In the earlier days, people used to invest their money in a savings bank account. However, as the wheels of business and investment have progressed, mutual funds have become a popular source of investment for the layman. The prime reason behind this popularity is that, mutual funds are owned and managed by companies, and they offer a diversified portfolio for the investor to invest in. For a layman, dealing, analyzing, and understanding the facets of the investment market is not a simple task. No doubt, if you have deep interest in financial planning, you can gain some excellent knowledge, but practical awareness about the functioning of mutual funds is more than necessary to convert your few hundred dollars to few thousands, and often to few millions.
If you're a beginner in the investment field or you don't have a large capital, then it is not possible to invest in individual stocks and shares and get profits. This is because, individual stocks and shares of popular public listed companies is often high, and you need to purchase several shares to make any worthwhile profit. Both these results are not possible if your investments are meager or limited. Also, it's not very suitable to invest in different shares all by your own knowledge and effort. Think of a situation when you have an access to a larger platform that is more promising and offers you access to high-priced stocks with the small amount that you have invested. Won't you prefer that? And that is exactly what a mutual fund does for you. To put it in simpler words, mutual funds are professionally managed companies that pool money from investors and invest it in the stock market, in shares and other securities. As an investor in mutual funds, you own the shares but you are not liable for individual securities. You can invest a small amount of money, or more, in mutual funds and also benefit from the money invested by other share holders. All investors receive returns on the gains and losses of the shares, in proportion to the amount of the money invested, i.e., the mutual funds give a good return on investment. Broadly divided, equity funds, debt funds, and balanced funds are the types of mutual funds. Before proceeding to think about the best way to invest in mutual funds, you must make sure that you have allocated a certain minimum budget, that you can invest them. After profits and good returns, you may reconsider and invest more, but initially allocate some fixed budget for your investment and start from it.
Carefully read the prospectus and brochure of the company in which you wish to invest. Generally, every investment has some risk factors, so while going through their brochures, try to enlist all the possible risk factors that will be bearing. If there are certain terms and conditions that you may find difficult to comply with, like in cases of lower returns and fall in market price of the shares, then don't opt for that company. After all, be comfortable with what you do. You can glance through the shareholder's report of the company in order to analyze its performance. Meet some analysts and friends who have experience in this field and seek some expert advice and valuable experience.
Fee Charges and Exemptions
Well, at the crux of the matter, a mutual fund is a business, so like in every other business, mutual funds require funds that are utilized in shareholder transactions, marketing, investment planning, and various other expenses. Companies bear all these expenses by cutting certain costs and fee charges from the money of the investors. The fund you receive as a return is the sum total of all possible exemptions and cuts, as per company rules. Shareholder fees and annual fund operating expenses are the costs that the companies consider while you invest in their mutual funds. Generally, these deductions are done on a percentage basis on the amount invested.
Different Classes of Funds
Mutual funds usually offer more than one class of shares. For example, there are three types of shares―class A, class B, class C shares. Each class will have the same objectives and goals. However, the arrangement of the fee structure and securities will be different. The expenses cost incurred from the investor's side will depend on the class of shares he/she has invested in, and the amount of money that is invested.
There are various tax deductions that you are entitled to while you invest in a mutual fund. You will owe the income tax for the dividends you receive. In other words, you will be paying taxes on personal capital gains and fund's capital gains.
It is a fact that there are many advantages and disadvantages of mutual funds, so before investing, it is good to be sure about the rules, laws, obligations, and conditions of the company. This will help you identify the best decision, wherein, you can invest your hard-earned money while gaining practical knowledge on investing.