What are mutual funds? How to select the best mutual fund for your needs? How to invest in them? Let's learn all in this article!

In my previous article, I mentioned about investments for college-going students. I put forward my thoughts on how should one manage their expenses and what amount should I be investing in for sustainable growth. If you haven't read it yet, I recommend you to go through that before reading this article. Click on the link below to read it.


What are mutual funds?

What are Mutual Funds?

Many of you agree that Stock Market can be a great way to make money provided you pick the right stocks at the right time. But many of us, do not have the skill, the time to study the market and make the right decision. There happen to be some experts who know more about this field than us. They have spent significant time studying how the market works and how can one benefit from it. So how about giving them the authority to choose stocks on our behalf. We can simply provide them with the money to invest it in the market and for that, they may take a small chunk of our profits.

Sounds good right? But where will you find such a person? Mutual funds are your answer. The fund house appoints a fund manager who makes investments with our money on our behalf. It can be one of the best ways to start your investment journey.

What are the types of Mutual Funds?

  1. Equity mutual funds

  2. Debt mutual funds

  3. Hybrid mutual funds.

Equity Mutual Funds

Equity mutual funds are those which invest your money in the stock market aka equities. The returns depend on how well the companies that they have invested in perform. They are risky but can also generate high returns. It can also be divided into

  1. Large-cap Mutual Funds - Going by their name, they invest your money in the top 100 companies of India.

  2. Mid-cap Mutual Funds - They invest in companies ranging from 101 to the 250th rank.

  3. Small-cap Mutual Funds - These invest in companies that are pretty small and on the scale rank below 250.

Debt Mutual Funds

Debt mutual funds are those which invest your money in fixed income instruments viz. bonds, securities, money market instruments and similar. They provide you with a fixed return and the risk factor is pretty low. Saying so, they can hardly generate more than the returns from a fixed deposit scheme.

Hybrid Mutual Funds

Going by their name, they invest in both equities and debt assets. If you do not wish to take high risks but at the same time do not want the meagre returns of a debt fund, hybrid funds can be the one.

Which mutual fund should you invest in?

Before investing in a mutual fund, look at the fund house that is running the fund. Fund house refers to that organisation that is managing that particular mutual fund. It can be Tata. Nippon India. ICICI Prudential or similar. There are a lot of mutual fund houses in the country and you would not like to invest in the lesser-known ones.

Secondly, look at their historical performances. How much returns have they generated in the last 1 or 3, or 5 years? Technically, historical performances do not indicate that they will keep making the same returns in the future but it provides an overview of how they are performing.

Then you must not forget to look into the thing called Expense Ratio. Every mutual fund has this figure and this indicates how much will the fund house charge you to maintain, invest your money and manage its expenses.

The lesser the expense ratio, the better it is for the investor.

Finally, there is something called the Exit Load. It is the fee that is charged if the investor exits the scheme within a certain period from the date of investment. Again, the lesser the exit load, the better it is.

So let's say you have invested ₹100 and the fund has an expense ratio of 1% and exit load of 0.5% if redeemed under 1 year. After 11 months, it becomes ₹120 and you decide to withdraw your money from the fund. Then when you withdraw, you won't get the entire amount back. When you withdraw you will get ₹120 - 1% of ₹120 - 0.5% of ₹120 i.e. ₹118.2. The mutual fund house deducts 1% of ₹120 i.e. ₹1.2 as their expense ratio and 0.5% of ₹120 i.e. ₹0.6. If you withdraw your money after 1 year, exit load won't be applicable but the expense ratio stays regardless of the time frame.

How can you invest in a Mutual Fund?

Our parent's generation used to invest in a mutual fund through agents. Hence, they had to pay a commission to the agents apart from paying the expense ratio and exit load(if applicable). But the current generation does not need to pay any extra commission to the agents to invest in a mutual fund.

There are a lot of online investment platforms available today through which you can use to invest in a mutual fund directly. No middleman business. Some of these platforms include Groww, Zerodha, Upstox and a lot more. I personally use Groww to invest in mutual funds, track them and so far I do not have any complaints against them. This is not sponsored. Not a recommendation. You can use any platform of your choice.

If you are planning to open an account using Groww and invest in mutual funds, you can use my referral link, through it both of us can get ₹100 deposited in our account when you activate your account on Groww.

Click here to open an account on Groww.

Thanks for making it here. In my next article, I will explain which mutual fund - large-cap or mid-cap or whatever should you be investing in. Stay tuned till then. If you liked this blog, consider giving a like, if you learnt something new, share it among your peers.

Let me know your thoughts in the comments.

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