Mutual fund explained in Malayalam

Mutual Funds in India: A Comprehensive Guide on Benefits, Risks, and Investing

A mutual fund is a professionally managed investment vehicle that aggregates money from numerous retail and institutional investors to construct a diversified portfolio under the guidance of a fund manager. This article will explore mutual funds in depth spanning definition, types, working, advantages, disadvantages, SEBI regulations and tips for investing in them in India.

I have given Malayalam video link about mutual fund investing in last section of this post.

What is a Mutual Fund?

A mutual fund is an investment instrument that pools money from a large number of entities like individuals, companies, trusts etc. and deploys it into various securities like shares, bonds, money market instruments etc. based on the stated objective of each scheme. The pooled money is professionally managed by an asset management company which oversees where to invest depending on market conditions.

In exchange for this service, the asset management company and other intermediaries charge a small fee. The investment objective and strategy guides the fund manager's decisions on portfolio composition and periodic rebalancing. Based on this, mutual funds allow even small investors to gain access to a well diversified and expertly curated basket of securities.

Unlocking the magic of mutual funds : A comprehensive guide in Malayalam (മ്യൂച്ചൽ ഫണ്ടുകളെ കുറിച്ച് മലയാളത്തിൽ കൂടുതൽ അറിയാൻ ഈ ലിങ്കിൽ ഉള്ള വീഡിയോസ് കാണാം  - Mutual funds Malayalam

Types of Mutual Funds

Mutual funds are typically classified based on their underlying portfolios into:

1. Equity Funds

Equity or stock funds invest a minimum 65% of total assets into shares of publicly listed companies. Based on market capitalization focus or sectors/themes chosen, they can be further categorized into:

• Large Cap Funds
• Mid Cap Funds
• Small Cap Funds
• Sectoral/Thematic Funds like Banking, Infrastructure, Pharma etc
• Multi Cap Funds - Mix of market caps

They are ideal for investors seeking long term capital appreciation who can tolerate risks associated with equity volatility. Returns are linked to stock performance.

2. Fixed Income Funds

Also called debt funds, they park a minimum 80% of the corpus into fixed income instruments like corporate bonds, gilts, treasury bills, commercial paper etc issued by governments, companies, banks and other entities. Based on duration of instruments chosen, they include:

• Liquid Funds
• Ultra Short Duration Funds
• Short Duration Funds
• Medium Duration Funds
• Long Duration Funds
• Dynamic Bond Funds

They suit investors desiring steady payouts with good credit quality. Returns comprise interest payouts and capital gains from bond trading.

3. Hybrid Funds

Hybrid mutual funds allocate between equity and debt in various combinations. This balances risk-return profile. Popular types are:

• Equity Savings Funds
• Arbitrage Funds
• Balanced Advantage Funds
• Dynamic Asset Allocation Funds

They work for investors wanting best of both asset classes in a single portfolio. Returns derived from equity and debt components.

4. Money Market Funds

They park corpus in very short term debt and money market tools like certificate of deposits (CD), commercial paper (CP), treasury bills etc where liquidity and safety take priority over returns. Ideal for parking emergency funds serving cash equivalent needs.

5. Thematic/Sectoral Funds

Further specialization into specific sectors like information technology, infrastructure, banking etc or investment themes like environment, consumption, rural economy etc help align with one's views. Enable tactical investing.

6. Passive Funds

Index tracking exchange traded funds (ETF) and index funds mimic popular benchmarks without fund manager intervention. Allow low cost passive investing into equity and debt markets.

7. Fund of Funds

These invest in other mutual fund schemes based on risk appetite rather than individual assets. Simplifies investing by effectively outsourcing entire asset allocation and security selection process to a fund manager.

Working of a Mutual Fund

A mutual fund essentially acts as an intermediary between investors and capital markets. It raises money from numerous large and small investors who become unitholders of the mutual fund schemes they choose to invest in. Their money gets pooled into the corpus of the particular scheme they opted for based on its stated mandate.

The corpus is then managed by the asset management company through its investment team including fund managers, analysts and traders who decide on buying and selling securities to construct the scheme's portfolio as per its objective, risk profile and investment strategy. For instance, an equity fund will primarily buy stocks while a debt fund will invest in bonds, money market instruments etc.

The unitholders or investors do not actively trade the underlying portfolio. Instead, open-ended funds allow them to easily subscribe to new units or redeem existing units directly with the mutual fund itself rather than finding buyers on stock exchanges. So purchase and redemption facility acts like deposits and withdrawals in bank savings accounts while the fund manager handles investing.

The unit price fluctuates based on how the underlying securities perform, reflecting prevailing market values. For equity funds, stock prices influence net asset values (NAV) while for debt funds, bond yields and interest rates impact valuations. Unitholders can easily track performance vs benchmarks.

Professionally managing money on behalf of thousands of unitholders enables even small investors to gain access to services of specialists bringing expertise and research capabilities difficult to match for retail individuals directly investing in markets. This makes mutual funds an attractive vehicle.

Advantages of Investing Through Mutual Fund Route

While mutual funds carry risks inherent to capital markets, they provide certain advantages making them a favored investment vehicle for common investors in India.

