What is a (Mutual Fund)? 4 Important Things Beginner Investors Must Understand Before Opening an Account

Why Do We Need to Know About Funds?

If you have savings but don’t know where to invest them or are afraid of losing money by investing on your own due to lack of knowledge or even lack of time to manage your portfolio? That is why Mutual Funds (Investment Funds) play an important role in the personal finance of everyday investors.

What is a Mutual Fund? Let’s Understand Together

Mutual Funds are intermediaries that pool money from many individual investors and then combine all the funds into a large pool. This pool is managed by professional experts (Fund Managers) who are certified by the Securities and Exchange Commission.

The working mechanism is as follows:

• Each investor deposits money into the fund
• The manager invests the money according to the fund’s policy
• When returns are generated, they are shared with investors proportional to their investment

4 Advantages That Make Mutual Funds Attractive

1. Easier Risk Diversification

Individual investors often have limited funds, making it difficult to diversify risk across various assets. But when money is pooled into a fund, the manager can invest in multiple asset types simultaneously, effectively reducing risk.

2. Managed by Professionals

Your money isn’t left idle but is managed by experienced and specialized professionals, reducing the need for you to spend time studying the market and analyzing investments yourself.

3. Supervised by Relevant Authorities

Having the Securities and Exchange Commission overseeing and inspecting the fund provides investors with greater confidence that their money is safe and managed appropriately.

4. A Good Tool for Beginners

Whether you’re new to investing, have limited funds, or lack time, mutual funds can meet those needs.

How Many Types of Mutual Funds Are There? Which Should You Choose?

Funds can be classified in two ways: based on redemption policies and investment policies.

Classification by Liquidity

Closed-End Funds (Closed-End Funds):

• Offered once during the fundraising period
• Fixed number of units
• Redemption period is fixed
• Risk: Low for the fund but high for investors (If sold before maturity, must be sold outside the system)

Open-End Funds (Open-End Funds):

• Can be sold at any time
• Number of units is not fixed
• Can be redeemed for cash anytime
• Risk: Low for investors but high for the fund

Classification by Investment Policy (Risk-Return)

Money Market Fund (Lowest Risk): Invests in deposits and short-term debt instruments, providing interest income. Suitable for those who want minimal risk.

Fixed Income Fund (Low Risk): Invests in bonds, bills, and debentures, offering higher returns than Money Market Funds.

Mixed Fund (Moderate Risk): Invests in both debt and equity (up to 80% in stocks). Suitable for beginners starting to learn about stock investing.

Flexible Fund (Moderate to High Risk): No restrictions on proportions; managers can adjust stock-bond ratios based on market conditions (0-100% in stocks).

Equity Fund (High Risk): Invests at least 80% in stocks, offering high returns but with market volatility.

Sector Fund (High Risk): Invests in a single sector (such as banking, communication, transportation), at least 80%. Returns can be more volatile than the market average.

Alternative Investment Fund (Very High Risk): Invests in commodities (gold, oil, agricultural products), with highly fluctuating prices due to market price movements.

5 Steps to Choose the Mutual Fund That’s Right for You

Step 1: Assess Your Risk Tolerance

Ask yourself: How much change in your investment portfolio makes you worried? Take the KYC test provided by the asset management company to understand your risk level.

Step 2: Study the Economic Overview

Is the current market expanding or slowing down? Analyzing economic signals will help you decide whether to focus more on stocks or bonds.

Step 3: Read the Fund Prospectus

Once you’ve narrowed down to funds suitable for your risk profile, read details about investment policies, returns, and other conditions.

Step 4: Check Past Performance

Choose funds with good returns and low volatility compared to other funds of the same type.

Step 5: Continuously Monitor and Evaluate

If economic conditions change, you may need to switch units to funds better suited to the new situation.

How Do Funds Generate Returns? Understanding NAV, Capital Gain, Dividend

After purchasing units, you might wonder how to make a profit.

NAV (Net Asset Value) - Net asset value

NAV is the price per unit calculated from the total assets of the fund minus liabilities and expenses. Calculated at market close daily. If NAV is higher than your purchase price, it indicates a profit; if lower, a loss.

Capital Gain - Profit from buying and selling

When you sell units at a higher price than the purchase price, the difference is the profit from trading. This profit/loss is unrealized until you actually sell the units.

Dividend - Payouts

Some funds distribute returns in the form of dividends, paid periodically, without requiring you to sell units. The total return you receive includes both Capital Gain and Dividends.

Summary: Investing in Mutual Funds Is Not as Difficult as You Think

No one is an expert in investing from the start. Everyone has their limitations, whether it’s insufficient knowledge, lack of time, or limited initial capital. But these limitations shouldn’t be obstacles to investing because Mutual Funds are tools that help solve all those problems.

Most importantly: Not investing is riskier than investing wisely. Letting your money sit idle and lose value due to inflation is wasteful. Starting with mutual funds is easy—just one step: Start now.