In today’s economic climate, making sure that your money grows to keep up with inflation is more a necessity than a choice. Accumulating wealth over a period of time is almost always, difficult to achieve just by earning a salary and saving a part of it. What everyone needs to do to make their short term and long term goals a reality is to invest their money somewhere.

Investing your money ensures that your money doesn’t lie dormant and loses its value. Invested money, when enough time passes, will almost always give good returns. The biggest advantage is that you can keep up with the phenomenon of inflation.

Also, everyone has certain goals that they want to fulfil at certain stages of life. Maybe you want to own a home just before you start a family, or you want that car that you always dreamt of, or you just want to create enough funds to retire comfortably and leave a legacy for your family. Whatever it is, thoughtful investing is the best way to accumulate wealth to do it. But where should one invest? Real estate ? Stocks ?

One of the most popular forms of investment for the general masses is mutual funds. Read on to find out the answers to questions like, what is mutual fund, how you can invest in them very easily, and the working of mutual funds.

What are mutual funds?

A mutual fund is, basically, a pooled amount of money that is collected from multiple investors and collectively invested in different types of financial instruments like equity, debt funds and others. Unlike stocks, where you invest some money to buy shares of a company directly, a mutual fund allows you to invest through an Asset Management Company or AMC, not just into stocks but many different portfolios. One of the advantages of mutual funds is that the AMC, which is the professional fund manager, will be managing your investment and deciding the best areas in which to invest your money.

The consequence of this is that your money is in safe and professional hands, and their expertise in this arena will ensure that your investment shall give good returns, which is the ultimate goal of these fund managers. Also, an investment in a mutual fund need not be high. It can actually be as low as Rs. 500 if you’re going for a Systematic Investment Plan or SIP.

How mutual funds work?

What exactly happens when you invest in mutual funds? Let us consider that you have invested Rs 2000/- into a mutual fund. As a standalone amount, your investment is not very significant and will not give you appreciable returns. However, just like you, many other investors will be investing in mutual funds with the Asset Management Company, with everyone putting in various amounts. Now, the AMC has lots of different investments from different contributors. So, what they do is they pool all of this money together and create a sizeable corpus.

This corpus is then invested in a diversified portfolio. The investment is not just made into a particular stock, but a variety of equity funds and debt funds. This is done to make sure that the fund is balanced in a fluctuating market. So when prices of a stock go down, others may go up and thus the invested amount remains more or less the same.

What is Net Asset Value, or NAV?

A Net Asset Value is a numerical value that is assigned to mutual funds. It is the price of one single unit of the mutual fund. It is calculated by dividing the total cash value of the mutual fund (after subtracting all charges and liabilities) by the total number of mutual fund shares. The net asset value determines how your mutual fund is performing and it is calculated by the AMC at the end of every day.

How can I make money by investing in mutual funds?

When you invest in mutual funds, you can make money via two different ways.

Via dividends

The first way to earn returns from your investment is via dividends. The funds that were invested for the mutual funds will give out dividends based on the market. If you choose to receive these dividends for your investment, then you’re making money out of your investment through these dividends. However, many AMCs will give you a second option, which is to reinvest the dividends into the mutual fund and keep on doing it until your money grows with the power of compounding.

Via capital gain

The second way that you can make money off your investment is via capital gains. This is similar to the share market, where you buy your units of the mutual fund for a particular price, and when the price of your units increases at some point in the future; you sell your units and earn a profit. This is dependent on the Net Asset Value of the mutual fund.

Types of Mutual funds

There are many different types of mutual funds, all with varying degrees of risks, benefits and returns. There are some that require long term investment, while others are beneficial for shorter terms. Let’s have a look.

Equity funds

An equity fund is a mutual fund that is invested entirely in the shares of a company. Just like stocks, equity mutual funds can give significantly gives higher returns but at the same time have some risks associated with them due to the unpredictability of the market.

Debt funds

Debt funds are mutual funds that are invested in securities like debts, government bonds and other fixed income assets. A debt fund is one of the most risk-free investment options as they give out fixed returns.

Hybrid funds

When you invest in a combination of equity funds and debt funds, it is termed as a hybrid fund.

The beauty of investing in these mutual funds is that you need not just invest in risky equity funds or risk free debt funds that give out low returns. To manage the risk, a combination of debt fund investment and equity funds is used so that your money remains safe.

Methods of investing in mutual funds

When it comes to investing in mutual funds, you have two options. You can either invest a lump sum amount as a one-shot payment, or go for small investments at regular intervals.

Investing lump sum amount.

If you have some surplus cash that you would like to invest in mutual funds, you can do so by investing the entire amount at once. The advantages of doing this are that you will get greater returns for your investment.

Investing via Systematic Investment Plan or SIP

If you plan to invest in mutual funds by putting in small, regular amounts, then that is called as a Systematic Investment Plan. A SIP is one of the best ways for an individual to invest in a structured and regulated manner. For example, you can invest amounts as small as Rs. 500 every month for as long as you like. The dividends earned on this amount are reinvested and through the power of compounding, your investment will grow slowly but significantly. When it comes to SIP, a long-term plan is most feasible. And when the time comes for you to achieve your short term or long-term goals, you can easily liquidate your funds.

A quick, step by step guide to investing in mutual funds

Given below is a quick guide to understand how mutual funds work step by step.

Step 1: Choose your Asset Management Company or AMC. Choose a reputed AMC that has a good history of managing mutual funds. Since you’re trusting the money manager with your hard-earned funds, experience and past record always matters.

Step 2 : Decide whether you want to invest a lump sum amount or start SIP. A lump sum amount is best if you have surplus cash that you’re looking to invest. It will make sure your money grows and since the amount will be significant, the growth itself will also be significant. SIP is best when you want to invest small amounts every month.

Step 3 : Approach the AMC. When you’ve done your research, visit the branch of your chosen AMC and enquire about the various mutual fund schemes available. You can choose high risk and low risk options by dividing your funds into equity and debt funds.

Step 4 : Submit documents. If you already have an account, you can immediately start your SIP by submitting KYC documents.

Step 5 : Watch your money grow. Once you’ve done your investment, sit back and watch it grow. The longer you keep it invested, the more it will grow. Keep an eye on the NAV value at regular intervals so you know how your fund is performing.

Investing in mutual funds is considered one of the best ways of investing your money. It is relatively safer and excellent for the long term. The phenomenon of compounding dictates that the longer you invest, the higher will be the benefits. So, it is important to start as early as possible, when it comes to mutual funds.

Explore Various Mutual Funds here.

DISCLAIMER

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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