Let's explain this term in a very simple way. Let's assume that you as an investor have no idea of shares and stocks. You need professional help and expertise. All you have to do is invest in a mutual fund scheme. A mutual fund scheme collects money from investors and buys and sell stocks collectively.
|Scheme Name||Latest NAV||(%) Daily Return|
|Quant InfrastructuDP (G)||9.07||0.66|
|Quant Infrastructure (G)||8.86||0.66|
|Quant Consumption DP (G)||26.36||0.45|
|Quant Consumption (G)||25.08||0.44|
|Quant Focused DP (G)||32.78||0.4|
|Union Small Cap (G)||15.11||0.4|
|Quant Focused (G)||32.50||0.4|
|Quant Larg&MidCap DP (G)||39.14||0.39|
|Quant Larg&MidCap (G)||38.42||0.39|
|Union Small Cap DP (G)||15.81||0.38|
|Scheme Name||Latest NAV||(%) Daily Return|
|HDFC Focused 30 (G)||77.21||-0.88|
|HDFC Focused 30 DP (G)||82.01||-0.88|
|HDFC InfrastructurRP (G)||15.37||-0.84|
|HDFC InfrastructurDP (G)||16.27||-0.83|
|Sundaram FinSerOpp (G)||47.51||-0.81|
|Sundaram FinSerOppIP (G)||51.12||-0.81|
|Sundaram FinSerOppDP (G)||49.72||-0.81|
|JM Core 11 (G)||9.41||-0.67|
|JM Core 11 DP (G)||10.29||-0.67|
|Essel Multi Cap (G)||11.18||-0.61|
Say, there is a Mutual Fund Scheme called Super Returns Mutual Fund, launched by Super Returns Asset Management Company. What this fund does it comes out with a new offer of a scheme called Super Return Mid Cap Scheme. When it gathers say Rs 100 crores, it invests the money gathered from several investors into the stock markets. If the scheme is an equity scheme it would invest most of its money in shares, while if it was a debt scheme it would invest the same in debt like government securities, bonds etc.
Now, the fund will offer you units at Rs 10 initially. You buy one unit at Rs 10. Say, you buy 1000 units at Rs 10 and you pay a sum of Rs 10,000. One year down the line the stocks invested by the Super Return Mid Cap Fund rise and net asset value climbs to Rs 12.
You can now sell the units back to the mutual fund at Rs 12 and you would get Rs 12,000 for your 1000 units.
For a new buyer who is interested to buy the units he would have to buy the units at Rs 12, since the net asset value has climbed. This means he has to pay Rs 12. In the example below we have tried to make it as simple as possible, assuming that the Super Return Mid Cap Fund is an open ended fund. We have avoided writing on things like entry and exit load, so as to avoid confusing the reader.
Again, we are trying to make it as simple as possible in explaining to you the different types of mutual funds.
Equity funds invest most of the money that they gather from investors into equity shares. These are high risk schemes and investors can also make losses, since most of the money is parked into shares. These types of schemes are suitable for investors with an appetite for risk. Read more articles on Equity Funds.
Debt funds invest most of their money into debt schemes including corporate debt, debt issued by banks, gilts and government securities. These types of funds are suitable for investors who are not willing to take risks. Returns are almost assured in these types of schemes. Read more articles about Debt funds
Balanced funds invest their money in equity as well as debt. They generally tend to skew the money more into equity then debt. The objective in the end is again to earn superior returns. Of course, they might alter their investment pattern based on market conditions. Read More articles on Balanced funds.
Money market mutual funds are also called Liquid funds. They invest a bulk of their money in safer short-term instruments like Certificates of Deposit, Treasury and Commercial Paper. Most of the investment is for a smaller duration.
Gilt Funds are perhaps the most secure instruments that are around. They invest bulk of their money in government securities. Since they have backing of the government they are considered the safest mutual fund units around. Check More Article on Gilt Funds.
If you are an investor who is looking at the much talked about mutual fund SIPs, there are many ways to apply to them. Many brokers accept mutual fund applications. Apart from this you can also apply directly through the website. Many mutual funds will give you login and password after you register.
Remember, you need to comply with Know Your Customer Requirements before you apply. This is also known as KYC Requirement of Mutual Funds. You can also call the various toll free numbers of mutual funds, which can provide you all guidance on how to invest.
