A mutual fund is one among the ‘investment options’ availed by corporates, companies, and individuals as well. In the process, an asset management company (AMC) will pool money from various sources and invest the fund in debt, equity, money market, stocks or securities abiding to share the resulting profit on equal terms among the money sources.
In India, the mutual funds are overlooked and regulated by Association of the Mutual fund in India (AMFI).
Before you could make a conclusion about mutual fund investments, here is a brief elucidation regarding investment options and costs incurred.
Types of investment objectives
There are basically 4 objectives available for an investor to channel their funds, these include:
- Debt: This is one among the lower risk funds to which making an investment is generally regarded safe. This category is also called by the name income funds as they provide a fixed returns.
- Money market: Another lower risk fund, which is suitable for short term profits and easy liquidity, here the investment is made on Treasury bills, Commercial papers, Repurchase agreement etc.
- Hybrid or balanced: Here a safe choice is made by splitting the investment into both fixed income securities and stocks.
- Equity: This is a high-risk fund with a better return made by investing exclusively in stocks of domestic companies.
Net asset value (NAV) which is the net or total expense for each unit of the fund, which is reckoned by the AMC depending on each business day performance.
An annual fee might be charged by the AMC which includes all their service costs. AMC might also charge loads or sales charges to meet the distribution costs.
Process to invest in mutual funds
1. Understand portfolios. Before you could make an investment understand the type of portfolio to you would require, this process is known as asset allocation.
Making an ideal asset allocation is really important for selecting a slot which would echo your risk profile, thereby covering asset classes for future requirements.
A healthy allocation should have a right balance between both high-risk and low-risk instruments. Surprisingly, age is an important factor here, say you are 35 years old so you can have 35% low-risk instruments which will cushion if in case any downturns occur in the rest invested.
When it comes to mutual funds, the golden rule is that younger you are, more shall be your high-risk investments since your profile has the flexibility to take high risks without many potential losses.
2. Shortlist funds. Once you are done with step one, shortlisting the right fund type comes the next priority. You may take the benefit of past performance and investment philosophies to choose a right fund types, you shall avail the shareholder reports and prospectuses from your AMC to aid this decision.
While the prospectus will clear the legal validity of the fund, shareholder report will give you facts and figures based on past history.
3. Fix the ultimate Goal. This might be one important step, because without a proper fiscal objective the returns may not appeal to have a satisfactory result.
So be sure why you need mutual funds, whether it’s for your retirement, planning your marriage or substituting your income.
It has to be like, more returns you expect higher has to be your risk profile at the same time considering governing factors.
4. Be clear with time limits. Some funds are close-ended, meaning they cannot be liquidated until reach maturity.
In a nutshell, shorter span means lower risk but low returns, whereas longer span investments have high risk but big returns.
So have a clear idea on how you will plan your investment.
5. Assess your risk profile. Once you are set with the time frame and other criterions, now it’s time for assessing your risk profile.
This might come up with certain questions to be self-echoed. Are your ready to trek both up and down hill? Is the market dynamics fine for you?
Are you looking for small returns but lower risks? Is the overall return your final objective? Though this depends on personal outlook, this might help you get a better understanding.
6. Diversification of funds. Any investments have its own potential risks involved, but it's all part of the game unless you have the gut to take challenges.
Diversification is one fiscal strategy that will help you minimize the losses that might occur. The best to make diversification is to reach out to sectors that are not fully correlated like gold, infrastructure, mixed market, equity etc.
Say, a minimum of 20 different assets might help you get a good grip.
7. Find a good AMC. In fact, this point has to be mentioned first, but it was well understood that maintaining a good portfolio needs a good AMC.
There are several factors that you could look for in an AMC, a few are to check their past history, see their market performance, reach out for personal verdicts, study the growth prospects of the company, after all the market leaders often tend to stand out of the crowd, so it’s all depended on the way you perceive and fix priorities.
All your worries regarding account handling, making a profile, channeling funds etc. shall be left for the worry of company professionals, all you have to do is be ready with money and brain.
8. Follow-up. Now you are almost set and the last thing you need to do is keep a good watch and keep track of market and your portfolio performance.
Follow-up shall be done by several means, online through NAV’s, facts sheets, dedicated websites etc.
Newsletters are another major link that’ll keep you updated, this is often from your AMC by fund manager charting all latest updates.
Newspapers might come handy if you are lazy with others. Mutual Funds is the game of making right choices, risks and returns are simply of it to keep the player motivated.
So before you get ready to wet your hands see if you are really conceived by all facts and well elucidated.