After taking care of Life insurance, Health Insurance, and contingency needs, now time for concentration on wealth creation. Wealth can be created through numbers of ways. One investment route is through mutual funds. That’s why I have chosen this topic as Basics of investing in Mutual Funds in India. Mutual funds are the best method of accumulating the wealth in long term. Moreover, most of the people are not even aware of the mutual fund as an investment instrument and through this article I want you to be aware of common terms used in mutual funds.
- Asset Management Companies: A company that invests its customers’ fund into stocks, bonds, securities etc. according to financial objectives. Large numbers of investors invest the money into a common fund. A group of highly qualified persons, who are very familiar with financial markets called as fund managers, plan and invest the money into the different asset class. Asset management companies provide investors more diversification of portfolio than the investors would have.
Units: Like the ‘numbers of shares’ are the measurement of shares, the mutual funds have units. If one investor invests Rs 1000 in a mutual fund of unit price Rs 10, the investor will get 100 units of the fund in the portfolio. As the investment grows over a period of time, the asset value is also growing. Suppose a fund value on November 15, 2015, is 10000000 and per unit price is Rs 10 and on January 1, 2015, the fund value is Rs 11000000, then the unit price will be RS 11 approximately. Like the stocks and IPO, the funds also launch in the market and it is called as NFO (New Fund offer).
- Net Asset Value (NAV): The price of unit of mutual fund as earlier is called as Net Asset Value (NAV)
Asset Under Management (AUM): The market value of assets that an AMC manages on behalf of investors. The AUM is declared once in every month. It is the total value of the portfolio that the fund is invested in on that particular day.
- Types of Mutual Funds: There are broadly two types of mutual funds.
- Another way of classifying the mutual fund is according to the investment on companies on which the fund is investing. Large Cap, Mid Cap and Small Cap. Large Cap mutual funds are investing the money mostly into large companies. As these companies are big and have the long-term track record, the investment is less risky. Mid-cap funds are investing the money into mid-size companies.
As these companies are moderate sized and have the potential of turned into big companies, the investment attracts more return. The fund managers have to wisely choose the mid-cap companies which has a high potential for growth and at the same time riskier than large-cap funds. The small cap funds are investing the money into the small cap companies and it has the high return potential and high risk.
- Based on the asset class, broadly the funds can be of three types. Equity Funds, Debt Funds and Balanced Funds. Equity funds are investing the amount mostly in the stocks. Debt funds are investing the money in the fixed income instruments like government bonds, securities, company bonds etc. Balanced funds are investing the money both in the equity and debt instruments. As these funds balanced portfolio or having mixed asset class, the investment is less risky and reasonable return. The funds can also be of following types.
- Diversified Equity Fund: These funds invest the money across all sectors like manufacturing, pharma, FMCG etc. By investing in this way they are minimizing the risks.
- Tax saving Funds (ELSS): These funds are designed considering the large numbers of taxpayers who are not exposed to the equity market. The funds help you to save tax with some exposure to the equity market. These funds are also called as Equity linked savings scheme and the investment is locked for 3 years.
- Sectoral Funds: These funds are investing money into a specific sector like metal, technology, pharma, FMCG, Infrastructure etc. The purpose of investing in a specific sector is the high potential growth of that sector.
- Fund of Funds: These funds invest across the different mutual funds based on the investment objectives.
- Index Funds: Index funds invest the money into the stocks which are part of the index e.g. Sensex, nifty.
- Liquid Funds: Liquid funds are like short-term fix deposits. These funds are less risky as they are mostly investing in debt instruments.
Hope you are now familiar with the terms used in Mutual Funds and it will help you further to understand the mutual funds.