Remember, you need to understand the MF schemes before you invest. In the above para, we have made aware of how the various schemes operate. What is most important is that investors pick and choose carefully. If you are a person who has retired, it would be dangerous to choose the equity option. You would do well to consider debt mutual funds. Similarly, if you are young and have a steady income flow, opt for SIPs through equity mutual funds.
Mutual Fund meaning refers to an investment programme which is funded by shareholders which trade in diversified holdings and is professionally managed. A mutual fund generally gathers money from the investor community and the same will be parked into those investments which an investor wants.
These funds are generally managed by professional money managers who allocate the funds assets across various investment portfolios and endeavour to produce income or capital gains for the fund’s investors.
The mutual funds are more popular because they allow the investor to pick one fund which contains different stocks which are spread out based on the risk-taking capacity of the investor and hence one need not worry about putting too many eggs in one single basket. It also reduces the monitoring of prospectuses or keeping a tab on industry news.
The mutual funds are managed by a fund manager, who picks up all the investments in the portfolio. It is often a big selling point for the beginners who do not have experience and would rather rely on an expert in the mutual fund for investing.
For Example: If an HDFC mutual fund initially comes up with an open-ended equity scheme, then whatever the money it gathers from the investor group from this scheme will be invested in the equity shares.
Say if the units were issued at Rs 20, will start inching up if the share prices surge. The Net Asset Value of these units which initially started at Rs 20, will increase gradually. So, it goes up from Rs 20 to Rs 22. Those investors who initially bought these shares at Rs 20 can sell it back to the mutual fund at Rs 22 and reap a profit of Re 2 per share. As it is an open-ended equity scheme, the mutual fund can sell its units constantly at the net asset value. So now, a new investor who did not buy the original initial issue at Rs 20 per share can now buy it at Rs 22 per unit.
The first and the foremost thing required to invest in a mutual fund is to be “KYC compliant”, here KYC stands for Know Your Consumer. This includes submission of photographs, address proof, date of birth proof and a copy of PAN (Permanent Account Number) card.
One can either directly approach brokers for making investments in mutual funds or can approach the mutual fund house. One can either opt for considering an equity mutual fund or can go for a debt mutual fund.
It is important to update the KYC each and every time when you change your address as it is crucial to stay updated.
There is a long way to go for mutual fund sector. While its development may seem substantial for a comparatively fresh sector in 2016. It is extremely small at 8.4 per cent as a share of GDP. The way individuals invest, which is a nice indication has been visibly changing. This is due to the growing sector consciousness.
The Indian mutual fund industry's AUM is anticipated to reach 20 lakh crore earlier than anticipated with reduced bank interest rates and demonetization. Over the next 2-3 years, the mutual fund industry will see solid development powered by possibilities in the below-given field.
Digitalization and Digitization
Mutual funds provide a more flexible mix of customer choices and schemes, investment choices and higher tax efficiency. For long term loan, gold and real estate have become unattractive failing to produce decent yields in the last 2-3 years. Instead of shareholders take benefit of SIPs, a rigorous manner to construct long term capital and handle the intrinsic volatility of equity markets, with enhanced knowledge of the mutual fund sector.
Beginners to invest in mutual funds may find it a little complicated initially. Investment in Mutual Funds can be done in two ways either directly or through an independent financial advisor or mutual fund distributor or broker based on the medium of investment either via online or offline mode. One should note that having a PAN Card (Permanent Account Number) and complying with the KYC (know your customer) requirements are must to invest in mutual funds in India.
Individuals can purchase mutual funds directly from the mutual fund houses without the need to pass through any middleman. In this case, one has to do the research part all on their own as they will not be getting any financial advice or assistance from any fund houses. One can buy mutual funds physically by visiting the office of the asset management company or by filling in the application form and mailing it with supporting documents or via online mode.
The Financial Advisor is a certified, professional expert who will identify the investor's financial goal and helps an investor to build a financial blueprint based on the goals and recommend the correct investment options to match their objectives. One should understand as to how the advisor is paid and one is convenient with their recommendations. The financial advisor may charge a fee for providing his/her service to their clients.
Mutual Fund Brokers/ Agents/ Distributors
The mutual fund brokers or agents or distributors are the financial entities which usually recommends investors with investment products. One should always make a clear understanding of how they get paid for the investment and one should do their part of the research for meeting their financial and investment needs. Investors can transfer money to them directly or across the counter or by bank transfer. One should maintain an account with them to enable smooth transactions. Most of the brokers offer investment in multiple class assets apart from providing value-added services like risk profiling, financial planning and so on. One need not have to pay any additional fee for the services provided by the distributors as they get commissions directly from the mutual fund companies.