1. Diversification:

A mutual fund invests across a wide spectrum of securities across market caps, sectors, risk categories etc. This diversified approach reduces overall portfolio risk compared to betting one's capital on just a handful of stocks or bonds where downturns can take a higher toll. Loss in one asset gets balanced by others.

2. Professional Management

Hardworking fund managers and their teams bring in extensive experience, training and insights to make prudent investment decisions tailored to prevailing economic conditions and future outlook. Actively managed funds rely on their judgment for performance. Investors benefit from their financial acumen.

3. Low Investment Amounts

Mutual funds allow even those with humble savings to gain access to sophisticated assets like foreign securities, derivatives etc which individually may call for higher capital commitment beyond their means. Affordable tickets ensure wider access to capital markets.

4. Liquidity

Open-ended mutual fund units can be purchased and redeemed directly with the Asset Management Company without requiring a secondary market trade. This makes entry and exit convenient compared to various fixed return investments locking money for longer periods without flexibility.

5. Transparency

Stringent SEBI guidelines mandate mutual funds to disclose detailed portfolio reports, performance metrics compared to category benchmarks, expense ratios, risk profiles etc in a standardized fashion. This allows investors to easily compare competing options.

6. Flexible Options

Various mutual fund categories outlined earlier offer solutions matching diverse needs like regular income, tax efficiency, long term growth etc. Dynamic switching across schemes without capital gains tax makes mutual funds adaptable.

7. Governance and Regulation

SEBI formulates strict guidelines for mutual funds regarding transparency, fees permitted, risk management etc keeping unitholders' interest paramount. Trustees provide oversight ensuring compliance and redressal for investor grievances via arbitration mechanisms. This structure breeds confidence.

Disadvantages of Mutual Fund Investing

While mutual funds mitigate various individual investing challenges, some drawbacks persist:

1. Costs and Fees

Annual fund management fees including expense ratio is deducted from overall returns earned. Higher expense ratios due to distribution commissions etc diminish investor profits. Direct plans without distributor fees offer lower costs. Entry or exit loads also apply in certain funds.

2. Performance Unpredictability

Fund returns depend on market conditions across asset classes chosen. Sporadic downturns facing entire markets can adversely impact investors depending on timing of investments or redemptions. Researching long term track record aids decision.

3. Lack of Control

Actively managed mutual funds do not allow investors customization or discretion on portfolio contents or frequency of trades. They must rely on fund manager decisions which may vary in efficiency.

However, these limitations do not overshadow the bigger advantages outlined earlier that make mutual funds a prudent investment for wide retail participation in capital markets rather than directly purchasing individual stocks or bonds exposed to higher risks.

SEBI Regulations for Mutual Funds

The Securities Exchange Board of India (SEBI) regulates the Indian mutual fund industry formulating guidelines covering operational aspects, disclosure requirements, risk management etc. intended to protect common investor interests.

Some key guidelines cover:

• Investment restrictions including limits on exposure of a single mutual fund scheme to an individual stock or sector
• Standardized disclosure of fund performance against category benchmark returns to enable comparisons
• Daily publication of Net Asset Values (NAV) per unit alongwith portfolio details for transparency
• Caps on total annual recurring expenses that can be charged to investors
• Strict code of conduct and internal controls for fund management
• Guidelines for managing risks like liquidity mismatches, derivatives exposure etc
• Grievance redressal mechanism for investors including dispute resolution via arbitration

Compliance to these guidelines certified by SEBI registered trustees and annual audits ensures orderly functioning, systemic stability and help promote trust. Recently introduced risk-o-meters indicate volatility too.

To learn about how to invest in mutual fund check this post - How to invest in mutual funds in India.

To learn about systematic investment plan or SIP investing, check this post - Systematic investment plan or SIP

Tips for Investing in Mutual Funds

Here are some handy tips for those evaluating mutual fund investments:

• Match appropriate fund category with your financial goals, investment horizon and risk tolerance
• Analyze historical long term returns against category benchmark and peers
• Choose lower expense ratio funds including direct plans to save costs
• Start investments via Systematic Investment Plan (SIP) instilling discipline
• Maintain portfolio balance investing across market cap categories
• Prevent excessive exposure to single sector or stocks
• Assign clear entry or exit downside targets for trimming losses
• Attempt not to frequently switch schemes chasing short term performance

To conclude, mutual funds offer multiple advantages like diversification, liquidity, governance and flexible options making them a wise investment channel for innumerable middle class Indian households to participate in capital market growth in a simplified, well regulated manner. Identifying suitable schemes through careful due diligence aids overall portfolio construction.

Check mutual fund playlist in our youtube channel - Share market malayalam to watch all videos related to mutual funds. 

Mutual fund playlist in Malayalam (മ്യൂച്ചൽ ഫണ്ടുകളെ കുറിച്ച് മലയാളത്തിൽ കൂടുതൽ അറിയാൻ ഈ ലിങ്കിൽ ഉള്ള വീഡിയോസ് കാണാം  - Mutual funds Malayalam