Mutual funds demystified

What should you know about the working of mutual funds? We provide the answers.

A savvy investor in India today knows the value of investing in mutual fund units. There are scores of high performing mutual funds available for the asking, but selecting the right one is vital. As such, mutual funds in India offer good returns over a longer period of time, with a propensity for low to moderate risk. It is possible to minimise the risk associated with mutual funds by investing by diversifying the portfolio and divesting funds across a variety of debt and equity instruments.

For those who are relatively new entrants to the stocks and securities arena, the idea of investing in mutual funds and the many products contained therein can be a daunting one. Following a few cues will hold new investors in good stead:

- Do your research: Find out all you can about how mutual funds work. They are characterised into Open Ended and Closed Ended. If you are a new investor with not enough experience of the markets and only some funds at your disposal, you might consider buying mutual funds with SIP (Systematic Investment Plan).

- Hire a fund manager: At the outset, it is imperative to enlist the services of an experienced fund manager who will invest in the best mutual funds in India. The manager will explain which equity mutual funds you should invest in and why. Since the manager earns a commission off your earnings, he is committed to selecting the best portfolio for you. Besides, the presence of a manager takes the pressure off you – you do not need to possess detailed knowledge of debentures, Government securities, current interest rates etc.

- Opt for equity mutual funds: Equity mutual funds carry moderate risk and offer high returns over a period of time. Take care to invest in high-quality, high-priced mutual funds for better returns. They are long term investments that invest your money in stocks. The money is normally invested in a wide variety of sectors ranging from FMCG to banking. Ask the fund manager for information on the various types of equity mutual funds NAV, i.e. small cap to mid-cap, and from tax saving and hybrid, among others.

- Why equity mutual funds particularly? Because the returns from equity mutual funds are accrued from investing in top quality business houses and companies that are in a fast phase of growth or which have already shown a high growth rate. Though the fund may be more expensive than others, the returns are high as well and the potential for risk (and hence losing all your money in a lower-priced fund that may tank) is lower. Plus, the earnings from equity funds are tax-free after a holding period of one year.

- Additional knowledge is required for…Knowing which stocks to pick over others, whether to invest for the short term or the long term and the benefits of each, which companies have a better track record and share price, if SIPs are a better option at the starting before diversifying into other instruments, etc.