In a simple manner, one can say that mutual funds are for those who have no time and/or knowledge to invest and create wealth and you need some professional person to handle on your behalf.
Let us take a simple example to understand it. Suppose you have Rs. 1 lac and want to invest in stock market. You don't know where to invest, how to find out the right valuation of the company, fundamentals, technical anlysis etc. Confused. So, you discussed the matter with your collegue and he suggested you to invest in some "XYZ" company. He claimed to have knowledge and some "internal" news. You trusted him and invested the whole Rs. 1 lac in that company.
After couple of days, that stock started coming down. Since you were confident on his advise, you just relaxed. And then after few days, the stock crashed like anything and you're in 50% loss. You could not gather force to book your lossed and stock slipped 30% further. Your friend is no where to help you and give you explanation.
So, at last, you booked all your losses and started blaming stock market, operators, big HNI, FII's etc. And after few days, your luck also.
Then, after 3 months, suddenly you saw newspaper and you were shocked to see the price of "XYZ" company at all time high. Infact, that company is now trading at the rate when you bought the shares. Your so-called friend also praised his knowledge. Again, you blamed your luck.
And finally, you decided that you'll never invest in stock exchange in any manner and will stick your investments with PPF, bank fixed depsoit, post office schemes, LIC insurance plans etc. And you'll pass this "information and lesson" to your children also in hereditary.
This is a real example of many Indians. They burn their fingers and then no looking back.
You've spend 20-25 years of life to get basic and professional education to earn money. Can't you spend few minutes to understand the basics of mutual funds?
Let us begin then.
The companies which handles our money – our aseets are called Asset Management Companies (AMC's). Generally, these AMC's have few professional fund managers who have skills to invest your money wisely in different schemes.
Types of Mutual Funds
Broadly speaking, there are 3 types of schemes – Equity, Debt and Gold. All the schemes are combinations of these 3 constituents.
Equity funds invest their money in stock market.
Debt Funds invest their money in Govt. securities and / or bonds of good rated companies.
Gold Funds will invest in Gold – directly or indirectly.
The schemes that invest in different sectors of stock market like Pharma, FMCG, IT, Power, infrastructure, Banking etc. are called equity diversified mutual funds. This way they spread the risk. If one or 2 sectors are not performing well, the fund manager has the liberty to shift the money to some good performing sectors.
Some fund invest their whole money in one specific like Banking sector. Here the risk is more as the growth of the fund depends upon the performance of one sector. Some bad news on that sector can pull the returns of that scheme down. Such funds are called thematic funds. One should know when to enter such sector specific schemes and when to exit.
In debt funds, the fund manager will invest in safe instruments like bonds etc. Here the money is safe but still there is risk of interest rate cycle.
Gold ETF (Exchange Traded Funds) will invest in Gold only. Generally, the price of Gold ETF is equivalent to Gold price. Good for buying Gold in electronic form.
Then, some schemes will invest 65% in equity and 35% in debt. Such schemes are called balanced funds. Some schemes will invest 80% in equity and 20% in debt. Some schemes will invest 15% in Gold, 10% in debt and rest in equity. There can be number of such combinations. The investor can choose funds according to his risk appetite.
The charge collected by a Mutual Fund from an investor for selling the units or investing in it is called as load.
When a charge is collected at the time of entering into the scheme it is called an Entry load or Front-end load or Sales load. The entry load percentage is added to the NAV at the time of allotment of units.
An Exit load or Back-end load or Repurchase load is a charge that is collected at the time of redeeming or for transfer between schemes (switch). The exit load percentage is deducted from the NAV at the time of redemption or transfer between schemes.
Some schemes do not charge any load and are called "No Load Schemes".
Recurring sales expenses
The Asset management Company may charge the fund a fee for operating its schemes, like trustee fee, custodian fee, registrar fee, transfer fee etc. This fee is called recurring expense and is expressed as a percentage of the scheme's average net assets. The recurring expenses are subject to certain limits as per the regulations of SEBI. Such expenses are decuted by AMC's before declaring NAV.
Checking Latest NAV of Mutual Funds
You can check the latest NAV of Indian Mutual Funds from the official websites of the AMC's. Some websites also displays NAV of all the companies. One such website is http://www.investmentkit.com/mutualfunds/nav.php , wherein you can see the latest NAV of all mutual fund schemes of India. This page is updated everyday.