What are mutual funds and how to invest in them?
A mutual fund collects money from investors and invests the money on their behalf. It charges a small fee for managing the money.
How to invest in mutual funds?
You can either invest directly with a mutual fund or hire the services of a mutual fund advisor. If you are investing directly, you will invest in the direct plan of a mutual fund scheme. If you are investing through an advisor or intermediary, you will invest in the regular plan of the scheme.
If you want to invest directly, you will have to visit the website of the mutual fund or its authorized branches with relevant documents. The advantage of investing in a direct plan is that you save on the commission and the money invested would add sizeable returns over a long period. The biggest drawback of this method is that you will have to complete the formalities, do the research, monitor your investment... all by yourself.
Types of Mutual Funds in India -
The Securities and Exchange Board of India has categorised mutual fund in India under four broad categories:
- Equity mutual fund scheme: These schemes invest directly in stocks. These schemes can give superior returns but can be risky in the short-term as their fortunes depend on how the stock market performs. Investors should look for a longer investment horizon of at least five to 10 years to invest in these schemes. There are 10 different types of equity schemes.
- Debt mutual fund schemes: These schemes invest in debt securities. Investors should opt for debt schemes to achieve their short-term goals that are below five years. These schemes are safer than equity schemes and provide modest returns. There are 16 sub-categories under the debt mutual fund category.
- Hybrid mutual fund schemes: These schemes invest in a mix of equity and debt, and an investor must pick a scheme based on his risk appetite. Based on their allocation and investing style, hybrid schemes are categorised into six types.
- Solution-oriented schemes: These schemes are devised for particular solutions or goals like retirement and child’s education. These schemes have a mandatory lock-in period of five years.
Mutual fund charges: The total expenses incurred by your mutual fund scheme are collectively called expense ratio. The expense ratio measures the per unit cost of managing a fund. The expense ratio is generally in between 1.5-2.5 per cent of the average weekly net assets of the schemes.