All about Mutual Funds – How does Mutual Fund work

Investors are looking for avenues that help them grow their money and achieve their financial goals. Investing in stock markets is one such avenue that can help investors grow their money over the long term. But investing in the stock market may not be easy for the first-time investor. Mutual Fund investments on the other hand simplify the process of investing in a pool of diversified stocks, thus taking the hassle out of stock selection for beginners by allowing them to invest in mutual funds.

The meaning of mutual funds is that it is a financial instrument that essentially collects money from investors and puts them in a basket of diversified securities. Let’s understand more about mutual funds and its types.

Types of Mutual Funds

There are three types of mutual funds classified based on their underlying assets. These include:

Equity Mutual Funds: Equity Mutual Fund is a type of mutual fund that invests in stocks that have the potential to grow and generate wealth over the long term. These funds can, in turn, be classified based on market capitalization, i.e. Large cap, Midcap and Small-cap. It can also be classified based on a theme or a sector such as healthcare or IT. Investors can choose equity funds based on their investment horizon and their financial goal.

Debt Mutual Funds: Debt Mutual Fund is a type of mutual fund that invests in fixed income securities issued by the Government or corporates. These include treasury bills, certificates of deposit, debentures, corporate bonds, etc. These can be classified based on their duration (short-term or Long Term Debt Funds called Gilt Funds).

Hybrid Mutual Funds: This is a type of mutual fund that invests in debt, equity-related instruments and gold or other commodity. The objective of this fund is to balance the risk-reward potential for its investors. The equity component enables capital appreciation thereby generating wealth for investors while the debt component acts as a portfolio diversifier and diversify the impact of volatility.
Five Features of Mutual Funds

These are the five features of mutual funds:

Mutual Funds are managed by professional fund managers.
Mutual Funds can be open-ended or close-ended.
Mutual Fund diversifies investor’s money by investing across asset classes
It offers different options according to the investor’s goals, duration, or risk profile
Mutual funds guarantee no fixed returns
Advantages of Mutual Funds

These are the five key advantages of mutual funds:

Liquidity – One of the key benefits about mutual funds is that it offers liquidity and can be redeemed completely or partially and at the prevailing NAV (net asset value).
Transparency: Investors can be at ease about mutual funds since they are regulated by the Security and Exchange Board of India (SEBI) and allows them to track and monitor their mutual fund performance.
Diversification: Mutual funds invest in different stocks and multiple securities, thereby offering diversification and reducing the downside risk of investing in just one stock. A typical equity fund could hold about 35-60 stocks.
Suitable for any wallet size: The good thing about Mutual Fund Investment is that it can be started using a monthly SIP (Systematic Investment Plan) as low as Rs. 500.
Professional Fund Management: Mutual funds are managed by qualified fund managers allowing you convenience and ease of investing.
Thus. mutual funds with the plethora of options and benefits make it a preferred choice for investors. It can help investors achieve their long-term and short -term objectives. Before investing, it is however important to know more about the mutual fund through its scheme information document (SID).

How Financial Planning with Mutual Fund investment can help you during the Pandemic?

According to AMFI, mutual funds in India have achieved Rs. Rs. 92900 cr net inflow in April 2021. There are different types of mutual fund investment suitable for every investor risk profile. Largely there are three types of mutual funds which are Equity Mutual Fund, Debt Mutual Fund and Hybrid Funds.

Equity Mutual Funds

An Equity Mutual Fund is a type of mutual fund that help you achieve capital appreciation over the long term by taking on market risk. Equity mutual fund investments are volatile and is suitable for long term investment.

Debt Mutual Funds

A debt fund is a type of Mutual Fund also referred to as a Fixed Income Fund or a Bond Fund that invests in fixed income instruments, such as Government and Corporate Bonds, corporate debt securities, and money market instruments etc. Debt Mutual Fund Investments are generally less volatile than equity mutual funds. During uncertain times, it is natural for investors to divert their investments from riskier asset classes such as equities and move to mutual fund investment plans such as Debt Funds to park their money. However, care must to be taken to redeem only in the case of an actual need. Untimely exits from mutual fund investment plans can prove detrimental to your wealth creation plans.

