The benefits of investing in mutual funds

We think about it all the time, we hear about it all the time, yet we fail to react to it all the time. There are tonnes of benefits that come with investing in monetary instruments on a regular basis. It is the best and simplest way to get a strong portfolio done and to make the best savings on the long run. If you have thought about starting your portfolio, the timing could not have been better. There are tonnes of products that are available and each of them would give you huge benefits and returns.

The simplest and best instrument to invest in is mutual funds. It would give you good returns, help you ease your profit margins and also be able to help you reduce your tax liabilities. There are many reasons why you should invest in the mutual fund market as compared to anything else available today. The first and obvious reason that comes about today is the amount of liability you have or the risk that such an investment carries. There is no doubt that you can get healthier profits from any investment in the stock market, but the level of risk is extremely high too. You would want to reduce the risk you take by trying to divide your investment across different verticals.

Instead of putting all your money in the stock market, look at investing across different mutual fund India products. This would be so much better than putting your money in one specific company. With this, you would also be able to grow out different investment patterns and profit rates. It is bound to give you a huge boost in both the short and long span of time. When you are looking to invest in these funds, study the bunch of companies that have been put together and realise the industry growth that is expected. It would give you a clear idea on how well you can do and how the growth just might be.

The tax benefits are another reason that most people want to buy these funds. Because you are able to reduce the amount of tax you are liable for thanks to these investments, they are hot property. You would be in an instant win situation right from the word go. The benefits are surely present when you are investing in mutual funds, apart from being a great source of money, it would be a great learning curve too.

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What are the Different Types of Mutual Funds?

Investing in mutual funds is without doubt the best idea if you have been thinking about your future and financial security. The biggest benefit is that you are able to plan it out perfectly based on your financial capabilities, plus you are able to control your investments completely when you have calculated your returns. Apart from understanding the benefits of mutual funds, you have to also understand the different kinds of funds that are present in the market today.

Open ended

One of the biggest kinds of mutual funds is open-ended which would allow you to buy or sell units of the fund at any point of time. In other words, there is no fixed maturity date on the fund. In these kinds of funds, there are a few kinds too

1.       Debt/Income funds: In this kind of fund, most of the invested money is put into debentures or other debt investment plans. This could include government security instruments too. Now, even though the capital appreciation is lower as compared to others, it is perfect for investors who want to a constant income coming through.

2.       Liquid funds:  These kinds of investments are to make the excess funds into short term investments so that you decide a better long term investment afterwards. These kinds of investments are perfect when you have saved an amount and planning a short term investment.

3.       Growth funds: These are very popular in retail investments and it could be a high risk element in both the short or long term. These kinds of schemes are a perfect example of the capital appreciation you can receive in the long run. This is probably the reason that most people look at investing in growth funds early so that the risk involved is lesser and the returns on the long run are very good.

4.       Tax saving growth funds: This probably the most recommended mutual funds, as they provide big tax benefits to its investors. Your money is invested in equities that offer long term growth opportunities called equity linked saving schemes or ELSS. These kinds of funds normally come with a 3 year lock in period.

Balanced funds

These kinds of funds are good for investors that are looking to enjoy good growth and income at the same time. These funds are invested in different kinds of securities – mostly equities and fixed income. Of course, the proportion of investment is pre-decided and is revealed in the offer documents. These are great ways to get good returns and is cut out for the investor that knows his kind of investment returns and plans. It does bring out a great deal of profits if you plan it right. This makes it one of the most popular types of mutual funds.

Close ended funds

These funds do not allow you to buy or sell units at any point of time. These kinds of funds can be invested at only during the launch of the fund. These are rolled out during the new fund offer period and can be purchased only then. These funds do come with the goal to protect the principal amount and deliver good returns at the same time.

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Ways to Invest in Mutual Funds

If you have been working for a few years in India, chances are quite high that you have heard of investing in mutual funds many times. In that past, most of these kinds of investments were driven through agents. It’s a lot different now as you would get to know every bit of information about these investments online and that surely makes your decision easier.  If you have been thinking about making an investment, here are a few simple methods:

1.       Invest via an AMC: You can invest into a mutual fund by approaching the mutual fund companies directly. Each of the companies provide online facilities to invest from the second investment onwards and thus are able to complete your transaction easily. Sounds good? Well almost. In this process, you have to fill the first form at the office of the AMC, so apart from the first investment; the rest can be done on the internet. The tough end of this deal is if you want to participate in 3-4 different funds, that means you have go to each of the offices and have the first form filled and submitted. So, this investment makes sense only when you are going to invest a big amount of money and over a long period of time too. Plus, you do not really need a demat account for this.

2.       Use your Demat account: The most common and recommended methods would be to use your demat account. You can look through all the different mutual funds and easily make your investments. All it would take is a few clicks on your mouse, to choose to invest in the fund of your choice. The only catch would be the charges you have to pay the demat medium you use. The biggest advantage though is that you can have access to all your transactions and details from one place alone. How easy is that?

3.       Use the fund directly: Certain funds allow you to purchase mutual funds online, that means not having to go through a broker or source at all. You would have all the possible information you need about the mutual fund along with the performance of the fund over the years. It is a very easy solution no doubt and is a sure option on the long term. You would have lesser commissions to pay and thus is a great idea if you are planning to invest on the long term. 

