What is Mutual Fund investments in 2023

What is Mutual Fund investments in 2023

If you want to invest money in the stock market, but are not an expert in it, then you can earn profits by investing in mutual funds. What is Mutual Fund? So today’s article is going to be very special for you. Because today in this article you will be given all the basic information related to mutual funds, after understanding which you will know well about mutual funds.

In mutual funds, the money of many people is invested together, not of any single person, and the benefits of this investment are also shared equally among all the people. How does all this happen? Let’s know the complete information.

What is Mutual Fund?

What is Mutual Fund? Before knowing this, we have to understand the different meanings of both mutual and fund words. Mutual means; ‘Reciprocal’ means mutual and fund means ‘money’ or ‘capital’. That is, the two are combined to form “mutual money” – the amount or capital that is collected by many people together.

What is Mutual Fund

Actually, in mutual funds, many people’s money is mixed or collectively invested in the stock market or investment schemes. The profits from this investment are calculated by NAV (Net Asset Value) and then divided equally among all investors after subtracting applicable expenses and levies.

The money collected under mutual funds is invested in a planned manner. How, where and how much to invest money is decided by a team of expert people. This team is led by a fund manager, on whose directions the team works. The team consists of market and stock market experts who study the past record and forward prospects of companies and their shares before investing, so that investors can lose less and get good returns.

Thus, the benefit of investing in mutual funds can be obtained by investing less money even in large-priced investment schemes.

What is Mutual Fund Unit?

The total amount deposited in a mutual fund is invested in shares, bonds, treasury bills or many other securities. After this, this total investment is divided into several parts and one part of it is known as one unit.

It should be noted here that the mutual fund unit does not represent ownership of any particular securities such as shares or bonds. It represents the collection of all the elements within the fund in exactly the same proportion from which it has been prepared on a large scale.

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What is Net Asset Value (NAV)?

In mutual funds, when the value of a single unit is fixed, it is called net asset value (NAV). On the basis of this NAV, the performance of a mutual fund scheme is assessed. NAV is announced from time to time by mutual fund companies.

You can understand this with this example. Suppose you want to invest in mutual funds and you have 20 rupees. You buy a unit of mutual funds at the time of NFO for these 20 rupees. So the net asset value (NAV) of this mutual fund during the NFO period is Rs 20.

Now let’s say, 9 more people like you invest in this mutual fund and buy one unit each. In this way, the mutual fund scheme collects Rs 200 by selling a total of 10 units.

Let’s say, after one year, the value of these 200 rupees invested becomes 300 rupees. So now the price of a unit here becomes 300/10 = 30 rupees. That is, the net asset value (NAV) of a unit became 30 rupees.

Now let’s say that 5 more people want to invest in this mutual fund scheme. But now the value (NAV) of one unit of this scheme has been 30 rupees. So if each of them wants to buy a unit, they will have to pay Rs 30 for one unit. The company sells the unit to these five people and collects 150 rupees more. Now the total money the company has 300 + 150 = 450 rupees. But here the number of units becomes 15.

Any mutual fund company can issue a new unit to increase the amount. Doing so will not affect the investment of old investors, because these units are given to new investors at a new price.

Some Other Terms Related to Mutual Funds

» NFO (New Fund Offer)

When a new mutual fund scheme is launched in the market, this time is called NFO or New Fund Offer. Every fund launched is given a name and the fund is promoted with this name. Along with this, mutual fund companies also issue NFO prospectus. This statement contains information about the purpose of the fund and the fund management team.

During NFO, the price of a mutual fund is kept at Rs 10. That is, you can buy a unit by paying 10 rupees in the beginning. During the NFO period, the company does not invest your money in any investment, that is, does not buy any shares. When the NFO period is over, your fund manager starts investing in pooled money.

After this, whatever increase or decrease in the amount of total investment, the price of your unit also keeps increasing and decreasing.

» Asset Management Company (AMC)

All the mutual fund running companies are called asset management companies or AMCs. In fact, AMCs are sebi-registered companies that create mutual fund schemes and collect money from people.

