Mutual Funds

A mutual fund is a type of investment where a group of investors collectively pool their money to create a large, diversified portfolio managed by fund managers. Instead of buying individual stocks or bonds, investors purchase shares in the mutual fund, using the combined capital to invest in a wide range of assets. This collective approach not only simplifies the mutual fund investment process but also offers the benefits of professional management and diversification, making it an attractive option for both new and seasoned investors.

When you invest in mutual funds, you get access to a range of securities, such as stocks, bonds, and other assets, without needing to select individual investments yourself. By combining resources with other investors, you get a broader array of opportunities and professional management, making mutual funds a convenient and accessible option to achieve various investment goals. The fund managers are experts in selecting the right mix of assets to achieve the fund’s investment goals. They aim to grow the money by making smart investment decisions. When the investments generate profit or earnings, they are distributed among the investors. However, before this distribution, the mutual fund will deduct any expenses related to managing the fund. This means investors get their share of the profits after covering the fund's operating costs. In India, mutual funds are regulated by the Securities and Exchange Board of India (SEBI). This regulation ensures that mutual funds operate fairly and transparently, protecting investors' interests.

Mutual funds offer a practical way for investors to pool their money together to invest in a diversified portfolio of assets. Here’s a step-by-step overview of how they work:

• Pooling of Funds: When you invest in a mutual fund, your money is combined with other investors into a collective fund. This pool of funds is managed by professional portfolio managers who invest in a mix of assets, such as stocks, bonds, or other securities.

• Professional Management: Mutual funds are managed by experienced professionals who decide which securities to buy or sell based on extensive research and market analysis. They research, select, and manage the investments within the fund’s portfolio, aiming to achieve its objectives.

• Diversification: The pooled money is invested in diversified assets such as stocks, bonds, or other securities. This diversification helps spread risk because your investment is distributed across a range of assets rather than being concentrated in a single security. It allows investors to benefit from broad market exposure without needing much capital.

• Net Asset Value (NAV): The value of your mutual fund investment is determined by Net Asset Value (NAV), which is calculated by dividing the total value of the mutual fund’s assets minus liabilities by the number of outstanding shares. NAV is typically updated daily, reflecting the fund’s performance.

• Buying and Selling of Units: You can buy shares of a mutual fund at the NAV price. Open-ended funds allow you to buy and redeem shares at any time, while close-ended funds are bought during the initial offer period or on the stock exchange. SIPs (Systematic Investment Plans) allow you to invest a fixed amount regularly, often monthly.

• Dividends and Returns: Mutual funds may pay out dividends from the income generated by the investments, such as interest or dividends from stocks. These payments can be reinvested or taken as cash. The overall return on your investment is influenced by the fund’s performance and how well the underlying assets perform.

Mutual funds are categorised based on their investment structures and strategies, which help address different financial needs and goals. Understanding these categories allows you to select the fund that best fits your investment horizon and risk profile.

Based on the maturity period

• Open-ended funds: These funds do not have a fixed maturity date, allowing you to buy or sell units anytime. This flexibility makes them ideal for investors seeking liquidity and the ability to enter or exit the fund whenever desired.

• Close-ended scheme: These funds are only available for investment during their launch period. It is known as a New Fund Offer (NFO). Once the NFO ends, you can only buy or sell units on the stock exchange, where they are traded like shares.

• Interval Funds: These funds combine features of both open-ended and close-ended funds. They allow investors to buy or sell units only during specific intervals (e.g., quarterly or annually). This means there are predetermined times when you can exit or enter the fund, offering a balance between liquidity and stability.

Based on Principal Investment

• Equity Funds: These funds primarily invest in stocks of various companies, aiming for capital growth over time. Equity funds can be volatile but offer the potential for high returns by investing in a diverse range of companies, from large-cap to small-cap stocks.

• Debt Mutual Funds: These funds invest mainly in fixed-income securities like bonds, government securities, and corporate debt. They are generally considered safer than equity funds, offering more stable returns with lower risk. Debt funds are suitable for investors seeking regular income and lower risk.

• Hybrid Mutual Funds: These funds invest in a mix of both equity and debt instruments. They aim to provide a balance between growth and income by diversifying across different asset classes. They are categorised into:

  • Balanced Hybrid Funds: They maintain a relatively equal distribution between equity and debt investments, aiming for moderate growth and income.
  • Aggressive Hybrid Funds: These funds have a higher allocation to equities compared to debt, aiming for greater growth potential but with increased risk.
  • Dynamic Asset Allocation Funds: These funds adjust their equity and debt allocations based on market conditions and economic outlook. The goal is to optimise returns by shifting between asset classes dynamically.

When it comes to mutual fund investments, you have two main approaches: Lump Sum and Systematic Investment Plan (SIP). Both methods offer unique advantages depending on your financial goals, risk appetite, and investment horizon.

• Lumpsum Investment: A lump sum investment in mutual funds is an investor's one-time, substantial investment into a specific mutual fund scheme. This approach involves investing a significant amount upfront, providing an immediate boost to the investment portfolio. While this method allows for potential immediate capital appreciation, it also exposes the investment to market timing risk, as the entire amount is invested at a single point in time. It is suitable for investors with enough funds available, such as from a bonus or inheritance, who are confident in their investment choices but should be mindful of market conditions. Invest in Mutual Funds with Kotak Securities for a smoother lump sum experience. Benefit from a user-friendly platform and expert guidance to navigate your investment choices seamlessly.

• Systematic Investment Plan (SIP): A Systematic Investment Plan (SIP) is a hassle-free way to invest in mutual funds. Instead of making a large one-time investment, investors commit to investing a fixed amount at regular intervals, usually monthly. SIPs offer the advantage of spreading the investment over time, reducing the impact of market volatility. This disciplined approach helps investors navigate market fluctuations and benefit from the concept of rupee cost averaging – buying more units when prices are lower and fewer when prices are higher.

SIPs are well-suited for those looking to start investing with smaller amounts and those seeking a systematic and disciplined way to grow their wealth over the long term. They provide flexibility, convenience, and the potential for compounding returns, making them a popular choice for investors with varying financial goals. Start on your investment journey with SIPs through Kotak Securities. Enjoy the ease of regular contributions and watch your wealth grow systematically.

Step 1: Log in to Mutual Fund using NEO App/Web

Step 2: Enter a registered Phone number, password

Step 3: Enter the OTP sent to the registered number

Step 4: After logging in, click on the 'Mutual fund' tab next to F&O tab

Step 5: Choose desired scheme from the collections on the mutual fund home page or search for the scheme that you want to invest in

Step 6: On the scheme details page, click on 'Start SIP' or 'One-time' button

Step 7: On the order form, enter the desired SIP or One-time amount

Step 8: Select the desired payment mode - UPI or Net Banking & complete the payment either through UPI Pin or by entering & validating net banking credentials.