Mutual funds: A Guide For New Investors

What are mutual funds?

Mutual funds give investors the chance to pool their money and "mutually" buy stocks, bonds, and other investments with the same goal in mind, such as to make money right away or for long-term growth. As a mutual fund investor, you don't own the stocks of the companies the fund buys, but you do share equally in the profits or losses of the fund's total holdings. This is another reason why they're called "mutual funds."

Other important things about mutual funds:

Professional money managers decide which securities (stocks, bonds, etc.) to buy and when to sell them so that you get the best return on your money.
They usually have low minimum investments and can only be bought and sold once a day at the net asset value at the end of the day.
You have a stake in all of the investments in the fund and any money they make or lose.
They offer a wide range of ways to invest and different styles of investing.

What are the different types of mutual funds?

The most popular types of mutual funds are listed below:

Equity funds
Debt funds
Money market funds
Index funds
Balanced funds
Income funds
Fund of funds
Specialty funds

How do mutual funds work?

When you buy shares of a mutual fund, you buy the right to a portion of the returns made by the fund's portfolio of stocks, bonds, and other assets. According to Brandon Renfro, a Certified Financial Planner and assistant professor of finance at East Texas Baptist University, mutual means that you share the profits (and losses) with the other investors in the fund.

Dividends and interest are earned by a mutual fund from the different investments it holds in its portfolio. Depending on their strategy and market state, fund managers can choose to reinvest the profits or give them to their investors. When managers sell assets and make capital gains (or losses), those gains (or losses) are also given to investors.

Mutual also means that the performance of a mutual fund depends not only on the manager of the fund but also on how the investors act. When people sell their shares in a mutual fund, the fund manager might have to sell some of the holdings in the portfolio. If these assets are sold at the wrong time, the fund could lose money, which could be passed on to the other investors.

What Advantages and Disadvantages Do Mutual Funds Offer?

By providing investors with a safe and varied portfolio of investments, mutual funds benefit investors. They produce shareholder returns by:

Distributions of capital gains.

Mutual fund managers occasionally sell assets if they notice that the value of their holdings has improved. Sales result in capital gains, which the fund distributes to shareholders at year’s end after deducting any capital losses.

Payout of dividends.

Mutual funds make money from dividend-paying equities or bond interest yields. This income is periodically returned to shareholders by the funds.

Appreciation of a portfolio.

The market value of a mutual fund’s whole portfolio rises along with the share price of the fund. Gains in a mutual fund’s NAV represent the increased value of your shares.

Advantages of Mutual funds

The advantages of investing in mutual funds are numerous. Many of them are...

Liquidity
Diversification
Professional Fund Management
Safety and openness
Flexibility in performing SIP

What Risks Are Involved With Mutual Funds?

Risk-taking is a component of all investments, and mutual funds are no different. Your investment in a mutual fund could result in a partial or complete loss. As market circumstances change, the value of the fund's portfolio could drop along with bond interest or stock dividend payments.

With mutual funds, past performance is less significant because it cannot forecast future returns. However, the previous performance of a mutual fund might give you a sense of how volatile or stable it has been.

How do I invest in mutual funds?

Instead of purchasing mutual fund shares from other investors, investors purchase them directly from the fund or through a broker for the fund. The net asset value of the mutual fund per share plus any purchase-related costs, such as sales loads, determine the price that investors pay for the mutual fund.

Shares of mutual funds are "redeemable," which means investors can sell them to the fund at any moment. Typically, the fund has seven days to send you the money.

How do I choose the right mutual fund: important tips for beginners

1. Think about your investment objectives and risk tolerance

2. Recognize the management style used by the fund: is it active or passive?

3. Recognize the variations among different sorts of funds.

4. Look out for expensive costs

5. Research and assess the prior performance

6. Ensure that your portfolio is diversified.

7. Maintain an eye on long-term development

Is it wise to invest in a mutual fund?

When investing in mutual funds, time is extremely important, particularly for equity funds or funds with a high stock exposure. Such funds' returns are directly correlated with equities market performance, necessitating the selection of the best entry and exit points to maximize profits. As a result, the Net Asset Values (NAVs) of these funds would be higher if the markets were reaching new highs.

However, it is nearly impossible for novice investors to correctly predict the market's lows and highs as it becomes difficult for even seasoned fund managers. The secret to successful timing and strong returns in mutual funds involves adhering to the specified investment strategy by the fund managers.

How can I learn about mutual funds investment?

1) Set financial objectives.

Invest in mutual funds with definite objectives in mind. Write down your financial objectives, spending plan, and timeframe for achieving these objectives. You can use this exercise to figure out how much money you should set away each month for investing. To reach your financial goals, you might occasionally need to cut costs in other areas. And you can only perform these calculations if you sit down and write down your financial objectives.

2) Pick your investing profile wisely.

There are numerous mutual fund kinds and classifications, including equity funds, debt funds, and hybrid funds. In accordance with their market capitalization, funds are also divided. To help you achieve your targeted goals, carefully consider the fund type you choose. To reduce your risk exposure if you are new to investing, it can be a good idea to start with debt funds or hybrid funds. Select a fund based on your risk tolerance and investing objectives.

3) Don't obsess over prior performance.

