Decoding Mutual Funds ; The Basics everyone should know.

Table of Content ;

1. What is Mutual Fund?  

2. Industry growth and Top Players of MF Industry?

3. Ways to Invest in a MF. 

4. Classification and Types.

WHAT IS MUTUAL FUND ?

When collection of money (from normal public) is invested in a Business, Real estate, Debts, Gold and Precious metal by an experienced and qualified individual (know as Fund Manager) with an objective to earn more returns is referred to as mutual fund. 

On an average Mutual fund gives the return of 15% compounding annually, This means that If you would have invested 1,00,000Rs in a mutual fund. In a year it would have become 1,15,000Rs. 

Then How does the Fund Manager earns? He charges you "Expense Ratio" on daily basis to invest your money and make returns for you. 

Industry of Mutual Fund 

Growth of Mutual Industry in India 

  Only 8% of population in India invest in Mutual Fund. Even after this the total market value of investment managed by Mutual Fund Industry in India as of 31 July 2024 is  64,96,653 Cr (64.97 Trillion Rs).

Top 3 Asset Management Company which manages the MF industry in India is :

1. SBI Mutual Fund - manages Rs 9,13,780.06 Cr which is more than15% of whole industry under the fund house.

2. ICICI Prudential Fund -  manages Rs7,20,000 Cr. which is 11% of whole industry under their fund house 

3. HDFC Mutual Fund - manages Rs7,15,750 Cr. somewhat near with ICICI Prudential.

Ways to invest in a Mutual Fund :

1. Lumpsum - When the investor invests their whole money at once in a particular fund.

2. SIP (Systematic Investment Plan)  - When the investors invest their money in a fund in regular basis. (such as monthly or weekly)

3. STP (Systematic Transfer Plan) - It is a type of plan which allows the investor to change money from one fund to another in same Fund house.

4. SWP (Systematic Withdrawal Plan) - It is a type of plan allows the investor to withdraw money from their investment from a particular fund in a in a systematic manner.

Classification of Mutual Fund based on :-

There can be various types of schemes under a Fund House, For Example SBI mutual Fund have schemes such as "SBI BlueChip Direct Growth Fund", " SBI Flexicap Regular Growth Fund", "SBI Nifty Index Direct Growth Fund". These are names of some schemes which every Fund House provide. This information helps us to make the right decision while we invest our money. So understanding these terms in case of a mutual fund is essential. 

Classification and Types ;

I.  Based on Asset Class -

1. Equity - Equity mutual fund are those funds which invest in equity market. The fund gives higher returns with higher risk. 

2. Debt - This type of fund are those which invest in debts such as bonds.  

3.Hybrid - This type of mutual fund invest in both equity and debts.

II. Based of Fund Management - 

1. Active - When the fund manager actively analyze and buy and sell the stocks as per the analysis. This type of fund is Active Funds.

2. Passive - When the Fund manager replicate the Sensex (List of or the benchmark. This is the passive type of Fund.

III. Based on Reinvestment - 

1. Growth - It is a type of fund which reinvests all the returns again into the fund, instead of distributing it to the investors, results in increasing the value of investments.

2. Dividend - It is a type of investment which distributes all the returns to its investors.

3. Dividend Reinvestment -  It is a type of fund where in the returns is given to the investor in additional units of the mutual fund. 

IV. Based on Expenses - 

1. Regular - When the third party is involved in between the investor and the Mutual Fund House, it is a regular plan. The Expense Ratio of this type of Fund will be more when compared to Direct Plan.

2. Direct - When there is no involvement of middle party and there's direct transaction of Investor and Mutual Fund House.

V. Based on the Company It invests in - 

1. Large Cap Fund/ Blue Chip Fund - In these type of MF, the money is invested in well established companies Such as HUL, Reliance, TCS, Asian Paints, ITC, Bharti Airtel etc. These funds are less risky however it also gives lower returns.

2. Mid Cap Fund -  In these type of MF, the money is invested in companies Such as Raymond, CEAT, Bajaj Electrical etc. These funds are more risky than Large cap funds, fortunately it gives more returns higher returns than Large Cap Funds.

3. Small Cap Fund -  In these type of MF, the money is invested in companies Such as Andra Paper, Delta Corp, Appolo Pipes etc. These funds are most risky funds. It gives the highest returns in all types schemes. 

4. Flexi Cap Fund - In these types of MF, the money is invested in all three types of companies (large, mid, as well as small), so the risk is distributed and returns can also be generated.

Based on these various types of features of a particular mutual fund people invest as per their needs and objectives, after assessing risks and returns.

The objective of this article was to provide knowledge of Mutual Fund to the people of non Finance background. In  the next article we will be discussing the topic of Mutual Fund in More detailed way.