Several third-party portals are available online through which investors can invest. You can visit one of them and invest in a variety of mutual funds after payment of a nominal fee.
Key Takeaways from Mutual Funds
A mutual fund calculator is a tool which helps in generating returns at maturity based on the investment amount, expected returns on investment and the tenure of investment. The users can adjust the variables of the calculators like the amount of investment, frequency of investment, systematic investment plan (SIP), frequency of SIP, lump-sum amount, expected rate of return and so on. The returns are usually varied in nature and are mainly based on the period of investment. The users should fill in the fields accordingly to find out how much would be the principal investment to arrive at the estimated accumulated wealth at the time of maturity. Investors can plan in a better way in advance by using the mutual funds calculator to meet their financial goals.
1. Equity or Growth Funds
The term equity funds clearly state that the investment money will be predominantly parked in equity shares (shares of companies). The primary objective of investing in these funds is wealth creation or capital appreciation. They have the ability to generate the highest return and these are best for long term investments.
Examples of Equity Funds include:
- ‘Large-Cap’ funds which mainly invests in companies which run a large established business.
- ‘Mid Cap’ funds which invest in mid-sized firms.
- ‘Small-Cap’ funds which invest in small-sized companies.
- ‘Multi-Cap’ funds which invest in a mix of large, mid and small-sized companies.
- ‘Thematic’ funds which invest in a common theme. Example – infrastrucutre funds that invest in companies that will benefit from the growth in the infrastructure segment.
- ‘Sector’ funds which invest in companies that are related to one type of business. Example: Technology funds that invest only in technology companies like Tech Mahindra Ltd, Oracle Financial Services Software Ltd, Infosys Ltd and so on.
- Tax Savings Funds
2. Bonds or Fixed Income Funds
The term bond is a kind of fixed income instrument which represents a loan made by an investor to a borrower (government or corporate). A bond is a kind of agreement between the lender and borrower which includes the details of the loan and payment. It is mainly used by states, companies, sovereign governments to finance projects and operations.
The owners of the bonds are referred to as creditors/issuer/debt holders. These bonds include details such as the end date which refers to the principal amount of the loan which is due to be paid to the bond owner and includes all the terms for fixed interest payments or variable payments made by the borrower.
They mainly invest in fixed income securities such as commercial papers, debentures, government securities or bonds, bank certificates of deposits and money market instruments like treasury bills and so on. They are a relatively safer form of investments and are suitable for income generation.
Examples of Bonds or Fixed Income Funds include –
- Corporate Debt
- Short Term
- Liquid, Floating Rate
- Dynamic Bond
- Gilt Funds and so on.
3. Hybrid Funds
The term hybrid funds refer to an investment that is characterized by diversification amongst two or more asset classes. Here the mutual funds will park your investment in both equities and fixed-income funds, which means the fund typically invests in a mix of stocks and bonds. The aim is to offer the best of both in terms of growth potential and income generation. These funds offers the investor a diversified portfolio and hence it is known as asset allocation funds.
Examples of Hybrid Funds includes –
- Child Plans
- Aggressive Balanced Funds
- Pension Plans
- Monthly Income Funds
- Conservative Balanced Funds and so on.
The following are the types of Mutual Funds based on an asset class
This includes investing primarily in stocks and hence it is also known as stock funds. Mutual funds usually pool the money from the investors from the diversified background and infuse the same into the shares of different companies. The returns or losses are determined based on the performances of these shares in the stock market. Though investment in equity funds earns quick returns, the risk associated with losing money is relatively higher.
The debt funds usually invest in the fixed income securities which include bonds, treasury bills, securities, gilt funds, short-term plans, liquid funds, fixed maturity plans, long term bonds and monthly income plans and so on. These debt funds come in with a maturity date and interest rate. If an investor is risk-averse who is looking out for a small but regular income (which includes small but regular income) then they can opt for debt funds.
Money Market Funds
The term money market funds are also known as capital market or cash market. It is usually managed by the banks, government, corporations by issuing money market securities like treasury bills, bonds, certificate of deposits, dated securities and so on. The fund manager will invest the investor's money and disburses a regular dividend to them in return. If an investor opts for a short term plan the associated risk is very less.
