You can view the video on YouTube here
This is the first of a series of articles on building a mutual fund portfolio. My goal here is to help you understand how a mutual fund portfolio is built. Over this series, I’m going to take you right from understanding a mutual fund and its features to selection of funds, increasing or reducing your investment and also monitoring it. However, if you are a first time investor or someone who has not completed 5 years of investment in mutual funds, please consult an IFA i.e. an independent financial advisor. So why write these articles? There is good and bad advice so these videos will help you better understand what mutual funds are and help you navigate them better. Lets get into it then.
What is a mutual fund?
A mutual fund is formed when capital collected from different investors is invested in company shares, stocks or bond. Whom is it collected from? Say Rs 5,000 from me and Rs 10,000 from you and so on. Whom do we give it to? A fund house who uses this money to buy and sell shares on our behalf. To understand this better let us look at a popular fund – Axis BlueChip fund. The fund size is approximately Rs 11, 800 crores. And what has the fund manager done with this money? He has purchased stocks of different companies with the idea of selling it when it reaches a certain target price. Here are the stocks in the portfolio of Axis Blue Chip fund
You can also look at the holdings in a different way, that is sector wise
So if you are investing Rs 10,000 your money is going into a pool which is then used to buy company shares. Do you own the shares? No, you own a share of the mutual fund. For example, if a fund holds Reliance Industries in its portfolio, the mutual fund investor does not directly own Apple stock.
The obvious benefit is diversification i.e. don’t put all your eggs in one basket. This is one among many advantages of mutual funds which I will cover in the next article but for now, I wanted to highlight a few more features of mutual funds.
A mutual fund has clearly defined objectives. Taking the same example of Axis Bluechip fund, it is categorised as a large cap fund which means that the fund can only purchase the top 100 companies by market capitalisation listed on the stock exchange.
A mutual fund is professionally managed. A fund manager doesn’t work alone. He is backed by a large team which comprises of research analysts who study world markets, monetary policies, sectors, individual companies. Basis all this data, the fund managers take a call on which stocks to buy and when to sell.
Mutual funds charge fees called expense ratios which are deducted from your investment. It can be anywhere from .1% to 2.25%. Roughly translated, it means that if you are investing Rs 10,000 and the expense ratio of the fund is 1% then Rs 100 will be retained by the fund as management expenses.
A mutual fund house, which runs the mutual funds, is a separate entity. So Axis MF is not part of Axis Bank and HDFC MF is not a part of HDFC Ltd or HDFC Bank
Well regulated by SEBI - Securities and Exchange Board of India
In the next article, I will cover different types of funds and their advantages and disadvantages and then we will go onto how mutual fund investors make profits or losses. If you liked this article, then stay tuned for the next few ones.
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