What are mutual funds and why you should start investing in them?
“Mutual funds were created to make investing easy, so consumers wouldn’t have to be burdened with picking individual stocks.” — Scott D. Cook
Many people ask me to tell them which is the best asset to invest in? So here is one. This is an asset which I personally prefer! It is the best asset if you don't have much knowledge of Stocks, Cryptocurrency, Real Estate, etc.
On average, a good equity mutual fund can give a return of more than 10%-20% annually. However, there are exceptions too, 19 Mutual Funds gave a whooping return of more than 100% in 1 year.
Here’s the list:
Investments have grown much higher in Mutual Funds especially in India because many people call it their favourite asset to invest in. According to Securities and Exchange Board of India(SEBI) data, Mutual Funds put in a net amount of Rs 5,526 crore in equities in April, much higher than a net sum of Rs 4,773 crore invested in March.
What are Mutual Funds?
Let’s assume that you aren’t feeling well. The natural instinct would be to go to a doctor. And hence, you’ll consult the doctor and pay him consultation fees in exchange for medicines. In a way, we are confident that going to the doctor will give us the right medicines and treatment, or let’s say there is a certain factor of trust. My blog will be revolving around this example.
This is basically how mutual funds work.
Mutual Funds collect a pool of money from an investor and invest them in different assets, bonds, stocks, etc. An experienced fund manager heads the mutual fund.
As the stocks have a stock closing price, the Mutual Funds have NAV.
What is Net Asset Value (NAV) and how is it calculated?
Net Asset Value (NAV) is a fund’s market value per unit. It is calculated by dividing the total value of all the assets in a portfolio, minus all its liabilities.
NAV is calculated at the end of every market day, after taking into account the closing market prices of the securities in its portfolio. When selecting a mutual fund for investments, remember that daily changes in NAV don’t matter. It is best to look at the annualized return of a fund over different time frames to estimate the performance of the fund.
Types of Mutual Funds
Equity funds
Equity mutual funds buy stocks of a collection of publicly traded companies. According to the Investment Company Institute, most mutual funds on the market (55%) are some type of equity fund. Equity funds have a higher potential for growth but more potential volatility in value. The younger you are, as financial planners advise, the more your portfolio should include equity funds as you have more time to weather inevitable ups and downs in market value.
Equity mutual funds can be sliced and diced in several ways depending on the goals of the fund:
Funds based on company size
Some funds focus only on “large-cap” or “small-cap” companies, which refers to the market capitalization, or value, of the companies:
- Large-cap fund: Companies with a market value of $10 billion or greater.
- Mid-cap fund: Companies worth $2 billion to $10 billion.
- Small-cap fund: Companies worth $300 million to $2 billion
Bond funds
Bond funds invest in government and corporate debt. Considered a safer investment than stocks, bond funds have less potential for growth than equity funds.
Balanced funds
Also known as asset allocation funds, these investments are a combination of equity and fixed-income funds with a fixed ratio of investments such as 60% stocks and 40% bonds.
Index funds
An index fund is a type of mutual fund whose holdings match or track a particular market index, such as the S&P 500.
Are there any charges you have to pay?
Yes, for a Mutual Fund to run it requires funds for marketing, hiring fund managers, logistics, etc. (This can be referred to as the doctor's fee from the example above)
Any mutual fund can charge you around 0.3%–2.5% for managing the fund known as the expense ratio.
A large expense ratio can hurt your returns in long term. Here’s why:
If you invested Rs 1,00,000 assuming you earned a 12% return with a 0% expense ratio you can earn up to Rs 30,00,000 in 30 years. On the other hand, if your mutual fund charges you with an expense ratio of 2.5% you would only end up getting Rs 16,50,000 which is almost half of what you could have. So it is very important to check the expense fees you pay.
How do I invest in Mutual Funds?
There are two ways of investing in Mutual Funds:
Lump-sum
A lump sum investment is when the depositor invests a significant sum of money in a particular mutual fund scheme
SIP(Systematic Investment Plan)
SIP or Systematic Investment Plan, on the other hand, entails the investment of smaller amounts on a monthly basis.
If you want to learn which is better for you check out this video :
Which apps can be used to invest in mutual funds?
Many applications out there provide you with the options of investing in Mutual Funds.
Top 5 Apps To Invest in Mutual Funds in India
- ETMONEY. Download App: Android | iOS.
- Groww. Download App: Android | iOS. (This is the app which I use to invest) Referral Code — https://groww.app.link/refe/darshan5465815 Earn your ₹100 reward straight to your Groww Balance by activating your account using this link
- PayTM Money Mutual Funds App. Download App: Android | iOS.
- Kuvera. Download App: Android | iOS.
- CashRich. Download App: Android | iOS.
How much money do I need to start investing in Mutual Funds?
You can invest as low as Rs 500 in a mutual fund through SIP, which may not be possible with most other investment options. So what are you waiting for?
Top 5 Mutual Funds of 2021
To know more check out this link: https://www.etmoney.com/mutual-funds
Conclusion
Investing for many is a hectic task because they are not experts in the financial field or have no knowledge of investing. Mutual funds can help if you have zero or less knowledge of how the market works and where to invest your money. You give your money to someone who is more experienced in this field (as the doctor from the example). Here your fund managers are your doctors who treat your money and invest them so you can earn returns. Please check the expense ratio before investing. If you are on pocket money you can invest as low as Rs100-Rs500 and see the magic of compounding. The more early you start investing the more you can benefit from the power of compounding. So, in conclusion, start investing now
Check out my other blogs :
- https://darshan-jain159.medium.com/what-is-inflation-how-does-it-affect-our-lives-bca1ad9afa2
- https://darshan-jain159.medium.com/compounding-the-eighth-wonder-of-the-world-9aa3c2948588
Follow up for more content. Next up on the list of topics cryptocurrency.
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