Are MFs the Same as Investing in Stock Markets?

The term Market doesnt necessarily mean just the 'Stock' market. There is a gold market, fixed income market, T Bills market, G sec market and a stock market.

Different schemes of a mutual fund basis their investment objective invest either in any of these markets or a combination of markets. Thus there are mutual funds for a day like Liquid Funds to funds like equity mutual funds where one needs to ideally invest for more than 3-5 years .

So how different is it to invest in a equity mutual fund than in an equity of a company?

When you invest in the stock markets, you buy a share of the company. You become a part owner to the extent of your investment. When you invest in the scheme of a Mutual Fund, the scheme inturn invests in the company. You are allotted units. Thus typically if the stock price of a company say is Rs 500, one could buy 2 shares of a company with an investment of Rs 1000. But with the same Rs 1000 allows you to indirectly partcipate in the growth of many companies.

While investing in stock markets, you have to do your own research and select the stock/s. When it comes to a Mutual Fund, a professional fund manager takes care of investing your money across various asset classes depending on the nature and objective of the investment.

5 must know concepts for a first time mutual fund investor

Concept 1 - NAV (Net Asset Value)

When you invest in a mutual fund you get allotted units based on the prevalent price of the scheme on that day. This price is called NAV or Net Asset Value. All open ended schemes (schemes that are open all the year around and thus one can buy or sell on a daily basis) declareNAV on a daily basis. Thus if you invested `12000 in a scheme where the NAV is 12 you will get 12000/12=1000 units. It's the same when you want to sell (or redeem your units). You just multiply the NAV by the units to get the redemption (sale) value.

Concept 2- But don’t look at the NAV alone. Look at past performance and other features

Whilst choosing fund don’t focus on a fund with a “low NAV “ in the hope that you will get more numbers of units for what matters is the percentage return on your invested amount. For example, given a similar performance level of 10% appreciation, a Rs 10 NAV will rise to Rs 11 whereas a fund with a NAV of Rs.100 will rise to Rs 110. It is worthwhile to consider other factors (performance track record, fund management, volatility) that determine the portfolio return. A mutual fund displays the portfolio of each scheme on its respective website. A portfolio is nothing but a detailed disclosure on various instruments and companies that the scheme has invested in. In fact in all probability the NAV is high on account of good performance of the scheme over the years. Imagine two schemes, one a new scheme A with NAV of Rs 15 and another old scheme B with a NAV of Rs 150. Also further assume that both these schemes hold shares of the same companies and in the same proportion. If the holdings of both these schemes increase by 10%, the NAV of the both the schemes will go up by 10% that the NAV of scheme A will be ` 16.5 and that of scheme B by Rs 165. Thus a NAV of Rs 15 or Rs 150 does not matter at all.

To know rest of these 5 must know concepts click here.

Concept 3- Start small. Open a Sleep in Peace account.

Concept 4 - What is the Investment objective?

Concept 5 - Open ended funds.