Making money by mutual funds,How do mutual funds work and in what places are mutual funds invested? why mutual funds are right, Benefit of investing in a mutual funds and risks in mutual fund investment.
Making money by mutual funds, you must have heard this at some point, you either would’ve seen an ad on TV or heard it from someone. But you probably never understood that making money by mutual funds is right, but which one is right for me? How do mutual funds work and in what places are mutual funds invested? And as an investor, what things about mutual funds should we keep in mind? And apart from this, a very important thing, that by investing in a mutual fund, what expenses do we have to give and how we can minimize those expenses.
In this article you can also know, why mutual funds are right, Benefit of investing in a mutual funds and risks in mutual fund investment or how we can determine our risks, because every time you must’ve heard, that before investing you should see your risks. We can say that making money through mutual funds by investing in it is a subject to market risk. So we will discuss that as well in this article.
Why mutual funds are right?
First I will tell you why mutual funds are right Friends. Every person earns money like you and I. After earning we think that we should invest somewhere. Take for example; I think that I should invest in the stock market. But I am a very common investor and I don’t know which stock I should invest in. And the biggest confusion in front of me is even after I find a good stock, at what time do I have to enter the stock and at what time should I exit the stock?
Secondly, the whole day I’m busy with my work and cannot concentrate on the stock. So question arise about at what time should I exit from a stock? And because of this, for an investor, mutual funds are a very good instrument for investment. Because mutual funds on our behalf, makes investments in different financial instruments. How is it possible?
How do mutual fund works?
I will do a discussion about that how do mutual fund works? I will explain this to you step by step.
- Firstly, small investors like you and I Who want to invest their money somewhere or the other give their money to AMC’s.
- Now what are AMC’s? AMC’s are Asset Management Companies like Axis, Kotak and many other companies apart from this, are in India Who, pool money from investors like us in one place.
- And after pooling the money, there is a very experienced and educated fund manager. Fund manager is the person, who invests our pooled money in different places.
- So the first step is, the money of investors like us, Gets pooled in an Asset Management Company.
- Now, the fund manager will invest the pooled money in different financial instruments.
- The different places could be investing in debt, in equity, in government securities. Apart from this, there are a lot of instruments in which the money can be invested.
What places are mutual funds invested?
I mentioned that the fund manager invests the money in different instruments. What can those instruments be or what places are mutual funds invested? To know the answer to this question, you read the description given below.
- First place is, share market. A lot of fund managers invest in the share market depending on the objective of that particular mutual fund.
- If I tell you about the share market, then they invest in a company’s share, with which they get some shares of the company.
- Second is debt. A lot of mutual funds invest in debt as well. The benefit of investing in debt is that they don’t have a lot of volatility.
- And if in debt, someone gives company money, and then the company pays the person interest from time to time.
- After a period of time, returns the entire amount of the person. So, this depends on every mutual funds objective that the money that is pooled should be invested in which instrument.
- And there are such mutual funds who invest in debt as well as equity. And now that the topic of equity has come up.
- I will tell you in detail that there are some subcategories under equity in which mutual funds make investment.
- If I talk about equity, there mainly three subcategories, First, large cap companies Second, mid cap Third, small cap.
Large cap companies
- Large cap companies are the very big companies like Reliance. There is very little risk of investing in these companies and the return is very normal in the same way.
Mid cap companies
- If I talk about mid cap companies, then these companies, are neither too big, nor too small.
- There is a little more risk of investing in these companies and sometimes they give good returns.
Small cap companies
- As well Apart from this, small cap companies, who are very small companies and have the potential to become big companies in the coming time.
- So, whenever you invest in any mutual fund, then they very clearly tell you where they are going to invest their money.
- Are they going to invest in large cap, mid cap or small cap categories?
Multi cap mutual funds
- And many funds make their investments in all three categories which is called Multi cap mutual funds.
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Risks in mutual fund investment
Now let us discuss about risks in mutual fund investment. What are risks in mutual fund investment and how do they work and why while investing should we pay attention to risks?
- Now consider that you want to make an investment of ₹ You will always think how you can make that 100 into 105 or 110.
- But there are chances that you 100 can go down to become 90 as well. So, this is called risk.
- That there are chances of your money going down this is what we call risk. So, we should always avoid our risks.
- We should always try to minimize our risks. And by minimizing our risks, we should try to get a good return.
- Now, every person has their own personal risks. And risk is dependent on many factors.
- For example, on your income, on your age and apart from this, for how long you want to invest.
- Now, consider that you are very young and you want to invest for a very long time.
- If you invest for a very long time then your risk gets neutralized. But, if you’re quite old and you might need money at any time, then your capacity to take risks is very low.
- In this situation you should invest in such an instrument where the risk is very low.
Benefit of investing in a mutual funds
Now, friends, the benefit of investing in mutual funds is that we get a lot of risky instruments to invest in. If you want to take a very high risk, then you can invest in such a mutual fund that has a very high risk but can also provide good returns. If there are some people who want to take very little risk, or if they want to take very negligible risk then there are some option, which on investing, there is very little risk, but the returns won’t be that much either.
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So, friends, I will conclude this discussion by saying that if you wants a good return then you have to take high risks. But the vice versa isn’t true by taking more risks; it is not guaranteed that you will get high returns. So, here I will give you a little advice. First you should see your risk, to see how much it is. Then you should see your mutual fund to see how much risk it has and when both your risks match, that becomes your best investment option.