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The Five Commandments Of Mutual Fund Investing

Mutual funds are, in reality, the only investment option for the retail investment option for the retail investors. They are a very powerful investment tool and offer a variety of benefits like professional management of funds, liquidity, safety and a diverse range. They definitely have a very bright future through there was slight apprehension since people have a tendency to dwell in the past. Though there were a few irregularities till 1993, matters have changed due to strict regulation. There has been an increase in transparency and professionalism with the entry of private player. The natural need of people to invest their savings will also ensure a bright future for mutual funds.

Introduction:

Who is the fund sponsor? What is an asset management company (AMC)?

  • The company that establishes the mutual fund in the form of a trusted and registers it with SEBI is the fund sponsor.
  • The Asset Management Company is appointed by the trustees to float the mutual fund schemes and manage the fund in accordance with the SEBI regulations, the trust deed guidelines and the terms of the asset management agreement.
  • As an investor, you should check the sponsor’s track record. Security of the fund sponsor’s track record can prevent one from losing money. Apart from a consistent track record, sponsors should have requisite experience and background in managing mutual funds.

Who is the fund manager?

  • The fund manager is an employee of an Asset Management Company who formulates the investment strategy and invests the funds.
  • As an investor in the fund, you should
    • Understand the investment philosophy of the fund manager.
    • Check the returns he has generated on funds previously managed by him and
    • Find out whether the fund manager has delivered on the investment objectives of the funds he has managed in the past.



Does the fund manager’s investment philosophy suit you?

  • Each fund manager will have a different style and philosophy of investment. While some are aggressive other available for subscription all through the year and is not listed on the stock exchanges. Investors have the flexibility to buy or sell any part of their investment at any time at a price linked to the funds Net Asset Value (NAV).

What type of fund should you invest in?

  • Funds are either open-ended or close-ended and an investor ought to choose the one that suits his need.
  • Open-ended funds: An open-ended fund is available for subscriptions all through the year and is not listed on the stock exchanges. Investors have the flexibility to buy or sell any part of their investment at any time at a price linked to the funds Net Asset Value(NAV).
  • Closed-ended funds: A close-ended fund has a fixed corpus and operates for a fixed duration. The fund is open for subscription only during a specific period. Usually, the redemption date is also specified. When they terminate, investors can redeem their units close-ended funds are listed on the stock exchanges. An investor can get liquidity through sales/ purchase at the prevalent market price, which may differ, from the NAV of the fund.

Which scheme should you opt for?

Mutual funds can offer different investment schemes. These schemes can be classified as income funds, equity funds, and balanced funds. Investors should invest in schemes which meet your requirements in terms of your need for regular income capital appreciations, and safety of principle.

Income funds: They seek to provide a regular source of income by investing in fixed income security like debentures and bounds.

Equity Funds: They aim to grow money over time. Here the investment focus is mainly on the stock. Historically, stocks, on average, have outperformed most other kinds of investment held over in long term.

Balanced funds: The fund attempts to maintain a balance between interest income and capital appreciation. An investor should invest in schemes, which meet your requirements in terms of your need for regular income, capital appreciation, and safety of principal.

Conclusion:

We discussed, which are the important commandments of mutual fund investing, What type of fund you should invest. I believe you will have a clear idea of what is meant by a fund manager? Feel free to command any query regarding mutual fund investment.

Sarafudheen PM

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