Mutual Fund Investments- An Insight


Currently people are largely aware of Mutual Funds. Thanks to the "Mutual Fund Sahi Hai" campaign by AMFI. Even after this effort, people are averse to investment in Mutual Fund because of fear of loss of money. This is mainly because of lack of understanding on what & how mutual funds are and its working method. 

Many consider mutual funds as an indirect instrument to make investment in equities. So, people treat mutual funds in the same style as how they deal with investment in stocks. The above understanding is partially correct as mutual fund invest in stocks. However, when it comes to returns, it works differently. 

To make the understanding of mutual funds, let me explain it with help of one of the popular and oldest savings methods, which is chit funds. In a chit fund scheme, a fixed number of people called subscribers are grouped by an individual or an organisation and all these contribute an equal amount for a fixed period to create a sum. The money collected like this in each month is paid to one of the members. This continues till the time all the members get the collected money one time in the entire duration of the chit scheme. 

Now when it comes to Mutual funds, the money collected from the subscribers are  invested in either equities/stocks or bonds or gold depending on the objective of the scheme. Here the major difference is mutual offers flexibility as it allow any person to join or leave the scheme according to their preference.

 If the majority of the investment is in equity or stocks, then that scheme is called equity schemes. Similarly, if the majority of investment is into bonds or in fixed income products, it is called debt funds and if the investment is into gold, it is called gold funds. The fund is managed by Fund Managers, who will decide on the stocks or the bonds where the money collected is to be invested based on both fundamental and technical studies.
                                

As mentioned earlier, the investor is allowed to make investment and also allowed to withdraw the invested amount at any point of time. Equity Mutual fund schemes are collection of stocks/equities.The value of investment in equity funds depends on the valuation of the underlying stocks and hence the schemes does not offer a fixed rate of return.As an investor, you need to be aware that the valuation of the investment on any day can be lower or higher than the actual amount invested as it is subject to equity market fluctuations.In order to regulate/discourage short stay in the schemes fund houses specify exit loads-a fixed percentage as fine for withdrawing before a particular period of time like 6 months or 1 year. The investor need to check the exit load conditions applicable when investing in any mutual fund schemes.

 Thus the investor needs to allow a longer duration to beat the stock market risk and to get an attractive return. There are different schemes available that are suitable for various time frame of investment.

Before investing in mutual fund schemes, one need to clearly define the time period he would like to remain invested and with the support of a financial planner/advisor, he should choose the right scheme. If the investment is done in this manner, mutual fund investments are safer and create wealth for the investor.

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