These days if you go to any website or youtube or any personal finance advisor you might have come across the term "Mutual Funds" frequently. For a begineer, it might seem like a sure shot way of losing money because for most people investing in share market is a very tricky business that they know nothing about and would rather keep their money in something simple as Bank Deposits giving fixed returns.
National Institute of Securities Markets better explains Mutual Funds as an investment portfolio managed by a professional organization known as an Asset Management Company(AMC). The benefit of this is that these Mutual Funds are personally managed by Professionals who understand how investing in share markets work and have past experience of getting good returns on these investments. So instead of directly investing on the basis of our limited knowledge or because our peer group of friends have invested in them. It makes much more sense to rely on someone who actually knows what they are doing.
One of the starting questions that comes to the mind is - "How do mutual funds work?" Well! you can think of mutual funds as something similar to buying gold coins from a jeweler's shop. On any given day, Gold is selling at a particular rate per gram. Lets say that you have Rs 20,000 cash with you and you went to the Jeweler's store to purchase gold coins and on this particular day gold was selling at a rate of Rs5000 per gram. That means you could buy exactly 4 gms of gold. Mutual funds can also be purchased in a similar fashion wherein each unit of mutual fund is selling at a particular rate in the market known as the Net Asset Valve (NAV). The amount of units you can purchase will depend on the NAV of the fund on that day and the amount of money you are willing to invest.
So ofcourse when we do want to go buy gold, we wait for the rates to go down so we are able to purchase more units for the same amount. Similarly in mutual types, the best time to invest is when the fund NAV is low which is typically at the launch of a new fund know as the New Fund Offer (NFO). Reason being that during the NFO the rate of the NAV is predefined and set at Rs 10 as compared to any other day when the NAV keeps fluctuating through out the day.
Any predictable question that comes to mind is - "How to invest?". There are two ways to go about it i.e. either through a Systematic Investment Plan (SIP) or Lumpsum/Bulk Investments. In SIP, the investor is required to invest a specific pre-decided amount every month on a set date for a specific duration of time. While Lumpsum/Bulk investments are one time investments that can be kept in the funds for a duration as per the suitability of the investor. In case of SIP the minimum amount set by many AMC's is Rs500/- and for Lumpsum its kept as Rs5000/- In both of these cases, there is no pre decided date of encashment of this investment as there is no end date to the mutual fund.
Now that you have gained some interest in Mutual Fund, another big question that needs answering is - "How long do I stay invested?". The simple answer is understanding your end goals and what exactly are you investing for as people have different goals as different stages in life. Some might me saving for a marriage ceremony others might be saving to ensure their child has a good education. Ideally any investment that is kept for a long duration say 5 years and above does have a history of giving better rates as compared to the first year.
To sum it up, discover your end goals and understand the duration of achieving these goals. Your choice of mutual fund and the duration of investment in these funds will largely depend on these goals. Good luck and hope you start your investment journey soon!
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