a girl's expression How to Invest in Mutual Funds.

Learn How to Invest in Mutual Funds and What is Mutual Fund

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When a man earns money by working hard, no matter if he earns from a job, whether he earns by running a shop, or whether he does any business, first of all, he fulfills his needs with the money he earns. And he saves the remaining money.
So the question is, Which is the best place to keep the remaining money?
Firstly let’s see, the remaining money we have is what we call saving. What option do we have to save them?
There is no need to think about it so much either you will keep it at home or else you will keep it in a savings account but keeping money in both these places is a loss deal. Because when you keep your money in a savings account or at home so the money kept gets reduced.

Understanding the Increasing Inflation Rate in India & What is Inflation?

Let’s understand it with an example suppose you have saved ₹ 100 at a particular time. It’s your savings and there is a book in the market whose price is ₹ 100. So you can buy this book from the market whenever you want. And now the average inflation rate in India is 7.5%. That means the thing which is worth ₹ 100 today. Next year it will be 107 rupees 50 paise. This means that if you keep the remaining ₹ 100 in the house. The book you can buy today you won’t be able to buy next year. The money you save decreases every year because of inflation. This is why when people deal in money compare it with the inflation rate. Because of inflation, not only your savings rather your current salary also gets reduced. That is why companies make appraisals every year when you are talking to your manager about the appraisal. So you should also take into account the inflation rate.

We should always keep our money where all the rich people keep the money which means we should invest. The rich man invests his money in investments to get rich. The poor man spends money to buy things that make them look rich.

Making money from money is called investment but the thing is an ordinary man, who has only knowledge of his job and a shopkeeper who knows only about his shop’s good show, did he start investing when he did not know about investing? He may face loss. This is true, but first of all, we need to see what options are available to a common man to invest in.

India's current and future inflation rate graph

Firstly there is a very old and common method. You can give money to a known person on interest. Keep the interest rate such that it beats inflation but there is also a problem that will happen in that case if the money is not returned, So it’s kind of a risk keeping money in a savings account is also an investment but because it interest rate is not able to beat the inflation rate so it loses and money decreases. People think that a savings account is just a place to keep money. Where your money is secured and it is easy to transfer money but the main purpose of a savings account is we give money to the bank so it invests we got our interest but the interest we get in a savings account is 4% and the average inflation rate is 7.5%That’s why keeping money in a savings account is considered a bad investment.
That is why the savings account has become an account for transacting money.

Why is it Important to Diversify Your Investments

Investments Diversify option

You will find different types of investment options in the market. Some people invest in gold, some people buy property. Some people make fixed deposits, some people invest money in the share market, and some people invest money in government bonds or company debentures. There are many such options in the market. Even after that very few people dare to invest because there is a risk and due to lack of knowledge, one does not feel like investing money anywhere. You have to remember that when you invest, Risk is always involved in that there is not a single investment in the world that does not carry risk. Keeping money in a savings account is also a risk. If you look at the past there are many such banks which have become bankrupt. Keeping money in the house is also a risk. If someone comes to know that there is a lot of money in your house. So your house also comes at a risk. Chances of theft increase. The risk is always in investments somewhere less and somewhere more. You have to decide how much risk you have to take. More risk means more profit and less risk means less profit.

Investment Risk Pyramid-compressed

As you move up in this pyramid So your risk will increase and your profit will also increase. You must have heard one more thing if you invest money in different places so there is more profit and less loss. That is called diversified investments and it sounds right If you see the pattern of the last 50 to 100 years of the market.

If you look at the record of the stock market, Be it US Crisis or Harshad Mehta scam Or if we talk about covid, every time the stock market has gone down and has come up every time making more profit than before this made us understand that if we invest in the long-run so in that, we have an advantage.

all-time Sensex graph history

This graph shows clearly that the stock market may have gone up and down but in the long run, it is going up. Similarly, if you look at the graph of gold and real estate every graph is going up and down but in the long run, each graph is going up. That is why people consider it good to invest money in different sectors. Some money is in the stock market or the bond market, some on interest and some in real estate. In this way, invest money in different sectors and diversify within them as well. Like if you have invested money in the stock market So invest some money in the technology company and made some investments in oil and gas companies. Or some in consumer and goods by doing this. The profit is
If a sector is in a loss, let’s wait for that sector to come up and when a sector is going up and making a profit, then after seeing the right time, withdraw the money after making a profit. That’s what we call a diversified investment.

A Quick History of Mutual Funds and What is Mutual Fund?

