A mutual fund is a financial investment that is composed of money collected from various investors. Through a mutual fund investment, investors pool all their money into one professional and secured space that is handled by money managers.
These money managers are responsible for allocating the fund’s various assets in securities such as stocks, instruments of money markets and bonds and also generating income or capital gains for the investors.
Mutual funds are available in two main categories: Direct and Regular mutual funds.
A direct mutual fund is a direct plan that is purchased directly from an AMC (Asset Management Company). A direct mutual fund is a recently introduced concept that is gradually gaining popularity in the money market.
It was introduced in January 2013 by The Securities and Exchange Board of India (SEBI) that made it compulsory for all AMCs to provide an opportunity for investors to invest directly in mutual funds without involving a broker, or an agent.
Therefore, in direct mutual funds, there is no interference or role of any type of intermediaries. This also helps in reducing the expense ratio as the investors are free from distribution or commission fees.
If an individual invests in a direct mutual fund, he/she is also free from any transactional charges as they are directly involved with the mutual fund organization.
Regular mutual funds are the most common and well-known mutual funds to investors. As opposed to a direct mutual fund, these funds are purchased through a broker or a mutual fund distributor and are comparatively expensive as the expense ratio is higher than that of a direct mutual fund.
The fund company pays a commission for every regular mutual fund plan to the middleman for every new investor that is introduced.
This commission, in turn, is added to the expense ratio by the AMC as a result of which regular funds are somewhat more expensive than direct mutual funds.
Considering all the above points direct funds may seem like a better option as they are cheaper but a mutual fund that is low priced may not necessarily prove beneficial to investors.
Advantages of mutual funds
One of the biggest advantages of mutual funds is diversification that helps in reducing and eliminating risks.
For instance, if an investor does not have enough money, he/she may pool in the money from different organizations and industries from investors of a similar kind, which not only prevents investment risks but also helps in further spreading investments through the mutual fund.
Therefore, in simple terms, one bad investment does not have the power to affect an entire one.
Every mutual fund is handled by a professional money manager who provides professional expertise on investment matters.
The Asset Management Companies ensure that highly qualified fund managers are provided to the investors who conduct thorough research of the best fund options available through their strong research skills and personal expertise.
If an investor wants to invest in a big industrial sector but does not have the money to do so, mutual funds ensure that investments are still possible through a SIP or Systematic Investment Plan.
This means that if the total investment cost is Rs. 50,000 then an investor can start investing in a mutual fund with around Rs. 5000 every month.
Money can be easily moved in and out of the mutual funds whenever there is a financial emergency.
4 golden rules of investing in mutual funds
It is very important to know your financial goals before investing in a mutual fund. Secondly, you must make a list of all your objectives and ensure that all your future and existing investments fulfill your financial goals.
This also helps investors to decide whether they want to choose a regular mutual fund or a direct mutual fund and also ensures that the investment objectives are fulfilled within the desired timeframe
Patience during volatility or uncertainty
Most mutual fund managers advise investors to remain calm and patient during an uncertain or volatile period.
It was reported in 2018 that most investors had withdrawn their money or put investments on hold out of panic and fear during volatility.
Make sure you do not panic and keep investing money in your SIPs every month
An ideal mutual fund should be able to protect itself during a market recession or uncertain period.
In such situations, it is important to make sure that all the assets are invested in different sectors that prevent an entire investment from failing if one asset underperforms.
Therefore, it is important to build a well-diversified and balanced portfolio that can withstand risks
Don’t over diversify
Diversification is one of the popular merits of a mutual fund. However, over-diversification of a fund may also cause problems.
A lot of investors include too many schemes in their portfolios which according to fund managers decreases the chances of your investment growth. ,
Therefore, including a maximum of four to five schemes in your portfolio that match the investment horizons and risk profiles ensures a good mutual fund investment