What is a Mutual Fund: A comprehensive guide /><br/>
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Newcomers to investing are often advised to start their investment journey with Mutual Funds till they have a better idea of the stock market. There are two principal reasons for this advice.

First, Mutual Funds provide individual investors access to professional management of their investments. This is immense support for people who are new to investing and are yet to master the ropes.

Second and equally important, Mutual Funds facilitate investments in assets which would otherwise be out of reach due to the large amount of capital typically required for such investments.

But what is a Mutual Fund? Let us now check out what a Mutual Fund is and how it works.

What is a Mutual Fund?

A Mutual Fund is a financial instrument combining capital from multiple investors which is then invested in an assortment of securities, including stocks, equities, debt funds, bonds, and other assets.

Skilled fund managers oversee these funds and the fund's objectives to guide their investment choices to create dividends for the investors

When allocating the pooled corpus towards a diverse range of securities, fund managers try to keep the investments aligned to the objective of the fund, which can be growth, income, stability, or a combination of these.

What is NAV?

Mutual Funds issue units to investors. A unit represents an investor's ownership of the fund's portfolio and the dividends that are generated by the scheme.

The value of each of these shares is known as the Net Asset Value (NAV), and it fluctuates based on the performance of the portfolio's underlying securities and the buying and selling of the units.

The NAV is calculated and sealed when the market closes for the day as per the following formula: NAV = (Assets minus Liabilities) / Total number of outstanding shares or units.

How does an investor make money from Mutual Funds?

There are three ways for investors to earn money from a Mutual Fund.

1. Through dividends on stocks and interest on bonds that the fund holds:

The securities that the Mutual Fund invests in yield dividends based on how the market performs, or from pre-determined interest earnings, irrespective of market conditions. Investors collect the dividends or the interest earnings. Asset Management Companies (AMCs) offer investors the option of reinvesting the dividends so that their money can grow further through the power of compounding.

2. Through capital gains:

When investors sell or redeem their units at a price higher than the one the paid when buying the units, they make capital gains. The gains also depend on the time period or holding period of the investment. If the investment is for less than three years, you get short-term capital gains and if the investment is for more than three years, you get long-term capital gains. The tax on capital gains depends on the type of Mutual Fund scheme.

Understanding the Mutual Fund process

The Mutual Fund process starts with a group of people investing in a particular fund based on their risk tolerance, investment objective, and investment horizon. Once this is done, the fund manager reinvests the pooled money in various assets, while the investors receive units of the fund – which are somewhat like shares of a company. The number of units each investor receives is proportionate to the amount invested.

To calculate the number of units allocated to an investor, the invested amount is divided by the fund's NAV for that specific day. Investors opting to exit the fund have the option of selling their units back to the Mutual Fund company. The NAV at the time of selling determines the selling price of the units.

Also Read: How Do Fund Managers Manage Your Mutual Fund Investment?

Exploring different types of Mutual Funds

There are various types of Mutual Funds, each serving a specific investment goal. These include:

Class-based asset funds

  • Debt Funds: These funds primarily invest in assets such as government securities, corporate bonds, or other fixed-income assets to offer stable returns with lesser risk.
  • Equity Funds: These funds invest in stocks of companies and have the objective of capital appreciation, but they carry a higher risk due to their dependency on market movements.
  • Hybrid Funds: Hybrid funds offer investors a blend of growth potential and income generation through investments in both equity and debt instruments.

Structure-based funds

  • Open-ended Funds: These funds allow investors to invest or redeem units during any time of any business day at the fund's NAV, offering high liquidity. The number of units keeps changing because they keep being sold and bought, causing the NAV to fluctuate.
  • Close-ended Funds: These funds have a specific period for investment (usually five-seven years) and are less flexible than open-ended funds. The window for investing is for a limited period when the scheme is launched. This is called the New Fund Offer period or NFO period. Once the NFO period is over, investors cannot buy or redeem units.
  • Interval Schemes: These funds combine the features of both open-ended and closed-ended Mutual Funds. The units can be bought or sold only during a pre-determined time, and regular trading cannot be done. New investors cannot buy units once the investment time period is up.

