What are Mutual Funds & Should You Invest?

• Medium Duration Funds

These mutual funds make debt investments that have an average maturity of 3-4 years. The medium-duration funds invest in a mix of corporate debt instruments and bonds, government and money market securities.

• Medium to Long Duration Funds

Unlike the other funds, medium to long-duration funds are ideal options for all those who are looking for a long-term investment with more risk appetite. As per SEBI guidelines, their investments have a maturity period of 4 to 7 years. It includes corporate debt and government securities.

• Long Duration Funds

These debt funds have the longest Macaulay duration of seven years or longer, which makes these mutual funds the most prone to duration risk. To mitigate this risk, investors need to stay invested in these schemes for a longer duration.

The fund manager is the key person who is responsible for managing the money collected by a mutual fund and selecting investments that will make the investor’s money grow. A fund manager is typically supported by a team of analysts who can analyze individual securities to help the fund manager decide suitable investments for the mutual fund. Mutual funds can have more than 1 fund manager depending on the skills required to manage different aspects of the scheme’s portfolio.

AMC is the company that employs the fund manager responsible for managing the investors' funds. All AMCs must register with SEBI (Securities Exchange Board of India) and operate as per the SEBI guidelines. An AMC can introduce different types of mutual funds with different fund managers that help investors achieve various financial objectives.

NAV of mutual funds is the price of an individual mutual fund unit just like the price of an individual share. Mutual funds are bought and sold at the NAV which is calculated based on the assets, liabilities and outstanding units of the mutual fund at the end of every business day.

SIP or Systematic Investment Plan is a popular way of investing in mutual funds. SIP in mutual funds works by investing relatively small sums in a mutual fund at regular intervals. These intervals can be daily, weekly, monthly or quarterly.

STP or a Systematic Transfer Plan is an investment strategy that allows investors to switch their investment from one mutual fund to another in a disciplined way. As per current STP rules, this type of systematic transfer is allowed only between two mutual funds offered by the same fund house.

A systematic withdrawal fund (SWP) works on the reverse of the principle of a systematic investment plan. SWP allows investors to redeem their existing mutual funds investments systematically over a period of time. Investors can set up a SWP to get regular income after retirement.

AUM is defined as the total value of assets i.e. investments held by a mutual fund. Since the investments of a mutual fund and their value can change every day, the AUM of a mutual fund also changes. A large AUM indicates that a mutual fund has more investments and changes to the AUM is a good indicator of the performance of a mutual fund.

Exit load is a type of fee that investors must pay when they redeem their investment from a mutual fund. Exit load is charged as a percentage fee that is applied to the total amount that an investor withdraws from the scheme. Exit load is currently applicable to only a few mutual funds in India. In general terms, AMCs levy this charge to dissuade investors from withdrawing the funds.

SID and KIM are two key mutual fund document that is provided by the fund house i.e. AMC to its current and prospective investors. These documents are created using a format mandated by SEBI and are available through multiple channels including the website of the AMC. These documents can provide investors with details regarding the investment objective, type of investment, expense ratio, invest risks, etc. associated with a specific mutual fund investment. Understanding the details provided in the KIM and SID documents can help investors make better investment choices.

Currently mutual funds in India are offered under 2 different types of plans. Direct Plans of mutual funds are offered under a zero commission model either directly by the AMC or through select intermediaries. Regular plans of mutual funds are typically offered through intermediaries like brokers or financial advisors who receive a commission when units of the fund are sold. Direct plans have a lower expense ratio than regular plans of the same scheme, hence the former has the potential to generate higher returns as compared to the latter.

However, do keep in mind that not every type of mutual fund is suitable for all investment goals. So, one should be careful before choosing a scheme to invest in