So, before answering this question, let’s know about the mutual funds, how it works, and lots more.
What are mutual funds?
Mutual funds comprise two words mutual, which means many individuals coming together and fund means money. So, many individuals pooling together their money for a common purpose is known as mutual funds.
Making diversified investments, i.e., investment in gold, real estate, stock market, bonds, etc. by Investing in one place can be made by mutual funds.
What is an Asset Management Company?
Asset Management Company (AMC) is an enterprise that lumps together the funds given by the investors/individuals in different areas according to the risk-bearing capacity of the individual and invests them accordingly.
For example, if a person whose risk-bearing capacity is high and wants to invests in Equities of any AMC like SBI, so the AMC will invest in SBI Small cap/Equity Blue-chip Fund (large-cap Equity) or other funds where the risk, as well as return both, are high OR if the risk-bearing capacity of person is low he can invest in SBI Liquid/Overnight Fund and get the return likewise.
AMC invests our money on our behalf in different areas by the experts and charges a nominal amount of which as a commission charge (expense ratio), which varies from company to company.
Some of the examples of AMC are as follows:
- HDFC ASSET MANAGEMENT COMPANY LIMITED
- ICICI PRUDENTIAL ASSET MANAGEMENT COMPANY LIMITED
- CANARA ROBECO ASSET MANAGEMENT COMPANY LIMITED
- ESSEL FINANCE AMC Ltd.
- MOTILAL OSWAL ASSET MANAGEMENT COMPANY Ltd.
How does a mutual fund work?
It is easy to understand by this diagram, how mutual funds work and how AMC invests the funds further.
Advantages of Mutual funds
- Managed by professionals and investment is diversified, so it leads to mitigate the risk.
- It can be invested as per the investor convenience in lump-sum or every month, which is known as SIP (Systematic Investment Plan), whichever he/she can choose.
- Investing, according to your risk-taking capacity, for high risk, can invest in equities and for low risk can invest in debt.
- Minimum paperwork required or no paperwork as you can buy or redeem mutual funds online or through various apps.
- There are various mutual funds by which can benefit in tax.
Is Mutual Fund subject to market risk?
Now, finally, the wait is over and answer the question for which this article is Yes, but this answer is partially correct if mutual funds are chosen wisely like for debts or hybrid (some in equity and some in debt) they are risky but to some extent.
There are some mutual funds you can get a fixed amount of interest on a monthly, quarterly, or yearly basis as per your choice and can use that amount for your day to day expenses or for further investment or save it. For example- investingRs.1lakh in HDFC Balanced Advantage Fund, which is providing 12% per annum, which means you can get RS.12,000 in 1 year and eight years the amount you get is Rs.96,000 in the form of interest which equals to the invested amount. Hence, the investment you made in the market i.e., Rs.1,00,000, is only subject to market risk.