Investment objective-based funds

  • Growth Funds: These funds aim for capital appreciation and are typically riskier due to their high equity exposure. They invest money in the equity stocks of the growth sector.
  • Income Funds: These funds are designed to provide investors with a dependable income source and are generally regarded as having lower levels of risk. The money is usually invested in debentures, certificates of deposit, and bonds.
  • Liquid Funds: These funds provide a quick way of earning income by investing money in short-term and ultra short-term market instruments such as treasury bills, bank certificates of deposit, and commercial papers. The investment is fairly low-risk and brings good returns.
  • Tax-saving Funds: These funds provide tax benefits under Section 80C of the Income Tax Act. Also called Equity Linked Saving Scheme (ELSS), this fund invests money into equity. The risk factor is high, but these funds offer very high returns when the market performs well.
  • Pension Funds: These offer a long-term investment plan and yield returns regularly after the investor retires from work. The fund's investment corpus is divided between debt and equity instruments. The debt instruments balance out the risk and the equity instruments bring high dividends. Investors can either draw a lump sum of returns, or get a fixed regular pension, or a mix of both.

Actively managed and passively managed funds

  • Within an actively managed fund, the fund manager oversees portfolios with the support of thorough analytical research, to determine the appropriate actions of buying, selling, or retaining specific stocks. The aim is to generate maximum returns and outperform the scheme's benchmark.
  • Conversely, a passively managed fund replicates the benchmark index of the scheme proportionately. The fund manager's task is not to outperform the benchmark index but to replicate its returns. Examples of passively managed funds are Index Funds and Exchange Traded Funds.

Merit of Investing in Mutual Funds

Investing in Mutual Funds comes with numerous advantages. Here are some significant ones:

Access to professional expertise

Investing can be time-consuming and requires considerable dedication. However, if you lack the time or expertise to navigate the financial markets, Mutual Funds offer a viable alternative, with a professional fund manager handling your investments to generate satisfactory returns – for you. This service comes with certain fees, much like paying a driver for his services.

Potential for higher returns

Another big advantage of Mutual Funds is the potential to earn higher returns compared to traditional investment options. The performance of the market determines the returns of Mutual Funds: in a bullish market, the value of your funds can significantly increase though a bearish market can have the opposite effect. Because of this, comprehensive research and smart investment strategies are crucial for success with Mutual Fund investments.

Diversification

Choosing to invest in Mutual Funds means diversifying one’s portfolio, as a single fund can include a variety of stocks from various sectors. This investing in different asset classes spreads one’s risk exposure; if one investment performs poorly, chances are that another will do well. New investors are frequently advised, "Don't put all your eggs in one basket", and how it is wise to spread one’s resources across multiple options instead of relying on just one. Mutual Funds facilitate this, providing instant diversification.

Tax benefits

Investors can benefit from tax deductions of up to ₹ 1.5 lakh through investing in Equity Linked Savings Schemes (ELSS) as per Section 80C of the Income Tax Act. Furthermore, indexation benefits on debt funds can help investors earn higher post-tax returns.

Mutual Funds and investment goals based on timelines

Different types of Mutual Funds cater to various financial or investment goals. Investment goals can be broadly categorized into short-term (one to three years), medium-term (three to five years), and long-term (five years and more). Different types of funds are better suited for different time frames. For example, liquid funds are better for short-term goals, hybrid funds for medium-term goals, and equity funds for long-term purposes.

How to invest in Mutual Funds

There are two ways in which you can invest in a Mutual Fund: invest lump sum or take the SIP route.

1. Going all in with lump sum

If you have a sum of money you want to invest, you can put the lump sum in one go into a Mutual Fund scheme. This means you do not have to invest smaller amounts regularly. For lump sums, the minimum investment required is ₹ 100. However, this number varies depending on the investment company.

2. Going with SIP

SIPs, or Systematic Investment Plans, involve making fixed investments regularly in a Mutual Fund, eradicating the need to time the market and facilitating gradual wealth creation.

You can invest in Mutual Fund plans directly without the services of intermediaries (this is called a Direct Plan) or you can invest with the help of intermediaries, such as banks or private distributors or stockbrokers (Regular Plan). If you opt for the first, you need to familiarise yourself with the market.