We have understood that investing in different sectors reduces the risk. But the question is still the same, invest in different sectors, we need knowledge, time, and money because You need to know about each sector. All this will take a lot of time. If you hire an expert so his fee will be very high the expert’s fee will be more than the returns. So one thing is confirmed if you want to invest in different sectors So it will require a lot of money. If we talk about the share market, One share of MRF is more than 84,000, and also property, and gold prices are very high.
If you want to diversify in the Gold, Real Estate, Share market, and every sector. Then you won’t be able to do that. Only rich people will be able to do this. But we can do one thing: All small investors who have less money. If all this money is collected. And a fund should be created. Whenever money is collected for a particular purpose. It’s called a fund, so If everyone gathered a fund and hired a good financial expert who tells us where we should invest our money? So the expert fee will also seem less. Because that fee will be divided among all and its load will not fall on anyone. With less money, we can diversify and invest.

The idea is great but the biggest challenge is how so many people gather. The bigger challenge is who will you trust. By gathering funds you invest it by someone and if he runs so what will happen in that case? So the government took entry here. The UTI act was made for this in 1963 when the government takes responsibility. People may not trust any particular person, but people can trust the government and the organisations made by the government Like SBI, PNB bank, general insurance, etc. And once it happened that the UTI made by the government had a loss even after that, the public got their money back by consolidating all these things i.e. an act was carried out In 1963. The UTI act introduced mutual funds in India. The credit goes to Mr. T. T. Krishnamachari who was the finance minister at that time. He wrote a letter to PM Jawaharlal Nehru ji. The money kept in people’s houses should be invested systematically which will benefit the market of India and also the general public of India. This task was given to the Reserve Bank of India. And in 1964 India’s first mutual scheme came. Its name was US 64, This proved to be the most popular scheme in India. From 1963 to 1987 UTI was the single player in mutual funds in India.

From 1963-1987, the only player of mutual funds in India was UTI. After this, the Government bank, PNB Bank, Bank of India, General insurance corporation, and different financial institutions set up their Mutual funds. In 1993 SEBI was established and different companies started up with their own mutual fund sector.
By that time the competition had also started which is till today. Later on, international players also came in. like Morgan Stanley, JP Morgan All of them brought their mutual funds even though private, government and international companies were bringing mutual funds to India, but the government understood its criticality very well. That is why everything in Mutual Funds used to be very strictly regulated by SEBI. Even today SEBI keeps its involvement in every activity of mutual funds. All funds have to prove all their details, full expenses, and historical data by SEBI before advertising in public.

We also understand that if someone wants to start his mutual fund.

How Mutual Funds Work and What is The Complete Process Followed?

Five things are needed to start a mutual fund

  1. Trust
  2. Sponsors
  3. Fund manager
  4. AMC (Asset Management Company)
  5. Custodian

As per SEBI rules, a mutual fund can be formed only like a trust. It is not possible to sell mutual funds by establishing a private limited company. That is why to start a mutual fund, first, a mutual fund trust is created. After that its sponsors are made.

These sponsors play a very important role in mutual funds. Apart from this, who will become the trustee in the mutual fund SEBI approvals are taken under by sponsors.
After all this, an asset management company is formed. That we call AMC, the names you hear like SBI mutual funds, Tata mutual fund, ICICI prudential mutual funds. These are called assets management companies, that is AMC.
AMC has to keep its net worth above 10 crores. If less, then they will not be able to launch any scheme. The main job of AMC is to launch different schemes of Mutual Funds. It is the responsibility of the trustee of the mutual fund to ensure that all AMC systems work properly. In AMC, the auditor, and registrar are appointed by all the trustees. As per the SEBI rule, The AMC has to disclose all the details to the public before launching any mutual fund. Only after that people can buy units of that particular mutual fund.

What are Units in Mutual Funds and What Do They Mean for Your Mutual Fund Investment?

What are Units in Mutual Funds

Mutual funds invest money in different sectors. Divide it into units.

For example,
A share of MRF is above ₹84,000 One share of Honeywell is above ₹43,000 A share of 3M is above ₹23,000. If you want to buy these shares alone then it requires a lot of money but mutual funds will buy these 3 shares and will divide them into thousands of smaller units. So now when you buy a unit, its money will be very less and you will get all three shares for less money. What you couldn’t do before It may also happen that your ₹ 500 is invested in 10-12 companies.
Now another question is the unit of mutual funds and how its price is decided like the shares of a company, so are the units of mutual funds.
These units are issued at a fixed price when the mutual fund is started for example ₹10 or ₹100 this is called NAV, net asset value. Once mutual funds invest in the market, their investment value keeps on increasing and decreasing. And in the case of some investments, this value changes every day in the case of shares. It also changes the value of the units of the mutual fund. A mutual fund can offer a variety of schemes but every scheme has to be approved by the trustees and a file called the offer document has to be submitted to SEBI. The offer document should contain all the details so that people like us can make the right decision as to which mutual fund should be purchased. If SEBI does not comment on the offer document within 21 days from the date of submission, AMC by offering that document to the public can start fund generation from the public. After that AMC will assign a fund manager.

