A quick overview on Mutual Funds
Summary: When thinking investment, an investor has to find and choose from options available in plenty. No matter what option you choose for your investments, each have their pros and cons, but suitability is what matters. So before parking your money, it is important for you to know all about Mutual Funds and evaluate the benefits and risks involved.
When thinking investment, an investor has to find and choose from options available in plenty. So, whether one must invest in stocks, bonds, money market securities or go the traditional way by plotting money into fixed deposits, public provident funds, etc. or choose the best mix of two or more. No matter what option you choose for your investments, each have their pros and cons, but suitability is what matters. Similarly, when one has Mutual Funds as an investment option, the first question that arises is why should I invest in mutual funds? And the answer to it lies in knowing the following:
- What are mutual funds?
- What is
Net Asset Value (NAV)?
- What are the different types of mutual funds?
- What are the benefits of investing in mutual funds?
- What are the risks involved?
So, mutual funds are professionally managed pool of investment made by different investors into diversified selection of securities, in order to achieve a common financial goal. Being well diversified mutual funds keep losses at bay. Since mutual funds need constant vigil of the market and performance of different securities, it is managed by experts called the fund managers.
Once you are aware of
what are mutual funds & are clear about its definition, next in line is to know the Net Asset Value (NAV).
The Net Asset Value (NAV) of the Units will be determined daily or as prescribed by the Regulations. The NAV shall be calculated in accordance with the following formula, or such other formula as may be prescribed by SEBI from time to time.
NAV = [Market/Fair Value of Scheme’s Investments + Receivables + Accrued Income + Other Assets - Accrued Expenses - Payables - Other Liabilities] / Number of Units Outstanding
NAV will be computed upto four decimal places.
It is the scheme returns that are indicative of their performance. Investors, hence keep a track of latest NAV to gauge the performance of various securities and funds.
Next in line is to know the different
types of mutual funds available for subscription. Now this can be differentiated on the basis of maturity type and objective type. Starting with the former, there are three types of funds: open-ended funds, closed ended and interval funds. And those based on investment objectives are:
liquid funds, gilt funds,
tax saving funds,
index funds, and sector specific funds.
investing in mutual funds are many, namely diversification of funds in different sectors and industries, management of your funds by a professional, your funds stay liquid and are available to you anytime unless there is a lock-in period. The transaction cost is low due to economies of scale. Updated information of performance of funds renders transparency. Since all funds are registered with SEBI, stay assured that all mutual funds are regulated and monitored.
With a bounty of benefits, there are also risks involved and different securities and schemes may get impacted in a given period due to alteration in economic scenario. These can impact the performance of mutual funds. Also, investors might experience lack of control because they can never determine the exact composition of a fund's portfolio at a given time and neither can they influence the fund manager regarding which securities to buy.
Standard Risk Factors -
Mutual Funds and securities investments are subject to investment risks such as trading volumes, settlement risk, liquidity risk, and default risk including the possible loss of principal and there is no assurance or guarantee that the objectives of the Scheme will be achieved.
Scheme Specific Risk Factors - Risks associated with investing in Equities, Bonds, Foreign Securities, Securities Lending, overseas investment, Derivatives like Valuation Risk, Mark to Market Risk, Systematic Risk, Liquidity Risk, Implied Volatility, Interest Rate Risk, Counterparty Risk (Default Risk), System Risk, Risk attached with the use of derivatives. Also Other Scheme Specific Risk factors, Additional Risk Factors, Specific Risk Factors, etc.
Thus, when you question yourself on whether or not to invest in mutual funds, you must evaluate and then park your money into mutual funds.
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. Certain factual and statistical information (historical as well as projected) pertaining to Industry and markets have been obtained from independent third-party sources, which are deemed to be reliable. It may be noted that since RNAM has not independently verified the accuracy or authenticity of such information or data, or for that matter the reasonableness of the assumptions upon which such data and information has been processed or arrived at; RNAM does not in any manner assures the accuracy or authenticity of such data and information. Some of the statements & assertions contained in these materials may reflect RNAM’s views or opinions, which in turn may have been formed on the basis of such data or information.
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