A beginner’s guide to mutual funds

A beginner’s guide to mutual funds

The stock market attracts investors by the dozen. Fraught with market risks, stock market play is stressful indeed. If you’re looking to ease the stress and find an easy way to invest in the market and make money, mutual funds are your answer.

To put it simply, a mutual fund is a pool of investors, which includes individuals and companies, putting in their money, and reaping dividends under the guidance of a mutual fund manager, who manages the portfolio of investments in the mutual fund.

How do mutual funds work?

Once you choose a mutual fund, based on its performance and ratings (like S&P), you invest your money in it. You will then be allocated certain mutual fund units. The fund manager puts your money in the best possible avenues and makes a profit. The payout—to the extent of your mutual fund holding—is then credited to you.

What are the types of mutual funds?

Closed-end funds

An initial public offering with a prescribed number of shares is issued to investors. These shares are traded in the open market and are subject to the market demand and supply factors. A closed-end fund neither redeems nor issues any new shares.

Generally, the shares in a closed-end mutual fund trade at a discount to their NAV (Net Asset Value). The biggest advantage of investing in closed-end funds is that they offer a regular cash flow. Plus, you enjoy the flexibility to trade your mutual fund shares in the open stock market. With just a handful of mutual funds being closed-end, take your pick to enjoy an assured flow of income.

Open-end funds

A major chunk of mutual funds you find are open-end funds. Unlike a closed-end fund that issues only a set number of shares, there is no set limit in open-end mutual funds. An investor who desires to purchase can do so and the fund will issue new shares based on the current NAV. On the same lines as issuing new shares, open-end funds also allow redemption. The mutual fund investor can sell his shares at any point of time. Open-end fund investments reflect the current NAV.

Open-end fund investment can be load funds or no-load funds. Load funds are those that require the investor to pay a certain amount as sales commission. So, if an investor chooses an open-end fund that charges a load, the purchase price will be the NAV plus the load.

However, on the other end, you’ve the no-load funds—shares that you acquire at their NAV. With their lower expenses, open-end no-load funds tend to offer better returns to the investors.

Why choose open-end funds?

Diversity and accessibility are the biggest advantages of open-end funds. Plus, open-end funds offer liquidity. Open-end mutual funds offer a basket of funds to fit your investment goals. So, you can move between the various fund offerings, depending on the changing pattern of your investment goals. With a host of open-end mutual funds in the market, you’re sure to find one that fits your investment needs.

Benefits of mutual fund investments

The goal of an investment is to make a profit, and mutual funds do not fail you in this aspect. In addition, mutual funds offers diversification of investment and are professionally managed to help your money grow.

Investment portfolio

When you look to invest, you must explore the various investment opportunities. If you want to make money from multiple rewarding options, mutual funds offer this on a platter. Mutual fund companies invest in a wide variety of stocks and bonds, which help in diversifying your portfolio.

Minimised risk

Portfolio diversification helps to minimise the risks as well. An astute investor would surely not place all his eggs in one basket. Mutual funds invest your money in a wide spectrum of assets. Thus, a fall in an individual stock price will not have any major impact on your investment portfolio.

Suitable for small investors

Mutual funds are ideal for small investors who have limited funds for investment. You might not be able to afford blue-chip stocks as an individual investor. But when you invest in a mutual fund, your portfolio will include blue-chip and top-performing stocks as well. So, with your limited capital, it is possible to maximise your returns.

Mutual funds are professionally managed

Mutual fund managers are experts who can read the markets. This gives them the edge to identify top-performing stocks and add them to the investment portfolio and earn good returns.

Mutual fund companies are growing by the day. With their expert knowledge and resources, they are better placed to invest your funds in high return earning investments, thereby helping you earn handsome payouts. If you’re a beginner to investing in the markets, which can totally confound you, mutual funds are your best choice. You earn without having to sweat over calculating financial ratios and analysing financial statements.