A step-by-step guide to investing in MFs

To invest in Mutual Funds, here are the steps you need to follow:

1. Pick an Asset Management Company with a track record of delivering high dividends.

2. Decide whether you want to invest a lump sum or take the SIP route. Lump sum investments offer excellent returns if the investment is made when the market is low. With SIPs, you can invest at any phase of the market's cycle.

3. Visit the nearest office of your chosen AMC and find out about the different Mutual Fund schemes. You will have to decide on a scheme that is based on your financial growth goals. Alternatively, in this digital era, AMCs operate online as well, and you can sign up for a Mutual Fund scheme online.

4. Submit the documentation needed. If you opt for the SIP method and do not have an account, you will have to open one. If you already have an account, you may be asked to submit your KYC and you can start the SIP immediately.

5. The fund manager will handle the rest. Try to keep your money invested for long stretches and reinvest your dividends. This will help your money grow more.

Also Read: Asset Manager or Fund Manager Which One Should You Pick?

Final Words

Mutual Funds provide a straightforward means to achieving your financial goals. However, it is advisable to analyse the various fund options available and invest keeping your financial goals in mind. It is always better to consult a financial advisor to guide you.

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FAQs – Frequently Asked Questions


  • How does the Mutual Fund process work ?

    The Mutual Fund process involves pooling money from a group of investors and reinvesting the amount collectively in various assets, such as shares, bonds and government securities. Investors are given units in proportion to their investment amounts. These units can be redeemed or sold.
  • How does a Mutual Fund work, and what are the reasons for its existence ?

    A Mutual Fund is a way for multiple investors to combine their money and invest it in various securities to diversify their portfolios. It provides individual investors access to professionally managed, diversified portfolios which would otherwise be out of their reach.
  • How do you manage all Mutual Funds in one place ?

    You can manage all your Mutual Funds in one place through a consolidated account offered by various Asset Management Companies. These accounts allow you to track, buy, and sell units of different Mutual Funds.
  • How many days will it take to invest in Mutual Funds ?

    The process of Mutual Fund investment can typically be completed within a few business days. The exact timeline can vary based on factors like fund type and the investment platform used.
  • What are the key takeaways of Mutual Funds ?

    Mutual Funds provide access to professionally managed, offer diversified portfolios, and while they carry risk, they can provide substantial returns over the long term.

 

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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.

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Postings and monitoring

The Facilities Provider or ABCL or ABC Companies does not routinely monitor your postings to the Website but reserves the right to do so if deemed necessary if it is related to the facilities offered on the web site and to comply with law. However, in our efforts to promote good citizenship within the internet community, if the Facilities Provider or ABCL or ABC Companies becomes aware of inappropriate use of the Website or any of its facilities, any information, opinions, advice or offers posted by any person or entity logged in to the Website or any of its associated sites is to be construed as public conversation only, and the Facilities Provider or ABC Companies shall not be liable or responsible for such public conversation. You agree that in such cases, we will respond in any way that, in our sole discretion, as deemed appropriate. You acknowledge that Facilities Provider or ABC Companies will have the right to report to law enforcement authorities any actions that may be considered illegal, as well as any information it receives of such illegal conduct. When requested, ABC Companies/Facilities Provider will co-operate fully with law enforcement agencies in any investigation of alleged illegal activity on the internet.

Submissions and unauthorized use of any Materials contained on this Website may violate copyright laws, trademark laws, the laws of privacy and publicity, certain communications statutes and regulations and other applicable laws and regulations. You alone are responsible for your actions or the actions of any person using your user name and/or password. As such, you shall indemnify and hold Facilities Provider, ABCL / ABC Companies and its officers, directors, employees, affiliates, agents, licensors, and business partners harmless from and against any and all loss, costs, damages, liabilities, and expenses (including attorneys' fees) incurred in relation to, arising from, or for the purpose of avoiding, any claim or demand from a third party that your use of the Website or the use of the Website by any person using your user name and/or password (including without limitation your participation in the posting areas or your submissions) violates any applicable law or regulation, or the rights of any third party.

We reserve the right to terminate access to this Website at any time and without notice. Further this limited license terminates automatically, without notice to you, if you breach any of these Terms of Use. Upon termination, you must immediately destroy any downloaded and printed Materials.