What is a Fund Manager and How Does it Actually Work?

Fund managers are finance experts. and they have a research team their full-time job is to analyse investments. And buy the investment that fulfills the goals of Mutual Funds. Fund managers are important because they analyse the financial statements of different companies. To find their revenue, Expenses, profit, and loss. Fund managers talk directly to the managers and owners of big companies. The higher authority of Reliance will not talk to you but will talk to the fund manager. Because they know these fund managers have huge funds and if this fund manager will invest in our company then it will be very beneficial for the company. Big companies talk to these fund managers and explain their plans ahead. And by analysing all this, the money is collected from the people. The fund manager invests that money according to his own.

The diversification for which you may have to spend lakhs, you can also do it with ₹ 500 And you are also getting the expertise of a reputed Fund Manager for ₹ 500. Which you cannot afford alone. You must have heard about the expense ratio in mutual funds. Somewhere it is ₹ 90 or ₹ 100. The expense ratio of each mutual fund is different. This is the fund manager’s fee and the fee for implementing the entire process. Which gets divided among investors like us. Now invest your money and do your work comfortably. The fund manager will invest and sell according to his own. You do not have any role here and you do not need to worry about it. You can sell your unit whenever you want, and the money will be back in your account in 1 to 2 days.

The first important thing to understand about mutual funds is that not all mutual funds are the same. Each fund is different, some are high-risk funds, and some have low risk. Some invest in shares and some in depth. In every fund, it is decided where and how much money will invest. It is not that you have bought a mutual fund in the pharma sector and it will invest in the gold sector. People think that mutual funds invest only in the stock market. but it’s not true, Mutual fund experts invest money in different places. Those who purchase mutual funds should also know their goal for what purpose they are investing in mutual funds only then it become easy to select mutual funds.
If you are investing in your children’s education, you can take a mutual fund that has low risk. But benefit in the long term and if you’re planning for a vacation for that, you can take the high-risk mutual fund because if you can’t go on vacation it ain’t a big deal but the education of children is very important. So this is how you can set your goals.

Mutual funds give you different options to invest. If you do not want to invest the money collected then you have the option to Set some amount out of the amount you earn every month. That amount will be deducted every month from your bank account. Suppose you have set a 1000 rupees. 1000 rupees will be deducted every month from your bank account. This option is called SIP. Some people think of SIP as different from Mutual Funds. Rather, SIP is a mutual fund.

Disadvantages of Mutual Funds that You Need to Know

Fund managers will be able to invest money only when you invest money if you start withdrawing money from the mutual fund, that is, you will start selling the units of the mutual fund. So the fund manager was compelled to withdraw the money from the investment and return it to you. Sometimes the market goes down Fund manager is an expert and he wants to invest money at that time but the public is withdrawing money due to fear and selling its units. In that case, the fund manager will not be able to do anything. He will not be able to invest even if he wants to. if you want to take the risk but if the overall money is being withdrawn from the fund then the fund manager will not be able to do anything. But when you directly purchase shares you can purchase or sell shares whenever you want.

Secondly, fund managers do not take risks in some cases. They are afraid to experiment. If a fund manager invests in Reliance and if there is no benefit, then his job is not at risk but if the same fund manager invests in a smaller company and takes risks according to his expertise. And if there is a loss, then trustees will question him why did you invest money in a small company. And it may also happen that other companies do not give him a job. That’s why the fund manager does not take the high risk. He does not risk his job and he is happy with the average returns also.
The profit of the mutual fund company does not depend on the return received by the public. Rather, the profit depends on how much money is collected from the public. 1% to 2% of the money collected goes to mutual fund companies. Whether it benefits the public or not, that’s why some companies focus on collecting more and more funds. Rather than giving returns to the public that is why they play safe.

FAQs

Mutual funds are a great way to diversify your investments and get the best returns, but they can be difficult to understand.

The unit in a mutual fund is a share of ownership in the fund. You can buy or sell units of a mutual fund on the secondary market.

A fund manager is responsible for overseeing the investment of a fund. They are expected to make decisions about what stocks, bonds, or other assets to invest in and in which proportion.

Mutual funds are a type of professionally managed investment. They pool the money from many investors and then use that money to buy stocks, bonds, and other assets. Mutual funds can be bought through an investment advisor or a brokerage firm. They are also available to buy online through a mutual fund company's website or by using an app on your phone. Some people will tell you that investing in a mutual fund is the best way to invest in the stock market because it can reduce risks and provide diversification.

Inflation is an increase in the general price level of goods and services in an economy over a period of time.

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