Understand which Mutual Fund works for you

How do Mutual Funds Work?

A mutual fund is an investment vehicle that pools the fund from investors by their investment objectives and invests them in a variety of capital market instruments like equity shares, bonds, short-term money market instruments, and other securities or assets. The combined holding of equity shares, debentures, and other assets the fund owns are known as investment portfolio managed by the fund manager appointed by the Asset Management Company (AMC).

Simply put, it is a financial intermediary set up to professionally manages the pooled money from investors with investment objectives.  For that, the fund houses charge investors an annual fee aka expense ratio - To manage portfolios on their behalf.

Why should you invest in Mutual Funds?

Financial markets have always been complex and sophisticated. In order to be successful, it is important to have a financial intermediary that can provide proper knowledge and professional expertise. The mutual fund is one such financial intermediary that can benefit investors in achieving personal financial goals.

Here are the major advantages of investing in mutual funds:

Managed by Professionals

The mutual funds are managed by highly skilled fund managers who are experts with sound knowledge of the market and have extensive experience in making smart investment decisions based on research and expertise. As most novice investors do not possess sufficient knowledge of the market and time to carry out a proper research, the fund managers do this for living and consistently track all variables to reduce risks and maximized returns for investors.

Portfolio Diversification

A significant benefit of investing in mutual funds is that it provides a built-in diversification that isn’t available in other investment vehicles. A balanced and diversified portfolio can help in disperse market-related risks by spreading pooled money across various assets such as equity, debt, and other financial securities. When you’re investing in equity mutual funds, the same can spread across various sectors to reduce overall risk.

Liquidity

Mutual funds have very high liquidity enabling investors to make withdrawal anytime in the future. If the investor decides to redeem it, the fund funds will be credited back to the investor’s bank account.  However, it is only applicable to open-ended mutual funds and does not apply to close-ended mutual funds.

Higher Returns

The primary goal of many investors to invest is to achieve a higher rate of return on investments to beat inflation and achieve future financial goals. As mutual funds provide built-in diversification, mutual funds have more potential of providing comparative higher returns without putting a lot of effort.

Tax Benefits

In mutual funds, the investors can enjoy tax exemption of up to Rs. 1,50,000 under Section 80C, Income Tax Act, 1961. Equity Linked Savings Scheme is one type of open-ended mutual fund scheme that provides tax exemptions of Rs. 1,50,000 under Section 80C. However, the ELSS fund has a lock-in period of 3-years.

Transparency & Flexibility

Investors can have complete access to the periodical information on the value of the investment in addition to the disclosure of the investments made by the scheme. Apart from this, the investors are aware of the proportion of the pooled money within each asset class.

Apart from this, mutual funds allow investors to switch from one to another. They can switch from growth to income funds and vice-versa, and switch from capital gains to income, in accordance with investment objectives.

Things to consider before you invest in Mutual Funds

Investing in mutual funds is considered to be one of the best ways to build wealth in the long-term. Though investing in mutual funds is quite simple, there are still few things to consider before you start your investing journey.

Here are the few important things that you need to know:

Set your Goals

Before you do anything, sit down, relax and take a good look at your current financial situation – especially if you’ve never made a financial plan before. It is just because the first step to successful investing is to figure out your goals. Layout your plan, whether it is short-term to buy a new car or long-term to build a corpus for retirement, you must plan out your expenses, check on your risk tolerance and set your financial goals before making any financial decision.

Decide on Mutual Fund type

After deciding your goal for the investment, decide the type of mutual fund that you wish to invest in. Your reason for investment can help you decide on your investment type.

Let’s take a look at some popular funds:

Types of Mutual Funds	Description
Debt Funds	They invest primarily in fixed income securities like government securities, corporate bonds, debentures, and other money market instruments. They offer returns on a regular basis. This is an ideal choice if you are risk-averse and seeking a steady income
Equity Funds	They invest primarily in fixed income securities like government securities, corporate bonds, debentures, and other money market instruments. They offer returns on a regular basis. This is an ideal choice if you are risk-averse and seeking a steady income
Index funds	These funds try to mimic the performance of popular stock market indices like BSE Sensex or the Nifty 100. This is done by investing in the same pattern as these indices. Returns on these funds are highly correlated to the index the fund has benchmarked itself against.
Balanced funds	They offer you the benefit of diversification. They invest in a mix of equities and fixed-income securities. This can be a suitable option if you are seeking exposure to both stocks and bonds. These are also called hybrid funds.
Sectoral funds	They invest specifically in a particular sector or industry in the market. For example, some funds invest only in the pharmaceutical sector or the IT sector.

