Introduction to Mutual Funds in India

Mutual Funds are investments where investors pool their money and it is then used to buy a variety of different financial assets, such as stocks, bonds, and other securities. In simple terms, a mutual fund is an investment platform where the investors pool their money and are allotted units of the fund according to their investment. The money is managed by professionals who determine where to invest the money based on the fund’s goals and what is happening in the market at the present time.

One of the biggest advantages of Mutual Funds is that it gives diversification. Investors are exposed to a broad spectrum of assets with a single investment as opposed to investing in a single stock or bond. It helps to mitigate risk and makes investing more convenient. Mutual Funds are also good for beginners because they allow people to start investing with a small amount of money. They also offer professional management and diversified portfolios.

Investors new to the market can also understand the difference between investing and trading before starting mutual fund investment for beginners.

Let us understand this better with an example of 3 friends with Rs 150 each to invest. So instead of investing separately they decide to pool their money. Their total investment is Rs 450. One of them knows about the stock market and therefore is entrusted with the management of the investment.

He buys 5 shares of Company A at Rs 50 each and 2 bonds at Rs 100 each from the pooled funds. In this example, the friend who manages the money is the mutual fund manager, and the shares and bonds are the investment portfolio.

Diversification is the practice of spreading your investments across different types of assets, such as stocks and bonds, to reduce the risk of loss compared to investing in a single asset. After three days, the share price of company A rises from Rs 50 to Rs 60 and the bond prices remain unchanged. Thus, the total value of the investments goes up to Rs 500.

Since there are three investors, the total number of units is considered to be 3. Therefore, the Net Asset Value (NAV) is calculated by dividing the total portfolio value by the number of units:

NAV=500/3​≈166 

This example shows in a simple way how the NAV of a mutual fund is determined and how SIP investment for beginners works in India.

There are many benefits to mutual funds that attract new and seasoned investors alike. Below is the explanation of some of them:

• Diversification: Mutual funds invest in many types of financial instruments like stocks, bonds, and others. This minimises the risk involved in investment because it is not linked to just one particular asset class.
• Professional Management: Mutual funds are managed by experienced fund managers who analyse market conditions and make investment decisions on behalf of investors.
• Suitable for Different Investors: There are different types of mutual funds designed to match various financial goals and risk levels, making them suitable for a wide range of investors.
• Affordable Investment Option: Investors can begin investing with a small amount of money, which makes mutual funds accessible to individuals with limited capital.
• High Liquidity: Most mutual funds allow investors to buy or redeem units easily except certain close-ended or lock-in schemes such as ELSS.
• Cost-effective Investing: Mutual funds provide diversified investment opportunities at relatively lower costs compared to purchasing multiple securities individually. Investors searching for the best investment opportunities in the stock market often consider mutual funds for long-term investing.
• Benefits of SIP Investments: Through Systematic Investment Plans (SIPs), investors can benefit from compounding and rupee-cost averaging, which can help build wealth gradually over time.

The mutual fund is one of the methods that can be used for creating wealth in the future. There are some associated risks while making an investment in any market-linked instrument. The investor must select those schemes that suit his/her financial goals and risk profile. If the investor finds it difficult to make appropriate decisions, then he/she can consult a SEBI-certified investment advisor.

Step 1: Setting Financial Goals

Determine your financial goal prior to investing in any scheme.

Step 2: Knowing about Your Risk Profile

Decide on your level of risk tolerance while selecting mutual fund schemes. Equity schemes carry high risks, while debt schemes are relatively safe.

Step 3: Selecting an Investment Platform

Consider the most reliable platform for investing in mutual funds, like the Bigul Mutual Funds.

Step 4: Selecting the Mode of Investing

SIP or lump sum investments can be made for mutual fund investments. Investors confused between both approaches can read about SIP vs lump sum mutual fund investment before choosing the right option.

Step 5: Monitoring of Investments

Monitor your mutual fund investments to see whether they satisfy your financial goals.

Various kinds of risks accompany mutual funds, and the investor should be aware of them before making the investment.

• Market Risk: The equity mutual fund faces risk due to movements in the stock market. Factors like economic situations, international affairs, and the psychology of the investor determine whether the fund will increase or decrease in value. SIP helps minimise the risk involved but does not eliminate it entirely.
• Credit Risk: A debt mutual fund faces risk because of the failure of the issuing company to pay back the interest as well as the principal of the security issued.
• Interest Rate Risk: Changes in interest rates affect debt funds. When interest rates increase, bond prices usually decline, which may reduce the value of debt mutual funds.
• Liquidity Risk: Some securities might prove tough to sell on time without impacting their prices. This could result in some liquidity issues for some funds.
• Concentration Risk: The investment strategy of some funds might involve concentrating in one particular sector or investing only in a few securities. If that particular sector underperforms, then the fund could be at risk.

Investors should also understand common mutual fund myths before investing in mutual funds in India.

1. Is the mutual fund investment safe?

The mutual funds are regulated products that are professionally managed by fund managers. However, mutual funds are connected with market performance; therefore, the return on investments cannot be guaranteed.

2. How much should be invested in mutual funds for beginners?

Beginners can invest a small sum of money in mutual funds through SIPs. The sum of investment must be based upon one’s own financial objectives and earnings. One can start investing in a mutual fund with as small an amount as Rs 500. 

3. Is it possible to have losses in mutual funds?

Yes, mutual funds can result in losses due to their exposure to market risks. The risk factor can vary depending on market conditions and the type of risk.