Liquid Funds

Liquid fund is a type of Debt Mutual Fund that invest in debt and money market securities with maturities of up to 91 days. Liquid Fund and overnight funds contributed nearly Rs 60,000 cr in the month of April as per AMFI. Liquid Funds can meet the liquidity needs in case of emergencies such as medical expenses or unexpected travel, etc. Liquid mutual fund returns would typically be related to the prevailing short term interest rates which means the impact of any interest rate changes may be negligible.

Hybrid Funds

Hybrid Fund is a type of mutual fund that invests in both Equities and Debt instruments. Examples would be Balanced Fund, Multi Asset Fund, etc.

What is the index fund in India and how do you assess the index fund tracking error?

Index fund in India is a passive mutual fund that aims to achieve capital appreciation by imitating or replicating an underlying index. The objective of an index fund or an index ETF is to passively replicate the index in terms of its portfolio composition.

A fund manager of an index fund has to keep track of any changes in the weightage or list of stocks. He/she does not have a say in the portfolio composition and has to imitate the performance of the index.

Index funds are suitable to those who do not require extensive tracking and anticipate performance that is in line with the market returns can look at an Index Fund.

The majority of the index funds returns equal to or slightly lesser than the benchmark index.

Index Funds tracking error is a measure of how much the fund performance has deviated from the benchmark index. Index mutual funds disclose their tracking error in the factsheet. The fund manager has to create a portfolio that mirrors the index performance as closely as possible. Tracking error occurs in both scenarios; i.e. outperforming the index and underperforming the index.

When selecting a mutual fund, you need to evaluate the index fund tracking error by looking at the following:

How much is the annualized index fund tracking error?
How much is the degree of variance in the index fund tracking error?
What is the index fund portfolio turnover ratio?
Investors prefer index fundsto avoid the fund manager’s involvement and the higher expense ratio in the case of an active mutual fund. However, investors of the Index Fund should keep in mind that portfolio concentration is high as compared to an actively managed mutual fund, which has a mandate to not exceed the cap of 10% allocation in a stock. As of May 24, 2021, the top three Sensex stocks had a total weightage of 31.57 percent. An actively managed fund, on the other hand, won’t have such a portfolio concentration risk.

Educational Consultants – Assisting Students With College Admissions

Here five reasons how an educational consultant can help your student with college admissions:

1. Educational consultants do not guarantee students admission to any particular college. They do, however, assist students with the college search to find schools that are a good fit and affordable at the same time. They also provide information and assistance with financial aid, scholarships, and the FAFSA form. They know that some colleges are more generous with financial aid and scholarships and encourage students to include a few of these on their college list if they are a good match.

2. Educational consultants have the time and interest to help your student with anything pertaining to the college admissions process. They are available to talk with parents as questions arise. They advise students on what courses to take in high school, when to take the SAT and ACT, college visits, and even do mock interviews to help students prepare for meetings with college representatives. College counseling and assisting students with their applications and essays is their job and they are not limited in the time they can spend or distracted by other responsibilities.

3. Educational consultants make a point of finding schools that are interested in seeing your student graduate in four years, rather than the usual, five, six or more. Paying for two additional years of college can really add up. Most parents would be surprised to see the low four year graduation rate at many schools. The average six year graduation rate for colleges and universities in the U.S. is 54%, yet many schools are graduating 60% or more of their students in four years. This makes better sense to most parents.

4. Educational consultants help to keep your student organized in order to meet all deadlines for applications, supplements and financial aid and scholarships. Students appreciate having a schedule and completing an application so that there is plenty of time to review it before it must be submitted. This helps them feel more in control of the college admissions process. Colleges all have different application deadlines from November through June and many will not accept applications if they arrive late.

5. Educational consultants adhere to strict standards and have one purpose in mind: Helping your student navigate the college admissions process. They are trained in college counseling and attend national and state conferences to continue their professional development. They are active in professional organizations like the National Association for College Admission Counseling (NACAC) and Higher Education Consultants Association (HECA).

Most educators believe that more time and thought needs to go into college planning and helping students with the college search. Hiring an educational consultant to assist with this process has made a lot of sense to many parents and has helped their students make better college decisions. As one father commented, “If I am spending this kind of money on a college education, I want the best advice I can get.”

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