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Eight Important Things to Know About Mutual Funds

Updated on May 7, 2016

8 Important Things to know Before Investing in Mutual Funds

What is a mutual fund? According to the Securities and Exchange Board of India, or SEBI website, “a mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing those funds in securities in accordance with objectives as disclosed in offer document.” Following are the eight important things you should know about mutual funds.

How Far back do Mutual Funds Go?

The advent of the mutual fund industry in India was marked by the creation of the Unit Trust of India in 1963, with the objective of attracting small to market investments. Other public sector mutual funds entered the industry in 1987. Private players came into the picture only in 1993, but the industry really started growing after 1996, with deregulation and liberalization in the Indian economy.


Start Young with Mutual Funds

According to an article on the Birla Sunlife Mutual Fund (BSMF) website, time is the biggest ally when it comes to investing. The younger one starts, the greater is the power of compounding.

Lifecycle Investing and Mutual Funds

Investors who are in the earning phase of their lifecycle are in the best position to invest their savings and grow their wealth in preparation for the retirement, or consumption, phase of their lifecycle. Mutual funds help to grow wealth over the long-term; they can be used to save money for retirement.

Stock Market Returns with Mutual Funds

According to an article on economictimes.com, the BSE Sensex has risen 9-fold in the period 1995 to 2015, from 3,000 to 27,000 levels. Investors can benefit from such returns by investing in mutual funds, without the burden of having to invest in equities by themselves.

Investment Objectives and Mutual Funds

According to an article on getsmarteraboutmoney.ca, there are several kinds of mutual funds. Equity mutual funds invest primarily in equities, while fixed income funds invest in government and corporate bonds. Equity funds aim to achieve high returns, but are also more risky as compared to fixed income funds. Balanced funds invest in a mix of equity and debt, and calibrate this mix according to the performance in these markets. Index funds are passively managed funds; they track the performance of the selected index.

The Different Kinds of Equity Mutual Funds

According to an article on firstpost.com, there are large-cap, mid-cap, multi-cap, thematic equity and tax saving mutual funds. Large-cap funds invest in the stocks of companies having the largest market capitalization, while mid-cap funds invest in those with middle-range market capitalization numbers. Thematic equity funds are those that invest in particular sectors, such as energy, infrastructure, FMCG and so on. Tax saving mutual funds are those that come under the equity linked savings scheme (ELSS); they help to create wealth and are also tax saving funds.

Method of Investing in Mutual Funds

Investors can choose to invest a lump sum in the mutual funds of their choice. The other possibility is to invest using a systematic investment plan (SIP), which allows the investor to do rupee-cost averaging. According to the principalindia.com website, rupee cost averaging involves investing as per a fixed schedule; this way, you can buy more units when prices fall, and less when prices are high, leading to a low average cost per unit.

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Investor-Friendly Regulations

Investors have access to a wealth of information, given SEBI regulations on what must be disclosed in the mutual fund brochures. One such important regulation is that the mutual fund must give two options for each scheme, a regular plan and a direct plan. The direct plan is one which can be bought directly from the mutual fund company and hence, it has a lower expense ratio. This translates into more of the investor’s money being invested in the direct plan, as opposed to the regular plan.

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