In this article, you will get to know about:
- What is mutual funds?
- How to invest in it?
Every month when your salary is credited then you keep some part of that salary as savings. You keep some money for your later use, maybe for emergency or if you want to buy a house, or a car and you save for that. So what are the ways to save. One simple way is that you keep your salary as it is in the bank and it gets collected. It’s a very bad way, because such a money loses their value Inflation is increasing in our country and due to that the price of the commodities are increasing to. So, the value of your money keeps decreasing every year by 4-5% according to the inflation rate.
People invest the money so that they don’t lose their value kept just lying. There are different places to invest. Our country has mainly 4 places for investment.
- Savings account
- FD or Fixed Deposit
- Gold or jewellery
- Real estate.
People buy properties, or land or house. Some people who wants to take more risk also invests in stock market which is another way to invest your money. Every Investment has 3 things
Return means how much percent of profit are you earning through the investment, this is normally seen in percentage. If our inflation rate is 4% then you should see that your profit return is more than atleast 4 % otherwise there is no point of investment if you have put your money and the value didn’t increase, because the inflation rate is also increasing.
Risk means how risky it is to invest, what is the chance of losing all your money in that investment. What is the chance of going in loss after investing there.
Time means for how long are you investing.
So, the basic risk here is that if the time is more, risk is more, then the returns will also be more. If you want more return percentage on your investment then you will have to take more risk and should invest for a longer period.
Saving accounts has the minimum risk and there is no restriction too. You can save or take the money out at any time. But the return we get here is also very less, only 4% whereas our inflation rate in the last few years have been 4-5%.
Fixed deposit is also a less risky option but it has a time limit before that we can’t take the money out. Hence the return is also a bit more, somewhat 7-8%.
Gold and jewellery these days have a significant risk, their prices fluctuates a lot.If you are going to see this history then you will know that until 2012 the prices were consistently increasing, if you would have invested prior to 2012 then you would have got a good return here. But after 2012 there have been a lot of ups and down but they have maintained a level, hence there’s not a much profit.
Investment in the properties and real investment has low to moderate risk. I would say you can see the India’s housing prices in the last few years. It has come up and down a lot. In the quarter or March 2011 it has touched the return rates of 30%and in March 2018 latest quarter then it gives just 5% return rates. One of the disadvantage in investing in housing is that it needs a lot of capital, you need to have lacs and crores of rupees to invest. So this is a disadvantage.
You might have heard about stock market friends, you can get a lot of returns here but also loss. The risk of investing in stock market depends on the stock where you are investing. You need to have a good knowledge of the performances of the stock and how does the stock market works basically. You shouldn’t be investing here if you don’t have this knowledge.
So these are few main types of investments that I have told you but there are some other types too.
- Government bonds
- Corporate bonds
- We have crypto currency too these days
- People also invests in bitcoins
A general well known advice is that friends you should never invest your money only at one place. You should invest at different places so that if there’s any crash then you will not have to bear the over all loss. It’s a very less chance of everything crashing altogether like, gold, properties and even stock market. as this happens were rarely Chances are that if one thing crashes then you can get profit from the other. This is called as diversification, you have to invest at different places.
Mutual funds is a special kind of investment through which you can invest on different types together. You can do a diversified investment by investing at one place. Asset Management Company starts mutual funds. Basically you give your money to Asset Management Company and many people like you do so. that company invest all the money collectively at different places. They have appointed experts and with their suggestion they invest the money. They invest money at different places and the return rate they get collectively from these different places out of that some small percent of 1-2% is kept as a profit by the Asset company and the rest you get back as per that return rate. HDFC, HSBC, ICICI, Aditya Birla, Reliance, TATA, these are the few examples of companies and banks who have started their own assest managemnet company. All the companies starts different kinds of mutual funds in large numbers. For example ICICI has started more than 1200 mutual funds. So how risky is your mutual funds and what is the return depends on the mutual funds that you are investing in. Mutual funds can give the return rate of 4% and also of more than 30% too. It can be of zero risk and also of high risk to. Because all this depends on where the asset management company is investing your money. If that company is investing on stocks then it will be more risky and you will get more returns and if it’s investing in the government bonds then it will be less risky.
