Mutual Funds can land you in a soup if you are making an uninformed choice. Here’s a quick read to help you understand the basics before you get started.
Think Before You Act
Investing in Mutual Funds is like playing a game of chess. You need to carefully measure out your options, gather all the information that you can possibly find and then make a calculated move.
Mutual Funds can offer an exciting world of opportunities if you are curious and consistent. At the same time, it can turn out to be tedious and frustrating if you haven’t done your homework right.
Let’s brush up our basics before we get down to brass tacks.
How do Mutual Funds operate?
A Mutual Fund raises money from potential investors and invests the proceeds in financial instruments which can yield a high rate of return. The fund is managed by a fund manager. For the services offered, the investors are charged a nominal fee.
Additional Reading: How Mutual Funds Operate
What is the minimum age required for investing in Mutual Funds?
You can start investing on your own soon as you turn 18.
In the case of minors, all the transactions need to be carried out by parents/guardian on behalf of the minor.
What is SEBI?
The Securities and Exchange Board of India or SEBI was set up by the government. SEBI formulates policies, regulates and supervises mutual funds to protect the interest of investors
What do Mutual Funds invest in?
Mutual Funds normally invest in securities in the form of stocks, bonds, and debt instruments.
Now that you have a basic idea about how Mutual Funds work, should you go on and buy the first Mutual Fund offer that you see? The obvious answer is NO! A lot of your success will depend on your ability to see through the clutter and find the right instruments which can meet your short and long-term goals.
Presented below are some of the major pointers you should keep in mind before you begin to invest:
Do all Mutual Funds carry the same amount of risk?
Although risk forms a part of all your investment decisions, it is not evenly panned out. Some Mutual Funds carry a bigger element of risk than others. Also remember the bigger your appetite for taking risks, the higher your chances of making gains.
Do you need a lot of money to get started?
You need as little as Rs. 500 to get started with your Mutual Fund investments. With the help of SIPs, you can invest a fixed amount every month and see the money grow gradually.
Additional Reading: 5 SIP Schemes That You Can Invest In With Only Rs. 500
Are SIP-period and investment-holding period the same thing?
Based on your goals, you can decide if your SIP-period is three years, five years or more. SIP-period is the timeframe within which you are investing an equal amount of money on a monthly basis. You can stop your SIP soon as you hit the sweet spot.
However, you can continue to hold your investments even after your SIPs have stopped. You can choose to sell them off based on the market conditions and your immediate requirements.
Long-term or short-term…..which is better?
Mutual Fund is not voodoo magic, it is pure science. The longer you stay invested, the better your chances of multiplying the amount invested with the power of compounding.
However, for your short-term goals, you can stay away from equity funds and try investing in debt and money market instruments. This will help you generate significant returns while at the same time, reducing your risk of exposure.
Additional Reading: How To Make Mutual Funds Do The Hard Work For You
Should you invest indefinitely?
Mutual Funds work best when you are investing to achieve a specific goal that you have in mind. For instance, if you are investing for retirement, you must keep on investing until you have hit a number you feel comfortable to retire with.
What are Tax Saving Schemes?
Tax-saving Mutual Fund schemes are also known as Equity Linked Savings Scheme or ELSS.
Salaried-employees can take advantage of the ELSS schemes and park their money in one of these schemes without having to worry about the tax ramifications. These funds allow for exemptions up to Rs.1.5 lakh per annum u/s 80C.
Who is a Fund Manager?
A fund manager is the one who decides where to invest the money you have entrusted the fund with. The fund manager is responsible for allocating the fund and managing its portfolio.
Expense Ratio: What is that?
Of the total amount you invest in your fund, a portion of it goes towards managing the fund. This includes management fees, advertising fees, agent commission etc. This amount is considered to be the expense ratio. While choosing your Mutual Fund, make sure you check this figure out and stick to the ones offering lower expense ratios.
Mutual Funds can be a blessing in disguise for those who can be patient in times of distress, calm in the face of calamity and poised even when the bull is out of town!
If you are just about to begin your journey with Mutual Funds, take a look at the world of opportunities that BankBazaar has in store for you.