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What is a Mutual Fund and How Does It Work? How to find Best Mutual Funds to Invest in 2019 - YouTube

Channel: CA Rachana Phadke Ranade

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Hi guys CA Rachana Ranade here and I welcome you all to my next session Saturday lecture series

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and today's topic is mutual funds in this video let's quickly understand what are we going to

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learn number one we are going to talk about what is a mutual fund its basics and how it

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works number two we are going to learn what are the different types of mutual funds number three

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I am going to tell you about a very specific type of mutual fund which is a comparatively

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less known or I may see less explore type of mutual fund and the last and the bonus tip from

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my side is what are the things that you should check out before investing in any mutual fund

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This video is brought to you by "Easy Plan. Easy Plan is an app that helps you save money regularly

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from your phone where you can earn a higher return than your regular savings account and

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these returns can also go close to your returns on FDs and that too without any lock-in period.

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Easy Plan helps you to invest in low risk liquid mutual funds but do you know what's the liquid

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mutual fund no and watch this video till the end so that you can get an amazing idea about

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exactly what is a liquid fund and how it works Okay so let me just quickly tell you what is

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a mutual fund and how it works okay to put it in a very simple way let's take a very simple

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example on this assume that I were to go from Pune to Mumbai I have two options assume I can

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take out my own car I can ride on my own I can drive on my own I can enjoy because I know how

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to drive I know what way I have to choose I know what are the basic rules everything okay

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so I'm a well-educated person as far as driving is concerned so I can choose how to drive which

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way to go and how to go over possibility number two I am not really keen on driving I just want

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to reach Mumbai that's it so what I can do is I can just hire a driver I hire a professional in

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short he takes the decision on which road to choose and what speed to drive where to stop

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I keep all the decisions at his discretion I just told him the final destination okay that's

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exactly the difference between a stock market investment and a mutual fund investment in stock

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market investment you take your own decisions you know where you have to go how to go you have

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expertise in that and you have the enthusiasm I may say to explore these things but if you

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the second category you're really not bothered to explore things you better hire professional

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and he will take decisions for you that's exactly what a mutual fund does so in simple words mutual

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fund means there is a mutual fund manager who takes decisions on your own money which is

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invested with the mutual fund okay so let us understand basically what a mutual fund does

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ok it will collect money from people like you and me okay so assume that there is a there is a pool

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of hundred people okay and these hundred people given funds or contribute some money to a mutual

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fund now this mutual fund is going to reinvest this money into different different investment

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opportunities like a mutual fund can invest in equity a mutual fund can invest in debt a

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mutual fund can invest in either or both okay so that depends on the objective of the mutual fund

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scheme okay so putting it in a very short you know nutshell I may say mutual fund is nothing

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but a type of organization which would take money from people like you and me would create a pool

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of funds and this pool of funds will be invested in different different investments okay now what

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is the positive side for the mutual fund now mutual fund which is invested in different

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different avenues investment avenues mutual fund will earn income out of that okay now this income

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earned can be in the form of interest or it can be in the form of dividend okay it could be in

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the form of gain as well difference between costs price and selling price right so mutual fund okay

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they've got gains okay assume they've got hundred of begins then what which one is going to do with

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that distribute this to the investors those who are invested in the mutual fund do you think they

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want to distribute entire hundred rupees if they distribute hundred rupees are they mad

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just to do social service no they're not want to do that so they are going to take out some

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portion for their own purpose this is exactly known as management expenses or people call this

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as an expense ratio this expense ratio could be typically 1% to 3% of your total investment

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amount okay I hope you have understood how a mutual fund works in the most simplified manner

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Let's move on to the types of mutual funds originally what is to happen I'll tell you every

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mutual fund company I'm sure you might have heard about all this ICICI Mutual Fund or HDFC Mutual

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Fund or you might have heard about Aditya Birla's Mutual Fund like mutual funds so many mutual funds

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are there in the market every mutual fund used to come up with a different type of mutual fund and

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there was to say now invest in this one now invest in that one poor investor he used to get confused

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as to exactly where I should invest and where I should not so what's SEBI did SEBI said you can

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have now only five types of mutual funds okay which are the five types number one we have an

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equity mutual fund okay so let's understand what's an equity mutual fund like I explained right now

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mutual fund the mutual fund institution basically is going to collect money from people like you and

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me and this collected money will then be invested in equity will then be invested in stock market

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this will be an equity oriented mutual fund or an equity mutual fund second one is a debt fund

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what what will happen with a debt fund again same first step remains same that mutual fund is going

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to collect money from people like you and me but instead of investing in equity now it will invest

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in debt okay please understand in debt the risk is definitely on a lower side because there are there

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is there is nothing to do with the stock market fluctuations this money from a debt fund never

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gets invested in a stock market right third one is known as a hybrid fund okay hybrid fund I hope you

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have understood by the name itself it could be a little bit of equity would be a little bit of

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debt. Fourth one is basically a solution-oriented one solution-oriented fund could be like a child

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marriage fund. Okay second one could be it could be a child education fund okay so basically it's

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a solution-oriented you you have a solution you basically want a solution after some specific time