If you come across any breaches/violation or offensive material you must report to us at abc.secretarial@adityabirla.com

Use of Cookies

You agree and understand that the Website will automatically receive and collect certain anonymous information in standard usage logs through the Web server, including computer/computer resource-identification information obtained from "cookies" sent to your browser from a web server or other means as explained in the Privacy Policy.  

Facilities Changes and Discontinuation

The Website reserves the right to discontinue or suspend, temporarily or permanently, the facilities. You agree that the Facilities Provider/ ABC Companies will not be liable to you in any manner whatsoever for any modification or discontinuance of the facilities. The format and content of this Website may change at any time. We may suspend the operation of this Website for support or maintenance work, in order to update the content or for any other reason.

ABCL, ABC Companies, and its directors, employees, associates, or other representatives shall not be liable for any damages or injury, arising out of or in connection with the use, or non-use including non-availability of the Website and also for any consequential loss or any damages caused because of non-performance of the system due to a computer virus, system failure, corruption of data, delay in operation or transmission, communication line failure, or any other reason whatsoever. The Website will not be responsible for any liability arising out of delay in providing any information on the Website.

Compliance with the Law

You agree that you will not:

  • Use any robot, spider, scraper, deep link or other similar automated data gathering or extraction tools, programme, algorithm or methodology to access, acquire, copy or monitor the Website, or any portion of the Website.
  • Use or attempt to use any engine, software, tool, agent, or other device or mechanism (including without limitation, browsers, spiders, robots, avatars or intelligent agents) to navigate or search the Website, other than the search engines generally available by third party web browsers
  • Post or transmit any file which contains viruses, worms, Trojan horses or any other contaminating or destructive features, or that otherwise interferes with the proper working of the Website or the facilities.
  • Attempt to decipher, decompile, disassemble, or reverse engineer any of the software, comprising or in any way making up a part of the Website or the facilities.
  • You agree not to use the facilities for illegal purposes or for the transmission of material that is unlawful, harassing, libelous (untrue and damaging to others), invasive of another's privacy, abusive, threatening, or obscene, or that infringes the rights of others.

Restrictions on Commercial Use or Resale

Your right to use the facilities is personal to you; therefore, you agree not to resell or make any commercial use of the facilities. In addition, the Website welcomes your feedback as a user of the facilities. Any feedback you provide will become the confidential and proprietary information of the Website, and you agree that the Website may use in any manner and without limitation, all comments, suggestions, complaints, and other feedback you provide relating to the Website. The Website shall have a worldwide, royalty-free, non-exclusive, perpetual, and irrevocable right to use feedback for any purpose, including but not limited to incorporation of such feedback into the Website or other Website software or facilities.

No Endorsements

All product and facilities marks contained on or associated with the facilities that are not the Website marks are the trademarks of their respective owners. The Website would require you to respect the same. References to any such names, marks, products or facilities of third parties or hypertext links to third party sites or information does not imply the Website’s endorsement, sponsorship or recommendation of the third party, information, product or facilities.

Promotional Offers

You may receive from time to time, announcement about offers with intent to promote this Website and/or facilities/products of ABC Companies (“Promotional Offers”). The Promotional Offer(s) would always be governed by these Terms of Use plus certain additional terms and conditions, if any prescribed. The said additional terms and conditions, if prescribed, would be specific to the corresponding Promotional Offer only and shall prevail over these Terms of Use, to the extent they may be in conflict with these Terms of Use. The Website reserves the right to withdraw, discontinue, modify, extend and suspend the Promotional Offer(s) and the terms governing it, at its sole discretion.

Charges for use of Website

There are no charges or fees to be paid by you for use of this Website. However, you are responsible for all telephone access fees and/or internet service fees that may be assessed by your telephone and/or internet service provider. You further agree to pay additional charges, if any levied by Third Party Service Provider(s), for the facilities provided by them through the Website (Additional Charges).

No Endorsement

You are advised to be cautious when browsing on the internet and to use good judgment and discretion when obtaining information or transmitting information. From this Website, users may visit or be directed to third party web sites. The Website makes no effort to review the content of these web sites, nor is the Website or its licensors responsible for the validity, legality, copyright compliance, or decency of the content contained in these sites.

