Introduction to mutual funds in India

by Manshu on November 16, 2012

in Mutual Funds

Ankita Dhokia posted the following comment in the Suggest a Topic page back in August:

Ankita Dhokia August 28, 2012 at 8:17 pm [edit]

Hi ,
I wish to invest in mutual funds. I am an amateur and am completely lost in the numerous schemes offered by all companies. I wish to know the co relation between interest rates and stocks, debentures and money market instruments. Kindly guide on the same.
Thanking you ,
Ankita

Reply

What is a mutual fund?

The first thing to understand is that mutual funds are investment vehicles, and that simply means that investors pool their money together and then the mutual fund invests that money on their behalf. The easiest way to understand this is to think that as an individual investor you would’ve gone to the stock market and bought a share, but now as a mutual fund investor you buy a mutual fund unit, and then the mutual fund pools together your money with money from other investors and then goes and buys shares on your behalf.

What do mutual funds invest in?

There are four main type of mutual funds based on what they invest in.

1. Equity Mutual Funds: These are mutual funds that invest in shares of other companies.

2. Debt Mutual Funds: Debt mutual funds are mutual funds that invest in debt instruments so they may buy debentures of a company or government and other such things. Here is an article that lists out the different types of debt funds.

3. Commodity Mutual Funds: These are mutual funds that own commodities like gold, and in reality, India only has gold based mutual funds.

4. Hybrid Mutual Funds: Hybrid mutual funds invest in a mix of the above three classes at the same time. So for example, they may invest 65% of their money in shares and 35% in debt.

The answer to which mutual fund you want to invest in depends on what you actually want to buy and your appetite for risk.

If you want to invest in shares and understand that investing in shares can sometimes mean that you even lose your capital then equity funds are for you.

If you want to be safe and protect your capital then you should only invest in debt mutual funds.

If you were interested in getting returns from gold then you should invest in a gold mutual fund. A hybrid fund is for someone who needs a balance.

Types of debt and equity funds

Take a look at this page with the explanation of the different types of debt mutual funds, and this page if you want to know the difference between a debt and an equity product.

Deepak Shenoy has a great video on the different type of equity mutual funds.

How can I buy a mutual fund?

There are several ways to buy a mutual fund, you can go to the website of the mutual fund directly and buy it from there. You can buy them from an agent offline, you can buy them from a brokerage portal like ICICIDirect.com, and then there are free platforms like FundsIndia.com that you can use to buy mutual funds.

Conclusion

I understand that even this basic information can be a little overwhelming for the beginner so I think if you know nothing, then start by learning three things about them – what they are, what do they invest in and how can you invest in them?

The what is simply that they are investment vehicles that pool together money from different investors and then invest it on their behalf.

They invest in either shares, bonds, commodities or a combination of these.

And you can invest in them by using online portals or just contact an agent offline; there are many ways to buy them based on what you’re most comfortable with.

Please leave a comment if you have any questions or comments.

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