What is Mutual Fund? Basics of Mutual Fund

Last updated on October 9th, 2023 at 01:03 pm

What is a Mutual  Fund?

Mutual Fund is an investment option in which a company pools money from multiple investor and invests in securities like Stocks, bonds, money marker instruments etc.

The company that manages the fund is called Asset Management Company (AMC).

Asset Management Companies are having multiple Mutual Fund schemes each with different objective and plan.

For example there is a mutual fund scheme for retirement benefits.

What is an AMC?

Asset Management Company (AMC) is a company with professional investors who manages individual investors money in different securities, so as to realize the objective of the scheme.

The person who manages the fund is called Fund Manager or Portfolio Manager.

Thus AMC normally have several Fund Managers who are experts in different sectors.

Expense Ratio is the commission paid to AMC from investment amount for the expenses incurred by them.

The Expense Ratio essential for AMC for payment of salary to Portfolio Managers, regulatory fees paid to government, Registration with Stock Exchange, etc.

Top 5 AMC’s in India

Based on the Asset Value the following are the top 5 AMC.

The list is based on the market cap of the company in India. This list does not denotes the performance of the AMC.

Mutual Fund vs Direct Trading

AMC is doing investment in securities and share market. In which any individual can directly invest with Demat Account.

So why there is a need to go for Asset Management Company when you can do it yourself?

You can absolutely go and do direct trading if you have a outright knowledge about the securities you are investing.

For example if you are investing in a shares of a particular company, You should first do research about Companies line of work, how well it will do in future, What are Government policies related to the sector, Scope of a company to grow in the market, Available investors,etc

You could have guessed that this is going to be an over the top task for a common man who just want to invest his savings for getting a good return.

Thus paying a small fee to the AMC is not that big of a deal, when compared to the amount of time that it would need to ascertain the quality of the security you are investing.

Thus if you are a beginner, start investing in Mutual Fund and keep track of security and market movement. As you gain knowledge and confidence you can start investing in Securities directly.

Types of Mutual Funds

      As per SEBI mutual funds are classified as following.

1. Equity Scheme – In this scheme the the major part of fund is invested equity related instruments i.e. in share market.
2. Debt Scheme – Debt Fund or Income  fund is a fund that primarily invests in Debt Securities like T- Bill, Government Bond, Commercial Paper and Debentures etc.
3. Hybrid Scheme – In Hybrid fund the investment is done in both Debt and Equity Scheme.
4. Solution Oriented Scheme – These funds are made for achieve a particular particular goal in future. Ex. For Pension, Children Education, Building a House, etc.
5. Other Schemes– Index Fund, ETF and Gold Mutual Fund, ELSS etc.

Thus investor should choose a Scheme by considering  their objective, risk appetite, Investment Period, etc.

What is NAV?

Net Asset Value (NAV) is represents value of a Mutual Fund Scheme on a smaller scale.

Like share price of a company, each Mutual Fund Scheme is divided into small units with low price, the price of this unit is called NAV.

For example a Mutual Fund scheme with 100 units and NAV of Rs.10 has a Total Fund of Rs.1000.

i.e., Total fund in Management = NAV * Total Units

If additional investment is coming to the fund from investors the AMC will increase the number of units.

If there is a return from an investment the value of NAV will increase.

Advantages of Investing in Mutual Fund

• Easier way to invest in equity and money market Securities.
• Investment can be done  with smaller amount as low as Rs.100.
• Transparency as all the investment portfolio details are readily available in AMC’s Website.
• It can be monitored at any time, investment and withdrawal can be done at any day. Though the processing time for withdrawal can take two to three days depending upon the AMC.
• As the fund is invested in multiple securities risk is diversified. Due to market movement of a particular stock would not affect a fund much.

Cons of Mutual Fund

• Fund does not guarantee that it will realize its objective, There is a chance that even you could lose your invested Capital.
• Investor does not have any control over the securities invested by the Portfolio Manager.
• There is a lock in period which differs based on the scheme invested, If withdrawal done before the lock in period there would be penalty.
• There is an Expense Charge and fees collected by AMC for management of fund.
• Capital Gain Tax is applicable for the return earned of more than one lakh in financial year.

Conclusion:

Mutual Fund is a perfect option for first time investors. Mutual fund has been providing better return than bank deposit and other Debt securities in the market.

Mutual Fund market in India is regulated by AMFI a subsidiary of SEBI, with strict compliance. Hence protecting investors money.

Thus if you are a first time investor Mutual Funds are the best place to start, you can live your life while the AMC does the work of growing your money.

Also Read: Crypto Currency Investment Basics for Beginners