» Fund Manager

Each asset management company employs a fund manager, whose responsibility is to invest money in the fund scheme. A mutual fund company has multiple fund managers. Apart from this, the company also has a research team, which makes investment strategies.

» Mutual Fund Schemes

A mutual fund company or AMC runs several mutual funds schemes. The purpose of investment in each scheme is different. For example, under one scheme, the company invests only in the shares of big companies, while under another scheme, it invests in the shares of small companies. Under a third scheme, the company can invest money only in government bonds. In this way, companies operate many types of mutual funds schemes.

Categories of Mutual Funds

  1. Open-Ended Mutual Fund Scheme
  2. Close-Ended Mutual Fund Scheme

1. Open-Ended Mutual Fund Scheme

Under this fund scheme, investors can withdraw and invest money at any time of their choice. In this type of fund scheme, money keeps coming and going, so no fixed amount is deposited. In such a situation, the fund manager has to take an investment decision keeping in mind the circumstances.
Mutual funds are classified into two categories keeping in mind the flexibility of investing and withdrawing money:

2. Close-Ended Mutual Fund Scheme

In this fund scheme, you can invest money only at the time of NFO. NFO i.e. New Fund Offer – The time to launch a new scheme in the market. After this, you can withdraw money only on maturity. You can buy or sell units of closed-ended mutual fund schemes in a secondary market.

Such transactions have no relation to the mutual fund company, nor does it affect the amount deposited in the mutual fund scheme. Before the NFO of a mutual fund scheme, the asset management company (AMC) has to decide whether they are bringing an open-ended mutual fund scheme or a close-ended mutual fund scheme.

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Types of Mutual Funds –

Mutual funds are classified into several types based on the investment portfolio. The five parts into which mutual funds are classified by SEBI are as follows:

⁘ Equity Fund

The maximum money of this fund is invested in shares, which is about 65% of the total amount. The rest of the money is invested in bonds or other securities. Most of the money is invested in buying shares, so their returns are also available according to the stock market. There is a possibility of more profit in it, but the risk is also the highest. Long-term capital gains tax is not levied on earnings from such funds. In this, tax is calculated by adding short-term capital gains to earnings.

⁘ Debt Fund

Most of the money in this type of fund is invested in bonds and corporate fixed deposits. Debt mutual funds have a condition that at least 65% of this fund should be invested in bonds or bank deposits. Such as bank deposits, company bonds, government bonds, corporate fixed deposits, etc. The rest of the money is invested in shares.

It has less profit than equity funds. But banks can give better returns instead of fixed deposits. Since most of this money is invested in fixed-return bonds, the risk is comparatively low. If you redeem a debt fund after three years, you have to pay long-term capital gains tax, which will be 10 per cent without indexation and 20 per cent with indexation.

On the other hand, if you sell units of your debt fund before three years, you will have to pay short-term capital gains tax on the earnings earned from it. This tax will be added to your total income and then the tax according to your tax slab will be calculated.

⁘ Balanced Mutual Fund

In balanced mutual funds, your money is invested in both bonds and shares. Such a fund is expected to have good returns with safety. As we know, the returns in shares are high but it is risky. At the same time, returns are less in bonds, but it is safer than shares. Therefore, the combined effect of both is seen in balanced mutual funds.

That is, these funds give lower returns than equity funds that invest more money in shares, while those that invest more money in bonds are less secure than debt funds. If there is a good time in the market, then you will not be able to get high returns like equity funds here and if the time is going bad then you will not get bad returns. The team of these funds invests in stocks and bonds, understanding the market situation, with a balanced approach.

⁘ Tax Saving Mutual Funds (ELSS)

Tax saving mutual funds are also known as Equity Linked Savings Schemes (ELSS). Since the government gives exemption on the money invested in ELSS, these funds are more known as tax saving mutual funds. If you invest money in ELSS, then you can not withdraw this money for about 3 years, that is, your money will be locked for 3 years.

Most of the money in such funds is invested in stocks, so they are more likely to get good returns. But they are also risky like equity funds. Under Section 80C of the Income Tax Act, the tax liability of those investing in ELSS decreases. The amount of investment investors make in ELSS, the amount of money will be deducted from their taxable income.

