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Understanding Mutual Fund

Mutual funds are a very common means of investing in the stock market. They are a great way to diversify your investments into a wide variety of companies and investments, all based on the same investment criteria. Not only can they help you diversify your portfolio, but they can also help you build long-term wealth. Understanding Mutual fund investment can be a difficult task for many people. This video from CA Rachana Ranade will provide an overview of how mutual funds work and explain what are the different types of Mutual funds offered.

What we are going to learn about?

Let's quickly understand what are we going to learn number one we are going to talk about what is a mutual fund its basics and how it works number two we are going to learn what are the different types of mutual funds number three I am going to tell you about a very specific type of mutual fund which is a comparatively less known or I may see less explore type of mutual fund and the last and the bonus tip from my side is what are the things that you should check out before investing in any mutual fund.

What is a mutual fund?

So let me just quickly tell you what is a mutual fund and how it works okay to put it in a very simple way let's take a very simple example on this assume that I were to go from Pune to Mumbai I have two options assume I can take out my own car I can ride on my own I can drive on my own I can enjoy because I know how to drive I know what way I have to choose I know what are the basic rules everything okay so I'm a well-educated person as far as driving is concerned so I can choose how to drive which way to go and how to go over possibility number two I am not really keen on driving I just want to reach Mumbai that's it so what I can do is I can just hire a driver I hire a professional in short he takes the decision on which road to choose and what speed to drive where to stop I keep all the decisions at his discretion I just told him the final destination okay that's exactly the difference between a stock market investment and a mutual fund investment in stock market investment you take your own decisions you know where you have to go how to go you have expertise in that and you have the enthusiasm I may say to explore these things but if you the second category you're really not bothered to explore things you better hire professional and he will take decisions for you that's exactly what a mutual fund does so in simple words mutual fund means there is a mutual fund manager who takes decisions on your own money which is invested with the mutual fund okay so let us understand basically what a mutual fund does ok it will collect money from people like you and me okay so assume that there is a there is a pool of hundred people okay and these hundred people given funds or contribute some money to a mutual fund now this mutual fund is going to reinvest this money into different different investment opportunities like a mutual fund can invest in equity a mutual fund can invest in debt a mutual fund can invest in either or both okay so that depends on the objective of the mutual fund scheme okay so putting it in a very short you know nutshell I may say mutual fund is nothing but a type of organization which would take money from people like you and me would create a pool of funds and this pool of funds will be invested in different different investments okay now what is the positive side for the mutual fund now mutual fund which is invested in different different avenues investment avenues mutual fund will earn income out of that okay now this income earned can be in the form of interest or it can be in the form of dividend okay it could be in the form of gain as well difference between costs price and selling price right so mutual fund okay they've got gains okay assume they've got hundred of begins then what which one is going to do with that distribute this to the investors those who are invested in the mutual fund do you think they want to distribute entire hundred rupees if they distribute hundred rupees are they mad just to do social service no they're not want to do that so they are going to take out some portion for their own purpose this is exactly known as management expenses or people call this as an expense ratio this expense ratio could be typically 1% to 3% of your total investment amount okay I hope you have understood how a mutual fund works in the most simplified manner.

What are all the types of mutual funds?

