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Mutual funds are managed by professional fund managers who make investment decisions on behalf of the investors.
Know what happens to your money when a mutual fund scheme is wound up. (Representative image)
Investing in mutual funds is a popular way for individuals to grow their wealth over time. Mutual funds pool money from multiple investors to invest in a diversified portfolio of assets like stocks, bonds, and other securities.
However, sometimes a mutual fund scheme may be wound up or terminated. This can happen for various reasons such as poor performance, insufficient assets, or the fund’s closure due to a strategic decision by the fund manager or the regulatory authority.
Here’s a guide to understanding and investing in mutual funds and what happens to your money when a mutual fund scheme is wound up.
What Are Mutual Funds?
Mutual funds are managed by professional fund managers who make investment decisions on behalf of the investors. The main types of mutual funds are:
Equity Mutual Funds: Invest primarily in stocks. They are high-risk but offer high-return potential.
Debt Mutual Funds: Invest in bonds and other fixed-income instruments. They are lower-risk and provide regular income.
Hybrid Funds: A mix of equity and debt, providing a balance between risk and return.
Index Funds: Track a specific index, like the Nifty 50 or Sensex, and aim to replicate its performance.
Sectoral/Thematic Funds: Invest in specific sectors like technology, healthcare, etc.
How to Invest in Mutual Funds?
A. Direct Investment:
Online Platforms: You can invest directly through the fund house’s website or investment platforms like Groww, Zerodha, or Angel One.
KYC Compliance: You need to complete your KYC (Know Your Customer) process before investing. This can be done online via eKYC (using Aadhar and PAN details).
Investing via SIP (Systematic Investment Plan): SIP allows you to invest a fixed amount regularly (monthly or quarterly). This method is ideal for long-term wealth accumulation and takes advantage of rupee cost averaging.
Lump-Sum Investment: You can invest a lump-sum amount in a mutual fund at once. This is a good option when you have a large amount of capital and prefer to invest all at once.
B. Through a Broker or Distributor:
You can also invest through mutual fund distributors, financial planners, or brokers who offer advice and help with the selection of funds.
Types of Mutual Fund Investment Methods
SIP: Invest a fixed amount regularly. It’s a disciplined way to invest and benefits from the power of compounding.
Lump-Sum Investment: Invest a one-time amount. This is suitable for investors who have a large sum of money to invest at once.
SWP (Systematic Withdrawal Plan): Allows you to withdraw a fixed amount periodically (monthly or quarterly) from your mutual fund investment. It’s often used by retirees or individuals looking for regular income.
STP (Systematic Transfer Plan): Allows you to transfer money from one mutual fund scheme to another within the same fund house.
Steps to Start Investing in Mutual Funds
Choose a Fund: Select a fund based on your risk tolerance, investment goals, and investment horizon. Consider factors like:
-Past performance (though not an indicator of future returns).
-The type of mutual fund (equity, debt, hybrid).
-Expense ratio (lower expense ratio is better as it reduces your cost of investment).
–Complete KYC: Complete your KYC process through your fund house or an online platform.
-Select the Investment Amount: Decide how much money you want to invest, either in a lump sum or through a SIP.
-Track Your Investment: Monitor the performance of your mutual fund investments regularly and make adjustments as needed.
Advantages of Investing in Mutual Funds
Diversification: Mutual funds spread your investment across different securities, reducing the risk.
Professional Management: Fund managers with expertise handle your investments.
Liquidity: You can redeem your mutual fund units at any time (except in closed-ended funds).
Affordability: You can start investing with a small amount (as low as ₹500 in SIP).
Risks of Mutual Fund Investments
Market Risk: Equity mutual funds are subject to market fluctuations.
Interest Rate Risk: Debt mutual funds may be affected by changes in interest rates.
Liquidity Risk: Some mutual funds, especially closed-end funds, may not be as liquid.
Credit Risk: For debt funds, there’s a possibility that the issuer may default.
Common Mutual Fund Terms You Should Know
NAV (Net Asset Value): The value of a mutual fund’s holdings per unit. It changes daily based on the performance of the securities.
Expense Ratio: The fee charged by the fund for managing your investment.
AUM (Assets Under Management): The total value of assets managed by the mutual fund.
Risk Profile: Understanding your risk tolerance helps in choosing the right type of fund.
Popular Mutual Fund Platforms
Direct Investment: Fund house websites like HDFC Mutual Fund, ICICI Prudential, etc.
Third-Party Platforms: Groww, Zerodha (Kite), Coin by Zerodha, etc.
If A Mutual Fund Scheme Is Wound Up, What Happens To The Money Invested?
If a mutual fund scheme is wound up, the invested money is returned to unitholders based on the prevailing NAV, after deducting all relevant expenses. The mutual fund refunds the value of the unitholder’s outstanding units at the current NAV, as recorded in the Unit Holders’ Register. Unitholders are also entitled to receive a detailed report on the winding-up process, which includes all necessary information.
Mutual fund investments are a great way to achieve financial goals, but it’s important to choose the right fund according to your risk tolerance, financial goals, and investment horizon. Always do thorough research, consider seeking advice from a financial advisor, and ensure regular monitoring of your portfolio.
Disclaimer: The views and investment tips by experts in this News18.com report are their own and not those of the website or its management. Readers are advised to check with certified experts before making any investment decisions.
