Investing In Mutual Funds
Mutual Funds are professionally managed investment programmes where an Asset Management Company pools in money from various shareholders and invests or trades it in diversified holdings such as equity, debt or money market securities. The resulting profit is given back to the investors in form of dividends or capital appreciation.
To invest in a Mutual Fund, you need to understand the types of Mutual Funds that are available to you. These include:
• Equity: These are funds that invest exclusively in the stocks of domestic companies listed on stock exchanges. These are categorised as high-risk funds.
• Money market: These are mainly meant for investors looking for easy liquidity and returns in the short-term. These funds invest in money market instruments such as Treasury bills (T-Bills), Commercial Papers (CPs), Repurchase Agreements (Repo) and government securities. These are categorised as low-risk funds.
• Debt: These are funds that are considered as an alternative to Fixed Deposits. These funds invest in fixed-income securities. Debt funds are typically low-risk funds.
• Hybrid or balanced: These funds invest in both fixed-income securities (debt) and stocks (equities), thereby offering a balanced portfolio to investors.
Mutual Funds can also be categorised based on whether they are closed or open-ended.
• Close-ended:These funds have fixed maturities and money cannot be withdrawn from them before maturity.
• Open-ended:You can withdraw the investment in these funds at any point of time and get your money within a few days.
The biggest advantage of investing through a mutual fund is that it gives small investors access to professionally-managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult to create with a small amount of capital.
How to select a fund?
To earn 12-15% of return on your investment, you need to select good equity stocks or one can go for equity mutual funds to mitigate the risk to an extent. While selecting, equity MF, you need also check that your portfolio should have mid-cap/small-cap funds for around 30-40% and the remaining 60-70% should have a diversified fund, a large-cap fund, etc. to maintain an aggressive portfolio with right asset mix.
Whereas to maintaining a return of around 10-12%, you should invest in balanced fund/hybrid fund, etc. to maintain a moderate risk portfolio. In such case, one can avoid or reduce the investment amount in mid-cap/small-cap funds or avoid making investments in risky stocks.
Assets being managed by Mutual Funds are scaling new highs every month with the total assets under management (AUM) by the 42 SEBI registered “Asset Management Companies” in India growing at a rapid pace since 2014. Investments in MFs have seen a robust growth of 22-28 percent per annum and at the close of the calendar year 2016, the total AUM was around Rs 17, 00, 000 crore, with the 2016 figures swelling by about Rs 4,00,000 crore, the highest since 2009.
According to industry leader AMFI, the Average Assets under Management (AAUM) in the country at the end of July 2017 was at Rs20.42 lakh crore while Assets under Management (AUM) were placed at Rs19.97 lakh crore. According to existing data, retail participation which was generally in the 18,000- 24,000 crores a year range rose to 45,000- 50,000 crore in 2016, with the major contribution coming in from SIP’s and ETF’s. Based on information provided by AMFI, the total number of mutual fund folios at the end of July 2017 was close to 6 crore with retail clientele accounting for about 75 percent of the total.
Compared to the other savings and long- term investment options currently available for resident Indians, MF’s offer the most appropriate return on investment, although they are subject to market risk. Retail investors should categorise their financial goals and risk profile in addition to taking a look at the past performance of the asset management company of the fund and the credit rating of the mutual fund scheme before investing.
By Nishad MUKHERJI