Mutual Funds - How to Invest Wisely?
What is a Mutual Fund?
Savings has become
an integral part of life today. It not anymore advantageous of having
your money locked up in a fixed deposit for years, which is not going
to fetch an average individual of not more than 6% annually. The percentages
offered for a fixed deposit is also declining as years pass by, and this
is not doing the investor any good.
What do you do with the hard earned money then? This is a million dollar question which has varied answers. Banks and other financial institutions have come up with a big answer to this question in the form of Mutual Funds. Mutual Fund is something which pools the investment of various investors and invests the same in different securities. The losses and gains that result from Mutual Funds are being accrued to the investors only.
The investors have the options of investing in various money market instruments like bonds, debentures and government securities. There are high-risk portfolios and low-risk portfolios. The mantra is more the risk, more the gains, however if you want to play safe you have other options. Institutions like Merryl Lynch, HDFC mutual Funds, Standard Chartered Mutual Funds etc. offer these kinds of services. These companies often engage themselves in various market studies and researches and offer precious advice to the investors depending upon the types of investment they want to make.
These financial institutions invest the money which the investors invest in various other sources which include securities too to fetch those returns on their investment. A customer is given various choices and sent market updates regularly to let them know about the market value of the securities they have invested in. Today mutual funds play an important role in increasing the savings of the investors. They are clearly given equal preference rather than the money to lie down in the bank as a fixed deposit for a period without giving them higher returns.
What is NAV?
NAV called as the Net Asset Value of the fund is the cumulative market value of the investments or assets of the fund net of its liabilities. NAV per unit is the net value of assets divided by the number of units outstanding. Buying and selling into funds is done on the basis of NAV-related prices. Net Asset Value is computed as follows:
NAV= Market value
of the funds assets+Receivables+Accrued IncomeLiabilities-Accrued
Benefits of Investing in Mutual Funds:
1. Professionally qualified and experienced personnels manage Mutual Funds. Generally, investors, by themselves, may have reasonable forecasting capability, but to assess a financial instrument a professional analytical approach is very much required in addition to access to research and information about market prices and fluctuations in prices, time and methodology to make sound investment decisions and keep monitoring them.
2. Since Mutual Funds make investments in a number of securities, the resultant diversification reduces risk. They provide the small investors with an opportunity to invest in a larger basket of stocks.
3. The investor is spared the time and effort of tracking investments, collecting income, etc. from various issuers, etc. The investment professionals take care of all these activities and update the investors from time to time.
4. It is not necessary that investments should be in large amounts. It is also possible to make small time investments, as and when the investor has surplus funds to invest, he can work on his portfolio.
5. Mutual Funds are registered with SEBI. SEBI monitors the activities of Mutual Funds and clearly lays down the guidelines as to how it should operate, thereby reducing the risk element.
6. As Investments in open-ended funds is liquid, they can be redeemed at anytime unlike direct investments in stocks and bonds.
Are there any risks involved in investing in Mutual Funds?
Mutual Funds do not
provide assured returns. Returns from Mutual Funds are linked to their
performance. Investors portfolio generally consists of shares, debentures
and deposits. All these investments involve an element of risk. The unit
value of every investment varies depending upon the performance of the
company and companies may default in payment of interest/principal on
their debentures/bonds/deposits in case it does not do well that quarter
or for that financial year. Besides this, the government may come up with
new regulations, which may affect a particular industry or class of industries
which might comprise your investments. All these factors influence the
performance of Mutual Funds.
How to get started
Choice of any scheme would depend to a large extent on the investor preferences. Equity Funds would be the most suitable for an investor who is willing to take a fair amount of risk as investments in Equity Funds would earn them the maximum returns. Debt funds, otherwise called as debentures are suited for those investors who prefer regular income and safety. Medium and long term investors can invest in Gilt funds as they involve minimum risk and their capital is safe and secure.
Balanced funds are ideal for medium- to long-term investors willing to take moderate risks. Corporate, Institutional investors and business houses generally invest their funds for a very short period. Liquid funds are the best investment for these investors as they can convert their securities into liquid cash immediately as and when they require. For those investors who are seeking Tax benefits, Tax Saving Funds are ideal for these people.
While selecting a portfolio, one important aspect that should be taken into consideration is the duration of the investment. Based on your time horizon and risk factors you can select a particular portfolio. Apart from all this, factors like objective of the funds and returns on investments given by these funds on different schemes should also be taken into consideration while selecting a particular portfolio.
The performances of Mutual funds are not only influenced by the performance of the stock market, it is also influenced by the economy as well. Inflation and deflation factors play an important role in affecting the market prices and thus having an impact on the investments. Equity Funds are influenced to a large extent by the stock market. Apart from the economic factors the stock market also to a large extent depends upon the performance of the companies which in turn affect the prices of the stock. The interest rates and the credit quality influence the Bond Funds. As interest rates fall, bond prices rise, and vice versa. On the other hand, bond funds with higher credit ratings are less influenced by changes in the economy.
Its a proven fact that it's smarter to own a variety of stocks and bonds than to invest on the success of a few companies. But diversifying is not as easy as investing in a portfolio of individual stocks and bonds can prove to be expensive. You have to be updated with the investment market and should know as to what to invest in and when to invest in those securities to earn profits on your investments. It requires a lot of experience and concentration.
Mutual funds have one big advantage: When an investor invests money into a fund, it's pooled with money from other investors to create much greater buying power than he would have invested. This can be used to invest in stocks of high value and greater returns.
Since a portfolio can consist of hundred different securities, its success is not dependent on how one or two holdings perform. The return on other investments can nullify the underperformance of a few holding thus making the investment still a very profitable one.
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