What is Mutual Fund? What is SIP?

Introduction

It is important to know about mutual funds before investing. This will go a long way in helping you make your investment decisions. In Mutual Fund, the money of many investors is deposited in one place simultaneously and out of this fund, that money is then invested in the market. In this way it is a kind of collective investment. Mutual fund companies raise money from their investors. They invest this money in shares. In return, Mutual Fund companies also charge investors. Mutual Funds are managed by Asset Management Companies (AMCs).

Each AMC usually has several mutual fund schemes. Mutual funds have a fund manager, who determines the fund’s investments and maintains profit and loss accounts. Small investors can also invest a very small amount like Rs 100 per month through SIP. UTI AMC is the oldest Mutual Fund Company in India.

How many types of Mutual Funds are there?

There are 3 main types of Mutual Funds. About which we will tell you in detail.

1. Equity or Growth Funds – In this scheme of Mutual Fund, your money is invested in the stocks of the company. The Fund Manager prepares the complete horoscope of the company before investing the money. Only after that the investment is made by choosing the right company’s Stock. There is Large Cap, Mid Cap, Small or Micro Cap Funds in the scheme of Equity Funds. It is best for long term.

2. Income or Bond or Fixed Income Funds – In this scheme of Mutual Fund, your money is invested in Fixed Income Securities. Such as Government Securities or Bonds, Commercial Papers and Debentures, Bank Certificates of Deposits and Money Market instruments such as Treasury Bills and Commercial Paper. This scheme consists of Liquid Funds, Short Term, Floating Rate, Corporate Debt, Dynamic Bond and Gilt Funds. This scheme of Mutual Fund is considered comparatively safe.

3. Hybrid Funds – In this scheme of Mutual Fund, your money is invested in both Equities and Fixed Income. Such as Equity Fund, Debt Fund, Gold Fund and Liquid Fund. These Hybrid Funds were earlier also called Balance Funds.

What is NAV in Mutual Fund?

The performance of a Mutual Fund scheme is determined by its Net Asset Value. That is, the NAV of the fund is the market value of all the securities purchased by it. This keeps on changing with the ups and downs of the market. The market price of securities changes daily, hence the NAV of the scheme also changes daily.

Mutual funds invest money collected from investors in the securities market. This may be different every day as the market price changes every day. The NAVs of all mutual fund schemes are declared after the close of the trading day, when the markets are closed and are as per the Mutual Fund Act of SEBI.

What is SIP in Mutual Fund?

Systematic Investment Plan (SIP) is an investment method of mutual funds through which a person can invest a specified amount in a scheme of mutual funds at regular intervals. This installment can also be a nominal amount of Rs 500 per month which is very similar to Recurring Deposit. This amount is debited (withdrawal) from your bank account every month.

SIP has become quite popular among Indian mutual fund investors as it helps the investor to invest in a disciplined manner without worrying about market volatility. For long term investments, SIPs offered by mutual funds are arguably the best and easiest way to enter the world of investing.

To get the maximum and best return from investment, it is very important that you invest for the long term, which simply means that you start investing as early as possible so that your target profit can be maximized.

What is SWP?

Some people invest in Mutual Funds for regular income and also look at the option of getting dividend. There are many such schemes, especially those related to Debt, which give you the option of monthly or quarterly dividend. It is important to note that these dividends are distributed only from the growth received from schemes which have no guarantees every month, although the fund house always tries to achieve uniform dividends, how much will be the additional amount disbursed, it will depend on the dynamics of the markets, and depends on the performance of the fund.

Another source of monthly income is the use of a Systematic Withdrawal Plan (SWP). Here you have to invest in the development plan of the scheme, in which a specified amount of monthly payment has to be fixed every month. On a specified day, units/units equivalent to that specified amount are withdrawn. For example, an investor requests a payment of Rs.10,000 on the 1st of every month by investing 10 lakhs, then units worth 10,000 will be liquidated on the 1st of the month.

It is important to know that in both the cases, SWP and dividend, the tax regime is different and the investor should plan his/her plan keeping this in mind. Mostly this plan is preferred by Retired Persons.

FAQs