Mutual funds are becoming famous as many people are trying to invest in it because of better returns than the traditional investment (chit funds or fixed deposits). Here money is collected from various investors and an experienced person (fund manager) would invest the money in various stocks, debt, commodities like gold, silver.
A person who doesn't have knowledge about stocks or don't have time to research can easily invest in mutual funds. Mainly equity mutual funds give higher return than other mutual funds (gold, silver, debt).
Mutual fund terms you should know:
- Asset Management Company (AMC): They are financial institutions that manage multiple funds (Eg: SBI Mutual fund, HDFC Mutual Fund....)
- Net Asset Value (NAV): NAV is unit price of the fund. Depending upon the return of investments, this price could rise or fall.
- Asset Under Management (AUM): Total value of money that put into particular mutual fund.
- Expense Ratio: It is the annual fee charged by Mutual Fund scheme to manage money on your behalf.
- Portfolio: It shows all the investments made by the Fund.
- Exit Load: Exit load means fee you have to pay while selling your fund. (Mostly if you exit within 2 years they will charge otherwise they will not charge).
- Funds: These are individual schemes with specific goals and philosophy.
Let's know the different types of Equity Mutual funds:
- Large cap funds:
They must invest at least 80% of the assets in large cap stocks or top 100 companies by market capitalisation. - Mid cap funds:
Mid cap funds are mandated to invest at least 65% of their assets in mid cap stocks. These stocks are ranked between 101 and 250 in terms of their market capitalisations. - Large & Mid cap funds:
These types of funds must have at least 35% of their assets in large cap stocks and 35% in mid cap stocks. - Small cap funds:
Small cap funds have a mandate to invest at least 65% of their assets in small cap stocks. Small cap stocks are ranked below 251 in terms of their market capitalisation. - Flexi cap funds:
Flexi cap funds invest across large cap, mid cap and small cap stocks. These types of funds must have a minimum of 65% of total assets in equity and equity-related instruments. - Multi cap funds:
These funds are mandated to invest 25% each in large cap, mid cap, and small cap stocks. They should invest 75% of their corpus in stocks. - Dividend yield funds:
These funds must invest at least 65% of their assets in dividend-yielding stocks. - Value funds:
These schemes have a mandate to invest at least 65% of their assets in stocks, following a value investment strategy. - Contra funds:
Contra funds must invest at least 65% of their assets in stocks based on a contrarian investment strategy. - Focused funds:
Focused funds must invest in a portfolio of a maximum of 30 stocks. - Sectoral/thematic funds:
These types of funds have to invest at least 80% of their assets in a dedicated sector or theme. - Equity Linked Saving Schemes (ELSS) or tax saving funds:
ELSS or tax saving mutual funds qualify for tax deductions of up to Rs 1.5 lakh under Section 80C. ELSS funds must invest at least 80% of total assets in stocks. These funds have a mandatory lock-in period of three years.
Check this points before Investing in mutual fund:
- Know your investment objective ( new car or home, child education...)
- Time horizon ( In Equity Mutual funds invest above 5 years only ).
- Risk (High Risk, very high risk).
- Choose Direct fund, it gives more returns than regular. (In Direct fund you will invest directly without any broker Commission).
- Choose Growth option over dividend. (In Growth your dividend is reinvested so it give more returns).
- Consistency is the Hallmark of a good fund (not rankings).
- Choose Low Expense ratio fund.
- You won't get same returns every year as markets are volatile.
- Fund Manager Experience.
- Fund house details ( when fund launched, investment objective)
- If you are Investing Lumpsum amount check CAGR returns ( Compounded Annual Growth Rate). If you Investing through SIP check XIRR (Extended Internal Rate of Return).
- Compare Standard deviation, Alpha, Beta, Sharpe ratio(Higher is better), Sortino ratio(Higher is better), Turnover ratio(lower is better).
Selecting a right mutual fund to invest is one half and investing in bull and bear market Consistently is other half. Mutual funds can give good returns in the long run. Keep your cool and Keep Investing :)
