Mutual Funds Explained:
SIP mutual funds in India is growing like anything and is getting popular as the most favorable investment option. The industry has witnessed healthy growth in last five years or so. It is nothing but a common pool of savings created by a number of different investors having common investment objectives and needs. This money is then invested by the fund manager of the fund house according to the objectives of the scheme. They have proved to be an ideal investment product for an individual investor.
These funds in India are becoming the most popular investment vehicle offering various kind of schemes with different investment objectives. It is believed that investments through them are one of the most safest, easiest and convenient way of successful investment making. The investments are in alignment with the laid down investment objectives fulfilling the goals & objectives of the unit holders.
Structure of Mutual Funds:
In India, mutual funds function as trust created under the Indian Trust Act, 1882. There are three layers of mutual funds in India.
- Sponsors
- Trustee and
- Asset Management Company(AMC).
Sponsors work as promoters of the company. They take responsibility of starting mutualfund business. Sponsors contribute initial capital and appoint Trustees and Board of Trustees.
Board of Trustees then act as guardians of investors and ensure that money invested by investors is used according to the objective of the scheme.
Whereas, Asset Management Company(AMC) is the public face of fund management business. Sponsors and Trustees together form AMC and appoint Fund Manager. Fund manager then with the help of fund management team makes all the investment decisions.
Drivers for Investments in Mutual Funds:
The parameters that are responsible for increased investments in mutual funds in India are:-
- Customers are attracted towards investments in mutual funds because of the tax benefits it offers.
- Factors such as consistency in fund performance and brand equity are influencing customers to invest in relevant mutual fund schemes.
- Last but not the least is the simplification of processes that helps in increasing the quantum of investments.
How to invest:
There are three basic steps for investing in mutual funds. They are:
Step1- Identify your investment needs:
-->What are my investment objectives and needs?
-->How much risk I am willing to take?
--> What are my cash flow requirements?
Step 2-Choose the right fund:
-->The track record of performance over the last few years in relation to the appropriate benchmark and similar funds in the same category.
-->How well the fund house is organized to provide efficient, prompt and personalized services.
-->Degree of transparency as reflected in quality of the fund house conmmunications.
Step 3-Select the right mix of schemes:
-->Putting all your eggs in one basket may not meet your investment objectives and needs. So consider investing in a combination of schemes to achieve your specific financial goals.
Types of risks associated:
It is rightly said that "No risks, no returns". Risk is an inherent aspect of every form of investment. For Mutual Fund investments, risks would include variability, or period-by-period fluctuations in total return.
There are different types of risks associated with mutual funds & they are:
Market risk: At times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. This change in price is due to 'market risk'.
Inflation risk: Sometimes referred to as 'loss of purchasing power'. Whenever the rate of inflation exceeds the earnings on your investment, you run the risk that you wll actually be able to buy less, not more.
Credit risk: In short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures?
Interest rate risk: Interest rate movements in the Indian debt markets can be volatile leading to the possibility of large price movements up or down in debt and money market securities and thereby to possibly large movements in the NAV.
So, if your scenario is you are earning money in bagfuls, but having confusion where to invest or want high returns, do consider entrusting your money to sip mutual funds in india and see your financial dreams taking shape to reality.
