A mutual fund is typically fashioned by an investment firm. The whole thing is publicized and the share holders are then encouraged to put their money in this mutual fund. And most investment funds come with a theme – this is a kind of standard practice. The cash invested in the business is then utilized by the investment firm for buying an assortment of financial investments. Such purchasing is usually carried out in a way that makes it relevant to the theme of the mutual fund.
The assets in a mutual fund's portfolio are managed by a professional Fund Manager(s) who decides which securities to buy and sell based on the fund's investment objective, mentioned in the fund's prospectus. The job of the manager is to keep an eye on how the fund is growing. The mutual fund manager conducts various types of research on the area of investment with help from other financial analysts. The info gathered via such research is used in future decision-making pertaining to the buying or selling of bonds or stocks so as to get the best returns on the investment.
Mutual Funds are right way to invest into because it provides affordability, liquidity, tax benefits, and professional management and most importantly it helps in maximizing returns by effectively utilizing hard earned money. It also allows investor to systematically invest in equities and debt markets through Systematic Investment Plan. Through this mode investor can take exposure with as little as Rs. Five hundred and by investing regularly for a longer period can benefit from cost averaging and can built a large corpus to meet future commitments.
Why prefer mutual fund route over stock market?
Mutual fund is required to be registered with Securities and Exchange Board of India (SEBI), which regulates securities markets, before it can collect funds from the public. It acts like a company that pools money from investors and invests the same in stocks, bonds, short-term money-market instruments, other securities or assets and some combination of these investments. It offers an opportunity to invest in a diversified, professionally managed basket of securities. These securities are often referred to as holdings and all of the fund's holdings make up the portfolio. When one invest in a mutual fund, the investor is actually buying shares in the fund, which means investors own a percentage of the fund's entire portfolio in ratio of its holding.
If any new investor is looking to invest for the future in equities will usually face two options - mutual funds or individual stocks. However understanding the differences between them is essential as both carry inherent advantages and risks. Any individual investing in common stock of a company has to bear the responsibility of managing his portfolio on his own and also bear the price risk. In this active form of investment an individual must have sound knowledge, experience and adequate time, lack of which may increase his risk exposure. However Mutual Funds help to reduce risk through diversification and professional management. The experience and expertise of Fund managers in selecting securities and timing their purchases and sales help them to build a diversified portfolio that minimizes risk and maximizes returns.
Parameters for selecting right mutual fund scheme
Lastly, after understanding the basics of mutual fund and its various schemes, an individual as per his investment objective needs to know the various criteria to choose the fund, which can be:
- Performance analysis of the scheme for a considerable long period taking into account historical returns and portfolio.
- Analysis of the Fund House and the experience of the Fund Manger.
- Analysis of the fund corpus and how it has changed across the time period.
- Comparison of charges deducted by Asset Management Companies across the category where an investor wishes to make investment.
- The price at which one can exit (i.e. exit load) the scheme and its impact on overall return.
- Comparison of scheme with its benchmark and how has the scheme performed especially in a volatile environment.
- Last but not the least an investor can refer to certain investment ratios such as Sharpe, Sortino, Treynor, Alpha etc. to judge the risk-return analysis of the scheme.
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