Investing in Mutual Funds - Part 1

I got exposed to mutual funds in 2003, I don't have any idea about MF at that time and still managed to invest and make profit. I treated MF just like stock, after it gained 20% I just sold it and bought another MF. I didn't care about the track record of the fund, I didn't know the asset allocation. After an year of investing in MF I started taking it seriously and analyzed everything before investing.

I will share my experience on investing in Mutual funds in a series of article.

1.What is a Mutual fund?
Mutual fund is a scheme where many people pool their savings together to invest.

2.Who pools the fund? Are they safe?
AMC's (Asset Management Company) manages the fund and it sets an objective like

• Hey guys with this fund we are going to invest in Large Cap(Blue chip) companies and most of our investments will be in Energy Sector.
• Our benchmark is Sensex ( We are competing against Sensex, if you invest Rs 10000 equally in all the stocks which makes Sensex and the same amount in our MF then we will make sure that we will give you more returns than Sensex)

Yes, your investment is safe. All the AMC's come under the regulations of SEBI (Securities and  Exchange  Board of India)

3.What investing in stocks? then why cant I do it myself?

Yes, of course you can do it but there are certain reasons and benefits associated with investing in MF

• You can invest in MF even with a small amount, say Rs 1000.
• You can diversify your investment across many stocks in MF. Your 1000 Rs might be invested in 20 different stocks.
• You get a fund manager to overlook the investments made, track the performance and take corrective action if it doesn't perform well.

4. Should I pay anything to the AMC?

• If you invest through  your financial advisor, LIC agent,  your lovers brother then you will be charged with transaction charges(Since abolished entry load)
• Certain funds charge you Exit Load if you sell your funds within a year. 
• There is a fund management fee . You can check the Expense ratio of a fund to determine how much you pay a fund in percentage term every year to manage your money.

5. Is there any way to avoid all the costs associated with MF?

I started liking you, now you are looking for a free lunch.  You can't avoid all the costs but certainly you can avoid transaction charges by investing directly with the AMC. 

6. How should I do it?

Go to the AMC's web site directly and invest it online (For Ex: http://www.hdfcfund.com/). However for the very first time you need to visit the Investor service center of the AMC and invest.

7. What is NAV?

Net Asset Value is the value of your single unit of fund.  For Eg: If you have Rs. 10000 and if you want to invest in XYZ fund whose current NAV is 10, you will get 1000 units.

The rule is every AMC should declare NAV once in a week however most of the MF declare it every day.

8. Hey my friend invested in Unitech shares and got 100% returns in 6 months, will I get similar returns here?

No,  sicne MF is diversified it wont give you astonishing returns like investing in shares however MF will not go down heavily like stocks.

9.No man there is no thrill in MF's, its boring?

If you seek thrill then go Bungee Jumping or propose to Dawood's daughter. 

In next series we will see what are the different types of Mutual funds and on how to choose a fund.

    




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