Unless you stay under rocks, you must have heard of Mutual Fund, whether you have invested in it or not. Nowadays it is one of the most popular investment products among the masses, thanks to the awareness created through TV commercials and the eye-catching tagline “Mutual Fund sahi hai.”.
This article will give you a glimpse of the basics of Mutual Fund.
Table of Contents
- What is Mutual Fund?
- Mutual Fund terms one should know
- Types of Mutual Fund
- Difference between Stock and Mutual Fund
- Who should invest in a Mutual Funds
- Benefits of investing in Mutual Fund
What is Mutual Fund?
Before giving you the definition of Mutual Fund, let me give you an example from real life. It will help you understand mutual fund in a better way.
Consider that you went to a fancy restaurant. Upon checking the menu, you got the shock of your life. None of the dishes is priced below 350, and you have 500 rupees only.
By seeing the price, you realized that individually you won’t be able to afford 2 dishes, which is required to have a good meal experience.
Then you came out of the restaurant with a sad face. Just when you are about to leave for home, a gentleman came and told you that a nearby hotel is providing Buffet@499. He’ll take 1 rupee to guide you till that hotel. You happily agreed to that offer and went with him.
By reaching there, you realized that now you can have multiple dishes for only 500 rupees. Now you are happy because of it and have less risk whether you will like one single dish or not, as you have many dishes that you can try.
Now, let’s understand the same thing in terms of Mutual Fund.
You are the investor, the fancy restaurant is the Stock Market, expensive dishes are individual stocks, the uncle who guided you is the Mutual Fund manager, and the buffet is the Mutual Fund scheme.
So, a Mutual Fund is a collection of stocks that is managed by professionals to achieve a common goal.
Like in a buffet restaurant, we have the option of a vegetarian buffet, a non-vegetarian buffet, a Chinese buffet, etc.; similarly, mutual funds have different options for different kinds of investors, such as small-cap fund, mid-cap fund, ELSS fund, etc.
The number of people who wish to have a vegetarian buffet has a common interest. Similarly, people investing in ELSS have a common goal, i.e., to save tax.
Mutual Fund terms one should know
NAV: It stands for Net Asset Value. NAV represents the value of one unit of your investment. Higher the NAV, higher is the value of your investment. Lower the NAV, lower is the value of your investment.
AMC: It stands for Asset Management Company. It is the company that brings you the Mutual Fund schemes that investors invest into.
SEBI: It stands for Security and Exchange Board of India. It is the top governing body in India when it comes to Stock Market or Mutual Fund.
AUM: It stands for Asset Under Management. It is the total amount of money managed in one Mutual Fund scheme. If any Mutual Fund scheme says they have an AUM of 10,000 crore, that means they are managing 10,000 crore of investors’s money in that scheme.
Expense Ratio: This is the money an investor pays to the AMC to manage their money. It is typically 1-2% of your investment.
Exit Load: It is a charge levied by the AMC if you withdraw the money before one year. It is typically 1% of your investment.
SIP: It stands for Systematic Investment Plan. It means you invest a fixed amount of money at a fixed frequency (monthly, quarterly) in a particular scheme.
SWP: It stands for Systematic Withdrawal Plan. It is the opposite of SWP. In SWP, you withdraw a fixed amount of money every month.
ELSS: It stands for Equity Linked Saving Scheme. It is a type of Mutual Fund scheme introduced by the government to help taxpayers save money and make their money grow at the same time.
KYC: It stands for Know Your Customer. It is a one-time activity that an investor does to start their investment journey.
NFO: It stands for New Fund Offering. It is the initial phase of a mutual fund scheme where AMC raises capital from investors to buy stocks.
XIRR: It stands for Extended Internal Rate of Return. It is an indicator of return on investment when investment is not done in irregular intervals or the investment period is more than one year. XIRR gives a better picture of the RoI of a Mutual Fund than Absolute Return.
Types of Mutual Fund
We can categorize Mutual Funds based on many factors, such as
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- Open-ended and closed-ended mutual fund
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- Equity & Debt mutual fund
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- Large Cap, Mid Cap, Small Cap, Flexicap Mutual Fund
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- ELSS, Sectoral & Thematic Mutual Fund
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- Index Fund, Fund of Fund
Don’t worry. We will discuss each type of mutual fund in detail in the next article.
Difference between Stock and Mutual Fund
| Parametre | Stock | Mutual Fund |
| Definition | It represents direct ownership in a company. | It is also ownership of the company, but indirectly. |
| Risk Level | It is riskier than most asset classes. | It is comparatively less risky compared to stocks due to diversification. |
| Suitability | It is suitable for experienced investors who have knowledge about stocks. | It is suitable for beginners as it is professionally managed. |
| Diversification | It’s not diversified by default. | It is usually diversified or has scope for diversification. |
| Convenience | It is owned through DEMAT accounts. It’s a one-time and easy process. | It can be bought from individual AMC websites or third-party websites such as AssetPlus. |
| Cost to Own | It’s cheaper to own stocks. | It’s relatively costly to own Mutual Fund as it is actively managed. |
| Return on Investment | It’s high and depends on the individual stock. | It’s comparatively low as we invest in diversified stocks. |
| Tax Benefit | It doesn’t give any tax benefit. | ELSS mutual fund gives tax benefits under Section 80 c. |
| Liquidity | It is highly liquid in nature. | It is less liquid than stocks. |
| Systematic Investment | It’s not possible to do SIP in stock. | Mutual Fund is most suitable to do SIP. |
Who should invest in Mutual Funds?
A mutual fund as an investment instrument is suitable for every category of investor, whether they’re newbies or seasoned investors. It has a scheme for each kind of investor.
A risk taker can choose a small-cap mutual fund, while a conservative investor can choose a large-cap mutual fund. A person trying to save tax can invest in ELSS funds, while a person can invest in an index fund to mimic their preferred index.
So, in short, Mutual Fund is for everyone.
Benefits of investing in Mutual Fund
- Professional Management: It is managed by fund managers who are experts in their game. It removes the hassle of tracking the market every day.
- Low entry point: one can invest in a mutual fund with as little as ₹ 100. That means it’s not only for rich people.
- Systematic Investment: A mutual fund gives the option to invest systematically. You can invest the same amount each month or quarter. This helps in building financial discipline.
- Accessibility: One doesn’t necessarily need a third-party app to invest in Mutual Fund. One can do it directly from AMC’s website.
- Tax Saving: ELSS mutual funds help in saving tax under Section 80 c.
- Beating Inflation: Mutual funds help one to beat inflation as the return on investment is higher on mutual funds compared to inflation.
- Regulated: Mutual Fund Companies (AMCs) are regulated by SEBI. SEBI has proposed stringent Rules and Regulation for AMCs to follow so that investor money can be protected.