Apart from ELSS, EPF contribution, tax saving FD, insurance, NSC, home loan principal etc. are also entitled to tax exemption under Section 80C. ElSS has the shortest lock-in period compared to other tax saving investments mentioned.That is, tax saving mutual funds are a better option for those who want to save more tax by investing money for a short time.

⁘ Index Fund

In this fund, money is invested in shares like other equity funds. The difference is that it does not invest in the shares chosen according to its own like equity funds. Rather, it mimics the structure of market indices, such as Nifty, Sensex CNX 500, etc.

These indices include shares of certain companies and each share has a fixed weight-age in that index. When an index fund follows an index, it invests in all the stocks included in it. Money in stocks is invested in proportion to the weight-age given in the index.

The index whose portfolio the index fund follows will give the same returns as that index. However, many times the index fund fails to give exact returns. Because it can take time to copy the index, which is called a tracking error in technical language.

⁘ Exchange Traded Fund (ETF)

These funds are index funds in a way, but they cannot be bought or sold directly like index funds. The price of ETFs also changes continuously during market hours like shares. You can buy them from a stockbroker. They can be purchased without any mutual fund distributor.

⁘ Hedge Fund

No rules are followed in hedge funds. No retail investor can invest money in them, but only select groups of high net worth individuals can invest. Fund managers of such funds invest in stocks with aggressive strategy. The manager of a hedge fund can invest money anywhere in the world.

He can invest money anywhere in shares, bonds, commodities as per his wish. The fund manager of a hedge fund is only concerned with profits. In this, investors have to invest money for a period of at least 1 year.

Advantages and Disadvantages of Mutual Funds

After understanding what mutual fund is, now let’s talk about its advantages and disadvantages, which are as follows:

Advantages of Mutual Funds

  • Any common investor can invest in mutual funds and there is less risk in it.
  • It has a team of experts who always keep an eye on the amount invested and try to give better returns to the investors.
  • In this, common people can start investing with very little amount and low risk.
  • Investing in mutual funds is extremely easy, you can invest money in it only after a KYC.
  • The payment mode for investment is very simple, where the entire process is digital and contactless.
  • There is complete transparency in mutual fund investments. That is, you can get complete information online about which stock the fund manager is investing your money in.

Disadvantages of Mutual Funds

  • There is no definite guarantee of returns in mutual funds. Because the profit of mutual funds directly depends on the fluctuations of the stock market. Therefore, mutual funds are always at risk like the stock market.
  • For good profits, you have to invest in mutual funds for a long time. Because there is very little chance of getting good profits from short time investment.
  • Some of the money we invest in mutual funds is given to the fund house as an expense ratio. Therefore, you may have to bear a lot of expenses on investing for a long time.
  • On withdrawing money before one year, a 1% exit load has been fixed on the NAV, to prevent investors from going out. Therefore, mutual funds are not right for those who withdraw money quickly.
  • You have to pay tax on the returns received in mutual fund schemes. Investments of less than 12 months are taxed at 15% and investments above 12 months are taxed at 10%.
  • We have no control over the money we invest in mutual funds. Rather that money is controlled by the fund manager. He invests our money in the stock market or other markets as per his wish.
  • Mutual funds are diversified, which can sometimes harm you instead of profit.
  • The lock-in period is fixed in the closed-ended scheme. That is, the money you invest will be deposited for a certain time and you cannot withdraw it. If you withdraw money before the lock-in period, you may have to face losses on your investment.

Best Mutual Fund Company

You can see the names of 10 best mutual fund companies in India in the list below.

  1. ICICI Prudential Mutual Fund
  2. HDFC Mutual Fund
  3. SBI Mutual Fund
  4. DSP Blackrock Mutual Fund
  5. Mutual Fund Box
  6. Aditya Birla Sun Life Mutual Fund
  7. Tata Mutual Fund
  8. L&T Mutual Fund
  9. Reliance Mutual Fund
  10. Principal Mutual Fund

Conclusion:

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