Let's move on to the types of mutual funds originally what is to happen I'll tell you every mutual fund company I'm sure you might have heard about all this ICICI Mutual Fund or HDFC Mutual Fund or you might have heard about Aditya Birla's Mutual Fund like mutual funds so many mutual funds are there in the market every mutual fund used to come up with a different type of mutual fund and there was to say now invest in this one now invest in that one poor investor he used to get confused as to exactly where I should invest and where I should not so what's SEBI did SEBI said you can have now only five types of mutual funds okay which are the five types number one we have an equity mutual fund okay so let's understand what's an equity mutual fund like I explained right now mutual fund the mutual fund institution basically is going to collect money from people like you and me and this collected money will then be invested in equity will then be invested in stock market this will be an equity oriented mutual fund or an equity mutual fund second one is a debt fund what what will happen with a debt fund again same first step remains same that mutual fund is going to collect money from people like you and me but instead of investing in equity now it will invest in debt okay please understand in debt the risk is definitely on a lower side because there are there is there is nothing to do with the stock market fluctuations this money from a debt fund never gets invested in a stock market right third one is known as a hybrid fund okay hybrid fund I hope you have understood by the name itself it could be a little bit of equity would be a little bit of debt. Fourth one is basically a solution-oriented one solution-oriented fund could be like a child marriage fund. Okay second one could be it could be a child education fund okay so basically it's a solution-oriented you you have a solution you basically want a solution after some specific time frame for which you invest and whenever the time comes you are going to take out money from that one right fourth type was a solution fund solution solution oriented fund and the last one is like an other mutual fund the fifth one is make other one the best example of another fund is an index fund okay so basically an index fund whatever money this mutual fund house is collecting its directly invested in the fund it's I invested in the index basically so they want to invest directly in your nifty they are going to invest directly in Sensex something like that I hope you have understood the basic types of funds.

Lets understand Liquid mutual funds

So moving on today we are going to focus only on one type or in that type also know to talk about a specific subtype which is comparatively less explored by people like you and me I'm sure everyone looks at mutual funds only from one angle that is I would like to earn more but I don't want as much risk as is involved in stock market so majority of you I'm sure might be going ahead with equity oriented mutual funds but guys is that the only option available for mutual fund answer is no so today what we are going to talk about is debt fund and in debt fund specifically I'm going to talk about a fund which is known as a liquid fund okay now what's a liquid one liquid funds are a type of mutual fund that invest in securities with a residual maturity of up to 91 days assets invested are not tied up for a long time as liquid funds do not have a lock-in period I'm going to talk about various perspectives of a liquid fund number one for whom liquid fund is useful okay generally people like me poor people like me why poor I don't own any salary I seriously I don't earn even wonder if your salary okay but whatever income I get is business income or professional income so what happens with me and let us understand maybe 10 days 15 days I might not even earn 1 rupee but on the 16th I might earn X amount of money okay now the question is oh my god I have got that sweet message from Bank that your account has been credited with whatever rupees okay but then I don't know what I'm going to do with this money okay just as an example assume that on a single day I got 40,000 rupees okay but I'm not sure what I'm going to do with this 40,000 rupees but do I really keep this money in savings account that is one alternative right but in this I am going to get only 4% return instead of that what I may think of is let me park these funds temporarily in a liquid fund okay now what a liquid fund does is that it is a type of mutual fund which will park your money only for a short time short time it could be even like one day and it could be on a higher side okay it should not be beyond 91 days okay so in simple words for whom liquid funds can be important it could be for those people who get money they have some investable surplus but they are not sure when to invest or where to invest they just need some time to think on where to invest for them I feel liquid fund can be the best possible solution second if you talk about the returns on these liquid mutual funds typically whatever types of or whatever different schemes I just checked it could be the ICICI Prudential scheme or other schemes as well I found out that typically okay majority of the cases you earn a potential return of up to 7% it's way too higher than you're saving bank account and it is also beating your fixed deposit returns okay so I feel it's a amazing investment opportunity I might not say that the returns are like sky-high but definitely they are definitely higher than your savings account as well as your majority of FDs. If I go on to the next point is liquidity so let's assume that I had invested in this liquid fund and I need funds now I after almost seven days now I'm sure okay I need to invest my forty thousand in this specific area do I immediately get my money or no answer is yes so typically whenever I sell these liquid mutual funds okay I would get my money immediately okay so I did talk about returns I did talk about liquidity number three is are they safe will it eat up into my investments okay so that is what I wanted to talk about certain precautions that you have to take before you invest but that I am going to cover in the last segment of this video only but one more important aspect which you should understand because it is directly linked with one point which is your returns hmm but next is what taxability.

