If you’ve landed on this page, it’s safe to assume that you’ve been contemplating investing in mutual funds. Mutual fund investments can offer great returns over time.
However, this is where you should ask an important question: How?
How do mutual funds provide returns, or simply put, how do mutual funds work? This article will simplify this financial instrument for you.
What are mutual funds?
Mutual funds are investment tools that pool money received from several investors. An asset management company (AMC) then parks this corpus in money-growing avenues, like bonds, securities, government bills, and others.
In this investment mode, you – the investor – receive returns based on the performance of your mutual funds. The asset management company retains a cut on each transaction for the services provided.
How are mutual funds priced?
Depending on the prevailing market value of the mutual fund you invest in, you will be granted units of the product.
The market value of a mutual fund is called net asset value (NAV). If the NAV of your mutual fund is higher on the day you sell it, you make a profit. In short, this is what determines whether your returns are profitable. However, the composition of the mutual fund also determines its net asset value.
What do mutual funds invest in?
Mutual funds mainly invest in two broad assets: equities and debts. You need to select a mutual fund scheme that aligns with your financial goals and accordingly adjust the proportion of equities to debts.
If you’re a more aggressive investor or someone looking for high returns in the long term, you could go for a more equity-focused mutual fund. However, the risk also increases with equities, as they’re determined by movements in the Stock Market.
The conservative investor or those looking for short-term investments that can be liquidated faster, can consider a debt-fuelled mutual fund. Debt funds have a smaller lock-in period. On the other hand, they also offer lower returns.
When you invest in mutual funds, you invest in diversified assets. You also get to pick from many investment strategies and intrinsic assets.
How to go about investing in mutual funds
Now, the question arises: how do you invest in mutual funds?
You could try a lump sum investment, where you pool your savings and make a one-time investment. However, a better way of going about mutual funds is through a Systematic Investment Plan (SIP)
The main advantage of investing through the SIP route is unit cost averaging. This essentially means that your buying price for the same number of units comes down to a much lower figure.
Upstox provides an easy way of investing in mutual funds:
- Visit the Upstox website or app.
- Open a Demat account with Upstox and sign in.
- Head over to the ‘Products and Tools’ tab. You’ll find the ‘Mutual Funds’ tab under ‘Investing options’.
- Once you click on it, you’ll be directed to a list of over 2,500 mutual fund schemes. You can compare their performance, NAVs, and get more stats on the same page.
- Once you choose a scheme, click on it. You’ll find the option to start a SIP or make a lump sum investment.
All you need to do is decide to invest a certain amount in mutual funds every month and trust the expertise of your mutual funds manager. Know more about simple and smart investing in mutual funds with Upstox.