Mutual funds are managed by professional fund managers who make investment decisions on behalf of investors.
Know what happens to your money when a mutual fund scheme ends. (Representative image)
Investing in mutual funds is a popular way for individuals to grow their wealth over time. Mutual funds pool money from multiple investors to invest in a diversified portfolio of assets such as stocks, bonds and other securities.
However, sometimes one Mutual fund The scheme may be terminated or discontinued. This may be due to various reasons such as closure of the fund due to poor performance, insufficient assets, or a strategic decision by the fund manager or regulatory authority.
Here is a guide to understand and Investing in mutual funds And what happens to your money when the mutual fund scheme ends.
What are mutual funds?
Mutual funds are managed by professional fund managers who make investment decisions on behalf of investors. The main types of mutual funds are:
Equity Mutual Funds: Invest primarily in stocks. They are high risk but offer high return potential.
Debt Mutual Funds: Invest in bonds and other fixed income instruments. They are low risk and provide regular income.
Hybrid Funds: A mix of equity and debt provides a balance between risk and return.
Index Funds: Track a specific index like Nifty 50 or Sensex, and aim to replicate its performance.
Sectoral/Thematic Funds: Invest in specific sectors like technology, healthcare etc.
How to invest in mutual funds?
A. Direct investment:
Online Platforms: You can invest directly through the fund house’s website or through an investment platform like Groww, Zerodha, or Angel One.
KYC Compliance: You have to complete your KYC (Know Your Customer) process before investing. This can be done online through eKYC (using Aadhaar and PAN details).
Investing through SIP (Systematic Investment Plan): SIP allows you to invest a fixed amount regularly (monthly or quarterly). This method is ideal for long-term wealth accumulation and leverages cost averaging of Rs.
Lump sum investment: You can invest a lump sum in a mutual fund at once. This is a good option when you have a lot of capital and prefer to invest all at once.
B. Through a broker or distributor:
You can also invest through mutual fund distributors, financial planners, or brokers who provide advice and help in selecting funds.
Types of Mutual Fund Investment Methods
SIP: Invest a fixed amount regularly. It is a disciplined method of investing and takes advantage of the power of compounding.
Lump sum investment: Invest a lump sum. It is suitable for investors who have a large amount to invest at once.
SWP (Systematic Withdrawal Plan): Allows you to withdraw a fixed amount periodically (monthly or quarterly) from your mutual fund investments. It is often used by retirees or people looking for a regular income.
STP (Systematic Transfer Plan): Allows you to transfer money from one mutual fund scheme to another within the same fund house.
Steps to start investing in mutual funds
Choose a fund: Choose a fund based on your risk tolerance, investment goals, and investment horizon. Consider factors such as:
Past performance (although not indicative of future returns).
Type of mutual fund (equity, debt, hybrid).
– Expense ratio (Expense ratio is better because it lowers your investment cost).
–Complete KYC: Complete the KYC process through your fund house or online platform.
– Select the investment amount: Decide how much money you want to invest, either in lump sum or through SIP.
– Track your investments: Monitor your mutual fund investment performance regularly and make adjustments as needed.
Advantages of investing in mutual funds
Diversity: Mutual funds spread your investment across different securities, which reduces risk.
Professional Management: Skilled fund managers manage your investments.
Liquidity: You can redeem your mutual fund units at any time (except for closed-end funds).
Affordability: You can start investing with a small amount (less than ₹500 in SIP).
Risks of mutual fund investment
Market Risk: Equity mutual funds are subject to market fluctuations.
Interest rate risk: Debt mutual funds may be affected by changes in interest rates.
Liquidity Risk: Some mutual funds, especially closed-end funds, may not be liquid.
Credit Risk: For debt funds, there is a possibility that the issuer may default.
Mutual Fund Terms You Should Know
NAV (Net Asset Value): Value per unit of mutual fund holdings. It changes daily based on the performance of the securities.
Expense ratio: Fees charged by the Fund for managing your investments.
AUM (Assets Under Management): The total value of assets under management of a mutual fund.
Risk Profile: Understanding your risk tolerance helps in choosing the right type of fund.
Popular mutual fund platforms
Direct investment: Fund house websites like HDFC Mutual Fund, ICICI Prudential etc.
Third Party Platforms: Grove, Zerodha (kite), Zerodha coin etc.
What happens to the invested amount if the mutual fund scheme closes?
If the mutual fund scheme is liquidated, the invested amount is returned to the unit holders on the basis of current NAV, after deducting all relevant expenses. The mutual fund returns the value of the outstanding units to the unit holder at the current NAV, as recorded in the register of unit holders. Unit holders are also entitled to receive a detailed report on the winding up process, containing all necessary information.
Mutual fund investing is a great way to achieve financial goals, but it is important to choose the right fund according to your risk tolerance, financial goals and investment horizon. Always do thorough research, consider consulting a financial advisor, and ensure regular monitoring of your portfolio.
Disclaimer: The views and investment tips of the experts in this News18.com report are their own and not those of the website or its management. Readers are advised to consult qualified experts before making any investment decision.