Without a doubt, past performance should be taken into account when making a mutual fund investment. It need not, however, be the only factor. A common mistake made by new investors is to base their investment decision in a fund on its performance during the previous year. This is due to the fact that certain recently launched funds may present acceptable returns in the near term but not in the long run. Examining a fund's performance over the previous five or more years is a dependable technique to make sure it is stable. Also take into account additional elements including the expense ratio, the track record of the fund manager, and the AMC's track record. This may enable you to choose your investments more wisely.

4) Investments serve other goals besides reducing taxes.

Mutual funds, however, provide a lot more than tax breaks; among their advantages are investment discipline and the chance to build a sizeable corpus for the future. As a result, think of your mutual fund investments as a long-term strategy rather than a last-minute fix before the tax filing deadlines.

5) Use SIPs rather than one-time investments

Systematic Investment Plans (SIPs) or a lump amount are both options for investing in mutual funds. But for a beginner investor, SIP can be a better choice. To figure out and estimate the returns on your SIP investment, utilize a SIP calculator.

Timing the market and making investments at the proper time is necessary when investing with a lump sum. You run the risk of losing money if you invest at a time when the market is strong. Lump-sum investments are often best suited for seasoned investors.

SIPs, however, allow you to invest a set sum of money (monthly, quarterly, semi-annually, etc.) regardless of the state of the market. This strategy makes sure you have the chance to invest at all market levels. You might eventually get higher returns as a result.

6) No refunds are promised.

Mutual funds may provide yields that are appropriate. But that does not imply that you will always see a profit. You could lose money on your investments when the market performs poorly because returns are correlated with market performance. This is why it's so important to pick your money wisely.

7) Speak with an expert

The market is filled with a wide range of mutual funds. New investors could find it difficult to choose the best fund from all the available possibilities. Consult a financial counselor if you're unsure of how or where to invest your money. Based on your goals and resources, a financial advisor can assist you in making a decision.

Are mutual funds profitable?

Mutual funds are investments that raise money from people who want to make investments. Money will be put into different types of investments, such as money market mutual funds.

Money market mutual funds are safe ways to put your money to work. Most of the time, these investments pay off in less than a year. This product is also an investment, with a fixed deposit as one of the assets.

Money market mutual funds are profitable because of the following:

If you want to invest with the least amount of risk, you should choose the money market. Besides that, there are a lot of other reasons why this investment tool is better. These reasons have to do with its benefits.

Mutual funds are a type of investment vehicle that can hold money from multiple investors. Some of these funds are put into the money market. Why does this instrument pay attention to the money market? Here are some of the reasons:

Low Risk

When compared to other types of investments, the risk of investing in the money market is not as high. This product is good for both new investors and seasoned pros.

You can also choose to have all of your money managed in less risky money market instruments.

Money market assets include Bank Indonesia Certificates (SBI), bonds, and deposits, among other things. Because the risk is so low, these investments are seen as potentially profitable.

The profits are pretty stable

Money market mutual funds can help you reach your goal if you plan your finances well. You can choose placements that last for a long time and have pretty stable profits. You can use the money you make from this investment to pay for many different things.

People also think of the money market as a stable investment with less change. Also, this investment tool is less likely to be affected by changes in the global economy that are hard to predict.

Options for different investment terms

Money market mutual funds are also good for both short-term and long-term investors. It's also good for both experienced and less-experienced investors, especially when it comes to mutual funds.

But you should be smart about how long you invest. Make sure that the term works for you. Think about it carefully before picking the investment period.

Interest rates that are relatively high

The next reason why money market mutual funds can be profitable is that they have interest rates that are higher than average. In fact, the return on this investment may be higher than what banks usually offer with their fixed deposit products.

Mutual funds also make money when the value of their assets goes up. When the value of assets goes up, so do profits.

As for fixed deposits, the interest rate was set at the beginning, so even if the value of the assets goes up, profits won't go up.

It's easy to get money out of investments

The rules for investing in money market mutual funds are different from those for fixed deposits. If an investor wants to get their money out of a fixed deposit before the set time, they have to pay a fee.

On the other hand, these rules do not apply to the money market of mutual funds. This means that you don't have to wait until the end of the term to get your money back. This is one of the ways that mutual funds are helpful.

Even so, you still need to be responsible for keeping the investment period. Choose the right time frame for your investments, both short-term and long-term, based on your financial needs. The best time to put money into a mutual fund is between one and three years.

Flexible Investment Fund Placement

According to the definition of Mutual Funds, this type of investment is a place where investors can put their money in a public place. That is, as an investor, you don't have to put down a lot of money to get started.

Companies or banks that offer Mutual Funds will tell you how much money you need to start investing. Then, change the money to fit the investment goals and time frame.

How much money you can make also depends on where you put your money. The more money you bet, the more likely it is that you will win more.

There are no fees to buy or sell

If an investor wants to put more money into a money market mutual fund, they won't have to pay anything extra. Because money market mutual funds are investments that don't charge fees when you buy or sell.

Even so, you still need to pay attention to the companies' rules and regulations. Because some businesses or financial institutions also charge fees when they buy or sell. But you shouldn't worry because the fee isn't that high.

What are the best mutual fund apps?

1. Coin by Zerodha

2. Groww

3. Paytm Money

4. CashRich

5. Kuvera

6. ETMONEY