30 Jun 2014

Mutual Funds Part 1/7 - Basics of Mutual Funds

What is a mutual fund?
A mutual fund is a fund that invests in holdings of different companies. This offers the benefit of diversification and is professionally managed. I often get emails asking me if one should invest in mutual funds. Here is what one should know before beginning to invest in mutual funds

1. Yes, you can lose money in a mutual fund. However, if you invest long term the chances of gains averaging out are very high.

2. Mutual funds are a good option for people who do not understand the stock market. Funds are professionally managed by a fund manager who has more knowledge about market than the layman.

3. Mutual funds are divided into equity funds and debt funds. Equity funds invest in shares of different companies whereas debt funds invest in debt instruments like government bonds.

4. Mutual Funds have an exit load - exit load is a cost deducted if you withdraw your money before a certain amount of time. E.g. a fund will have an exit load of 0.5% if you exit before 3 months. Meaning - if you exit after 3 months there will not be an exit load.

5. Expense ratio - Expense ratio varies between 0.1% and 3% in a fund. Equity funds usually have a higher expense ratio. This is the amount deducted regardless on whether your fund is doing well.

6. Funds are an apt way of earning inflation beating returns.

7. Tax benefits - mutual funds offer many tax advantages especially to the people who fall under the 20 or 30% tax bracket.

8. Funds should be chosen based on careful evalution and an individual's risk appetite.

In the next few articles, I will be discussing how to invest in mutual funds, taxes on mutual fund returns, gold funds and Fixed Maturity Plans.

Here is to generating and creating wealth!

1 comment:

  1. Good informative article, Divya. Look forward to more on mutual funds..