Hello readers, we are happy to announce that our
team of MoneyWiseMind.com launched a new section “Investing Insights: Weekly Q&A For Stock Market Newbies”, to
spread the basic stock market knowledge to the beginners.
This is your go-to resource for demystifying
the stock market from the scratch. Each day, we will present 10 carefully
curated questions with answers that will cover essential concepts, strategies,
and terminologies. Whether you have just entered into the market, or trying to
starting your stock market journey, or looking to strengthen your foundation,
our weekly post will guide you through the basics and beyond, making investing
accessible and understandable for everyone. Happy reading.
Day 9: Basic Stock Market
Concepts
Understanding Mutual Funds:
1. What is the Difference between Open-Ended and Close-Ended Mutual Funds?
Open-Ended Funds:
These
allow investors to buy and sell shares at any time at the fund’s Net Asset
Value (NAV). They do not have a fixed maturity period and are the most common
type of mutual fund.
Close-Ended Funds:
These
funds have a fixed number of shares and a specific maturity period. Investors
can only buy into them during the initial public offering (IPO), but shares can
be traded on the stock exchange after that.
2. How is the Performance of a Mutual Fund Evaluated?
Mutual
fund performance is evaluated using several metrics, including:
Total Return:
The
percentage gain or loss in value, including dividends, interest, and capital
gains.
Benchmark Comparison:
Comparing
the fund’s returns with a relevant index like the Nifty 50 index or a
sector-specific benchmark.
Risk-Adjusted Returns:
Metrics like Sharpe Ratio or Alpha, which
account for the risk taken by the fund to generate returns.
Consistency:
The
ability of a fund to perform well over time, rather than occasional spikes.
3. What are Sector-Specific Mutual Funds?
Sector-specific mutual funds focus
on a particular industry or sector, such as technology, healthcare, or energy.
These funds allow investors to concentrate their investments in industries they
believe will outperform the broader market. However, they carry higher risk
since the performance is tied to one sector.
4. Can Mutual Funds Provide Regular
Income?
Yes, mutual funds can provide
regular income through:
Dividend Payout Funds:
These distribute dividends from the
stocks or bonds in their portfolios.
Bond Funds:
These provide income in the form of
interest payments from bonds.
Systematic Withdrawal Plans (SWP):
Investors can set up SWPs to receive
a fixed amount of money regularly from their mutual fund investment.
5. What is a Fund of Funds (FoF)?
A Fund of Funds (FoF) is a mutual
fund that invests in other mutual funds instead of directly investing in stocks
or bonds. This approach provides broader diversification and access to
different asset classes, but may result in higher fees due to the layered
management structure.
6. What is an ELSS fund, and How
Does it Help in Tax Savings?
An Equity Linked Savings
Scheme (ELSS) is a type of mutual fund in India that offers tax
benefits under Section 80C of the Income Tax Act. ELSS funds primarily invest
in equities and have a lock-in period of three years. They are a popular choice
for investors looking to save taxes while benefiting from potential stock
market growth.
7. What is a Mutual Fund’s Turnover
Ratio?
The turnover ratio measures
how often the securities in a mutual fund’s portfolio are bought and sold over
a year. A high turnover ratio indicates frequent trading, which can lead to
higher transaction costs and tax implications. A low turnover ratio suggests a
more stable portfolio.
8. How Does a Mutual Fund’s Asset
Allocation Impact Returns?
Asset allocation refers to how a
mutual fund divides and distributes its investments among different asset
classes, such as stocks, bonds, and cash. Funds with higher allocations to
equities tend to have higher potential returns but also higher risk. On the
other hand, funds with more bonds or cash provide stability but lower growth potential.
A balanced asset allocation ensures diversification, aligning risk with the
investor’s objectives.
9. What is a Mutual Fund’s Lock- In
Period?
A lock-in period is the duration for
which investors cannot sell or redeem their investments in a mutual fund. For
example, ELSS funds have a three-year lock-in period. During
this time, investors are restricted from withdrawing their funds, encouraging
long-term investment behavior.
10. Can Mutual Fund Investments be
Withdrawn Anytime?
For open-ended funds, yes,
investors can withdraw their money anytime by redeeming their units.
However, close-ended funds require investors to hold their
units until maturity unless they sell the units on the stock exchange. Keep in
mind that some funds might have an exit load fee if you withdraw too soon.
If you have any other questions in your mind relating to stock market basics or need any clarification, please put your query into the comment box, We will try our best to clarify the same
Disclaimer: The information provided on MoneyWiseMind is for educational and informational purposes only. It is not intended to be financial advice, and you should not rely on it as such. Before making any financial decisions, you should consult a licensed financial advisor.
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Weekly Q&A For Stock Market Newbies: Part - 8