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frame for which you invest and whenever the time comes you are going to take out money from that

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one right fourth type was a solution fund solution solution oriented fund and the last one is like

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an other mutual fund the fifth one is make other one the best example of another fund is an index

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fund okay so basically an index fund whatever money this mutual fund house is collecting its

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directly invested in the fund it's I invested in the index basically so they want to invest

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directly in your nifty they are going to invest directly in Sensex something like that I hope

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you have understood the basic types of funds. So moving on today we are going to focus only

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on one type or in that type also know to talk about a specific subtype which is comparatively

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less explored by people like you and me I'm sure everyone looks at mutual funds only from one angle

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that is I would like to earn more but I don't want as much risk as is involved in stock market

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so majority of you I'm sure might be going ahead with equity oriented mutual funds but guys is that

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the only option available for mutual fund answer is no so today what we are going to talk about

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is debt fund and in debt fund specifically I'm going to talk about a fund which is known as a

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liquid fund okay now what's a liquid one liquid funds are a type of mutual fund that invest in

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securities with a residual maturity of up to 91 days assets invested are not tied up for a long

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time as liquid funds do not have a lock-in period I'm going to talk about various perspectives of

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a liquid fund number one for whom liquid fund is useful okay generally people like me poor

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people like me why poor I don't own any salary I seriously I don't earn even wonder if your

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salary okay but whatever income I get is business income or professional income so what happens with

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me and let us understand maybe 10 days 15 days I might not even earn 1 rupee but on the 16th I

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might earn X amount of money okay now the question is oh my god I have got that sweet message from

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Bank that your account has been credited with whatever rupees okay but then I don't know what

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I'm going to do with this money okay just as an example assume that on a single day I got 40,000

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rupees okay but I'm not sure what I'm going to do with this 40,000 rupees but do I really keep this

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money in savings account that is one alternative right but in this I am going to get only 4% return

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instead of that what I may think of is let me park these funds temporarily in a liquid fund okay now

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what a liquid fund does is that it is a type of mutual fund which will park your money only for

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a short time short time it could be even like one day and it could be on a higher side okay

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it should not be beyond 91 days okay so in simple words for whom liquid funds can be important it

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could be for those people who get money they have some investable surplus but they are not sure when

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to invest or where to invest they just need some time to think on where to invest for them I feel

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liquid fund can be the best possible solution second if you talk about the returns on these

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liquid mutual funds typically whatever types of or whatever different schemes I just checked it

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could be the ICICI Prudential scheme or other schemes as well I found out that typically okay

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majority of the cases you earn a potential return of up to 7% it's way too higher than you're saving

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bank account and it is also beating your fixed deposit returns okay so I feel it's a amazing

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investment opportunity I might not say that the returns are like sky-high but definitely they

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are definitely higher than your savings account as well as your majority of FDs. If I go on to

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the next point is liquidity so let's assume that I had invested in this liquid fund and I need funds

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now I after almost seven days now I'm sure okay I need to invest my forty thousand in this specific

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area do I immediately get my money or no answer is yes so typically whenever I sell these liquid

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mutual funds okay I would get my money immediately okay so I did talk about returns I did talk about

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liquidity number three is are they safe will it eat up into my investments okay so that is what

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I wanted to talk about certain precautions that you have to take before you invest but that I am

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going to cover in the last segment of this video only but one more important aspect which you

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should understand because it is directly linked with one point which is your returns hmm but

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next is what taxibility there is someone who is actually looking out oh yeah born money and who's

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that Government of India okay they want to say Rachana you earned money now pay tax okay so what

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tax will be a levied on my gains on liquid fund is a very important point so please understand

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this there could be a long-term capital gain or there could be a short-term capital gain if it's

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a short-term capital gain what is short-term capital gain I invested in a liquid fund and

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I have sold it within a span of three years okay so I told you that one year criteria that but one

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year criteria is basically for the instruments in which I'm investing okay so if I buy into a

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mutual fund liquid mutual fund and I have sold it let us say within eight months as an example

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okay I've sold it within eight months then assume that I got ten thousand rupees as a return from

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this okay now this ten thousand will be taxed as for my tax slab okay so if you think that

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my income is up to two like fifty thousand that I won't have to pay any tax on that if you feel

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that my income is up to five lakhs then I would have to just pay five percent of this game if

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you feel that my tax lab is somewhere between five to ten lakh I love to pay twenty percent

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tax on that and just in case if you feel that my income exceeds ten lakhs then I don't have to pay

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thirty percent on this same amount okay so that's for what that's for a short-term capital gain on

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a liquidfund if it's a long-term capital gain on a liquid fund then the taxation is flat at

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the rate of 20 percent but there is a concept of indexation also involved it's a little bit tricky

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I might cover it up in a separate video okay I hope taxation perspective is also understood.