In addition, the Website does not endorse or control the content of any other user and is not responsible or liable for any content, even though it could be unlawful, harassing, libelous, privacy invading, abusive, threatening, harmful, vulgar, obscene or otherwise objectionable, or that it infringes or may infringe upon the intellectual property or other rights of another. You acknowledge that the Website does not pre-screen content, but that the Website will have the right (but not the obligation) in their sole discretion to refuse, edit, move or remove any content that is available via the facilities.

Electronic Communications

These Terms of Use and any notices or other communications regarding the Facilities may be provided to you electronically, and you agree to receive communications from the Website in electronic form. Electronic communications may be posted on the Website and/or delivered to your registered email address, mobile phones etc either by Facilities Provider or ABC Companies with whom the services are availed. All communications in electronic format will be considered to be in "writing". Your consent to receive communications electronically is valid until you revoke your consent by notifying of your decision to do so. If you revoke your consent to receive communications electronically, the Facilities Provider shall have the right to terminate the facilities.

Assignment

You shall not assign your rights and obligations under this Agreement to any other party. The Website may assign or delegate its rights and/or obligations under this Agreement to any other party in future, directly or indirectly, or to an affiliated or group company.

Legal Disclaimers

The information provided on or through the Website is for general guidance and information purposes only and they do not in any manner indicate any assurance or opinion of any manner whatsoever. Any information may be prone to shortcomings, defects or inaccuracies due to technical reasons. Certain information on Website may be on the basis of our own appraisal of the applicable facts, law and regulations in force at the date hereof.

The information (and opinions, if any) contained on the Website may have been obtained from public sources believed to be reliable and numerous factors may affect the information provided, which may or may not have been taken into account. The information provided may therefore vary (significantly) from information obtained from other sources or other market participants. Any reference to past performance in the information should not be taken as an indication of future performance. The information is dependent on various assumptions, individual preferences and other factors and thus, results or analyses cannot be construed to be entirely accurate and may not be suitable for all categories of users. Hence, they should not be solely relied on when making investment decisions. Your investment or financial decision shall always be at your own discretion and based on your independent research; and nothing contained on the Website or in any information would construe ABCL/ABC Companies or any of its employees/authorized representative as having been in any way involved in your decision making process. Any information and commentaries provided on the Website are not meant to be an endorsement or offering of any stock or investment advice.

Nothing contained herein is to be construed as a recommendation to use any product, process, equipment or formulation, in conflict with any patent, or otherwise and Facilities Provider / ABCL/ABC Companies makes no representation or warranty, express or implied that, the use thereof will not infringe any patent, or otherwise. Information on this Website sourced from experts or third party service providers, which may also include reference to any ABCL Affiliate. However, any such information shall not be construed to represent that they belong or represent or are endorsed by the views of the Facilities Provider or ABC Companies. Any information provided or sourced from ABCL Affiliate belongs to them. ABCL is an independent entity and such information from any ABCL Affiliate are not in any manner intended or to be construed as being endorsed by ABCL or Facilities Provider. The information does not constitute investment or financial advice or advice to buy or sell, or to endorse or solicitation to buy or sell any securities or other financial instrument for any reason whatsoever. Nothing on the Website or information is intended to constitute legal, tax or investment advice, or an opinion regarding the appropriateness of any investment or a solicitation of any type. Investment in the securities market and any financial instruments are inherently risky and you shall always assume complete and full responsibility for the outcomes of all the financial or investment decisions that you make, including but not limited to loss of capital. You are therefore advised to obtain your own applicable legal, accounting, tax or other professional advice or facilities before taking or considering an investment or financial decision.

No Solicitation

No Information at this Website shall constitute an invitation to invest in ABCL or any ABC Companies. These are meant for general information only or to meet statutory requirements or disclosures. ABCL or any of its employees are in no way liable for the use of the information by you, when making any decision or investing or trading through any investment vehicles or ABC Companies, or any other third party which may be engaged in offering of these services.

The information contained on this Website does not represent and should not be used to construe (i) the terms on which a new transaction would be entered into by ABCL or ABC Companies, (ii) the terms on which any existing transactions could be unwound by ABCL or ABC Companies, (iii) the calculation or estimate of an  amount that would be payable following an early termination of any past/existing transactions or (iv) the valuations given to any transactions by ABCL or ABC Companies in their books of account for financial reporting, credit or risk management purposes.

