For the last 2 years or so, mutual funds have been a hot topic across the different sects of India. A lot of hype has been given to encourage people to start investing in mutual funds. But do the mutual funds worth all the hype that it has been getting? How beneficial it is for a common middle-class person? What are the other alternative ways of investing and how mutual funds fare there? How can I start investing in mutual funds? Let’s find out the answers below.
What are mutual funds?
The description and/or definition of the mutual funds available on the web is way too technical and complicated for a common person to understand. I have tried to explain it in much simpler language.
So let’s start understanding mutual funds.
When a retail investor like you and I invest in a mutual fund then there are basically two steps involved.
Step1: Investors give their money to Mutual Funds Agencies like Axis Bank, HDFC Bank, Motilal Oswal, etc.
Step2: These Mutual funds agencies then invest all the money received from the retail investors (like you and me) and collectively invest in the share market, government bonds, gold, etc.
Now you must be wondering what is the need of investing in mutual funds when I can directly invest in the share market? What these mutual funds agencies get in return for investing the money of the retail investors?
Let’s answer that one by one.
What is the need of investing in mutual funds when I can directly invest in the share market?
Mutual fund agencies hire mutual fund agents who are highly experienced professionals and also have the knowledge of the internal matters of the companies. A retail investor like you and I pick the stocks based on the instincts or buzzing stocks. But the mutual fund agents choose their stocks based on their experience and knowledge about the companies. Adding to that, the mutual fund agents have a diversified portfolio as they invest your money across a number of stocks. So, the risk factor is also lower if you compare investing in a single stock. Hence, if you don’t have much knowledge about the share market, then it is safer to invest in mutual funds as compared to investing in stocks directly.
What these mutual funds agencies get in return for investing the money of the retail investors?
Well! The mutual fund agencies are no saints. They charge you a certain percentage of your net assets which generally varies from 1-2% to cover the administrative, advertising and all the other expenses (which includes the payment of the mutual fund agent as well). This fee charged by the mutual fund agencies is known as “Expense Ratio”. We will cover more on this topic later.
So here we go, now you have got a brief idea about the basics of mutual funds. Next, we will cover:
How can I start investing in mutual funds?
Do I need a Demat account to start investing in mutual funds?
What are direct and regular mutual funds?
What are the different types of mutual funds?
Do mutual funds only invest in Share market?
How safe are the mutual funds compared to other investment options?
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