As the name suggests hybrid refers to the balanced funds. These funds make an optimum mix of bonds and stocks which in turn helps to bridge the gap between the equity and debt funds. The ratio between the same can be either fixed or variable. It takes the best of two mutual funds by distributing 60% of assets in stocks and the remaining in bonds or vice versa based on the risk-taking ability of the investors. This is the most optimal form of investment for those who prefer to take more risks for debt plus returns benefit rather than holding on to the lower but steady income schemes.
The Mutual Funds can also be classified based on different attributes based on the asset class, risk profile and so on. The Structural classification which involves open-ended funds, interval funds and close-ended funds is broad in nature and the difference depends on the flexibility of the purchase and sale of individual mutual fund units.
The open-ended funds do not have any constraints with respect to the number of units or time period. An investor can trade funds based on their convenience and can exit from it whenever they want at the net asset value (NAV) at the time of exit. This is the reason why its unit capital changes regularly with new entries and exits. An open-ended fund may also stop including new investors if they do not want to or cannot manage large funds.
In the case of the closed-ended funds, the unit capital to invest is fixed beforehand and hence the investors cannot sell more than the pre-agreed number of units. Some funds also come up with a new fund offer (NFO) period, wherein there is a preset deadline to buy the units. These funds have a specific maturity tenure and fund managers are open to funding the size, however large it may be. The regulatory body – SEBI mandates the investors to be given either to list them on stock exchanges or to provide them with repurchase option to exit the scheme.
This fund has traits of both the open-end as well as closed-ended funds. The interval funds can be purchased or exited only at specific intervals and the same will be decided by the fund house and it remains closed at the rest of the time. There will be no transactions for at least 2 years. This kind of funds is generally suitable for those who want to save a lump sum amount for reaching out an immediate goal usually between 3 – 12 months.
The investment goals of an investor also play a major role while deciding to go with mutual funds. This particular kind of investment platform has something in store for everyone even if you are an aggressive investor or a conservative one who is risk-averse. The mutual fund basket has all forms of investment patterns be it for short or medium or long term. One can use different kinds of mutual funds with different investment objectives to reach their respective investment goals.
The following are the types of mutual funds based on investment goals:
The growth funds invest heavily in shares and growth sectors which are suitable for high net worth individuals (HNIs) investors who have surplus money to be distributed in riskier plans which will also fetch high returns or are positive about the high-risk schemes.
Analysts advise earning individuals to put away a portion of their monthly income in a chosen pension fund to accrue the returns over a long period as this will safeguard the individual as well as their family during financial distress post-retirement from regular employment. This fund helps investors to take care of most of the expenses in the later part of their life be it children’s wedding or a medical emergency and so on. Depending only on the savings post-retirement is not a good idea as the saved amount may end up.
These funds come in handy for those investors who are risk-averse. The investor's money will be deposited in a mix of bonds, securities, certificate of deposits which promises a guaranteed return. Income funds belong to the family of Debt Mutual Funds which is helmed by skilled fund managers who keep the portfolio in an organized way that the rate fluctuations will not compromise on the creditworthiness of the portfolio. This type of mutual fund has earned investors better returns than the traditional bank deposits which are best suited for those who are risk-averse.
Capital Protection Funds
This fund is suitable for those who opt to protect their principal and it fetches smaller returns. The fund manager will invest a portion of funds in Certificate of Deposits, bonds and the rest will be parked in equity funds. The investor will not incur any loss. One should lock in their investment for a minimum of three years (closed-ended) to safeguard their investments and the returns are taxable.
Fixed Maturity Funds
Most of the investors opt for fixed mutual funds as the financial year ends to take advantage of triple indexation as this will bring down the tax burden. If investors are not comfortable with the debt market trends then they can go for related risks by choosing fixed maturity funds which invest in securities, bonds, money markets and so on. It is a close-ended plan, it has a preset fixed maturity period which usually ranges between 1 month – 5 months similar to fixed deposits. The respective fund manager will make sure to put the money in those instruments with the same tenure, to reap accrual interest at the time of maturity of fixed maturity funds.
The equity-linked savings scheme is gaining popularity amongst the investors' group as it serves the investor by doubling the benefits of saving the tax as well as building wealth. The lock-in period is lowest at 3 years. The investments are mainly parked in equity and its related products. It is well known to earn a non-taxed return ranging between 14% - 16%. It is best suited for salaried and long term investors.
