What are Mutual Funds?
Mutual Funds are a way to save your funds for the future. They give better returns than regular fixed deposits and savings accounts.
A mutual fund is created by combining the money from big and small investors and is managed by an Asset Management Company (AMC). This company appoints a fund manager whose job is to maximize profits and minimize loss.
The fund manager’s job is to maximize the fund’s profits and minimize its loss by using a variety of strategies. The most common technique is diversification across multiple sectors so if one particular sector is going through a loss you get your loss balanced by returns from companies in another sector.
The type of mutual funds dictates the type of investment channels they participate in. For example, debt funds will invest your money in debt instruments, equity funds will invest in stock (equity) markets, and balanced funds invest in both.
Advantages of Mutual Funds
Mutual Funds invest in multiple sources depending on the type of mutual fund. This diversification is the key to the operation of mutual funds as it provides a way to balance your losses from one source against profits from the other. This diversification helps counter-balance the risks of volatility.
Because of this diversification, mutual funds are considered as a smart choice for long term or short term Investments and has many other advantages over investment instruments.
Mutual funds are managed by professional wealth managers. With a thorough knowledge of how each investment vehicle works, they create a diversified portfolio with a focus on maximizing the profits.
How Mutual Funds work
Investing in Mutual funds is just like investing in stock markets i.e Sensex or Nifty. Unlike stock investments, mutual funds invest your money in several different financial instruments. When you buy mutual funds, you are allocated certain units based on the current price of the fund’s NAV (net asset value).
For example, with 1000 IDBI shares of 65.95 rupees each and 500 Infosys shares at 1095.95 rupees each, the total assets of the funds are Rs. 6,13,925. Without any liability, if the fund holds 10,000 units then its NAV is Rs. 61.3925.
You get returns depending on the NAV price at the time of withdrawal.
Mutual funds might seem complicated and risky if you have never invested in them. In reality, they are much safer to invest in than stock markets.
You can invest in mutual funds either by putting in a lump sum at once or follow Systematic Investment Plan (SIP).
In SIPs, a certain amount (of your choice) is deducted at a fixed date through an automated electronic clearance transaction (ECS).
Terms to understand for profitable mutual fund investment
Mutual funds involve some technical terms and it can be intimidating for someone who is dealing with Mutual Funds for the first time.
So let us try to simplify these terms
- ASSET UNDER MANAGEMENT (AUM)
Total value of all assets under management is called AUM.
For example, let’s suppose a fund has 1000 IDBI shares of 65.95 rupees each and 500 Infosys shares at 1095.95 rupees each. The total AUM is
(1000*65.95) + (500*1095.95)
= 547975 + 65950
= Rs. 6,13, 925
- ENTRY AND EXIT LOADS
Entry Loads are charged by an AMC for investing in their funds. When you withdraw from a mutual fund switch between funds, the AMC can charge Exit Load as a small percentage of the amount withdrawn from the fund.
The main objective of charging exit load is to dissuade investors from switching between funds in the early period. Some mutual fund houses may even cancel exit load altogether for withdrawals after the first year.
- EXPENSE RATIO
Expense ratio indicates how much of mutual fund’s NAV is being used as expenses for operating the fund. Costs like advisory fee and marketing expenses are covered under expense ratio but brokerage charges are excluded from this ratio.
The operating costs of a mutual fund given as a percentage of the AUM are referred to as its expense ratio. A higher expense ratio is obviously bad for a mutual fund.
Compounded Annual Growth Rate (CAGR) is the annualized and compounded returns for a single mutual fund investment over a period of 1,3,5, and 10 years. It is an indicator of the fast the fund has grown on a yearly basis for a given number of years. It can also be used to compare mutual funds with other investment vehicles.
CAGR is a complicated formula, but a lot of mutual fund blogs or websites will have CAGR calculators so you don’t have worry about doing the math.
Internal Return Rate (IRR) is compounded annualized returns over a series of investments made at equal intervals like monthly, quarterly, and yearly.
For calculating IRR for your SIP investments, the amount invested at each interval does not matter, only the intervals should be constant if you want accurate IRR.
- ABSOLUTE RETURNS
Absolute Return is simply the profit percentage of the fund based on their entry price and exit price. They can be used to compare profit from multiple investment vehicles for one individual user/company.
- TRAILING RETURNS
Given today’s date, how much return the fund has produced over the past one quarter, two quarters, and over the past year – this is the trailing return for the fund.
Such trailing return calculations can be made for 1,3, 5, and 10 years.
- ROLLING RETURNS
The truth is no investor enters and exits on fixed dates as considered for trailing returns. So, there needs to be more data to give more accurate picture of returns over the same period of 3 years.
Rolling returns “harden” the trailing returns calculation by taking many more samples of fund data over the given period of time.
- BENCHMARK INDEX
A benchmark index is used to independently evaluate the performance of a fund and the fund manager. If a fund gained more than its benchmark index in a given period, then it is said to have outperformed the benchmark index.
If, however, both figures are the same, then the fund has underperformed because the fund manager’s goal is to elevate the performance of his fund significantly above the benchmark – that’s what he’s paid for!
Regular vs Direct Plan
Any agency or AMC charges commission on all regular mutual fund investment attracts.
The commission may be very small (0.5% to 1.5%) but for the long-term and/or high-value investments the charges get accumulated.
It seems pretty logical for an AMC to charge fees for enabling our transactions. But many people don’t know that from 1st January 2013 onwards SEBI enacted a rule making it mandatory for all mutual funds to provide direct trading options as well.
Users who chose to invest in direct mutual funds (instead of the regular ones), the AMC cannot charge them any commission for the same. They must enable all such transactions without any profit for themselves or any fee for the user.
You can probably understand why the AMC never promote direct mutual fund plans.
About WealthTrust App
WealthTrust is a zero commission wealth management app which allows you to invest in Direct Mutual Funds without any commission.
You can finally stop wasting 0.5% to 1.5% of your returns on the commission to an AMC by choosing WealthTrust’s direct plan.
With WealthTrust’s direct plans, you can switch from your existing regular mutual fund plans to direct mutual funds within a few minutes, thus unlocking the power of direct mutual funds.
Why should you consider WealthTrust for direct mutual fund investments?
In the WealthTrust app, you can smartly choose mutual funds based on their returns, keep track through real-time performance monitoring, and buy/sell at your convenience.
All transactions on the WealthTrust app are secured by state-of-the-art encryption standards.
We have a team of professional financial experts to carefully analyze over 4000 mutual fund schemes. The best mutual funds are then recommended to users to help maximize your maximum financial returns.
Switching from existing mutual fund plans to direct plans happens within seconds on WealthTrust as their process is totally painless and also paperless.
The app also helps you park excess money in liquid funds with a very low-risk profile.