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Tuesday, June 26, 2018

How to Invest in Mutual Funds

A mutual fund is an investment tool where different investors’ money is pooled together and invested in a diversified portfolio. The money is collected by an asset management company (AMC) or a money manager and invested in securities like stocks and bonds. The objective of the money managers and AMC is to generate capital gains on behalf of the investors.

For people with insufficient knowledge about the share market, mutual funds are a great way to gain access to diversified portfolios that are managed by experts in the field.

The Lingo

Here are a few common terminologies you need to be aware of prior to buying and investing in mutual funds in India.

Net Asset Value (NAV): This is the price you’ll pay for a share. It is calculated by dividing the cash and securities in a particular portfolio, minus any liabilities, by the number of shares.

Expense Ratio: This is the amount you are required to pay the AMC’s for their services.

Entry/Exit Loads: AMC’s have sales charges to compensate for distribution costs. You will also find funds that don’t have entry/exit loads.

In addition to the aforementioned points, before you put your money into a mutual fund, go through the mutual funds prospectus, which is a legal document that contains the funds strategies and objectives. Also, get a hold of shareholder reports to gauge past performances of a particular portfolio.

Perks of Investing in Mutual Funds

Mutual funds are an easy investment option for people with little knowledge of the financial market to make money through professionally managed, diversified portfolios. If you are still undecided about taking the next step and putting your money into a fund, take a look at the following benefits they provide:

Variety is the Spice of Life: This holds true for mutual funds. Your funds will be allocated to diverse securities for the purpose of gaining maximum returns at lower levels of risk.

Liquidity: The disbursement of payments is quick for mutual funds. You can receive dividends within a short period of time, generally within a week.

Inexpensive Shares: Small investors can opt for a diversified portfolio for a minimal amount of money. You can find shares for even Rs.500.

Mutual funds offer variety and you can pick from a number of different funds such as blue-chip and sectoral funds. You can also combine various funds to get the best of it all. All you have to do after investing is monitor the performance, while the money managers do their work and ensure that you get maximum returns.

The choice is yours

The most important thing to consider before you invest in a mutual fund is your financial goal. Whether you’re trying to save for retirement or planning to buy a house, the right mutual fund can help you achieve these goals.

Another factor to consider is your time frame. Are you in it for the long run? Or will you be needing cash to meet some short term requirement? If you are going to hold onto your fund for a long period of time then the amount of risk you can take should be significantly higher.

So when you go about investing in mutual funds remember that the share market is volatile and you aren’t completely free of risks. However, don’t let your fear get in the way. Even if the securities portfolio starts performing poorly, just wait it out for a bit before you decide to sell. If the fund is consistently performing poorly then it’s time to let it go.

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