ARE YOU A FIRST TIME MUTUAL FUND INVESTOR?

What is a mutual fund? - As the name suggests, a mutual fund is a fund set up with the money from a large number of people. For example, there are say 10,000 people contributing anything between Rs. 500/- and Rs. 1 crore each to set up a Mutual Fund with a total corpus of Rs. 100 crore. Then a person with experience in identifying good investment opportunities is made the fund manager. The returns he/she generates on the corpus, is either distributed to all the 10,000 investors on a pro rata basis as dividend, or those who do not want to take money out, their shares of dividend remain invested in the fund and grow over time. These investors can redeem their funds, fully or partially, when they require.
What is Net Asset Value? - Here, the Rs. 100 crore collected is divided into units of Rs. 10 each and every investor gets units on a pro rata basis. One investing Rs. 500/- gets fifty units while the one investing Rs. 1 crore will get ten lakh units. At the start NAV of the fund will be Rs. 10/- and as the value of total corpus rises or falls, the NAV will also change.  
What are the various types of Mutual Funds? - MMutual Funds are categorised through various parameters, one of them being the asset class they invest in. Funds which invest predominantly in stocks are called equity funds, while those which a major part of their corpus in fixed income instruments like gilts, corporate bonds, Non-convertible debentures, treasury bills, commercial papers, etc. are called debt funds. Likewise there are gold exchange traded funds (ETFs), infrastructure investment trust funds, real estate and commodity funds (the last two are yet to be launched in India). There are funds which invest in a mix of these asset clauses also.
How to select the best suitable fund? - At first you should decide your investment goal, that is, why you want to invest. Once you decide that, the next thing to find out is  when you will need the money for your goal. If you need the money say within the next three years, pure debt fund are better. If you would need the money between three and five years, a balanced fund is a better option and if you would need the money after five years or more, an equity fund is a better option. The choice of fund would also depend on your risk taking ability. To select the right fund you should also look at the performance track record of the fund manager and the fund house.   
What is the mode of investing in a fund? - You could decide to invest a lump sum or take the systematic investment plan (SIP) route. The SIP method of investing is similar recurring deposit in a bank. Through SIP, every month or quarter, you invest a pre-fixed amount of money in the fund. All investments are done at the prevailing NAV.
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