Mutual funds are managed by professional fund managers who take investment decisions on behalf of investors.
Investing in mutual funds is a popular way for individuals to grow their wealth over time. Mutual funds pool money from multiple investors to invest in a diversified portfolio of assets such as stocks, bonds and other securities.
However, sometimes a mutual fund scheme may be closed or terminated. This can happen for various reasons such as closure of the fund due to poor performance, insufficient assets or a strategic decision by the fund manager or regulatory authority.
Here’s a guide to understanding and investing in mutual funds and what happens to your money when a mutual fund scheme closes.
What is Mutual Fund?
Mutual funds are managed by professional fund managers who take investment decisions on behalf of investors. The main types of mutual funds are:
Equity Mutual Funds: Invest primarily in stocks. They are high risk but offer high return potential.
Debt Mutual Funds: Invest in bonds and other fixed income instruments. They are low risk and provide regular income.
Hybrid Funds: A mix of equity and debt provides a balance between risk and return.
Index Funds: Track a specific index, such as Nifty 50 or Sensex, and aim to replicate its performance.
Sectoral/Thematic Funding: Invest in specific sectors like technology, healthcare etc.
How to invest in mutual funds?
A. Direct Investment:
Online Platforms: You can invest directly through the fund house’s website or investment platforms like Grove, Zerodha or Angel One.
KYC Compliance: Before investing you need to complete your KYC (Know Your Customer) process. This can be done online through eKYC (using Aadhaar and PAN details).
Investment through SIP (Systematic Investment Plan): SIP allows you to invest a fixed amount regularly (monthly or quarterly). This method is ideal for long-term wealth accumulation and takes advantage of rupee cost averaging.
Lump-sum investment: You can invest lump sum in mutual fund together. This is a good option when you have a large amount of capital and prefer to invest all at once.
B. By Broker or Distributor:
You can also invest through mutual fund distributors, financial planners or brokers who provide advice and help in fund selection.
Types of Mutual Fund Investment Methods
SIP: Invest a fixed amount regularly. It is a disciplined way of investing and benefits from the power of compounding.
Lump-sum investment: Invest a lump sum. This is suitable for investors who have a large sum to invest at once.
SWP (Scheduled Withdrawal Plan): Allows you to withdraw a fixed amount periodically (monthly or quarterly) from your mutual fund investment. It is often used by retirees or individuals looking for regular income.
STP (Systematic Transfer Plan): Allows you to transfer money from one mutual fund scheme to another within the same fund house.
Steps to start investing in mutual funds
Select Fund: Choose the fund based on your risk tolerance, investment goals and investment horizon. Consider factors such as:
– Past performance (though not indicative of future returns).
-Type of Mutual Fund (Equity, Debt, Hybrid).
-Expense ratio (a lower expense ratio is better because it lowers the cost of your investment).
–Complete KYC: Complete your KYC process through your fund house or online platform.
– Select investment amount: Decide how much money you want to invest, either in lump sum or through SIP.
-Track your investments: Monitor the performance of your mutual fund investments regularly and make adjustments as needed.
Advantages of investing in mutual funds
Diversification: Mutual funds spread your investment across different securities, reducing risk.
Business Management: Skilled fund managers manage your investments.
Liquidity: You can redeem your mutual fund units (except closed-ended funds) at any time.
Affordability: You can start investing with a small amount (as low as ₹500 in SIP).
Risks of Mutual Fund Investment
Market Risk: Equity mutual funds are subject to market fluctuations.
Interest Rate Risk: Debt mutual funds can be affected by changes in interest rates.
Liquidity Risk: Some mutual funds, especially closed-end funds, may not be as liquid.
Credit Risk: For debt funds, there is a possibility that the issuer may default.
You should know the general terms of mutual funds
NAV (Net Asset Value): Value of mutual fund holdings per unit. It varies daily depending on the performance of the securities.
Cost Ratio: Fees charged by the Fund for managing your investment.
AUM (Assets Under Management): The total value of assets managed by a mutual fund.
Risk Profile: Understanding your risk tolerance helps in choosing the right type of fund.
A popular mutual fund platform
Direct Investment: Fund house websites like HDFC Mutual Fund, ICICI Prudential, etc.
Third-party platforms: Grove, Zerodha (Kite), Coin by Zerodha, etc.
If a mutual fund scheme is closed, what happens to the invested money?
If a mutual fund scheme is closed, the invested money is returned to the unitholders based on the prevailing NAV, after deducting all related expenses. The mutual fund refunds the value of the outstanding units to the unit holder at the current NAV, as recorded in the register of unit holders. Unitholders are also entitled to a detailed report on the winding-up process, containing all necessary information.
Mutual fund investing is a great way to achieve financial goals, but it is important to choose the right fund according to your risk tolerance, financial goals and investment horizon. Always do thorough research, consider consulting a financial advisor and ensure regular monitoring of your portfolio.
Disclaimer: The opinions and investment tips of the experts in this News18.com report are their own and not those of the website or its management. Readers are advised to check with certified experts before making any investment decisions.