If you are a first time mutual fund investor excited to make her / his first ever investment, congratulations, you have commenced on an investment journey that can help you become wealthy at end of it. For a lot of first time investors, mutual fund investments may seem a little complicated, but they are far simpler than that what many people anticipate.
For those who still aren’t accustomed to what mutual funds are, they are market linked schemes that invest in various asset classes and money market instruments to help the scheme and its investors achieve a common investment objective.
How do mutual funds function?
An Asset Management Company running a mutual fund pools financial resources from various investors and invests the sum accumulated allows its designated fund manager to diversify the scheme’s portfolio by purchasing securities. The fund managers which the AMCs hire to run funds usually have a proven track record and vast experience in managing mutual fund schemes. Mutual fund investors can buy units at the scheme’s current NAV (net asset value). The fund house levy an expense ratio that is deducted from the investor’s capital gains. The investor can either choose to receive dividends or reinvest the capital earned through the growth option.
How to avoid a brokerage charge while investing in mutual funds?
While it is impossible to invest in the stock market without a broker, investors can avoid brokerage charges in mutual funds. A simple way to avoid brokerage charges while investing in mutual funds is by opting for a Direct Mutual Fund Plan. Mutual fund plans are available in direct and regular plan options.
A Regular Mutual Fund plan has a higher expense ratio as compared to regular plans. That’s because a regular plan is usually purchased through third party aggregators, brokers, and mutual fund agents. The fund house has to pay a commission fee to this third party aggregator and recovers this fee by levying a higher expense ratio on regular plans.
A direct plan can be purchased both online and offline by directly getting in touch with the AMC or the fund house running that fund. A mutual fund scheme with a low expense ratio will give you more returns over the long term because your capital gains will witness deductions in a lower percentage. Imagine how much a mutual fund scheme with a regular plan having a 2.5% expense ratio can affect your capital gains compared to the same mutual fund scheme whose direct plan has a 1% expense ratio.
Why invest in mutual funds?
Mutual funds offer diversification like no other investment avenue. Retail investors can own expensive stocks in small percentages through mutual funds as compared to buying a stock whose single share may cost thousands of rupees. Also, these days investing in mutual funds is a simple paperless process. All investors have to do is ensure that they are KYC (Know Your Customer) compliant and complete all the pre-investment investment formalities.
It is now possible to invest in mutual funds with just Rs. 500 per month. The introduction of a Systematic Investment Plan (SIP) has made it possible for almost anyone to invest small fixed sums at regular intervals in mutual fund schemes. Now with the help of the SIP calculator a free online tool, investors can also get an estimate on the final amount which they will receive at the end of their SIP journey.