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Mutual Fund

Mutual fund is a trust which is established to raise money from lot of small and big investors this money is then invested in securities like stocks , bonds and debt . According to Global Financial Literacy Excellence Center research 76 % of indians lack financial knowledge and in remaining 24% are those who generally lack expertise in market , these all types investor prefer mutual funds , bonds and debt funds to invest their funds .

All mutual funds are regulated and supervised by SEBI (Securities and Exchange Board of India). Every mutual fund should be registered as Asset management company and approved by SEBI and they should enter into agreement with trusties of mutual funds so that they can raise money from investors and allocate them their units .

Advantages mutual funds:

  • Diversification:
    Mutual funds creates a pool and invest in various sectors or company . investors enjoys this diversification through mutual fund with very less amount . And even if one company gets collapsed the losses are covered by other which are performing great.
     
  • Expertise:
    Mutual funds are managed by an teams experts which are highly skilled and have good experience.
     
  • Liqudity:
    it means how fast your money get back to you after it has been sold . there is more liqudity in open ended funds over close ended funds.
     
  • Transparency:
    It is govern by SEBI regulations , all mutual funds have to follow it and provide details of their investment time to time.

Risks involve in mutual funds:
Stock market risk:
Money invested in equity mutual funds have risk volatility (ups and down) of stock market.

credit risk:
When mutual funds fails to pay promised interest in specially in debt funds

Inflation risk:
when mutual funds gives returns less than inflation rates

Systematic Investment Plan (SIP):
This plan allows you to invest even small amount regularly like weekly or monthly basis in your mutual fund scheme.

Lumpsum Investment:
Here investor invests his significant amount in mutual fund at once

How SIP is better than Lumpsum Investment:
Can start with low amount : You can start SIP for min 500 rs but in lumpsum investment you need min 1000 rs. (depending on the fund)
Average cost : when you invest regularly your cost of units are average out.

Compounding : In SIP dividend or interest paid by the mutual fund is used again for buying more units .Hence Compounding helps to get higher returns
Discipline : It helps to create a habit of saving

Things to consider while choosing mutual funds:
Identify your goals:
Depending on your goal and time period you can choose the type of fund, purchasing a car can be goal or retirement plan or tax saving.

Risks:
equity mutual funds are volitile , ups and down can be seen in short term but in long run it may provide you much higher returns.whlie on other hand debt funds are more stable.

Portfolio for equity mutual fund:
you should consider at stocks in which fund is investing that are they overpriced or undervalued , investing in blue chips or midcaps or smallcaps.

Expense ratio:
How much fees are they charging for manging your funds.

Exit load:
Entering and exiting the fund the fees charged by the fund house is known exit load.

Direct plan vs Regular:
Direct plans gets higher return than regular because it is sold directy by amc not any broker so no commission is cut.

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