What are mutual funds?

The real key to making money in stocks is not to get scared out of them. - Peter Lynch

MUTUAL FUNDS

Lillaney

4/23/20233 min read

Mutual Funds
Mutual Funds

A mutual fund is a type of investment vehicle that pools money from a large number of investors to purchase a diversified portfolio of stocks, bonds, or other securities. The fund is managed by a professional portfolio manager who makes investment decisions on behalf of the investors, with the goal of achieving the fund's investment objectives.

When you invest in a mutual fund, you are buying shares in the fund. The value of your shares is determined by the net asset value (NAV) of the fund, which is calculated by dividing the total value of the fund's assets by the number of shares outstanding.

Mutual funds offer several advantages to individual investors. They provide access to a diversified portfolio of securities, which helps to reduce risk. They also offer professional management and the convenience of easy buy and sell options, which makes it easier for investors to participate in the stock market without having to pick individual stocks or bonds.

Mutual funds come in many different types, including equity funds, bond funds, index funds, among others. Each type of fund has a different investment objective, asset allocation strategy, and risk profile, allowing investors to choose the fund that best meets their individual investment needs and goals.

What are the benefits of investing in a mutual fund?

  1. Low fees.

  2. Easy access to a variety of markets.

  3. Flexibility

Which is better: an ETF or a mutual fund?

If you invest in an index ETF or index mutual fund you should be able to beat most active investors.

The advantage of ETFs as compared to mutual funds is their flexibility although mutual funds are not that bad as well.

Personally, I prefer ETFs like Nifty ETF(NiftyBees).

What are the best mutual funds to invest in India and why?


Whenever someone asks me the best mutual funds to invest I am reminded of the following:


If you give a man a fish, you feed him for a day. If you teach a man to fish, you feed him for a lifetime.


In order to find the best mutual funds to invest we need to understand 3 things as follows:


  1. Goals of the investor.

  2. Risk taking capacity of the investor.

  3. Time horizon of the investor.


Let’s explore each one of them.


  1. Goals of the investor.


The first thing to understand before investing in a mutual fund is the reason why the investor wants to invest. What does the investor want to achieve? Goals can be of various types like given below:


  1. Short term goals - Saving for a vacation / buying a car

  2. Medium term goals - Education / Marriage

  3. Long term goals - Retirement / buying a house


  1. Risk taking capacity of the investor.


The next thing to understand before investing in a mutual fund is the risk that the investor can take. Risk taking capacity can be of various types.


  1. Low risk taking capacity - Willing to take a 10-20 percent loss.

  2. Medium risk taking capacity - Willing to take a 30-40 percent loss.

  3. High risk taking capacity - Willing to take a 50-60 percent loss.


  1. Time horizon of the investor.


The next thing to understand before investing in a mutual fund is the time for which the investor wants to invest. Time horizon can be as follows:


  1. Short term - Up to 5 years

  2. Medium term - 5 to 10 years

  3. Long term - More than 10 years


Once we know the goals, risk taking capacity and time horizon of the investor an appropriate mutual fund can be chosen as follows:


  1. For short term goals and low risk-taking capacity - debt funds can be considered.

  2. For medium term goals and medium risk-taking capacity - hybrid funds can be considered.

  3. For long term goals and high-risk taking capacity - equity funds can be considered.


In this way we can choose the best mutual funds depending on our goals, risk taking capacity and time horizon.


If you would like to watch a video about mutual funds you could refer the below:


Mutual Funds | Dilip Raju Lillaney



Src: What are ETFs? | RTI For Money , What are mutual funds? | RTI For Money