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Mutual Fund-

Mutual fund is a trust that pools money from a group of investors (sharing common financial goals) and invest the money thus collected into asset classes that match the stated investment objectives of the scheme. Since the stated investment objectives of a mutual fund scheme generally form the basis for an investor is decision to contribute money to the pool, a mutual fund can not deviate from its stated objectives at any point of time. Every Mutual Fund is managed by a fund manager, who using his investment management skills and necessary research works ensures much better return than what an investor can manage on his own. The capital appreciation and other incomes earned from these investments are passed on to the investors (also known as unit holders) in proportion of the number of units they own.

When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit holder. Any change in the value of the investments made into capital market instruments (such as shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual Fund scheme is assets net of its liabilities. NAV of a scheme is calculated by dividing the market value of scheme is assets by the total number of units issued to the investors. For example:

  • If the market value of the assets of a fund is Rs 100,000
  • The total number of units issued to the investors is equal to 10,000
  • Then the NAV of this scheme = (A)/(B) i.e. 100,000/10,000 or 10.0
  • Now if an investor X own 5 units of this scheme
  • Then his total contribution to the fund is Rs. 50(i.e. Number of units held multiplied by the NAV of the scheme)

Types of Mutual Funds Available:

  • Equity schemes invest maximum part of the funds into equity holdings. They include diversified, mid-cap, sector specific and tax saving schemes- HDFC Equity fund (mid-cap), Franklin India Blue-chip (open ended equity fund), HDFC TaxSaver etc.
  • Debt Funds - These Funds invest in debt papers to reduce risk and provide stable income to investors. They include gilt funds, income funds, MIPs, short term plans and liquid funds - HDFC Floating Rate Income Lt, Tata Gilt Retirement280216 etc.
  • Balanced funds - These are a combination of equity and debt funds - Tata Balanced, Birla Sun Life 95 etc.

SIP-

Systematic Investment Plan (SIP) allows you to invest a fixed amount at regular intervals in a scheme. There are many benefits of investing in a SIP.

Power of compounding - Investing in SIP allows the investor to take advantage of the power of compounding. Regular investments in a scheme leads to compounding which means you earn interest on your interest as it is added to the original amount. This is very beneficial for long term wealth creation.

Rupee cost averaging - When an investor invests through SIP, he gets the benefit of rupee cost averaging. It means that the investor gets more units when the Net Asset Value (NAV) of the scheme is low and fewer units when the NAV is high. This brings down average cost of units over the long term.

Flexibility - An investor has the flexibility to choose the amount, duration and the interval of the SIP. They also have the option to change the amount, pause or stop the SIP.

Disciplined investing - Investment via SIP inculcates the value of disciplined investing in an investor as they are committed to investing a specific amount for a fixed period of time which is essential in long term wealth creation.