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What is a Mutual Fund, and How Do You Invest in It?


A common question often asked by new investors is 'What is a mutual fund?' It is an investment vehicle through which you can invest. These products can invest in securities like equity, debt, cash, commodities and more. Therefore, you can get access to multiple securities through a single investment product.

You might be thinking about whether there are any best mutual funds to invest in or the best mutual funds to buy. Well, in the concept of investing, nothing can be termed as 'best'. Investments can only be differentiated on a comparative basis.

There are numerous types of mutual funds offered by various fund houses, and each mutual fund type has its own characteristics.

Let's explore the key seven elements you must know about mutual funds investment:

1. Different Mutual Funds for Different Goals

There are various types of mutual funds, and they are based on the following features:

  • Fund Structure - Open-ended, closed-ended and interval funds
  • Portfolio Management - Actively managed and Passive funds
  • Asset Class - Equity, Debt, Fixed Income, Gold and more

These types of mutual funds can be further divided into various subcategories.

Each of these funds can match your various goal-based planning needs. For example, debt-based funds like Liquid Mutual Funds can help you build a strong emergency corpus. Similarly, equity funds can help you beat inflation and build a solid retirement corpus over time. You can use the mutual fund calculator to chart your investment journey. Thus, you can add different types of mutual funds schemes to your portfolio based on your goals.

2. Regularity

You might have heard about this phrase, "An apple a day keeps the doctor away". The term emphasises the regularity aspect playing a vital role in building a compounded impact. In the same way, in a mutual funds investment, you can regularly invest through SIP or Systematic Investment Plan to build compounded returns in the long term.

Another method to invest in mutual funds is through lump sum investments.

Thus, you can choose to invest bit-by-bit or lump sum, or both as per your convenience.

3. The Underlying Asset

A lot of times, you might be wondering what happens when you invest in mutual funds? And what causes the fund to make profits or plunges?

The answer is simple; mutual funds are nothing but a representation of their underlying asset class. Therefore, when the prices of the underlying securities decline, the fund value declines and increases when the asset prices rise.

But what is it that rises and falls? Let's see further.

4. NAV and Mutual Fund Units

The Net Asset Value or NAV of securities can be calculated as the total prices of the fund's underlying securities divided by the number of units in the scheme.

Now, when you buy mutual funds, you are issued units of the scheme. When the NAV of the scheme rises more than your purchased value, you can make a profit, and when it falls below your purchased value, it could result in a loss.

5. Riskometer

Different types of mutual funds have different risk profiles associated with them. Typically, equity-based mutual funds can be riskier when compared with the debt counterparts. The more the risk related to the particular mutual fund, the lengthier can be your investment horizon.

Furthermore, looking at the riskometer and matching the desired investment's risk profile with your risk appetite can help you make better financial decisions.

6. STP and SWP

You can move your money from one fund to another through STP or Systematic Transfer Plan and redeem funds using the SWP or Systematic Withdrawal Plan route. You can get systematic flexibility in terms of investment, transfers and withdrawals in mutual funds.

7. Saving Taxes

Mutual funds can also help you save taxes. By investing in ELSS or Equity Linked Savings Scheme, you can save taxes by investing an amount of up to ₹1.5 Lakhs.

Therefore, mutual funds are vehicles that can help investors pool their money for various financial goals. You can seek advice from a finance professional on how to invest and how much to invest in mutual funds for your desired goals.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully

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