Mutual Funds: Planning to invest? Top tips to know; things to keep in mind

Several investors want to invest in Mutual funds. Before investing in any of the investment options it is important to know about its basic details, risk involved among others.

If you are interested in mutual funds and want to invest in the same, then here are some of the basic details provided by SEBI and BSE which you need to know.

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What is a Mutual Fund?

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unitholders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time, as per the information provided by SEBI.

Also, a mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.

Types of mutual fund schemes?

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.

An open-ended fund or scheme is available for subscription and repurchase on a continuous basis and do not have a fixed maturity period. While a close-ended fund or scheme has a stipulated maturity period. The fund is open for subscription only during a specified period at the time of launch of the scheme.

Schemes according to Investment Objective:

A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes.

How to invest in a scheme of a mutual fund?

Investors can contact the agents and distributors of mutual funds for necessary information and application forms. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Post offices and banks also distribute the units of mutual funds.

How much should one invest in debt or equity oriented schemes?

An investor should consider his risk taking capacity, age factor, financial position, etc.

What should an investor look into an offer document?

According to the information provided by SEBI, an abridged offer document which contains very useful information, is required to be given to the prospective investor by the mutual fund. The application form for subscription to a scheme is an integral part of the offer document. SEBI has prescribed minimum disclosures in the offer document.

An investor, before investing in a scheme, should carefully read the offer document. Investors should look at main features of the scheme, risk factors, initial issue expenses and recurring expenses to be charged to the scheme, entry or exit loads, sponsored track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed, etc.