge levied by the investment management company
AUM – Asset Under Management: Updated cumulative market value of investments managed by a mutual fund or any investment firm
How to invest in a mutual fund?
As a beginner to mutual funds, you may be curious to know about the top performing mutual investment plans and gain maximum out of it in a short time by investing in it. This is partly a wrong approach for a starter.
As a novice to mutual funds, you must explore the options to invest in low risk mutual funds. It is important to gather the past track record of the mutual fund plan and. Instead of investing a huge amount of money in risk loaded equity mutual funds, you can opt for Systematic Investment Plan (SIP) which is ideal for beginners. SIP allows you to invest a small amount of money every month which will be automatically debited from your bank account. The risks are spread, and it is one of the best ways to begin your mutual fund investment.
Just as you have SIP for investment, you can also use Systematic Withdrawal Plan (SWP) which allows you to withdraw a small amount of money regularly.
You can also invest in a mutual fund that gives you tax benefits. You can invest in Equity Linked Saving Schemes (ELSS) that help you save tax for up to 1.5 Lakhs under section 80C. Another advantage of this scheme is that the gains from the mutual fund is also tax-free. Tax saving mutual fund schemes have a lock period of 3 years.
When it comes to returns from the mutual funds, it also depends on your holding period. If you take a mutual fund at earlier stage of your career, you will get huge returns after investing for 5 to 10 years.