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A Comprehensive Guide To Mutual Fund Investments

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By Author: Shashank Pawar
Total Articles: 53
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Joining the likes of the National Egg Coordination Committee’s iconic advertisement campaign - “Roz Khao Ande” - which resulted in increased consumption of eggs in India, AMFI’s highly publicized - “Mutual Funds Sahi Hai” campaign - attracted about 50 lakh retail investors in just over 12 months.

AMFI’s innovative advertising campaign, which promises greater transparency, has triggered national interest in mutual fund investments, giving nascent investors the confidence to explore a lesser-known investment instrument.

Although the Mutual Funds Sahi Hai campaign is informative, questions - such as “what are mutual funds?” or “how do mutual funds work?” - remain in the minds of the new generation of investors.

From the basics of mutual funds to different plans and options, this document, which is all about mutual funds, provides the knowledge you need to become a well-informed investor.

The Basics of Mutual Funds Investment

Understanding when and what to invest in might require experience, but in general, mutual funds basics are straightforward. Mutual funds, as the name indicates, are a pool of shared funds sourced from many investors. The fund manager/s of an Asset Management Company (AMC) manage the money collected, investing it in various money-market products, such as stocks, corporate bonds, or government bonds. The fund manager/s, on a day-to-day basis, monitor the money invested in different instruments, which forms the portfolio of a mutual fund in line with the investment purposes outlined in the offer document.

As an investor, you can buy "units” of a mutual fund. The number of units you get will depend on the money you invest, and the fund’s Net Asset Value (NAV). Here is an example -

Let’s say you invest Rs 100,000 in a mutual fund with a current NAV of Rs. 100.

In this scenario, you will get Rs 100,000 / Rs 100 = 1,000 units.

If the NAV rises to Rs 120, your fund value will be - Rs 120 X 1,000 units = Rs 120,000.

Tenure of Mutual Funds and Its Asset Allocation Structure

The most-important mutual fund information relates to maturity options, and the schemes, from the perspective of asset allocation structure. Let’s go a little deeper into different mutual funds on the market.

Maturity Period of Mutual Funds

Mutual funds are open-ended or close-ended. While close-ended mutual funds stipulate a 1-year, 3-year, or a 5-year maturity period, open-ended mutual funds offer investors the flexibility to redeem their investments whenever they wish. For both open-ended and close-ended funds, the AMC transfers the proceeds (number of units X NAV) to your bank account on a T (trading) + 2 (days) basis.

Asset Allocation Structure

Though there are multiple mutual fund schemes, AMCs usually pursue 3 asset allocation structures - Equity Funds, Debt Funds, and Hybrid Funds.

Equity mutual funds invest in equities, which makes them a high-risk investment compared to other options. Aimed at generating capital appreciation, equity funds are appropriate for investors with a long-term investment horizon.

Debt fund portfolios include secured investments, such as government securities, corporate bonds, and debentures. This less-risky fund aims to give investors a steady return on investments.

Hybrid mutual funds have become popular with investors because of their unique asset allocation structure, which is a combination of debt and equity instruments. Hybrid funds strive to create a win-win situation for investors by offering them the security of debt instruments, and the capital appreciation of equities.

If you are new to the game, consult a financial advisor to learn more about your risk profile and investment opportunities.

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