Mutual Funds Turned Inside Out
21 Products Assessed
At this point if most of your investments are in your savings account or a fixed deposit, and your biggest asset so far is your home, then you are in the majority. Like you, most smalland middle-income investors, especially salaried individuals, rarely invest in stocks or mutual funds. The primary reason is the lack of knowledge and preconceived notions about the risk of losing the investment. This article is our attempt to collate essential factual information on alternative and contemporary investment options that general consumers may look at. The idea is to explain the significance and operative model of mutual funds as well as rebuff several myths for the average consumer in order to help them make sound investment decisions.
Mutual funds were conceptualized to make investments in stocks a bit easy, with the option of buying and selling stocks with small amounts as and when one wants. Basically, your small investment in a mutual fund is clubbed with other such small investments to make it a large pool of investment in various securities. The fund is appropriately named mutual fund since all investors ‘mutually’ share the fund’s gains as well as losses on an equal basis, proportionately to the amount they invest.
Interestingly, you can diversify your investment portfolio across a large number of securities, thereby minimizing the risk of major loss. You need not worry about fluctuations in individual securities in the fund’s portfolio.
Systematic transfer plan (STP)
In STP, you invest a lump-sum amount in some mutual fund and then a fixed sum is transferred from that mutual fund to another mutual fund.
Systematic withdrawal plan (SWP)
If a mutual fund investor redeems the units every month and gets the same deposited in their bank account, it is called SWP. The plan is recommended to liquidate the mutual funds corpus after one sees a good bull market.
Systematic investment plan (SIP)
SIP is a way of investing in mutual funds on monthly basis wherein a fixed amount goes from your bank account to the mutual funds.
Fixed maturity plan (FMP)
They are the equivalent of a fixed deposit in a bank, though with a caveat (stipulation). The maturity amount of a fixed deposit in a bank is not ‘guaranteed’ but only ‘indicated’ in the FMP of a mutual fund. The regulator does not allow fund companies to guarantee returns, and hence the ‘indicated returns’ in FMPs. FMPs are debt schemes and are generally open for two to three days with minimum investment set at about Rs 5,000. The prevalent yield minus the expense ratio (that varies from 0.25 per cent to 1 per cent) will be the indicative return that can be expected from the FMP.