Mutual Funds Without the Jargon: A Plain-English Walkthrough for Complete Beginners
If you have ever been confronted with investment options and felt lost between terms such as NAV, equity funds or expense ratios, you are not alone. Mutual funds are one such investment plan that you should get familiar with, if you wish to make the best of your hard-earned money. It is impossible to jump right at the mutual funds market, given the extensive financial knowledge needed at the start. Learning the basics, risks, and what to look for will help you become a smarter investor in no time, though.
What Is a Mutual Fund?
Mutual funds allow an investor to spread their savings into a wider spectrum of securities than they would have if they bought the shares of ten different companies.
Imagine that someone has gathered a sum of money from many investors. Such a fund is managed by a fund manager who deploys the resources in purchasing shares, bonds, or any other securities allowed by SEBI and the fund prospectus.
By buying units of a particular fund, an investor purchases a fraction of the entire portfolio of that fund. Therefore, the investor’s proceeds will depend on the merits of the entire portfolio.
Understanding The Common Types of Mutual Funds
You will come across different fund categories when exploring investment options. Each serves a different purpose and carries its own level of risk.
Equity Funds
These funds invest mainly in company shares. They may suit people with longer investment horizons who can handle market ups and downs. Returns are not guaranteed, and losses are possible.
Debt Funds
Debt funds invest in instruments like government securities, corporate bonds and money market instruments. Their risks are different from the ones of equity funds and may include interest rates and credit risk.
Hybrid Funds
These funds combine equity and debt investments in various proportions. The combination depends on the scheme’s objective and investment strategy.
Index Funds
Index funds aim at tracking a certain market index rather than letting a manager choose the investments to outperform it. Their performance may slightly differ from the one of the indices, due to expenses and tracking differences.
Before choosing a category, you should consider your financial goal, the time you can spend invested, and the risks you are willing to take.
What Do NAV and Expense Ratio Mean?
There are two terms that one may come across while studying mutual funds, NAV and expense ratio. The former stands for Net Asset Value and is the price of each unit of the scheme. It is the collective value of all the assets that the fund owns, minus debts, and expenses.
The NAV alone does not determine whether a fund is a good buy or not. There are other factors to consider before making a purchase decision. While a lower NAV will have an inverse relation with one’s profits, one should look at the contents of the fund portfolio and the expenses it charges before investing.
The latter term, an expense ratio, is the percentage of a scheme’s assets that go towards paying its expenses. One must evaluate the expense ratio of similar schemes to understand how much one will have to shell out on the chosen scheme.
How Can You Start Investing in Mutual Funds?
Your goal or investment horizon will define the period for which you have to consider investing in a mutual fund. The type of schemes you will consider will also be defined by your goals. The time also decides the risk level you could take on the Mutual Funds you buy.
A MF app can help one go through the various schemes, study the details, and take necessary actions to invest in the Mutual Fund of their choice. While investing through such apps, you will need to ensure that the app is authentic, check what all charges are applicable, and go through the details of the schemes presented before choosing one. An investor can choose to either go for a one-time lump sum payment or go for SIPs.
A Systematic Investment Plan is a convenient way to invest in a mutual fund; it enables you to invest a fixed amount in your chosen scheme at specified intervals. A SIP can help you develop a habit of saving, but it does not guarantee returns or protect you from losses.
Conclusion
Learn about how funds work and the risks they entail, and what kind of goals you can achieve with the various schemes on offer. Use an MF app to review scheme details and monitor your investments and explore the resources available through 5paisa to build your understanding. With some learning and patience, you can get up to speed with investing and make better choices for your financial future.