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Let's move on to the last segment which is the precautions to be taken and some bonus tips from

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my side as to at least two to three points which you should consider before investing

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in any liquid fund number one check what is the entry load or the exit roll okay see guys entry

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load is generally going to be zero exit load would also be zero for majority of the cases

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but in some funds with which I was checking on the internet there is an exit load if you exit

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the scheme within seven days of investing okay so if you're investing today and let us say you sell

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the units within two to three days you might be charged with an exit node so just check whether

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the exit load is there for the scheme or does not prevail for the scheme number two also check what

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is a locking period see generally there is no lock in period for any liquid fund okay at least

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whatever we searched I did there was no locking period for any scheme but that should be a basic

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precaution that you should check before investing in any fun and the last point very very important

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I am investing in a liquid fund does this mean that there is zero risk as I mentioned it's a

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very important point guys please understand this point okay is there a zero risk involved in liquid

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fund answer is no there is a risk for sure see the moment you are getting a a bit more return

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as compared to saving a little bit more return as compared to FD there is a thumb rule of Finance

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high risk high returns the moment you are reading higher returns it means that you are exposed to

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some sort of risk now what could have that some sort of risk you might say but madam it's a debt

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fund so there's no stock market risk I agree there is no stock market this question is that

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where do this in which instruments do these mutual funds invest okay so going back to our first point

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people like you and me invested in this mutual fund now the question is where do this where

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does this pool of money go into this pool of money can be going into something known as certificate

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of deposits it could be going into commercial papers it could be going into government bonds

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into Treasury bills okay I'm sure all these are alien names for you but if I start explaining

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each and every concept the video will go like 1 hour something something so I'm gonna discuss this

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separately in a different video okay so these are different different names of debt instruments as

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of now okay now what could happen I'll give you a simple example of one of the debt instruments

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here one of the debt instruments I talked about is a commercial paper okay let me repeat it's a debt

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instrument be DEBT it's not a death instrument okay right I know it was a bad joke okay anyways

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so debt instrument commercial paper it's a kind of an unsecured instrument what does it mean tomorrow

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if some company who had issued this commercial paper and that is a commercial paper in which

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this mutual fund is investing that company goes bankrupt example yes we do have an example our

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favorite ILFS okay ILFS come up with a commercial there were many mutual fund liquid funds were

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invested in commercial papers of ILFS okay what will happen is there a risk for this liquid fund

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yes there is a risk so ensure that not a big chunk of your liquid fund goes into a specific category

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like a commercial paper and worse scenario could be like it is going into a commercial paper but

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only of one or two companies okay so ensure that the portfolio of this mutual fund liquid scheme is

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well diversified into different different types of instruments and also in different different

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companies which you know issuing these type of instruments okay so guys to sum up liquid funds

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are not risk-free but they are definitely low risk category of mutual funds the question is

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where will I find out the portfolio of all these typical liquid fund schemes we do have

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a free website moneycontrol.com and you'll find the portfolio of each and every liquid fund in

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that specific moneycontrol.com so be sure that you check out the portfolio and then only invest

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in liquid funds okay so I hope we have got a very very holistic approach about what is a liquid fund

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what are the different types of funds meanings and I hope you have gotten a good confidence

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about when you should invest in liquid funds and now that you have understood a lot about

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liquid funds let us now understand how to invest in liquid funds in the most simplistic manner

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through the Easy Plan app okay so let's login to our Easy Plan app and just for your understanding

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it's an app through which your funds get saved in ICICI Prudential liquid mutual funds what

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says what's your name I'll just quickly introduce myself okay Wow so it says that it is helping me

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to set a savings goal first okay so I feel this is very important your first step towards financial

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success is setting up a goal that's what we are doing right now let's say I want to save for a

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vacation why not or an emergency fund first first I feel emergency fund is more important so let's

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set up for that how much you spend approximately every month so let us say I spent twenty thousand

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per month okay so obviously for three months I will be spending 60,000 for six months one like

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twenty thousand but I feel that three months emergency fund should be good enough for me so

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let me give this as a target for my savings do you want to save every week or every month I am

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NOT a salaried person so I won't get a monthly income I can also enjoy a weekly income okay so

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let me choose weekly but anyways I had an option to do that okay it's giving me suggestions how

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much do I want to save 5% of my income 10% of my income or 15% and I feel 10% of my income should

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be good enough to save okay wow it says that emergency fund will be ready in 23 months good

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part I liked about it is number one it helped me to set a goal and number two it helped me

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to even you know tell me in within how much time frame I'll be able to achieve that goal okay so

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I'm saying save a goal great job setting a goal he has a surprise present okay let me just scratch it

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Wow I've got 20 rupees bonus for setting my first ball so a very important aspect

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of easy plan is that you can invest in multiples let's say if I start with a multiple of only one

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hundred rupee it's not necessary that I need to you know regularly invest hundred hundred

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hundred rupees let's say in the first month I give a target of one hundred next month I'm not

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able to invest hundred it's absolutely fine if I skip a specific month I can even invest five

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rupees in a specific month so that's a very amazing point and I feel that one more one

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point is that there are no penalty charges for skipping any installment and with this still you

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can reach your goals and you can earn a little bit better than your saving and almost close to

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your FD returns so if you want to invest using Easy Plan app please check the link which is

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given in the description box the link contains separate links for iOS users and Android users.

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I hope you have understood today is the discussion very well that's it from my side Jai Hind bye bye

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