The Basics of Investment and Mutual Funds

Investing is essential for building long-term wealth, but many people shy away from it due to a lack of understanding—especially when it comes to the stock market and mutual funds.

If you're just starting your financial journey, here’s a beginner-friendly guide to help you understand key investment terms and mutual fund concepts.

What is a Share or Stock?

A share (or stock) represents ownership in a company. For instance, if a company has 200,000 shares and you own 400 of them, you own 0.2% of that company.

Shares entitle you to a portion of the company's profits (via dividends or capital gains) and give you a stake in its growth.

Mutual Funds: What Are They?

A mutual fund is a pool of money collected from multiple investors, managed by a professional fund manager, and invested in a diversified portfolio of stocks, bonds, or other securities. They’re perfect for beginners because they offer diversification, expert management, and accessibility.

Key Terms You Should Know

1. NAV (Net Asset Value)

The NAV is the current market price of one mutual fund unit. It fluctuates daily based on the market performance of the fund's holdings.

2. NFO (New Fund Offer)

This is the initial offering when a mutual fund is launched. Think of it as the IPO (Initial Public Offering) of a mutual fund.

3. Entry Load

A commission paid when buying mutual fund units via brokers (usually waived if bought directly from the AMC or online).

4. Exit Load

A fee charged when selling mutual fund units before a specific time (usually 1% if withdrawn before 6 months or 1 year).

Types of Mutual Funds

🔓 Open-Ended Funds

You can buy or sell units anytime. There’s no lock-in period, offering liquidity.

🔒 Close-Ended Funds

You can invest only during the launch period, and your investment is locked in for a fixed duration (e.g., 3 years).

Investment Options in Mutual Funds

🌱 Growth Option

Dividends are reinvested into the fund, increasing the NAV. Ideal for long-term investors who don’t need regular cash flow.

💸 Dividend (Income Distribution) Option

You receive periodic dividends whenever declared by the fund. Suitable for those looking for regular income.

Fund Categories Based on Asset Mix

📊 Equity Funds

Invest primarily in stocks. High return potential but also come with higher risk.

🛡️ Debt Funds

Invest mostly in bonds, debentures, and fixed-income instruments. Lower risk and relatively stable returns.

⚖️ Balanced or Hybrid Funds

Combine equity and debt in a strategic ratio to offer a balanced risk-return profile. For example, 70:30 or 50:50 equity-to-debt mix.

Understanding the Ecosystem

🏠 Fund House (AMC)

An Asset Management Company (AMC) that manages and operates the mutual funds (e.g., HDFC Mutual Fund, SBI Mutual Fund, ICICI Prudential).

👨‍💼 Fund Managers

Financial professionals who handle investment decisions, choosing where to invest and managing the fund’s performance.

Sectoral Funds

These funds invest in specific sectors like Pharma, Technology, or Energy. While they offer high returns, they also carry high risk due to lack of diversification.

Mutual Fund Benchmark

Each fund is compared to a benchmark index (like Sensex, Nifty, or sectoral indices). Outperforming the benchmark is a sign of a well-managed fund.

SIP: The Most Beginner-Friendly Investment Plan

What is SIP (Systematic Investment Plan)?

A SIP allows you to invest a fixed amount every month into a mutual fund—just like a recurring deposit.

●       Minimum investment: As low as ₹100/month

●       Example: Instead of investing ₹42,000 at once, you can invest ₹3,500/month for 12 months

●       SIPs offer rupee cost averaging and compound growth over time

SIPs are a smart, disciplined way to start investing and grow wealth gradually.

✅ Final Thoughts

Mutual funds are a versatile, beginner-friendly way to start investing. By understanding the basic terms and options, you can make informed decisions and start building your financial future today.