Mutual funds have become an increasingly popular investment option for many retail investors in India today given their benefits like diversification, professional management, liquidity and convenience. However, there are still some key concepts and aspects about mutual funds as an investment product that many individuals may find confusing or difficult to comprehend fully. To help demystify mutual funds for the average investor, here are 5 very useful and practical tips to better understand the essential mutual funds meaning and working as an investment vehicle.
1. Mutual Funds are Professionally Managed
Mutual funds are professionally and actively managed investment schemes. They pool money from thousands of investors and invest according to the stated goal. Fund managers take all investment decisions guided by the fund house’s research team. Investors do not select individual stocks or bonds.
2. Each Investor Owns Units of the Fund
Investors own ‘units’ of a mutual fund scheme based on how much they invested. The total value of all units is the fund’s Net Asset Value (NAV). If the fund’s investments rise, the NAV and price of each unit rises proportionately. The number of units reflect investor’s share of the fund’s profits and losses.
3. Funds Have Defined Investment Objectives
A key thing for investors to understand is that every mutual fund scheme has a clearly defined investment objective guiding the fund manager’s decisions. The objective could be long term capital growth, regular income generation, tax savings or any other goal. Based on the stated objective, the fund manager constructs the overall portfolio by selecting securities and assets that can fulfill that goal. As an investor, you can align your own financial goal with the right mutual fund scheme having a matching objective. So, reading the fund’s objective is crucial before investing to ensure it fits your needs.
4. Risks Depend on Asset Classes
Mutual funds invest in various asset classes like stocks, bonds, money markets instruments etc. A key thing for investors to understand is that the risks they face from a mutual fund investment depend largely on the asset class(es) the fund invests in. For instance, equity funds that predominantly invest in stocks tend to be more volatile and riskier while debt funds that invest in bonds and fixed income assets are relatively much safer. The specific asset allocation between various asset classes by a fund determines its overall risk profile.
5. All Funds are Stringently Regulated
The Securities and Exchange Board of India issues guidelines to protect investor interests. Fund houses need to meticulously comply with regulations related to transparency, reporting, audit, valuations, charges etc. Investors must read offer documents carefully before investing.
Conclusion
mutual funds offer a professionally managed investment avenue with benefits like diversification, liquidity, and regulation. However, as an investor it is vital to educate yourself about their structure, objective, risks, and costs before selecting the right fund aligned to your goals. While HDFC mutual fund manages the investments, you must manage the mutual fund by making an informed selection and monitoring it regularly. Invest knowledgeably in mutual funds.
