Let’s get started with the first blog of Ecofinlysis. This blog is a summary of all the basics you need to know before investing and venturing into the world of mutual funds.
You might have heard statements like
"Mutual Funds: Sahi Hai"
"Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing."
Today,we are going to simplify the exact same instrument.- "MUTUAL FUNDS"
Mutual Funds:
In order to get the core understanding of MFs, let us take an example. Suppose you wish to travel the entire of Europe. You have to two options here– either you can plan the entire trip yourself manually or you can hire some agency which is experienced enough to plan out the entire trip in an efficient way. That’s exactly what mutual funds is all about it.
In mutual funds, a sole individual or a group of professionals having experience and expertise in analyzing investment opportunities, manage the investors’ funds and invest them accordingly to give good returns to the funds’ investors. Basically, the investors that don’t have either time or enough knowledge to analyze and select individual stocks, go for mutual funds! Giving them access to diversified, professionally managed portfolios of equities, bonds, and other securities at affordable prices.
If a mutual fund is considered to be a company, then its CEO is the “fund manager”. The fund manager is hired by a board of directors and is legally obligated to work in the best interest of mutual fund shareholders. Most fund managers are also the owners of the fund. The fund manager may employ some analysts to help pick investments or perform market research.
Expense Ratio
In return, these fund managers charge commissions, which is often referred to as “expense ratio”. Expense ratios is the part of the returns of the investor’s funds to meet its managerial requirements and act as a way to charge for their services. Generally, the expense ratio found in the market, ranges from 0.5% - 3%.
“The lower the expense ratio, the better the proportion of returns.”
Entry & Exit Load
Entry load can be said to be the amount or fee charged from an investor while entering a scheme or joining the company as an investor.This is generally nil.
Exit load is a fee or an amount charged from an investor for exiting or leaving a scheme or the company as an investor.This depends on time for which you hold the mutual fund for, before you sell it off.
TYPES OF MUTUAL FUNDS
EQUITY MUTUAL FUNDS
As the name suggests, these mutual funds fundamentally only invest in equity i.e stocks. Equity mutual funds further have various classifications – smallcap, midcap, large-cap stocks. These mutual funds analyze the fundamentals and technicals of the companies and create a well-diversified portfolio ranging of manually picked stocks from varied sectors.
This is a great investment opportunity for investors who are young and wish to benefit from equities and appropriate risks, concurrently. Within equity mutual funds,the following are the options available as well. The fluctuations in these mutual funds are proportionate to fluctuations in mutual funds.
These are generally actively managed mutual funds with moderate to comparatively higher expense ratio,since equity portfolio has to re balanced regularly.
Tip:
Don't select the mutual funds who give extravagant and too-good-to be true returns in a short span of time.These might result into bad investments.
DEBT MUTUAL FUNDS
A debt mutual fund mainly carries out investments that gain fixed rate of returns-such as loans, debentures, government bonds, commercial papers, or other debt instruments. This sort of investment is suitable for people who wish to take lower risks and earn a stable income over the years.
These mutual funds are likely to pay more capital gains as compared to investments in banks like FD's. Important criteria to look at here is the lock-in period in debt mutual funds,before investing,along with entry and exit load.
HYBRID MUTUAL FUNDS
Hybrid Mutual Funds carries out investments in both debt and equity. This portfolio is well diversified within equity along with various debt instruments, which provides the benefits of both greater returns of equity and low risk of debt,
Personal Favorite
Index Funds
It is very difficult to continuously beat the market in terms of getting capital gains,
The philosophy behind these mutual funds is to buy stocks representing indices like NIFTY50 and S&P500. Of course ,the index funds are long term investments. Having an SIP will help recover any losses if any as compared to lump sum investment, These are passively managed mutual funds with low expense ratios.
Factors to keep in mind before investing into mutual funds
Low Expense Ratio
Entry Load and Exit Load
Lock-in Period
Direct or Regular Mutual Fund (will be covered)
Past Records and Price/Unit of Mutual Funds.
Risk appetite
This brings to the end of our first weekly blog. Hope you gained something valuable by reading this blog. Dont forget to subscribe to our newsletter to the weekly update about stock markets.
~Shravan Lad
Founder,Ecofinlysis
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All rights are reserved.
Great work
well explained in simple words. easy to understand.