An Investor named Rahul has got Rs.1000/- for investment. He desires to spend his money in buying shares of start-up companies in India since he had been completely bowled over by reading the success stories of people who invested in shares of start-up companies. However, he faced many road blocks for carrying out his decision to invest in the start-ups. Some of them were lack of knowledge about different companies in the start-up sector, illiteracy of technicality in investment in shares, absence of professionals to guide and above all, insufficient amount of money to invest in all the companies.
Here is why Mutual funds become life saver in these types of situations.
Mutual Funds are created and run by companies called Asset Management Company (AMC) which invites people of like-minded financial goals to pool their money. This sum which is now handed over to the AMCs’ will be professionally managed and parked in the appropriate stocks of companies in Start-up sectors which is identified to be potential return-givers to those investors. In short, a layman gets to use his own money in a wise manner with the guidance of professionals in stock markets and for the shares he desired. Profits/returns generated by these AMCs’ will be handed over to these investors after deducting the fees charged for services AMCs’ provided and it will be distributed in the proportion in which investors pooled-in their money. Total value of the market price of stocks included in the mutual fund divided by the number of units of mutual fund distributed to investors is termed as NET-ASSET-VALUE (NAV) on the basis of which each unit of that particular mutual fund is available in the market.
How to go if you want to invest in Mutual funds?
1. Approach the banks or other AMCs’ to open a demat account and a trading account.
2. Submit Photograph, PAN card, Name and Address proof, Bank Account Details and KYC Compliance.
3. Decide the right kind of mutual fund to achieve your financial goals (AMCs’ will guide you in that area).
4. If an equal amount of money is to be consistently invested in the future, it is better to choose SIP investment than investing manually every time. (SIP stands for Systematic Investment planning which allows one to buy units on a given date each month or quarter automatically by a standing instruction from the bank)
5. Keep a track of NAV when bought, number of units purchased and latest value of MF as on date so that you know whether you are on a profit or loss.
Expenses an investor has to incur for mutual funds are entry load (one-time-fee charged at beginning of investment; Rs.100-150/-), Exit load (at the time of redemption; 1%-3%) and recurring charges (during the time period of investment; max.2.5% p.a on AUM).
Mutual funds are not fully risk-insulated since its risk lies on the stocks in which it puts the money. However, one way to assess a fund’s level of risk is to look at how much its returns change from every year. If the fund’s returns vary a lot, it may be considered higher risk because its performance can change quickly in either direction.
Investing in mutual fund gives many benefits in one package like professional guidance, umpteen stock choices, low costs, risks reduction, liquidity etc. However, like every other financial instrument, it requires time and patience to grow your money through mutual funds. Best advice that can be given is START EARLY AS POSSIBLE.
The author is a CA final Student by academics and a freelance financial content writer by passion.
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