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Calculating Your Mutual Fund Returns is as Simple as 1, 2 & 3!

Understanding how mutual funds work is very important if you are planning to invest in them. Unlike the stock market which fluctuates through the day, a pricing for a fund is decided only one a day and that is typically done at the end of business hours. Calculating your return on investment is very important and is quite simple to do too. The ROI should be calculated for a specific time period and would be the total increase in capital divided by the total investment made. This percentage would give you the best idea of how well your investment is doing. 

There are different methods of calculating the profit that you have made on your investment also. Different formats are taken by different investors but the simplest two ways are to break it down by an absolute return method or by a total return in fund. 

In the absolute return method, you most important dates are the date of investing and the date of exiting the fund. You can calculate the absolute return by dividing the total chance in the NAV during period of investment and the NAV that was present at the start of your investment. With this you are easily able to figure out the return and you can use this on any kind of mutual fund. So, this is how the absolute return is calculated using - (NAV(end) - NAV(start))/NAV(start).

The other way to use a mutual fund calculator is by calculating the total return that is obtained from the fund. In this method, you include the dividends that you have received too. So add the dividends in the holding period and then remove the total change in the NAV. Finally divide this with the initial NAV when you purchased the fund. This can be calculated with - {Dividends +[NAV(end) - NAV(start)]}/NAV(start).

With these calculators, you would be able to plan your investment and know how close to your target you’ve reached.

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How to Calculate Mutual Fund Performance and Returns?

As we progress through our career and financial goals, there would come a time when you are required to take informed decisions on financial planning. Each time, you would have to take a call on the evaluation of the investment and how well you are planning it out. Yes, there has to be a diversified approach to your investment, but having a constant watch over the growth is a must.

Mutual funds are a common choice by many to plan out their investment for a long period. Equity based funds almost always beats other investment forms in the market today. To evaluate the performance of your fund, it is important to keep a benchmark. This benchmark will and must always give you an idea of exiting or progressing ahead.   

So, how would you go about this? Here are a few simple methods –

1.       Absolute return: The two most important dates with respect to an investment are – the beginning date and the end of the holding. This is calculated by the dividing the absolute change in the NAV from the investing period and the NAV during the start of the investment. The simplest advantage is that we can use this calculation on any kind of fund to track out the return. (NAV(end) - NAV(start))/NAV(start) would give you the percentage increase.

2.        Total return in fund: Another method to calculate the total return that has come from the fund is to include the dividends that are in place too. This can be calculated by adding the dividends which are spread across the holding period and with the total change to the NAV, divided by the NAV at the initial day. {Dividends +[NAV(end) - NAV(start)]}/NAV(start)

With these calculations, the mutual fund performance can be tracked and you would be able to know when the fund is performing well as per your ‘benchmark’.

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Know the NAV of your Mutual Funds Before you Invest

All of us know that investing in a mutual fund today is a must. There are great investment benefits and you would get certain tax benefits too. One of the key points you must follow when you are investing in them the ‘net asset value’. This number represents the per share market value of the fund you have chosen. In simpler words, it is the price with which investors are bidding to fund shares from the company and also to sell them too.

So, how do you derive this value for a mutual fund? It is quite simple – you have to add the complete total of cash and securities in the fund portfolio (the assets) and remove the liabilities that are present. For example, let’s say a fund has the assets of 3 million and the liabilities of 2 million; then the NAV of the fund would be 1 million.

The computation of mutual fund NAV is calculated at the end of every day and is of great importance to investors. You can also figure out the real time NAV performance based on the traded fund series. In other words, you can easily find out the price per unit of the fund, by dividing the NAV by the number of outstanding units. This would be different from that of a common stock that is in the stock market. While this is based on supply and demand forces, that of the stock market is purely on market sentiment.

Using the NAV of a fund, you can easily understand the present condition of the fund. You can also chart out a series to figure out how the demand for the fund would be. You would not be able gauge the performance of the fund though as it would be independent of the NAV.

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Planning of making your first investment?

One of the first excitements after you start earning is to make your first investment. You are curious as to the ways you can make the investment and if you have to just start small and choose amongst the many options to take the plunge. Just like any other first time investor, you are bound to come across many ideas from friends, colleagues and well wishers and probably, one of them would be mutual fund investments.

What is mutual fund?

A mutual fund is an investment programme that is promoted or created by shareholders amongst diversified holdings and trading. This is professionally managed and you would have experts looking after your investment, giving you a massive benefit. The mutual fund definition itself means creating a portfolio among different companies so as to get a balanced return.

How to make an investment?

One of the first tips for investment in a mutual fund is to understand the kind of companies that are going to be a part of the portfolio and the period of investment. You can gauge an approximate of the growth thinking about the industry as well as the exit time horizon. You would know how long you would be participating in the mutual fund as a whole too. It is key to understand what the estimates are from the mutual fund investments and how you can get the best results from it.

The main idea would be to keep a close watch on the growth of the fund and since it is one of the first investments to make, you can choose similar funds in the future. It is important to notice that these predictions being made are by experts and that they would consider the past and present market conditions to determine the future growth of the mutual fund.

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