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Mutual Funds: What, Why and How

A mutual fund collects money from a variety of investors and then invests that money for them.

Anshika Bajpai |

Updated:February 13, 2019, 12:26 PM IST
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Mutual Funds: What, Why and How
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We all know that - mutual fund investments are subject to market risk and that we should read the offer document carefully before investing.

But what actually is a Mutual fund and why is everyone running to put their money in it? Here’s what you need to know about it before you start thinking of investing in them.

So what are Mutual Funds?

Simply put, a mutual fund collects money from a variety of investors and then invests that money for them. It is the best thing for people who do not know much about money and investments. If you have a figure in your mind as to how much you want to invest and how much you want out of it, you can easily choose a plan accordingly and start investing in it. The investors charge a small fee in return but that is worth it since it’s relatively safer and you don’t have to think much about it.

Kinds of Mutual Funds

SEBI has recognised 4 major kinds of mutual funds that are;

Equity Mutual Fund: These invest directly in stocks. They are high profit, high loss schemes since they depend directly on how the stock market performs. It’s better to buy Equity mutual fund for the long run like 10 years or more.

Debt Mutual Fund: These invest in debt securities. They are not as risky as equity mutual funds and they give decent returns. It’s better to buy these for the short term, probably for 5 years or less.

Hybrid Mutual Funds: These invest in a mix of both debt and equity mutual funds. An investor can decide what kind of a scheme he/she wants to invest in, based on his/her risk-taking capabilities.

Solution Oriented Mutual Funds: These mutual fund schemes are made especially for certain goals like retirement or higher studies. It offers a simple plan to people who are thinking of investing for a specific thing in the future. For this reason, they have a compulsory lock-in period of 5 years.

How to invest?

There are 2 ways you could do that. Either invest directly through a mutual fund company or seek the services of a mutual fund advisor.

If you are investing directly, then you can either go online and check out the website of the mutual fund or you can go to their nearest branch with all your documents and forms. Nowadays almost all the banks have a financial advisor who helps you figure out which plan to invest in. This will save you some money on commissions and you can instead invest that money and get better returns.

If you are investing through an agent, then you will save yourself a lot of time going through schemes and not having any expert advice on what and where to invest. This way you will have help in completing all the formalities, doing the research and monitoring your investments.

This leads us to the question; how much should you invest in a mutual fund?

While they say 20% of your income should go into your mutual fund investments, its okay to start with even lower too. How much you want to invest depends totally on how much you want as returns, your income, the purpose of investing etc. You can start with as low as five hundred rupees and go up to lakhs depending on your financial statements.

Finally, why do we need mutual funds?

Since mutual funds invest money in a variety of different stocks, bonds and securities it is not as risky as other forms of investment. So you know your hard earned money is safe and growing. It provides economies of scale by buying multiple mutual fund shares and since they can be bought and sold with ease, it makes them a highly liquid investment that is always desirable to have.

To know more, click here.

This content has been created in association with YONO SBI.

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