Before writing on this topic I can say only one thing that is ” Mutual Fund is the best tool for you to invest your money into stocks if you have no experience with the stock market and its related issues”. Additionally, if you don’t want to take any risks and want wealth generation then it is an initial step toward Personal Finance.
What is Stock Market
Whenever we as a commoner hear the name Stocks from any person suggesting stocks for making money, the first thought that comes to our mind is.. just avoid it. But my question to you for this is why? People generally make a mistake by thinking that Mutual Funds are an option to invest only in Equity and whereas it is not like that. For maximum people, Equity means the stock market, but Equity means picking shares of individual companies.
Due to past scams, people generally tend to avoid investing in Equity and the same is for mutual funds. And that is why the Industry of Mutual funds grew in the country after a delay. So people must be well versed with the term before going to invest in mutual funds. So let’s start with simple and logical things like this: if you want to invest in the stock market then you have two options with you. First, you can do it on your own or secondly, you can hire somebody to do it for you whom we call a Fund Manager.
To invest on your own in the market, you should have enough time and expertise to know the market. You must also have the experience to work with a handful of stocks you gonna pick up. Else you can go for the second option which is to choose somebody who is well-qualified and trained to manage the stocks for you on your behalf. But to choose such an experienced person will cost you much and it is not actually economical for most people. But many people can together choose and hire one Fund Manager and the same is happening in a mutual fund.
What is Mutual Fund
A mutual fund is a way in which a large number of people who are willing to contribute small amounts come together. The amount collected by all of them will be handed over to the Fund Manager to manage and generate returns for you. A fund Manager is a person who makes decisions regarding buying and selling of shares on your behalf after thorough research.
Basics of Mutual Fund
The mutual fund industry in India is mainly subdivided into three parts. Sponsors, Trustees, and AMC with Fund Manager as an integral part.
First of all, the organization or firm that is planning to start a mutual fund house is known as the sponsor. SEBI has laid down some rules about the sponsors and all sponsors have to abide by those rules prior to opening any fund house. The Sponsors make an investment in setting up a Mutual Fund house. The firm or sponsors will set up a trust which is known as an Asset Management Company (AMC).
After this, the trust will appoint a trustee (a person) who will act as a custodian of the money pooled by various investors in the mutual fund house. This trustee will provide its services to the Asset Management Company in lieu of fees termed AMC fees. Any scheme which AMC wants to launch in the market must be approved prior by the Trustee.
So you must have cleared in your mind that your money is safe when in a mutual fund and it is not possible for Asset Management Company to run away with your money. As AMC is a trust and as per rules fixed by the government no trust can run away with the money of investors. And if it does so, in that case, the personal property of the trustee is attached to and can be sold and the trustee can be jailed. So, your money is safe from being stolen by these companies in any way.
But one thing you must keep in mind is that your investments are not safe from fluctuations in markets called volatility. The market keeps on swinging up and down and so does your investment keeps fluctuating. You can not totally avoid this fluctuation in the market but you can pacify it to an extent by diversifying your portfolio.
As in a Mutual Fund money is pooled by a large number of small customers and collectively invested into stocks or Bonds, so the return generated will also be distributed among all the investors based on the proportion of investment. Why we should go for Mutual Fund and not for Direct stock picking? And the answer is quite simple, as
⇒First, we don’t have any expertise with us to tackle market fluctuation or the timing of the market.
⇒Second, we do not have enough amount to go for direct stock picking so better go with a small amount.
⇒Third, we do not know how to manage our investment so as to produce inflation-beating returns for us.
Where you can invest through Mutual Funds
The total 4 types of assets you can buy using a mutual fund are Equity, Bonds, Gold, and Property. You can buy a property through mutual funds via special mutual funds called real estate investment trusts (REITs). Equity mutual funds buy into the stock of listed companies, whereas debt mutual funds buy debt papers issued by the government and firms. While you can purchase actual gold by investing in Gold funds.
Types of Mutual Funds
Large-cap funds are those which have a corpus of more than 10,000 crores, while Mid Cap firms have a corpus of between 2500 to 10,000 crores. Small-Cap firms have a corpus of less than 2500 crore. Large-cap funds have been slow but steady growth, whereas MID-cap funds have good exposure to the market already so bit stabilized. Mid-cap funds have greater returns and risks as well as compared to large-cap funds. Small-cap funds are new to the market so they are having the highest returns as well as the highest risks associated with them.
when the market is at its lowest level time, small-cap funds generally get more losses and are the ones who are prone to failure. So, in the low market time, the asset belonging to Small-cap funds is generally merged with mid or large-cap funds by Fund Manager if the particular fund does not perform well.
SEBI defines large-cap as the company that features within the first 100 companies by market capitalization on the stock market, Midcap from No. 101 to 250, and Small Cap 251 and below. But in general, one other definition is being followed for Companies to be categorized as Large-cap which has a Market Capitalization of more than 10,000 Crore, Mid Cap companies have a Market Capitalization of 2500 to 10,000 Crore. While Small-Cap companies have a Market Capitalization below 2500 Crore.
You may also like to Read:
- What is a Systematic Investment Plan (SIP) in Mutual Funds?
- Costs associated with the Mutual Fund investment
If you really want to generate wealth, then the one-stop solution for you is investing in the stock market. But stock market investments are subjected to risk which you must know before entering into it. If you don’t want to expose yourself to those risks or want to minimize them, investing through mutual funds will be the next best solution for you in the long term.