Investing in Mutual Funds

MUTUAL FUND:
Mutual Fund is an instrument of investing money. One can define it as a trust that pools in savings and funds from large number of investors who have a common financial goal.

The best alternative for investment is to go for a mutual fund. The most important reason for investing in a mutual fund is that your risk is spread over a number of stocks and one can be part of a large and well-diversified portfolio with very little investment. On investing, mutual funds issue units to the investors, which represent equitable rights in the assets of the mutual fund. These funds are managed and invested by professionals. They regularly monitor market trends and economic trends for taking investment decisions. These funds declare their portfolios every month. There is also high liquidity especially in open-ended funds that can be purchased and sold in the market at prices related to the Net Asset Values (NAVs) of the funds. This is extremely beneficial especially during rising or falling Markets. Moreover, one can invest in it online just like share markets and with features like dematerialized account statements, easy subscription and redemption processes, they are sure a convenient way of investing.

In simple terms, Mutual Funds can be divided into open- and close-ended schemes.

OPEN-ENDED SCHEMES:
These schemes are characterized by the fact they are available for subscription throughout the year. You can buy or sell the units of these schemes at prices based on the NAV. In the time of recession, one can buy units at below their par value and reap profits in the medium or long term.

CLOSE ENDED SCHEMES:
Funds in these schemes are locked in for a period of time. The maturity period of schemes varies from three to fifteen years.
Exit routes:

1. Units of such schemes can be purchased during the initial public offering (IPO) and henceforth be traded in the exchanges where they are listed.
2. By way of periodic repurchases of units based on the existing NAVs.

They are further sub-divided as under.

Income or Debt Funds:
These schemes are targeted as risk-averse people. These funds invest mostly in the fixed income securities like government bonds and securities and corporate debentures. Returns are low but steady.

Growth or Equity Funds:
These schemes are for the risk-takers. These funds invest mostly in equities of companies. In the long run they give good and high returns than any other option.

Balanced Funds:
This is a type of hybrid fund. These schemes are meant for the risk-neutral investors. Balanced funds invest in a combination of both stocks and bonds, and thereby neutralizing risk to a great extent.

Money Market Funds:
These funds invest mostly in short term instruments like treasury bills, government bonds, commercial paper and inter-bank call money. They are the best vehicles to invest in for a short period. The returns are based on the prevailing interest rates in the market.

Industry Specific Funds:
These funds invest only in one industry, e.g. cement industry or fast moving consumer goods (FMCG). The returns are based on the performance of the industry.

Sector Funds:
Sector funds invest in specific sectors or group of sectors, e.g. software companies.

Index Funds:
Index funds are based on the indexed stocks, e.g. in BSE-30 or NSE-50 stocks. Obviously, the returns are based on the performance of the respective indices.

Hybrid Funds:
Special Schemes - Pension Schemes, Child education Schemes etc.

How to invest in mutual fund?
Investing in a mutual fund depends on various factors like income and expenses, lifestyle, but most important on age. Experts say, if you are in your late twenties and early thirties then you should invest more in equity funds. If you are in your forties, you should park your funds in a balanced manner. And if you are above fifty then you should look at steady income, and that implies more investment in debt funds.

Tax Advantages:
Investment in mutual funds also enjoys several tax advantages. Dividends from Mutual Funds are tax-free in the hands of the investor (This however depends upon changes in Finance Act). Also Capital Gain accrued from Mutual Fund investment for a period of over one year is treated as long term capital appreciation and is tax free.

Mutual Funds Investments are subject to Market Risks.