Mutual Funds 101

Mutual funds offer an accessible and diversified way for beginners to invest and grow their wealth. Understanding their basics is crucial for making informed investment decisions. Investors should try to align investments with their risk appetite and financial goals. Hence, it's vital to know about the different types of funds. Some of the most prominent types include equity, debt, and hybrid funds. The process of investing involves several steps. Decoding the various terms, fees, charges, and tax implications could make investing smoother.

Investors must choose a fund and how they want to invest in it. They can make lump sum contributions or through systematic investment plans (SIPs). One must also be familiar with the key rules and regulations of mutual funds. In India, these are set by the Securities and Exchange Board of India (SEBI). These ensure that both investors and asset management companies follow fair investment practices. Plus, investors should avoid common mistakes and plan using the SIP calculator and lumpsum calculator. In this way, beginners can optimise their investments and build a diversified portfolio. 

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Episodes

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E01: Understanding Mutual Funds
05 mins
Mutual funds could help you grow your money without needing to know much about the stock market. They gather money from various investors to create a diversified portfolio of assets like stocks, bonds, and government securities. Managed by Asset Management Companies (AMCs), these funds employ professional fund managers. These managers analyse market trends and adjust investments to optimise returns and manage risks. In India, the Securities and Exchange Board of India (SEBI) regulates these funds. To invest, you buy 'units' of a mutual fund, each with a value known as the Net Asset Value (NAV). NAV could be subject to changes based on the market fluctuations. You could invest in these funds through a lump sum amount or an SIP, where you invest small amounts regularly. You could review the fund you’re investing in using the Fund Fact Sheet. This document contains details on the fund’s objectives, portfolio, performance, and other key metrics that might be of use. You could check out ELSS for income tax deductions of up to Rs. 1.5 Lakhs under Section 80C of the IT Act. Whether you’re saving for retirement, education, or other goals, mutual funds could help you achieve your financial goals.
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E02: Do You Know About the Different Types of Mutual Funds
04 mins
Mutual funds offer diverse investment options categorised into three main types. These are equity, debt, and hybrid funds. Equity funds invest in the stock market, carrying higher risk with a potential for greater returns. They include ELSS, large-cap, mid-cap, small-cap funds, sectoral and thematic funds, etc. Debt funds focus on fixed-income assets like corporate debentures and government securities. They provide relatively stable returns with lower risk. Hybrid funds combine equity and debt investments to balance risk and returns. Asset management companies (AMCs) offer various mutual fund options. They can be classified based on market capitalization, investment duration, and so on. Multi-cap funds invest across company sizes and sectors. Sectoral funds focus on particular industries. Investors can use an SIP calculator to plan regular investments in these funds. Conversely, they could use a lump sum calculator to determine returns for one-time investments. Understanding the different types of mutual funds could help you align your financial goals and risk tolerance. For example, ELSS funds offer tax benefits under Section 80C of the Income Tax Act. Debt funds include overnight funds, liquid funds, money market funds, etc. Hybrid funds offer sub-types like aggressive and conservative options. Investors could also explore other types to best match their investment horizon.
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E03: How Can You Invest in Mutual Funds
04 mins
Investing in mutual funds need not be as daunting as it seems. Start by assessing your risk tolerance and defining your financial goals. Based on this, you could choose a fund type. Then, decide how much you wish to invest without impacting your monthly expenses. You could invest online or offline. Online investments could be made through the website/app of various AMCs, financial services companies, or your bank. If you wish to invest offline, you might need to visit the respective entities’ branches. After choosing a platform, create an account with basic information like name, phone number, PAN, and bank details. Then, complete the KYC or Know Your Customer process using PAN and Aadhaar, either online or offline. Next, select your investment method. You could opt for an SIP (Systematic Investment Plan) for regular investments or lumpsum for a one-time large amount. For further help, you could reach out to an AMC representative or a SEBI Registered Investment Advisor (RIA). You could monitor and manage your mutual fund portfolio online through the platforms of the entities mentioned. This might allow you to buy more units, sell, or switch funds as needed. Always be mindful of the risks involved in investing.
Frequently Asked Questions
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Mutual funds are investment vehicles that accumulate money from multiple investors to buy stocks, bonds, etc. and create a diversified portfolio. Professional fund managers make investment decisions on behalf of investors. This allows individuals to access a range of assets even with small investment amounts. Moreover, they can benefit from professional management and market exposure. Investors can use SIP calculators or lumpsum calculators to plan their regular investments.
There are 3 main types of mutual funds according to their asset class. First, we have Equity Funds. These invest primarily in stocks and other equity-related instruments. Such funds include Equity Linked Saving Schemes (ELSS), multi-cap funds, sectoral & thematic funds, etc. Next, we have Debt Funds. These focus on fixed-income securities like bonds, government securities, etc. They have various types classified into duration of maturity, varying credit risk levels, etc. Finally, there are Hybrid Funds. These combine both equity and debt investments for a more balanced risk-reward approach. Hybrid funds vary based on the ratio of equity and debt assets. Each type offers different returns and caters to various investment goals and risk appetites.
Investing in mutual funds involves a number of simple steps. First, choose a fund based on your financial goals and risk tolerance. Complete its KYC (Know Your Customer) formalities and share the required documents. Next, decide on your investment amount and frequency by using a lumpsum calculator or an SIP calculator. Finally, you can invest directly through the asset management company or via a broker/distributor. Remember to monitor your investments regularly and rebalance as needed.
The Securities and Exchange Board of India (SEBI) regulates mutual funds to protect investors and ensure transparency in the market. It sets rules for asset management companies (AMCs), governs fund structures, and mandates proper disclosures. SEBI’s guidelines also focus on preventing malpractices. It ensures that investors’ rights are upheld and promotes fairness in the industry. These regulations help to create a safe environment for investors.
Mutual funds come with various charges like expense ratio and exit load. The expense ratio covers the fund’s operating expenses while an exit load is charged if investors withdraw early. Taxes on mutual fund gains include short-term capital gains (STCG) and long-term capital gains (LTCG). This depends on one's holding period of investments. Tax-saving laws under Section 80C can also help reduce tax liability. Understanding these charges and taxes is crucial for optimising returns.
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