You can then compare the various funds available to decide on one or many funds that you would like to invest basis on your risk-taking ability, the amount you wish to invest if you want to do a lump sum or go for a SIP. The platform will further assist you to choose the fund of your choice by giving you the option to compare various features of the fund, analyze the returns offered by the fund in the past and any other information that you wish to understand before shortlisting the fund.

Review the Mutual Fund Schemes

With hundreds of mutual funds schemes available out there, you need the one that can align with your financial objective and in line with your risk profile. Decide whether you want to go with a Systematic Investment Plan (SIP) or Lump Sum. Also, do not forget to check the other factors like the fund manager’s background, past performance of MF scheme, asset under management (AUM), expense ratio, Net Asset Value (NAV), etc.

Also, it is important to check the investment allocation. You need to know the proportion of the pooled money – whether it is invested only in equity, debt, or both. Make sure the asset allocation aligned with your financial objectives.

There are many different types of mutual funds available in the market. Each type of fund is explicitly designed to achieve a specific financial objective. Many advertisements talk about mutual funds being the correct choice for investments. But the question now is, which is the correct mutual fund option for investment in all the mutual fund investment options available in the market?

"Ab Kaunsa Mutual Fund aapke liye Sahi Hai, ye aap khud decide kar sakte hai with reliancesmartmoney.com"

How to Invest in Mutual Funds?

Become KYC compliant

Every investor needs to fulfill the Know Your Customer (KYC) compliance requirements to start investing in mutual funds.  For this, you can download the KYC form. Most fund houses provide the form on their website. Fill in all the details and submit the form along with the necessary documents to registered transfer agents or the AMC of your choice. The documents include:

·         PAN card

·         Photographs

·         Proof of identity

·         Proof of address

Start Investing in Mutual Funds

Once you are KYC compliant, you can start investing in mutual funds. Create an account in a platform like reliancesmartmoney.com; simply enter your bank account details for the transaction of funds and select the scheme you wish to invest. You can create a SIP and choose any date for the monthly SIP based on your convenience. ‘Investment’ is a golden word and in this time and age, it’s an essential technique to achieve financial success.

Summary:

Mutual funds are one of the most popular financial instruments these days. Mutual Fund is an investment vehicle which pools the money from investors and invests them, in accordance with their financial objectives in a variety of capital-market instruments like equity, debt, and short-term money market instruments.  It comes out as a financial instrument that can help achieve long-term financial goals.

The primary advantage of investing in mutual funds is that it is managed professionally by an expert fund manager who makes and monitors your investments on your behalf. As the securities are spread across multiple industries and sectors, the mutual funds offer built-in diversification helping investors reducing overall risk. What mutual funds provide is the facility to invest the pooled money in many assets to ensure that, if there is a loss in any particular investment, it is minimized by the profits in others. In addition to it, it offers high liquidity, allows you to convert your shares into cash anytime. Apart from this, mutual funds offer great transparency, flexibility, and tax-benefits that make it one of the best investment options.

The emergence of mutual funds in the last decade as a popular investment vehicle is due to the fact that it serves most categories of investors through the plethora of schemes it offers.  Every individual has some life goal, and to achieve it – it is important to select an investment option that can help you achieve it. A mutual fund is one such viable option that can help you do that. Even so, it is important to have a clear understanding of which mutual fund works for you.

To do so, first, prioritize your financial goals and reevaluate your risk profile. As the mutual fund returns are also market-linked, there is no guarantee that you will make money off your investments. But, if you are clear on your goals and follow an intelligent plan you can reduce risks on your investments and save your invested amount from eroding over time. Also, it is important to select on the right type of mutual fund after reviewing parameters like Net Asset value (NAV), Expense Ratio, Asset under Management, and past performance.

With this in mind, you can plan things out and put it in action. There are many ways to invest in mutual funds via fund houses, banks, and financial planners. If you are investing for the first time, first you need to fulfill your KYC (Know Your Customer) compliance requirements. To do so, you need to submit the copies of your Permanent Account Number (PAN) card, proof of address, and photographs as specified. Once your KYC is done, you can start exploring mutual fund schemes.

After KYC is done, you can simply create an account with reliancesmartmoney.com and add your bank details for transaction purposes and select any MF scheme you wish to invest.

One more thing! Before you start investing in a scheme, it would be recommendable to read all the scheme related documents carefully.