Statutory Disclosure

ABCL and ABC Companies are engaged in a broad spectrum of activities in the financial services sectors. You understand and acknowledge that Aditya Birla Money Limited (‘ABML’), Aditya Birla Finance Limited (‘ABFL’) and Aditya Birla Sun Life Asset Management Company Limited and trustees and sponsor of Aditya Birla Sun Life Mutual Fund (‘ABSLMF’) are group companies and ABML / ABFL also acts as a distributor of ABSLMF.  Any recommendation or reference of schemes of ABSLMF if any made or referred on the Website, the same is based on the standard evaluation and selection process, which would apply uniformly for all mutual fund schemes. You are free to choose the execution facilities in the manner deemed fit and proper and no commission will be paid by ABSLMF to ABML / ABFL if you choose to execute a transaction with ABSLMF on the Website, unless otherwise agreed by you and ABML/ABFL separately. Information about ABML/ABFL, its businesses and the details of commission structure receivable from asset management companies to ABML/ABFL, are also available on their respective Website.

Similarly Aditya Birla Money Insurance Advisory Services Limited and Aditya Birla Insurance Brokers Limited are insurance intermediaries and engaged in the distribution of Insurance Products and it may services may include products of Aditya Birla Sun Life Insurance Company Limited and Aditya Birla Health Insurance Company Limited. However there is no conflict on these services and commissions if any payable are in accordance of the extant regulations.

Force Majeure

The Facilities Provider, ABC Companies and any of its Third Party Service Providers shall not be liable for any delay or failure in performance resulting directly or indirectly from acts of nature, forces, or causes beyond their reasonable control, including, without limitation, Internet failures, computer equipment failures, telecommunication equipment failures, other equipment failures, electrical power failures, strikes, virus, other malicious computer code, hacking, labour disputes, riots, insurrections, civil disturbances, shortages of labour or materials, fires, flood, storms, explosions, acts of God, war, earthquake, governmental actions, orders of domestic or foreign courts or tribunals, non-performance of third parties, or loss of or fluctuations in heat, light, or air conditioning.

Indemnification

You agree to protect and fully compensate Facilities Provider, ABCL, ABC Companies, subsidiaries, licensors, suppliers and facilities providers, employees, officers and directors, from any and all third party claims, liability, damages, expenses and costs (including but not limited to reasonable attorneys fees) caused by or arising from your use of the facilities, your violation of the Terms of Use or your infringement, or infringement by any other user of your account, of any intellectual property or other right of anyone.

No Waiver

The Facilities Provider, ABC Companies or any of its third party service providers and processor bank/merchants etc. shall not be deemed to have waived any of its/their rights or remedies hereunder, unless such waiver is in writing. No delay or omission on the part of Facilities Providers and ABC Companies, in exercising any rights or remedies shall operate as a waiver of such rights or remedies or any other rights or remedies. A waiver on any one occasion shall not be construed as a bar or waiver of any rights or remedies on future occasions.

Exclusive Agreement

You agree that these Terms of Use are the complete and exclusive statement of agreement supersede any proposal or prior agreement, oral or written, and any other communications between you and the Facilities Provider and its Third Party Service Providers or processor bank/merchants relating to the subject matter of these Terms of Use. These Terms of Use, as the same may be amended from time to time, will prevail over any subsequent oral communications between you and the Website and/or the processor bank.

Termination

Either party can terminate this Agreement by notifying the other party in writing. Upon such termination You will not be able to use the facilities of this Website.

Governing Law and Jurisdiction

The Website specifically prohibits you from usage of any of its facilities in any countries or jurisdictions that do not corroborate to all stipulations of these Terms of Use. The Website is specifically for users in the territory of India. In case of any dispute, either judicial or quasi-judicial, the same will be subject to the laws of India, with the courts in Mumbai having exclusive jurisdiction.

These Terms and Conditions are governed by and to be interpreted in accordance with laws of India, without regard to the choice or conflicts of law provisions of any jurisdiction. You agree, in the event of any dispute arising in relation to these Terms and Conditions or any dispute arising in relation to the Website whether in contract or tort or otherwise, to submit to the jurisdiction of the courts located at Mumbai, India for the resolution of all such disputes.

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