MUTUAL FUNDS

# What is a Mutual Fund?

A Mutual Fund is a vehicle for investing in stocks and bonds. It is not an alternative investment option to stocks and bonds, rather it pools the money of several investors and invests this in stocks, bonds, money market instruments and other types of securities. Buying a mutual fund is like buying a small slice of a big pizza. The owner of a mutual fund unit gets a proportional share of the fund’s gains, losses, income and expenses.

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# What is venture capital? What are venture capital funds?

Venture Capital is the fund/initial capital provided to businesses typically at a start-up stage and many times for new/ untested ideas. Venture capital normally comes in where the conventional sources of finance do not fit in. Venture capital funds are mutual funds that manage venture capital money i.e. these funds aggregate money from several investors who want to provide venture capital and deploy this money in venture capital opportunities. Typically venture capital funds have a higher risk/ higher return profile as compared to normal equity funds and whether you should invest in these would depend on your specific risk profile and investment time-frame.

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# How do I invest with a limited amount?

Regular investing is a very good way to build up an investment portfolio (read Dollar Cost Averaging to understand why) and this can be done with any amount of money. First, plan out how your investments should be spread out i.e. how much should be invested in equity shares and how much in fixed-income (bonds/ debentures) instruments. This should be based on your risk profile i.e. what your risk taking capacity is (how much risk can you take financially) and what your attitude towards risk is. Unless you rate high on aptitude, temperament and knowledge related to investing in shares, equity mutual funds offer a better alternative to investing directly in shares. Income mutual funds also offer a good alternative to fixed-income investment. For regular investment, most mutual fund schemes have a Systematic Investment Plan - this can be either monthly or quarterly installments. Typically, the minimum installment amount is around Rs500 and while choosing this plan, you will need to give around three- to four-post dated cheques at the time of investment.

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# How do you evaluate mutual funds performance?

Although past performance is no guarantee for the future, it is a useful way of assessing how well or badly a fund has performed in comparison to its stated objectives and peer group. A good way to do this would be to identify the five best performing funds (within your selected investment objectives) over various periods, say 3 months, 6 months, one year, two years and three years. Shortlist funds that appear in the top 5 in each of these time horizons as they would have thus demonstrated their ability to be not only good but also, consistent performers. To get help through this process, you can use our Find-A-Fund query module.

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# What are the time-tested investment strategies that work?

Start investing as early as possible - the power of compounding is the single most important reason for you to start investing right now as even a relatively small amount invested early will grow over the course of your working life into a substantial nest egg. Remember, every day that your money is invested, is a day that your money is working for you. Buy stocks or equity mutual funds and hold long-term – historically, world over, and even in India, stocks have outperformed every other asset class over the long run. Invest regularly – use the Dollar Cost Averaging approach – this will help you to adopt a disciplined approach to investing and works equally well for both buying and selling decisions. Importantly, it increases your potential gains when acting against the market trend, reduces risk when you are playing the market trend and relieves you from the pressures of forecasting tops and bottoms. Dollar Cost Averaging can effectively convert a regular savings plan into a regular investing approach. And, Diversify your investment - by diversifying across assets, you can reduce your risk without necessarily having to reduce your returns. To get the maximum benefit of reducing your risk through diversification spread your portfolio across different assets whose returns are not 100% correlated.

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# How many funds or stocks should you diversify your portfolio over?

To get the maximum benefit of reducing your risk through diversification spread your portfolio across different assets whose returns are not 100% correlated. Different assets should ideally span across different asset classes such as fixed income, equity, real estate, gold as well as different investment options within these asset classes e.g. within equity shares, your exposure should be to companies in different sectors; or within fixed income investments, partly government risk and partly corporate risk. As a thumb rule, diversify your investments across 15-20 different portfolio holdings if you are directly investing in stocks or bonds. If you are investing through mutual funds, then three MF schemes for stocks and three schemes for bonds should provide you adequate diversification