Different types of Mutual funds depends on the basis of the investment done by AMC people. We can divide this in the 3 categories:
- Equity mutual funds,
- Debt Mutual Funds
- Hybrid Mutual funds
In Equity Mutual Funds, your money will be invested in the stock market. So naturally in this type of Mutual funds generally the risk is more and also the return. In the stock market on which kind of company are you investing, if it’s a big company then it’s called as Large Cap Equity Funds, if it’s a small company then it’s called as Small cap and in the same way Mid Cap equity Funds. Big company doesn’t have much risk as compared to the smaller ones but big companies won’t have growth rate as high as it can be for the smaller companies. So risk and return b0th are less in the big companies. ICICI prudential blue chip fund is an example of a large cap equity fund. As I’ve told in the beginning, the more time you invest in, the more return you can expect.
Next type is diversified equity funds, here the investment is done in the large, medium and small cap or it’s done in different companies.
Next type is Equity Linked Saving scheme that is ELSS, this is a special type of Equity fund where you can save your tax. You can save the tax on it’s profit. The fund manager purposely invest on such places where there’s high return and also has high risk. IDFC Tax advantage is an example of an ELSS funds with the expected returns of 11.3% within a year.
Next type is Sector Mutual Funds, here specifically such companies are invested which belongs to a big sector like Agriculture sector. All the companies which are under the agriculture sector, they are invested on. A logistic or transport sector, also there. One example for this is UTI transportation and logistics funds. So the investment is done in that sector. These funds are more risky, since all the investment is done in one sector so if the sector is going down everything depends on that.
The last type of equity fund that I would want to tell you is Index fund. Index Funds are passively managed funds that is no agent of AMC is looking at where to invest the money here. These are passively managed that is according to the market’s rate ups and downs they too go up and down. Looking at the price of Sensex and Nifty it varies.
Now let’s look at the second category of the mutual funds friends, that is Debt Mutual Funds.
these are those mutual funds which are invested on the debt instruments. Debts instruments are bonds, debenture, certificates of deposits etc.
I will tell you what are bonds. Sometime if the Government needs money and it’s not getting that through the budget then the government borrows money from the people and take loans from the people. It is called as bonds. You can invest here, give to the government and the government will return you the money with a fixed interest.
Now debt mutual funds are of various kinds, let’s first talk about liquid funds. Liquid funds are those mutual funds which can be easily and quickly converted in to cash. Liquid means that actually, It’s not the liquid to drink. In economics liquid is something which can be easily converted into cash. So this thing can be converted into cash within a day or two. But it has a very low risk, such low that you can basically consider this as an alternative to savings account. Asset liquid fund is one such example where you will get the return of 7.1% in a year
Next type is Gilt Funds, these are those funds where Investments are done on the Government issued bonds. So technically it has zero risk because it’s never possible for the Government to not return your money. Mostly the interest rate can fluctuate.
Next type is Fixed Maturity plans and this can be considered as an alternative to Fixed deposits, because it has very low risk just like FD and it is done for a fixed time. For a specific time investment is done here and you can’t take the money before that
So these are the few main types of Debt funds there are more like Junk Bond scheme and the third category of mutual funds is Hybrid Mutual Funds friends, basically its a mixture of a debt and equity mutual funds. Some people wants to invest in the stock market but don’t want to invest all the money there and also invest some amount in the Debt instruments. So hybrid mutual funds are for them. If most of the money is invested in a Debt fund then it will be called as the Balanced savings Funds Approximately the ratio is 70:30 that means 70% of your money is at the low risk debt funds and 30% is in the equity funds and if it’s the other way, 70% is in the equity funds at the higher risk, then it is called as a balanced advantage fund.
The biggest advantage of mutual funds in comparison to other investment is that it is already diversified. Your risk gets very low due to diversification. Because you are not investing at one place so if one thing crashes so it won’t affect your money. So in comparison to the stock market, gold, real estate, mutual funds are less risky however the exact risk depends on the mutual fund that you are investing on. One more good advantage is that it is affordable, you don’t have to invest a big amount altogther, you can use SIP and invest a small amount every month. All the investment of the mutual funds, friends is done by a professional expert or a fund manager who decide where to invest and where to not. You don’t need to so it’s again a big advantage that an expert is working for you.
But friends this mutual funds has a disadvantage too. You are giving it to an unknown person, you don’t know how its going to perform. However he is an expert but you can’t trust 100% that an expert will be right all the time. But the biggest disadvantage that used to be for the mutual funds earlier is that the agents used to take a lot of commissions for investing in the mutual funds. They say that give us the money we will invest for you in the mutual funds and deduct a lot of commissions for themselves. Now this disadvantage is not possible friends due to the smart phone apps who can do this for you.