In simple words, mutual funds are funds financed by small and medium-sized investors under the management of an independent business organization or company. It is a type of investment portfolio consisting of various assets such as stocks, bonds, futures, precious metals, etc. Remember, the capital of such a fund is expressed in shares, and their value is determined based on the trading day results.
Mutual funds have been in existence since 1774, when Dutch merchant Adrian van Ketwitsch proposed a financial scheme that involved pooling money from multiple investors to make investments accessible to all individuals, not just rich people. These days, mutual funds are one of the most popular ways to increase your money. It is like a basket of investments containing stocks, bonds, short-term debt, or a combination of both, which is usually selected and managed by one or more investment professionals.
Remember, each mutual fund has a unique goal. A fund manager tries to fulfils this by following a specific management strategy. For example, they can invest in stocks from all over the world, a particular region or country, or in stocks of companies that pay high dividends or have fast-growing returns. They can also choose stocks they think are undervalued, or bonds they believe are less exposed to credit risk.
More or less, regardless of the purpose of the fund, buying shares in a mutual fund is similar to buying shares in a public company in the sense that each share of the mutual fund that you believe represents your partial ownership of the fund and the money it brings in. The critical difference is that you invest in a portfolio of company shares or other securities in a mutual fund rather than in shares of a single company.
So it is safe to say that a mutual fund is an open-ended investment, that is, one that can issue and buy back shares whenever it wants. Once you’ve bought shares in a mutual fund, you can sell them back to the fund-either directly or through a broker-at approximately net asset value (NAV).
In India, there are 1.85 crore mutual fund investors. 70% of them earn less than Rs 5 lakh annually. In 2020-21, mutual funds added more than 81 lakhs investor accounts. So what prompts them to invest in mutual funds? Is there any risk in mutual fund investments? Let’s see.
Benefits of Mutual Funds Investment:
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Simplicity
Always keep in mind that most investors don’t have the knowledge, time, or resources to build their portfolio of individual stocks and bonds from scratch. However, buying mutual fund stocks allows investors to benefit from a professionally managed, diverse portfolio, even if they have little or no knowledge of investment concepts and strategies.
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Diversification of Income
All investors, beginners, and professionals know very well that keeping all money in one type of investment is unwise. This adage speaks in favor of diversifying investments with mutual funds. Of course, an investor may need to buy any securities to diversify with individual stocks. However, multiple or even a single broad-based mutual fund can offer significant diversification. For example, an index fund can access all shares of a considerable market benchmark.
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Versatility
Many types of mutual funds allow investors to gain access to almost any market segment that you can imagine. For example, industry funds enable investors to buy in specific stock market areas. Investors can also gain access to exchange-traded commodities such as gold and other precious metals or oil and natural gas by investing in a fund that buys shares in companies that produce these commodities. This versatility can further diversify as the investor’s mutual fund portfolio grows.
Also Read : Timely Repayment of Loan EMIs: Important Benefits At A Glance!
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Availability
Mutual funds are easily purchased indirectly through an online brokerage account or directly from an investment company that offers the fund. Although many mutual fund firms require a minimum investment, you can start buying mutual fund stocks with or without a low minimum under certain circumstances.
The Disadvantage of Mutual Funds:
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Investment Risk
Stocks, bonds, and mutual funds that invest in them carry a certain level of risk, which is the possibility of reducing the value or, in the worst case, ultimately losing the principal amount – your original investment. Different mutual funds carry different types of risk. For example, equity funds are generally riskier than bond funds and, in particular, involve a high degree of market risk, considering the possibility of sharp jumps in stock prices. On the other hand, bond funds are considered riskier than money market funds and often involve credit risk, i.e., the risk that the companies in your fund will not pay their debts.
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Fees
If you’re not careful about which one you buy, a mutual fund can become an expensive proposition, from sales to management fees. These fees can reduce the return on your investment, so look for funds without sales or transaction fees and with an expense ratio (operating expenses divided by average net assets) that is at or below the average (0.45%) to maximize your returns.
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Less Control.
A mutual fund does not give investors as much control over the underlying securities as if they were buying the guards individually.
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Tax Inefficiency.
If you hold mutual funds in a taxable investment account, such as a brokerage account, you may be on the hook to pay taxes on investment income (such as dividends from an income fund). When determining what types of funds to purchase, consider the investment time. If you are not going to retire for many years, you are often encouraged to invest a lot in equity funds. As you approach retirement age, it may make sense for you to become more financially conservative and move money from stocks to bonds.
Also Read : 5 Income Tax-Saving Tips for Small Businesses
Currently, India’s mutual funds market is going through a crisis. Higher retail and wholesale inflation, capital outflows, demand for goods and services, economic downturn across the globe, political turmoil in several countries, and other factors negatively impact mutual funds. Here is the list of top 10 stocks abandoned by mutual funds in the wake of the recent market decline-
1.IndusInd Bank
- Total number of schemes that held the stock-153
- Total number of schemes that abandoned the stock-29
Quant mutual fund, Nippon India Quant, Edelweiss Flexi Cap, and Sundaram Equity Savings exited the IndusInd stock entirely in December 2021.
2.Bajaj Auto
- Total number of schemes that held the stock-158
- Total number of schemes that abandoned the stock-20
Passive funds, Taurus Ethical and Taurus Largecap Equity Fund, Quant Focused, Tata Quant abandoned the stock entirely in December 2021.