Taxation in liquid fund

There is someone who is actually looking out oh yeah born money and who's that Government of India okay they want to say Rachana you earned money now pay tax okay so what tax will be a levied on my gains on liquid fund is a very important point so please understand this there could be a long-term capital gain or there could be a short-term capital gain if it's a short-term capital gain what is short-term capital gain I invested in a liquid fund and I have sold it within a span of three years okay so I told you that one year criteria that but one year criteria is basically for the instruments in which I'm investing okay so if I buy into a mutual fund liquid mutual fund and I have sold it let us say within eight months as an example okay I've sold it within eight months then assume that I got ten thousand rupees as a return from this okay now this ten thousand will be taxed as for my tax slab okay so if you think that my income is up to two like fifty thousand that I won't have to pay any tax on that if you feel that my income is up to five lakhs then I would have to just pay five percent of this game if you feel that my tax lab is somewhere between five to ten lakh I love to pay twenty percent tax on that and just in case if you feel that my income exceeds ten lakhs then I don't have to pay thirty percent on this same amount okay so that's for what that's for a short-term capital gain on a liquidfund if it's a long-term capital gain on a liquid fund then the taxation is flat at the rate of 20 percent but there is a concept of indexation also involved it's a little bit tricky I might cover it up in a separate video okay I hope taxation perspective is also understood.

Checklist before choosing a liquid fund

Let's move on to the last segment which is the precautions to be taken and some bonus tips from my side as to at least two to three points which you should consider before investing in any liquid fund number one check what is the entry load or the exit roll okay see guys entry load is generally going to be zero exit load would also be zero for majority of the cases but in some funds with which I was checking on the internet there is an exit load if you exit the scheme within seven days of investing okay so if you're investing today and let us say you sell the units within two to three days you might be charged with an exit node so just check whether the exit load is there for the scheme or does not prevail for the scheme number two also check what is a locking period see generally there is no lock in period for any liquid fund okay at least whatever we searched I did there was no locking period for any scheme but that should be a basic precaution that you should check before investing in any fun and the last point very very important I am investing in a liquid fund does this mean that there is zero risk as I mentioned it's a very important point guys please understand this point okay is there a zero risk involved in liquid fund answer is no there is a risk for sure see the moment you are getting a a bit more return as compared to saving a little bit more return as compared to FD there is a thumb rule of Finance high risk high returns the moment you are reading higher returns it means that you are exposed to some sort of risk now what could have that some sort of risk you might say but madam it's a debt fund so there's no stock market risk I agree there is no stock market this question is that where do this in which instruments do these mutual funds invest okay so going back to our first point people like you and me invested in this mutual fund now the question is where do this where does this pool of money go into this pool of money can be going into something known as certificate of deposits it could be going into commercial papers it could be going into government bonds into Treasury bills okay I'm sure all these are alien names for you but if I start explaining each and every concept the video will go like 1 hour something something so I'm gonna discuss this separately in a different video okay so these are different different names of debt instruments as of now okay now what could happen I'll give you a simple example of one of the debt instruments here one of the debt instruments I talked about is a commercial paper okay let me repeat it's a debt instrument be DEBT it's not a death instrument okay right I know it was a bad joke okay anyways so debt instrument commercial paper it's a kind of an unsecured instrument what does it mean tomorrow if some company who had issued this commercial paper and that is a commercial paper in which this mutual fund is investing that company goes bankrupt example yes we do have an example our favorite ILFS okay ILFS come up with a commercial there were many mutual fund liquid funds were invested in commercial papers of ILFS okay what will happen is there a risk for this liquid fund yes there is a risk so ensure that not a big chunk of your liquid fund goes into a specific category like a commercial paper and worse scenario could be like it is going into a commercial paper but only of one or two companies okay so ensure that the portfolio of this mutual fund liquid scheme is well diversified into different different types of instruments and also in different different companies which you know issuing these type of instruments okay so guys to sum up liquid funds are not risk-free but they are definitely low risk category of mutual funds the question is where will I find out the portfolio of all these typical liquid fund schemes we do have a free website moneycontrol.com and you'll find the portfolio of each and every liquid fund in that specific moneycontrol.com so be sure that you check out the portfolio and then only invest in liquid funds okay so I hope we have got a very very holistic approach about what is a liquid fund what are the different types of funds meanings and I hope you have gotten a good confidence about when you should invest in liquid funds and now that you have understood a lot about liquid funds.

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