Mutual Funds : Introduction

   Mutual Funds, as its name suggests, are collection of funds which is used to invest in equity market for better returns. With decreasing interest rates on government bonds and conventional savings and increasing inflation, mutual funds are gaining interest. Many small investors are now interested in mutual funds as it gives them exposure to equity market and generate better returns.

"A mutual fund is a professionally-managed investment scheme, usually run by an asset management company that brings together a group of people and invests their money in stocks, bonds and other securities."- The Economic Times   

How it works

    As common people does not have experience of directly investing in stocks and bond, the asset management companies takes money from investors and invest them in equities. In this way small investors get benefited from stock market without any knowledge. It also helps investors who does not have enough money to invest in certain equity. For example:

After doing some research on a particular stock Mr. A found that stock to be good in future. However the price of this stock is more than the funds which Mr. A have. In this case what Mr. A can do is to find some more people who are interested in investment. In his way Mr. A collects sufficient fund to buy that stock. This is exactly what asset management companies does. 

Mutual Fund Units and NAV

    Investors purchase units of mutual funds from asset management companies. These units represent the share of investor in that mutual fund. These units can be redeemed to get funds. The transactions for the units take place on the basis of Net Asset Value (NAV) per unit.

NAV= Market value of net assets of the fund (securities held by firm minus liabilities)

thus, NAV per unit= NAV/ units outstanding  

Investing in Mutual Funds

Direct Plan : In direct plans investors invest in mutual funds directly from asset management companies, online or offline. Many discount brokers are also offering this facility by charging a nominal fee. In direct plans investors saves money as there is no middle man involved in between AMC and investor. However, investors are responsible for all the documentation needed. 

Regular Plan: Regulars plans are those where investors invest through a distributor. These distributors can be banks, financial institutions, brokers or advisers. In regular plan, all the documentation is done by the distributor. It includes submission of mutual fund applications, tracking, portfolio consolidation, nominee inclusion or modification, change of address, KYC compliance issues, etc., Since everything is now online, one need to follow some process and start investing in direct plans. 

Costs Involved in Mutual Funds

a) Expense Ratio: It is a small percentage of NAV deducted by the AMC. This expense ratio is the fee which the AMC takes to manage the fund and ultimately your money. This expense ratio is the livelihood of the AMC.

b) Exit Load: It is a small percentage of NAV which is deducted by the AMC if you redeem your units. The terms and conditions for the exit loads vary from scheme to scheme.

c) Entry Load: It is a small percentage of NAV which is deducted by the AMC when you invest in a mutual fund. However. now no AMC charges entry load because it is illegal.

d) Distributor’s Commission: You have to pay that if you have taken the regular plan of investing in a mutual fund.

Who Can Invest in Mutual Funds

 Anyone and everyone can start investing in mutual funds with as low amount as 500 INR. Following this are needed to invest in mutual funds:

• Bank Account
• Demat Account
• KYC documents

     So mutual funds are great tool for small investors who want to invest in equities and does not have exposure to the stocks market or do not have sufficient fund to invest in a particular stock. We will talk more about mutual funds like types of funds available, how to select a particular fund, mode of investment and so on in our upcoming post.