Every person in this world wants to save money for the unwanted situations that may arise in the upcoming time. In earlier days, people used to hide their belongings under the soil so that their children could use them in their hard times. But in today’s world, People are investing their belongings and money in mutual funds to get the safety of their money in the hands of the banks and other assets of investors.
The best investment time is considered in the stocks for small and big investors. Everyone wants to earn huge profits on their investments in stocks. A mutual fund is the kind of investment in which a company issues shares to the public. Professional money managers handle various instruments in the fund’s portfolio according to the funds’ legal investment policy.
The aim and the essential purpose behind the mutual funds are to secure two significant benefits for small and retail investors. First is the minimization of risks through diversification, and the second is the proper management of the invested funds. The risk associated with the investment can be minimized if spread over a dozen or even hundreds of companies. It seems impossible for small investors. Thus, diversification of investment reduces risk. Professional money management is required to become successful in the game of investment. Most small investors cannot devote the time and resources needed for managing their assets. Fund managers easily carry this out to produce better results.
Mutual funds in India are structured as follows:
Each mutual fund has a Board of Trustees, Asset Management Company (AMC) or manager, and unitholders. We also have promoters or sponsors who initiate mutual funds in India, but they do not play an active role afterwards. They remain shareholders of the AMC. Securities and Exchange Board of India (SEBI) guidelines state that the Board of Trustees has effective control over the AMC instead of the sponsor. SEBI guidelines establish mutual fund regulations in India.
Maximum limits have been prescribed for management fees and other chargeable expenses; SEBI regulates many aspects of mutual funds’ operations and policies.
Significant types of mutual funds are:
(1) Equity Schemes: investing primarily in equities with several plans such as growth plan, dividend plan, and dividend reinvestment plan.
(2) Bond Schemes: invest in government and corporate bonds of minimum and long duration, thus increasing their income from interest.
(3) Balanced Schemes: invest in equity and bonds based on specified policies and investment objectives.
(4) Money Market Schemes: a relatively recent phenomenon in India, such funds invest in concise term money market instruments at lesser risks.
During a day, the buying and selling prices of shares in a mutual fund scheme are based on their Net Asset Value (NAV). The NAV of a mutual fund is calculated once a day based on the closing market prices by valuing all assets and liabilities at their current values.
A systematic investment plan (SIP) commits the investor to invest a specified amount every month (or every quarter) in the units of a fund’s equity scheme. The number of units bought each month for the investor under the plan will depend on the ruling price: fewer units are bought when the price is high, and more units are bought when the price is low. It is a built-in advantage of SIPs. It averages out an investor’s buying price over the entire holding period. The SIP resolves a dilemma often facing investors due to ups and downs in the market price. Investors find it difficult to invest in an equity scheme.
Investors should not assume that SIP is always advantageous. The price level at the start is crucial. At the end of the chosen period, the price level also matters. It can be inconvenient and disadvantageous for investors to invest in most SIP schemes due to their rigidity. Building some flexibility in the choice of redemption date will help investors avoid a situation where accumulated units are forced to be redeemed at an unduly low price.