Planning to invest in Mutual Fund? Step-by-step guide on investing in MF for long-term wealth creation

Certain factors affect our investments yet are overlooked or unknown to a new investor. Initial financial planning requires a detailed understanding of the following factors:

• Risk Tolerance level

• Investment horizon

• Liquidity requirements

• Real Rate of Return

• Tax implications

• Existing assets & liability evaluation

• Other personal & professional situations if any

We spoke to Ankit Agarwal, Managing Director, Alankit to decode basics of mutual fund investing:

What is a Mutual Fund?

Mutual funds offer a route to investing in asset classes such as equity, debt, commodities (gold, silver, etc.), Global indexes, and real estate.

Mutual Fund is a trust that collects money from several investors who share a common investment objective.

Further, this money is invested in bonds, equities, other securities, and/or money market tools. Every investor owns his or her units that represent a part of the fund they are holding.

The profits earned/gained from this collective investment are further distributed equitably amongst the investors once the expense deduction is made from the total benefits which are done through the calculation of the scheme’s “Net Value Asset or NAV.”

How it is Managed

In a mutual fund, the investment activities such as evaluating and selecting securities, creating and managing the portfolio, and reviewing and rebalancing the portfolio based on the performance of the portfolio as a whole and the securities included in it, are done by professional fund managers for a fee.

They bring experience, information, and investment skills that individual investors may not have.

An investor may choose to capitalise through a mutual fund to be able to use the services of the fund manager who will make the investment decisions relating to the selection of securities, the timing of investments, reviewing and rebalancing the portfolio periodically, and executing the operational decisions related to the portfolio.

These services are provided to the investor by charging a fee.

Benefits of investing in a Mutual Fund

• Some securities may not be available for investment by retail investors. There are bonds and equity shares that are placed to institutional investors only. Mutual funds provide access to investors to such securities through their portfolios.

• Mutual Funds give the flexibility to an investor to organise their investments corresponding to their convenience. Direct investments may necessitate a much higher investment amount than what many investors may be capable to invest.

For example, investment in gold and real estate requires a large outlay. Similarly, an effectively diversified equity portfolio may entail a large outlay. Mutual funds offer the same profits at a much lower investment value since it pools small investments by multiple investors to create a large fund.

Similarly, the dividend and growth options of mutual funds set aside investors to structure the returns from the fund in a way that suits their requirements.

• Investing in the securities markets will involve the investor opening and managing multiple accounts and relationships such as broking accounts, Demat accounts, and others. Mutual Fund investment simplifies the process of investing and

holding securities.

• Mutual funds may offer an easier and more efficient way of investing in diverse asset classes and securities.

• One could invest in a myriad number of asset classes, strategies, geographies, and securities through a single Mutual Fund.

• It minimises the risk by asset diversification.

Cost/Fee Associated with Mutual Funds

Costs of investing in mutual funds are higher as the funds are managed by external agencies/Fund Managers that need to be paid a fee for their services apart from the transaction costs that the investors have to bear.

Direct investments may have lower costs since only the transaction costs have to be borne by the investor.

Mutual Fund Investment Options

The nature of primary return that an investor earns from a mutual fund investment, whether dividend or capital gain and the impact of tax on their returns, will depend upon the choices they make on structuring their return.

Most mutual funds propose a dividend option and growth option. The dividend option entails that the funds will payout the returns produced in the form of periodic dividends.

There is a dividend reinvestment option too where the dividend declared is not paid out but re-invested in the scheme. The NAV of the scheme will fall to the extent of the dividend that is paid out of its net assets.

In the growth option, the returns generated are retained in the scheme and translate into an appreciation in the NAV, and hence the value of the investment. The investor can realize this appreciation at any time by redeeming the units.

Investors can boost their post-tax returns by selecting the right investment option, given the type of investment and period of holding.

The need for income or appreciation can be met by using facilities such as periodic redemptions if the investor needs to receive money from their investment or reinvestment of dividends if the investor is pursuing long-term wealth creation.

They may have to take into consideration the impact of exit loads on the redemption of units. However, most funds do not impose an exit load if the investment is held for a minimum period, depending upon the type of scheme

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)