What is Mutual Funds? How to invest on it ?

 

Hello friends, today's blogs will be educational and will be related to your personal finance. In today's blogs, I would like to educate you about Mutual Funds. What are Mutual Funds, how to invest in them and basically all the information you should know about them as a common man or as a beginner investor.

Mutual funds are one of the most popular investment options for beginners and experienced investors alike. In this guide, you'll learn what mutual funds are, how they work, the different types of mutual funds, their advantages and risks, and how to start investing with confidence. Whether you're planning for long-term wealth creation, retirement, or financial goals, this article explains everything you need to know about mutual funds in simple and easy-to-understand language.

Let's start. Friends, every month when you get your salary, you keep some part of that salary in savings.

You always keep some money to use later. Maybe you keep it for emergency or you have to buy a house or a car. You must be saving for that.

So, what are the ways to save? The most obvious way is to have money in your bank. You keep that money in the bank and let it be collected there. This is a very bad way, friends.

Because the money you keep loses its value. Inflation keeps on increasing in our country. Because of this, the prices of everything keep on increasing.

So, the value of your money keeps on decreasing from 4-5% every year. Whatever the inflation rate is from that percent. People invest their money so that they don't lose their value.

You can invest in different places. There are 4 main places in our country where people invest their money. 1. Savings account.

2. Fixed deposit. 3. Gold or jewellery. People buy gold or jewellery with their money.

4. Real estate. People buy land or property with their money. If some people want to take more risk, they invest in the stock market.

This is another way to invest. There are 3 things in any investment. 1. Return, 2. Risk, 3. Time.

Return means how much percentage profit you are earning by investing. How much profit you are earning. This is normally seen in percentage.

So, if our inflation rate is 4%, then you should see that your return percentage should be more than 4%. Otherwise, there is no use of investing. You have invested money there and the value of that money has not increased.

Because the inflation rate is also increasing at the same rate. Risk means how risky is an investment. What are the chances that you will lose all your money by investing there.

What are the chances that you will go into loss by investing there. And time means how much time you invest. So, the basic rule here is that if the risk is more, if the time is more, then the return will also be more.

If you want more return percentage on your investment, then you will have to take more risk or you will have to invest for more time. 2. Savings account. Savings account has the least risk.

And there is no time restriction there. You can put money whenever you want. You can withdraw money whenever you want.

But the return that you get there is also very less. Only 4%. Whereas, in the last few years, the inflation rate has been 4-5%.

Fixed deposits are also one of the least risky options. But there is a time limit that you cannot withdraw your money before a fixed time. So, the return there is a little more.

You will get a return of 7-8% in fixed deposits. I would say that there is a significant risk in gold and jewellery investment at present. Their prices go up and down a lot.

If you look at the 10-year history, you will see that gold prices were increasing consistently till 2012. So, if you had invested before 2012, then you would have got a good return rate. But from 2012 till now, they have gone up and down a lot.

But they have maintained a level. So, you do not get a lot of return profit here. I would say that there is a low to moderate risk in buying a house and investing in property.

In the last few years, you can see the housing price of India. It has gone up and down a lot. There was a quarter of March 2011 when it had touched a return rate of 30%.

And in the latest quarter of March 2018, it is giving a return rate of only 5%. A big disadvantage in investing in housing is that it requires a lot of money. You should already have lakhs, crores and rupees to invest in it.

So, this is a big disadvantage. You must have heard about the investment in the stock market. You can get a lot of return in this.

But you can also face a lot of loss here. How risky it is to invest in the stock market depends on which stock you are investing in. For this, you need to have a lot of knowledge about which stock performs well and basically how the stock market works.

If you do not have this knowledge, then you should not invest in it. So, these were the main different types of investments that I told you about. But there are many more types of investments.

For example, there are government bonds, corporate bonds. Today, there is cryptocurrency as well. People have started investing in Bitcoin as well.

There is a general well-known advice here. You should never invest your money in just one place. You should invest your money in different places.

This will ensure that whenever a price crashes, you will not have to face an overall loss. There are very few chances that gold will crash at one time, property prices will crash, and the stock market will crash altogether. This happens very rarely.

The chances are that if anything crashes, you will get a profit from the return. This is called diversification. Investing in different places.

Mutual funds are a special type of investment through which you can invest in different places. You can make diversified investments by investing in one place. Asset management companies are those companies that open mutual funds.

Basically, you give your money to the asset management company and a lot of people invest their money in asset management companies. The company invests all the money in different places with the advice of an expert. They appoint their experts.

The money is invested in different places. The asset management company keeps a small percentage of the collective return rate from all the investments. It may be 1 or 2%.

The rest of the money is returned to you according to the return rate. HDFC, HSBC, ICICI, Aditya Birla, Reliance, Tata are some examples of companies and banks that have opened their own asset management companies. Every asset management company has different types of mutual funds and a lot of mutual funds.

For example, ICICI has more than 1200 mutual funds. How much return do mutual funds give and how risky are they? It all depends on which mutual fund you are investing in. At least 4% return rate can be given by mutual funds and more than 30% return rate can be given by mutual funds.

