How do top investors make money from mutual funds?

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Mutual funds collect money from investors to create a pool of money. Then the mutual fund company appoints another company, an Asset Management Company (AMC), to invest those funds in different securities as per the fund objective.

Fund managers at the AMC are the brain behind the investment, and they are the ones responsible for allocating funds and making all investment decisions on behalf of investors. Once the investment earns returns, these are distributed among investors, according to the mutual fund units they hold.

How to invest in mutual funds?

You can start your investment journey in a convenient and paperless manner using an online investment platform. Follow the steps given below to invest in mutual funds online.

  • Sign in/sign up with an online investment platform you trust and create your investment account.
  • Fill in the required details and complete the verification process.
  • Complete the e-KYC process, which only takes a few minutes.
  • Explore the various schemes available and choose the best plan for yourself.

How to earn in mutual funds

  • Capital gain: When the selling price of your investment is higher than the buying price, the difference between them is your capital gain or simply, it is the price appreciation of your assets.
  • Dividends: Dividends are earned when the company promoters decide to share their profit with their investors, which is also an indicator of the company’s good financial health.
  • Bond interest: Funds that offer bond interest are safer than equity-based mutual fund schemes, as they invest in fixed-income instruments, like government bonds and corporate debt securities.

Your mutual fund returns will differ, according to the type of scheme you choose.

Four ways top investors handle their investment for better returns

  • Long-term investment

As the nature of the stock market is volatile, a long-term investment horizon is something that bears better fruits. You can gain high returns from holding your mutual fund units for a long period and receive dividends and tax benefits for Long Term Capital Gains (LTCG).

  • Portfolio diversification

Mutual funds Schemes   are a great tool for portfolio diversification. Depending on your selected plans, a mutual fund manager invests your money in several securities that can help maximise your returns and sustain your capital in unfavourable conditions.

  • Capital protection

In a downtrend market, holding your investment is only going to hurt your capital. Thus, it is better to keep your capital off the market in such adverse conditions. However, there is also a smarter option where you invest your money in debt-based mutual fund schemes, which provide stable returns and are not affected by an equity crash.

  • Expense ratio

Mutual funds charge a small fee for their service, as a percentage of your Net Asset Value (NAV), called the expense ratio. Such minor matrices are often ignored but can indeed affect your return on investment in some manner, especially in the long term. Thus, it is better to check and consider a lower expense ratio scheme while buying a mutual fund plan.

Conclusion

Top investors have a strong financial knowledge using which they make appropriate decisions for their investments. You can also start your investing journey with mutual funds as they can help you meet your financial goals effectively.