A mutual fund collects money from investors and invests them. It charges a small fee for managing the money. Mutual funds are the best investment vehicles for regular investors who do not know much about investing. People can choose a scheme based on their risk appetite and financial goal and then start investing to achieve that goal.
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How to invest in a mutual fund?
Investors can either invest directly or through an advisor. If he chooses the former option then he will invest in the direct plan of the scheme. On the other hand, if he chooses the latter then he will invest in the regular plan.
If a person wants to invest directly then he should either visit the website of the mutual fund or go to their registered office with the required documents. By investing in a direct plan, an investor can save on the commission that is deducted from the fund NAV in a regular plan. This will add a sizeable amount of money over the long term. However, the investor has to do all the research by himself, track the fund’s performance and churn the portfolio when necessary.
Types of mutual fund schemes:
The Securities and Exchanges Board of India (SEBI) has categorized the mutual funds into the following classes:
Equity mutual fund schemes:
These schemes invest directly in the stock market. The money is spread across stocks of various companies belonging to different industries. These schemes are volatile in the short-term as they depend on the performance of the stock market. But over the long period, the risk reduces significantly and offer great returns in the range of 12-13%. An investor should invest in these schemes with a long-term horizon of at least 7 years. There are 10 sub-categories under equity mutual funds.
Debt mutual fund schemes:
These invest in debt securities. They are less risky than equity schemes and offer modest returns. If an investor has a goal within the next five years then he can invest in debt mutual funds. There are 16 sub-categories under the debt mutual fund category.
Hybrid mutual fund schemes:
They invest in a mix of equity and debt, and an investor must choose a scheme based on his goal and risk appetite. Based on their investment and allocation style, we can further divide these schemes into 6 sub-categories.
Solution-oriented mutual fund schemes:
These aim at achieving a solution to a particular goal like retirement or child’s education. They have a minimum lock-in period of 5 years.
Mutual fund charges:
The total expenses that a mutual fund scheme incurs are collectively called expense ratio. They depict the per-unit management cost of the scheme. It ranges between 1.5-2.5% of the average net weekly assets of the schemes.