Mutual funds can be zero risk and high risk. It all depends on where the asset management company is investing your money. If that company is investing your money in stocks then it will be more risky and you will get more returns.

If that company is investing your money in government bonds then it will be less risky. Based on where the experts in AMC are investing your money there can be a lot of different types of mutual funds. If we look at it from top to bottom then it can be divided into 3 categories.

Equity mutual funds, debt mutual funds and hybrid mutual funds. Equity mutual funds are those in which your money is invested in the stock market. So it is obvious that generally in this category of mutual funds there is more risk and more return.

Now in which stock market, in which type of company are you investing? It is called a large cap equity fund. If you are investing in a small company then it is called a small cap or mid cap equity fund. In big companies, the risk is less in comparison to small companies but the growth of big companies is not as high as that of small companies.

So the risk and return is less in both the big companies. The next type of equity funds is diversified equity funds. In this, large cap, small cap, medium cap small investments are made in all of them.

Or different types of companies are spread out and investments are made. The next type is equity linked savings schemes i.e. ELSS. This is a special type of equity fund in which you can save your tax.

You can save tax on the profit you will get. The next type is sector mutual funds. In this, specifically such companies' stocks are invested which belong to a large sector like agriculture sector.

So all the companies in the agriculture sector are being invested in it. If there is a logistics or transport sector then it is being invested in that sector. An example of this is UTI, transportation and logistics fund.

So it is being invested in that sector. These funds are more risky because it is being invested in one sector so whether that sector is falling or going down everything depends on it. The last type of equity funds that I would like to tell you about is index funds.

Index funds are passively managed funds. In this, no AMC fund manager would be sitting and looking that now I should put money here and now I should invest here. These are passively managed.

i.e. the rate of the market is going up or down according to that, these also go up or down. These go up or down depending on the price of Sensex and Nifty. Now let's see the second category of mutual funds which is debt mutual funds.

These are the mutual funds which are invested in debt instruments. What are debt instruments? Debt instruments include bonds, debentures, certificate of deposit. Now you can read and see If I start telling all this in the blog then the blog will become very long.

Let me tell you what are bonds. If the government needs money and is not getting money from the budget then the government borrows money from the people. Basically, the government takes a loan from the common people.

That is called bonds. You can invest in that and give it to the government. And the government will return the money after a fixed interest.

There are many types of mutual funds. First, let's talk about liquid funds. Liquid funds are those mutual funds which can be easily converted into cash.

Liquid means the same. It is not a drinking liquid. In economics, liquid is called which can be easily converted into cash.

The asset can be converted into cash. It can be converted into cash within 1-2 days. And there is a very low risk in this.

The risk is so low that you can consider it as an alternative to a savings account. Asset liquid funds are an example of a liquid fund. In this, you will get a return of 7.1% in a year.

You can see in the graph how consistent the growth has been. This shows that the risk is very low. For the last 5 years, this percentage has been increasing.

The next type is guilt funds. Guilt funds are those funds in which government-issued bonds are invested. Since the government is borrowing money from you technically, there is zero risk in this.

Because it never happens that the government does not return your money. The only thing is that the interest rate keeps fluctuating. The next type is Fixed Maturity Plans.

Fixed Maturity Plans can be considered as an alternative to Fixed Deposits or FDs. Because FDs are very low risk and are invested for a specific time before which you cannot withdraw money. These are the main types of debt mutual funds.

There are many other types like Junk Bond Schemes. The third category is Hybrid Mutual Funds. These are basically a mixture of Debt and Equity Mutual Funds.

Some people want to invest in the stock market but not all the money. Some money can be invested in debt instruments. These Hybrid Mutual Funds are for that.

If most of the money is invested in debt funds, then it is called a Balanced Savings Fund. Approximately the ratio is 70 to 30. That means 70% of the money is at low risk in debt funds and 30% in equity funds.

If it is the opposite, 70% in equity funds and higher risk, then it is called a Balanced Advantage Fund. There are other types in Hybrid Mutual Funds like Arbitrage Funds. But friends, I think I have given you a lot of information and knowledge.

Now I leave it to you. Go ahead and do your own research. See what other types of Mutual Funds are there and which one suits you.

The biggest advantage of Mutual Funds compared to other investments is that it is already diversified. Because of diversification, your risk is reduced. Because you are not investing in one place.

If something crashes, it will not affect your money. So, compared to the stock market, compared to gold, compared to real estate, Mutual Funds are less risky. However, the exact risk depends on which specific Mutual Fund you are taking.

Another big advantage is that it is affordable. You do not need to invest a large amount at a time. You can use SIP and invest a small amount every month.

And the investment of all Mutual Funds is done by a professional expert fund manager. He decides where to invest and where not to invest. You do not have to do this yourself.

So, this is also a big advantage that this expert is working for you. But friends, this is a disadvantage of Mutual Funds that you are giving this work to an unknown person and you do not know how he will perform. Although, he is an expert, but you cannot be 100% sure that the expert will always turn out to be right.

Another big disadvantage that used to happen for Mutual Funds was that a lot of agents used to take a lot of commission to invest in Mutual Funds for you. They used to say, give us money and we will invest in Mutual Funds for you. And they used to deduct a lot of their commission.