Mutual Funds - A Basic Primer

What is Mutual Funds?
Mutual funds are collective investment schemes that pools money from different investors to buy capital & money market instruments such as stocks, bonds, government securities etc. The money so collected under each scheme follows specific investment theme(s) so as to cater to the risk-return profile of the investors. A fund manager is typically entrusted to manage such pooled funds and is responsible for investing the money in the said securities.

The Jargons..

• NAV (Net Asset Value): Price of one unit of the fund, it is calculated at the end of each day by computing the total value of all securities held by the fund less expenses incurred and divided by the total units of the mutual fund
• Plan type - Grown, Dividend, Dividend re-investment: These are various options available to investors depending on their financial goals and needs. Those who save for long term needs go for growth option while those that need cash at regular intervals would go for dividend option.
• Color code: Indicates the risk level of a fund. Brown (high risk), Yellow (medium risk) & Blue (low risk).
• Expense Ratio: Ratio of expenditure to assets under management of the scheme - it includes all expenses incurred by the fund manager in managing the fund. This cost is deducted prior to passing the returns to investors and is reflected in the NAV.
• Scheme Information Document: A comprehensive document that provides details of the intention of the fund, how it plans to allocate and invest the money collected and the maximum permissible expenditure as approved by SEBI (Securites Exchange Board of India).

To whom are Mutual funds best suited?
Mutual funds are best suited for investors who do not have the time and indepth knowledge to pick up securities (stocks & bonds) all by themselves. Also certain securities such as government bonds are sold only in large sums (millions of Rs.) that retail investors may not be able to invest directly. In many cases, even if investors have the time and knowledge to pick securities, they may not be able to continually monitor them over a span of 5 or 7 years and churn their portfolios due to the demands of their regular day-job. In such cases it makes sense to invest through mutual funds.

Is Mutual funds for me?
The answer really depends on one's financial goals, risk appetite and comfort-level with mutual funds. Unlike fixed deposits, the returns from mutual funds are not totally risk-free - at the same time they have helped investors build wealth over a long period of 10-15 years. Talk to your financial planner to understand the investment vehicle and assess the risk-return paradigm against your existing portfolio prior to investing!