A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the total market cap of the fund—derived by the aggregating performance of the underlying investments.
Identifying Goals and Risk Tolerance
Before investing in any fund, you must first identify your goals for the investment. Is your objective long-term capital gains, or is current income more important? Will the money be used to pay for college expenses, or to fund a retirement that's decades away? Identifying a goal is an essential step in whittling down the universe of more than 8,000 mutual funds available to investors.
You should also consider personal risk tolerance. Can you accept dramatic swings in portfolio value? Or, is a more conservative investment more suitable? Risk and return are directly proportional, so you must balance your desire for returns against your ability to tolerate risk.
Finally, the desired time horizon must be addressed. How long would you like to hold the investment? Do you anticipate any liquidity concerns in the near future? Mutual funds have sales charges, and that can take a big bite out of your return in the short run. To mitigate the impact of these charges, an investment horizon of at least five years is ideal.
Which is the Best Mode to Invest in Mutual Funds?
There is no right time as such when it comes to investing in mutual funds. Each day, the number of investors investing in mutual funds is rising. From students to employed to retired people, everyone has started investing in mutual funds to help bridge the barrier of money being an issue to accomplish their personal and career goals.
If you are new to the investment world, then to give yourself the confidence of investing, to begin with, you can start with SIPs as you can initiate, pause, continue and redeem investments at any time (depending on the lock-in period). Investors can choose a date on which they like their bank account to get auto debited, and the amount goes in the funds selected.
In a SIP model, the fund managers purchase more units at lower NAV and lesser units at a higher NAV when the market rises. Hence, the average cost per unit declines over a period; this is popularly known as Rupee Cost Averaging. For a long-term investor, SIPs make for a handy tool of risk management.
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