What Factors Affect The Working Of Mutual Funds?

In today’s age, if you want to build wealth, you need to invest in mutual funds. Even if you’re an amateur investor, you can explore this investment category that lets you earn better returns while starting small with a Systematic Investment Plan (SIP).You can start investing in a mutual fund scheme through a fund manager who manages the portfolio of a group of investors seeking to achieve a common goal. The investment can be in stock, bond, or any other financial instruments. When you buy a mutual fund, you’re pooling money along with several other investors. New units or shares are issued as more people invest in a scheme.Since the funds are market-linked products, they are affected by market gains and losses. They are subject to market risks, which in turn affects the performance and investor returns. However, this is just one of the many factors affecting the working of a mutual fund. How mutual fund works, depends on several other factors. If you’re planning to initiate investment, these determinants have an impact on fund performance. These include:

1. Net Asset Value or NAV: This is the price per share of the mutual fund. The NAV is derived by adding the market value of all shares and dividing it by the number of outstanding shares in the fund. Most investors think that a lower NAV of a fund means it is a better investment choice. This is the biggest misconception. One should never choose a mutual fund depending on the NAV of a fund. To be precise, one should refer to fund value to know the fund’s history, everyday performance, and current cost before investing.
2. Asset Under Management or AUM: This represents the total market value of an asset managed by an Asset Management Company (AMC). If there is a group of investors who have invested in a mutual fund scheme, the cumulative of all investments derive a value known as Asset Under Management. AUM can be a great determiner in helping you find out a fund’s performance and popularity. However, there is no evidence that a high or a low AUM will help you know about a better working scheme. This is because different types of mutual funds perform differently depending on the changes in the AUM value.
3. Fund Managers: Fund managers largely manage mutual fund investments. It would be safe to say that managers play a pivotal role in making or breaking an investment. They have real-time updates about market performance, consider investment objectives, analyse risks, look after compliance of regulations and protection of wealth. Based on the market conditions and risk management skills, fund managers help the investors to determine a mutual fund’s performance. They exploit market opportunities and invest in schemes at the right time in the right manner.
4. Investment Objective: The foremost rule of any investment is to have a goal. Whether it is a short-term or a long-term target, there is always a type of mutual fund that caters to your investment needs. There is something for aggressive and conservative investors, for all wallet sizes and all age groups. You only need to choose the right type of mutual fund scheme basis, your risk tolerance, investment horizon, and liquidity option. If you have the ability to stomach risks, equity is the best-suited option as it can help you reach your financial goals faster. Otherwise, you can choose a debt fund scheme or a balanced portfolio that aligns with your goal.

Now that you know, how mutual funds work, you can start investing in a scheme. You have the option to make an affordable monthly investment or directly begin a one-time investment. Before that, you should understand your risk level, study the past performance of a fund, and determine how much fees and expenses you will incur. Once you select a mutual fund scheme, mutual funds can help to achieve your financial goal in the following ways:

• Mutual fund investment works on the power of interest compounding. Compounding can lead to an increase in the value of your investment returns
• If your current scheme is not delivering much returns, you have the flexibility to switch from one scheme to another in the same family of funds.
• In terms of liquidity, the MF investment is the best choice. In case you have to start investment in an open-ended scheme, you can redeem the units at the prevailing fund value.
• Your investments are safe as all AMC and fund managers have to comply with the SEBI (The Securities and Exchange Board of India) regulations.
• When it comes to earning money, you can either acquire profits in the form of capital gains or dividend income.
• With mutual funds, you get exposure to a variety of schemes related to various industries and sectors.

When it comes to market-linked investments, many people are reluctant to take advice; this may be due to a lack of privacy or fraud. But it is necessary to take advice, especially when you’re a novice mutual fund investor. Make sure you consult an expert financial advisor, who will readily help you and formulate an investment strategy that will enable you to meet your investment goals. Apart from this, you can directly approach AMCs or banks or reputed financial institutions.Remember, investing in mutual funds is all about discipline and patience if you want to realize better returns. Once you have mastered the two, you can surely reach your financial goals.

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.