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Several investors get drawn to mutual fund investments like a moth to a flame due to the several benefits it offers to investors. Are you planning to invest in mutual funds? Before you begin your mutual fund investment journey, it is important to know about the basics. So, in this article we will cover a few things that you must keep in mind before investing in mutual funds. Let’s begin by understanding what a mutual fund is.
What is a mutual fund?
A mutual fund is an investment vehicle that pools the money of several investors with similar investment objectives and invests it in different securities such as money market instruments, fixed-income investments, equities, gold, cash and cash equivalents etc. This pooled investment is professionally managed by a mutual fund expert known as fund manager who has an immaculate experience of managing mutual fund investments on the behalf of investors. These fund managers usually have a small team of researchers and analysts who help them shortlist the right types of mutual funds for an investor. In return for this professional management service, the fund house or the AMC (asset management company) charge a small fee to investors known as expense ratio.
One must note that a mutual fund scheme is mandated to be registered under the Indian mutual funds regulator – SEBI (Securities and Exchange Board of India) that purviews and regulates all mutual fund schemes before it can collect funds from the public.
Types of mutual fund schemes
Depending on the maturity period of a mutual fund scheme, mutual funds are classified into open-ended mutual fund schemes and close-ended mutual fund schemes. Mutual funds can be further bifurcated as income scheme, growth scheme, or balance scheme. These schemes can be either open-ended schemes or close-ended schemes.
How much should an investor invest in mutual funds?
Basis their investment duration, financial objectives, risk appetite, age, financial position, and other factors, an investor must carefully assess their financial portfolio and use a mutual fund return calculator to assess the right investment amount to reach their goals.
How to invest in mutual funds?
An investor has the option to either invest in mutual funds online from anywhere in the world or by physically submitting the necessary forms in the registered mutual fund branch offices. They can either take the help of a third-party service providers such as agents and distributors or directly invest in mutual funds on their own.
Things to consider before investing in mutual funds
An investor must carefully assess their financial goals, risk profile, and investment horizon before choosing the right type of mutual fund for their investment portfolio. An investor must also look at other parameters such as expense ratio (that can largely affect the take-home returns of an investor – the higher the expense ratio of a mutual fund scheme, the lower the net returns) and the experience of the fund manager. An investor can also check the past performance of the fund against their peer funds and underlying benchmark indices to understand if they have been underperforming or outperforming the markets. Happy investing!