3.SBI Card
- Total number of schemes that held the stock-135
- Total number of schemes that abandoned the stock-18
In December 2021, SBI Flexicap Fund, Motilal Oswal Midcap 30, Nippon India Quant, SBI PSU, and SBI Banking & Financial Services sold all holdings of SBI cards and payment services.
4.RBL Bank
- Total number of schemes that held the stock-49
- Total number of schemes that abandoned the stock-16
Axis Value, Invesco India Financial Services Fund, Invesco India Multicap, ITI Mid Cap, and others exited RBL bank’s stocks entirely in December 2021.
5.Latent View Analytics
- Total number of schemes that held the stock-16
- Total number of schemes that abandoned the stock-15
Edelweiss Small Cap Fund, Mirae Asset Midcap ICICI Pru ESG, Motilal Oswal Large & Midcap, and Edelweiss Aggressive Hybrid relinquished Latent view Analytics shares altogether.
6.HDFC Life
- Total number of schemes that held the stock-143
- Total number of schemes that abandoned the stock-15
PGIM India Large Cap, Taurus Flexi Cap Fund, IDFC Balanced Advantage, and others sold their HDFC Life Insurance stocks in December 2021.
7.Biocon
- Total number of schemes that held the stock-63
- Total number of schemes that abandoned the stock-13
Three index funds and Seven Quant equity funds exited from Biocon stocks entirely in December 2021.
8.Oracle Financial Services Software
- Total number of schemes that held the stock-52
- Total number of schemes that abandoned the stock-10
Five Taurus equity schemes, ICICI Pru Technology Fund, ICICI Pru MNC, Aditya Birla SL Pure Value, BOI AXA Flexi Cap left the stock of Oracle Financial Services Software.
9.Gail
- Total number of schemes that held the stock-107
- Total number of schemes that abandoned the stock-10
UTI Value Opportunities Fund, Nippon India Value, Tata Business Cycle, and Franklin India Bluechip abandoned Gail stocks in December 2021.
10.PB Fintech Limited
- Total number of schemes that held the stock-107
- Total number of schemes that abandoned the stock-10
SBI Banking & Financial Services Fund, Motilal Oswal Midcap 30, Mirae Asset Hybrid Equity, Nippon India Banking & Financial Services, and others left Gail stocks in December 2021.
Investing In Mutual Funds and Earning Profits: Proceed Ahead With Caution!
Remember, making a suitable investment in mutual funds is an excellent way to place your capital. Unfortunately, many people do not understand the simple truth that to make a considerable fortune, investments in mutual funds should be kept at least for several economic cycles during which the market ups and downs occur. Many people simply do not have the patience to close their positions at the stages when the price begins to decline. Lower prices are an excellent opportunity to buy more shares.
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Choosing A Mutual Fund For Investment
Naturally, you should choose from those funds that have shown stable growth over the past few years. Among them, select the one that is ahead of all others based on the last year’s results. In addition, the fund’s stock portfolio should be broadly diversified, i.e., it should contain shares of companies belonging to various sectors of the economy and not be focused on one specific niche.
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Don’t Make Silly Mistakes In Mutual Funds Investment.
Many times, investors choose sector funds whose portfolio is focused on a particular economy sector and, therefore, will depend heavily on it. Often, investors do not survive the long-term race, which involves investing in the selected fund for at least 10-15 years. During periods of recession, many people transfer their savings from one fund to another (which shows more impressive results) without waiting for the subsequent recovery. But it should be remembered that after a year or several years of relatively stable growth, any fund will inevitably experience some decline (this is an entirely natural process). The result is when they sell for cheap and buy for expensive.
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Always Be Prepared For A Crisis When You Invest In Mutual Funds.
Remember, the crisis comes unexpectedly. Just as it happened in the spring of 2020 with the coronavirus pandemic, of course, there were forecasts by analysts and different opinions about the impact of the spread of the new disease on the world economy. Still, no one could have predicted such a severe collapse. There were falls in the stock market all across the globe. As an investor, can you face such a situation fully armed and get out of it without significant losses? Yes, by allocating your assets correctly. You need to have stocks, bonds, and foreign currency assets in your portfolio. Don’t build your portfolio by investing in just one mutual fund. With a multi-grade portfolio, you protect yourself from unforeseen situations.
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Mangers Come and Go! Don’t Be Sentimental.
Don’t invest in mutual funds just because you’ve heard a lot about the skill of its manager. After all, the manager may change, and then your money will be transferred to another manager, who will turn out to be a “dark horse” for you. Asking about the background and reputation of the fund manager you will buy is undoubtedly beneficial. Still, this knowledge should not be the determining factor in your choice.
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Be Realistic
Try to understand that it is almost impossible to find a mutual fund that consistently outperforms one of the major stock indexes or an index that characterises the market sector to which the shares in the fund’s portfolio belong. The stock market cannot grow continuously at 25% per annum as it did in the beautiful last decade of the 20th century. Therefore, do not take a swing at the crane in the sky, but determine for yourself an acceptable amount of profitability and be patient.
Conclusion
In India, a lot of people invest in mutual funds with the hope of getting higher returns. Nevertheless, mutual fund investments are always fraught with risk. Recently, mutual funds exited the top 10 stocks due to numerous reasons. Therefore, be careful while investing in mutual funds and make decisions smartly. Be ready for worst-case scenarios. Patience and correct decisions will help you get more returns on mutual funds
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