1.0 INTRODUCTION

Mutual funds are among the most popular and successful investment vehicles, thanks to their combination of flexibility, low cost, and the chance for high returns.

Nowadays, many investors pool their money in the mutual fund schemes as the money is managed by the experts known as Fund Managers or Money Managers.

The maximum capital appreciation from the mutual fund investment attracts a number of people for the investment in various schemes.

The big returns received in the mutual fund allow the investors to spend it for any big function approaching, in property or for their child’s education.

Investing in a mutual fund is different than simply packing money into a savings account or a certificate of deposit (CD) at a bank. When you invest in a mutual fund, you are actually buying shares of stock in a company.

The company you are buying is an investment firm. A mutual fund pools money from different investors in order to invest in a large group of assets (also known as securities) such as stocks and bonds.

Professionals manage the holdings that make up the fund’s portfolio; investors buy shares that rise or fall in value based on the performance of the fund’s underlying securities.

2.0 WHAT IS MUTUAL FUND?

Mutual fund is in the business of investing in securities, much like Ford is in the business of making cars. The assets for a mutual fund are different, but the ultimate goal of each company is to make money for shareholders.

A mutual fund is a term used to describe a type of company that doesn’t do anything itself, but rather it owns investments. The company, which is the mutual fund, hires a portfolio manager and pays him or her a management fee.

The portfolio manager invests the money raised by the fund according to the strategy laid out in a document called the mutual fund prospectus.

Some mutual funds specialize in investing in stocks, some in bonds, some in real estate, some in gold. The list practically goes on and on with mutual funds organized for nearly every type of investing strategy or niche you can imagine.

There are even funds designed for people who only want to own dividend stocks that have increased the dividend every year for the past 10 years, 15 years, 20 years, 25 years and so on!

It is safe to say that there is a mutual fund for almost any objective you may wish to achieve.

3.0 WHY MUTUAL FUNDS ARE PROFITABLE?

The type of mutual fund in which you invested will determine how you generate cash.

If you own a stock fund, you are an increase in the stock price (capital gains) or cash dividends paid to you for your pro-rata share of the company’s distributed profits.

If the fund focuses on investing in bonds, you might be making money through interest income.

If the fund specializes in investing in real estate, you might be making money from rents, property appreciation, and profits from business operations, such as vending machines in an office building.

Mutual fund investors own shares in a company whose business is buying shares in other companies (or in government bonds, or other securities).

Mutual fund investors don’t directly own the stock in the companies the fund purchases but share equally in the profits or losses of the fund’s total holdings — hence the “mutual” in “mutual funds.”

4.0 HOW DO WE MAKE MONEY OUT OF MUTUAL FUNDS?

Before you can understand how investors make money investing in mutual funds, you have to understand how it generates profits. Shareholders make money in one of three ways.

The first way is to see a return from the interest and dividend payments off of the fund’s underlying holdings.

Investors can also make money based on trades made by management; if a mutual fund earns capital gains from a trade, it is legally obligated to pass on the profits to shareholders. This is known as a capital gains distribution.

The last way is through standard asset appreciation, which means the value of the mutual fund shares increases.

As stated above, mutual funds are professionally managed investment vehicles that will compound your money over a long term. Mutual funds may invest in a variety of instruments like equity, debt, money market, etc., and fetch favourable returns on your investment.

5.0 GUIDELINES FOR INVESTING IN MUTUAL FUNDS

Before you decide to invest in a mutual fund, it is important to keep the below points in mind. Doing so will help you choose the right kind of funds to invest in, and help you accumulate wealth over time.

5.1 Identify your purpose for investing

You need to define your investment goals which can be – buying a house, child’s education, wedding, retirement, etc.

If you do not have a specific goal, you should at least have a clarity on how much wealth you wish to accumulate and in how much time.

5.2 Fulfill the Know Your Customer (KYC) requirements

You need to comply with the KYC guidelines. For this, the investor needs to submit copies of required documents as specified by the fund house.

5.3 Know about the schemes available

Before investing, make sure you have done your homework by exploring the market to understand the different types of schemes available.

After you have done that, align it with your investment objective, your risk appetite, your affordability and see what suits you best.

You should identify the funds that invest in each asset class. You can compare mutual funds based on investment objective and past performance.

5.4 Consider the risk factors

Schemes that offer high returns is often accompanied with high risks.

If you have a high appetite for risk and wish to accomplish high returns, you can invest in equity schemes.

On the other hand, if you do not want to risk your investment and are okay with moderate returns, you can go for debt schemes.

Diversification of your investments and follow-ups are important to ensure that you get the best out of your investment.

6.0 CONCLUSION

Getting maximum benefits out of their capital is on every investor’s mind, but the entry timing in the mutual fund market and the risk factor involved must be studied properly.

Investing in mutual funds depends on your financial horizon, risk taking capacity and the existing portfolio. Nowadays, investing in mutual funds has become more interesting as a number of experts are present for the help.

No matter which category a mutual fund falls into, its fees and performance will depend on whether it is actively or passively managed. Passively managed funds invest according to a set strategy.

They try to match the performance of a specific market index, and therefore require little investment skill. Since these funds require little management, they will carry lower fees than actively managed funds.

Fund investors usually pay an annual fee for the running of the fund, known as an expense ratio, which is based on a small percentage of the total value of your shares.

However, this can be a relief to some investors, who simply don’t have the time to track and manage a large portfolio.