Saturday, September 15, 2018

#1 mutual fund: Basics, types, NAV, NFO | should you invest ? - Financially Pro

Basics of mutual fund- should you invest in it? Types, NFO,NAV

What is Mutual fund?

A mutual fund is a professionally managed fund where money is pooled from people and invested in the stock market.

Didn't got it?

Mutual fund takes money from you and invests on your behalf in the stock market.
This sounds good.

Let's unfold it little more.

Mutual fund business is to make an investment on behalf of other people and earn some money out of it.

They are smart, professional, knowledgeable and have fair skills of investment.

Now, I cannot make you understand in a more simple way. Do comment if you still didn't get it.

Basics of how to invest in mutual fund

Should you invest in a mutual fund?

It depends on a lot many factors.
Let's check one by one
  • Don't want your money stay idle and want to earn some return
  • Have a good amount of money but don't know where to invest it
  • If you are a goal based investor and investing for retirement planning, other goals like marriage, purchasing home etc
  • If you have time to do a detailed analysis of the company with fundamental analysis then you should go for the direct stock market rather than a mutual fund
  • If you have knowledge of investing in stocks but don't have time
  • If you don't have any knowledge regarding the stock market, investment etc( just go with my mutual fund series and you'll know everything about mutual fund)
  • If you don't like to see your stock market investment value to fluctuate more
  • If you don't like to take more risk
  • Failed too many times in stocks.

So, now you are clear with should you invest in a mutual fund or not.
If you have something more to say, I'll be waiting for your comments.

The biggest misconception about mutual fund

I love to talk about personal finance, so I talk to so many people about their money-saving habits, investments etc.

I have understood one common misconception about it.
Almost everybody believes that a mutual fund is an investment option like the stock market, FD, post office savings etc.

TOTALLY wrong.
So let's know what's the truth

Let me ask a question,
Do you know how to drive a vehicle?
If yes, then you would be driving and if not mostly you'll try to avoid it.

A mutual fund is also the same.
A mutual fund is not an investment option, it's a vehicle through which you invest in the stock market.

It's a vehicle and fund manager is a driver.
If you know to invest in the direct stock market then you can go directly and if you don't know and still want to get benefit out of it, you can go with a mutual fund.

Biggest doubt: direct stock market vs mutual fund
Again same answer. Do you know how to drive a vehicle?
If you know how to invest in stocks then you should go directly to share market.
But if you don't, you may choose a mutual fund.

There is no hard and fast rule.
I have seen many people investing in mutual fund although having good knowledge of stock market.
I think that you should invest in a mutual fund to keep some amount safe and give it a compounding effect.

Benefits of investing in mutual fund

  • Expertise: the fund manager doesn't invest your hard earn money on his own. He has a skilled analysts team who analyse stocks with different financial methods.

  • Starting small: you don't need a huge amount to invest in a  mutual fund, you can start small. So, the chances of losing money are also not high.

  • Time-saving: If you invest in stocks, a lot of research will be required to be done and it is very time-consuming. Mutual fund investment can save a lot of time. A mutual fund will do investment on your behalf so you can get the benefit of expertise.

Reasons not to invest in a mutual fund:

  • Tax saving: People tend to invest in a mutual fund to save tax and in the month of March.

What is NAV?

When purchasing stocks from market what we pay is a price per share. Same can be applied with a mutual fund.
If you want to make an investment in a mutual fund, you need to buy units of the fund. 
Per unit price or NAV is same.

NAV(Net Asset Value) is per unit price of the market value of the total investment by a mutual fund.

              Total assets - total liabilities NAV=_____________________________
       Total number of units


NAV is what you pay to a mutual fund to purchase its units.

Example: If a mutual fund has NAV of 100 and you buy 200 units, then your total investment is of 20000.

Types of a mutual fund:

  • Equity fund:
Equity fund invests in equity shares of different companies in the stock market. The main purpose of equity fund is for capital appreciation. As funds directly invest in shares, it is risky and fluctuates more market conditions.
Should you invest in it or not?
Let's talk this in detail in next post.


Large-cap equity fund:
This fund mostly invest in large-cap companies
Large-cap companies mean having a market capitalisation of more than 20,000 crores. 
(Market capitalisation= Current market value * number of shares)
Large doesn't mean it'll invest only large cap, it means around 90% to 95% will be invested in large cap.

Midcap equity fund:

This kind of funds invests in the mid-cap company. 

Mid-cap companies mean having the market capitalisation of 5000 crores to 20,000 crores.

This is a risky fund. So many aspects need to be considered before investing. I will go into more detail in the next post.

Small-cap equity fund:

This kind of funds invests in the small-cap company. These funds are riskier than mid-cap too.

Small cap companies mean having the market capitalisation of up to 5000 crores.

Thematic fund
This fund generally invests in themes like infrastructure, IT, banking etc.
Simplified: In a particular sector
Note: Avoid if you are a newbie

Tax saving fund:
This fund generally provides tax benefits to an investor. 

  • Hybrid fund:
The hybrid fund invests in equity and debt in a fixed ratio decided by them or directed by an investor.

This is also known as Balanced Fund.
It is a safe option compare to equity fund.

  • Debt fund
It is a safe option to invest where you can get risk free return. These funds invest in debt instruments like government bonds, corporate bonds, debenture etc. 
This fund is mostly used for creating a regular source of income and also for retirement purpose. 

  • Close-ended fund 
The funds described above are based on investment types. Here classification is based upon different criteria.
Closed-ended funds mean where you can invest only when they offer and generally come with a lock-in period.

Things to check before investing in mutual fund

  • Open-ended fund
This kind of funds can be purchased anytime from the stock market and differ from the close ended fund. 
You can purchase or sell units of open-ended funds anytime you want.

From an investment option which kind of fund is a better option?
- I will go into more detail in upcoming post.

What is the expense ratio?

An expense ratio is charged by the mutual fund for managing your money. 
Generally, it is not more than 2.5% of the total investment. 
The value of NAV is after deducting the expense ratio.

     What is  NFO(New Fund Offer)?
We know that when and company comes for the first time in the stock market for offering shares to the general public it is known as IPO(Initial Public Offer).

In the same way, when mutual fund comes for the first time to offer units to an investor is called NFO(New Fund Offer).

If still you have any doubt then comment it, I'll be more than happy to reply.

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