Mutual Funds 101 - Your Guide to Understanding and Investing in Mutual Funds

When it comes to investing your hard-earned money, there are two things you would generally want: high returns, and low risk. But it is mostly seen that these two are inversely proportional, which means that a high return fund is also high risk. However, if there is one form of investment which offers pretty decent returns and is relatively safe, it is mutual funds. There is a severe lack of mutual fund information in the market which scares off newer investors. Here is your handy guide to mutual funds and how they work.

How Do Mutual Funds Work?It is important to understand how mutual funds work before you invest. Mutual funds pool in the funds of several investors and invest them in a portfolio of large assets like stocks, bonds, etc., which a single investor would not have been able to afford. The returns from the said investment are then distributed among the investors, after keeping a certain percentage as their own fee for the transaction. This way small investors get a chance to invest in and reap the benefits of investing in major assets that they could not have been able to without mutual funds. Some of it are tax saving mutual fuds.

Is it risky?Mutual funds allow you to pick a fund containing different stocks which means you do not put too many eggs in one basket as opposed to investing a large amount in one major fund. It is true that practically all investments are subject to market risks, however minimal. But there are means to minimize the risks on your investment.

Study past performanceResearch is the key to investment. Before you invest a single penny, do thorough and extensive research on the performance of the portfolio over the past months or years. It is an indication of what you can expect from the said investment over time. Even after you have invested, it is important that you keep an eye on your investment, and its performance.

Diversify your portfolioInstead of investing a large sum in one fund, go for smaller amounts of money, spread over a number of different funds. This way if one of your investments is going through a loss or even if it crashes, you will have others to keep you floating through the loss. This helps minimize your risks of losing all your money.

Beware of unrealistic promisesYou will come across funds that offer almost absurdly high returns. However, these funds are mostly cyclical in nature and thus they can give you massive profits one day and then lose your money the next. Investment in such a fund is highly risky, especially for a beginner. It is better to go for safer Large Cap or Diversified Equity Schemes to ensure continued profit.

FeesIt is important to know expenses and fees or any other charges involved before investing in mutual funds.

Now that you know all about mutual funds, all you need to do is simply research and get down to investing. Start with small amounts and as you get the hang of the market you can go for more.

Here's a little bit about myself. I've done a Masters in Economics and teach the subject to high school students. I am 32 years old and married to an investment advisor. A Dhoni fan who loves to play football! I am a sports enthusiast and a firm beli