The liquid funds fall under the debt fund category as most of the investments are parked in debt instruments and money market for a tenure of up to 91 days. The maximum amount of money allowed to invest stands at Rs 10 lakhs. One of the exclusive features which differentiate it from other debt funds is the calculation of Net Asset Value. The NAV for liquid funds is calculated for 365 days (which also includes Sundays) while for others only business days are included for calculation purpose.
Aggressive Growth Funds
Investment in this type of funds is slightly on the riskier note as is it designed to make steep monetary gains. Though they are susceptible to market volatility, one can opt as per the beta. Beta is also known as the beta coefficient, is a tool to gauge the fund’s movement in comparison with the market as a whole. It can be calculated using the regression analysis and it represents the tendency of an investment’s return to respond to movements in the market.
By definition, the market has a beta of 1.0. A beta of 1.0 indicates that the investment’s price will move in the lockstep with the market. A beta of less than 1.0 will indicate that the investment will be less volatile than the market. A beta of more than 1.0 indicate that the investment’s price will be more volatile than that of the market.
The risk factor is always present in the mutual funds as the investment is made in a variety of financial instruments including equities, debt, government securities and so on. The prices of securities keep on fluctuating owing to several factors which include interest rates changes, economic factors, supply-demand, inflation and so on.
Very Low-Risk Funds
Liquid Funds and Ultra Short-term Funds which have a tenure of 1 month to 1 year are not risky and the returns from the funds are relatively low (best returns at 6%). Investors who are looking to fulfil the short-term financial goals and prefer to keep their money safe can opt for Very Low-Risk Funds.
Low – Risk Funds
When investors are unsure about investing in riskier securities in case of a fall in rupee value or due to an unexpected national crisis, then most of the fund managers recommend investors to park money in either one or a combination of liquid, arbitrage funds or ultra short-term funds. Returns from these funds range between 6% - 8%, but investors are free to switch when valuations become more balanced.
The risk factor in case of medium-risk factor is of medium level as fund managers invest a portion in debt funds and the remaining will be parked in equity funds. The NAV is not buoyant. The average returns from medium-risk funds could range between 9% - 12%.
The high – risk funds are suitable for those investors who prefer riskier funds and aim for huge returns in the form of dividends and interest, high-risk mutual funds. These funds require active fund management. One has to keep a track of regular performance reviews as they are susceptible to market volatility. Investors can expect returns between 15% - 20% though the high-risk funds and the best one can fetch up to 30% returns.
The specialized mutual funds invest mainly in those securities which are from a particular sector or geographic region or type of security or industry and so on. Due to the lack of diversification, the risk factor is high but will provide potentially higher rewards to the investors.
The following are the list of specialized mutual funds:
The index funds are a type of mutual fund wherein a portfolio is constructed to match or track the components of the financial market index. It is said to provide a broad market exposure, with low operating expenses and low portfolio turnover. These funds follow their benchmark index irrespective of the state of markets.
Emerging Market Funds
The emerging-market fund is a kind of mutual fund which invests the majority of assets in those securities from countries are classified as emerging. These countries are in the phase of growth and offer high potential return with equally higher risks than those mutual funds from the developed market countries.
As the term sector denotes, the sector funds are a type of mutual funds wherein investment is done solely in one specific sector. As investment is made only in specific sectors with only a few stocks, the associated risk factor is on the higher side. The investor should constantly be aware of the various sector-related trends and in case of a fall, he/ she should exit immediately, without having a second thought. The advantage of investing in this kind of mutual fund is great returns. Some of the examples of sector funds in India include IT, banking, pharma and so on. Most of the sectors have witnessed a huge potential and has proven consistent growth in the recent past and are anticipated to be promising in the future as well.
The term global fund is a kind of mutual fund which invests in those companies which are located anywhere in the world and also includes investor’s own country. This kind of fund seeks to identify the best investment from a global universe of securities. It can either be focused on a single asset class or can be allocated to multiple asset classes. Investment in this fund can be quiet risky due to changing policies, currency valuations, market and so on. The positive thing about it yields higher returns on long term investment.
Fund of Funds
The term fund of funds is also known as multi-manager investment. It is a kind of pooled investment fund that invests in other types of funds which contains different underlying portfolios of other funds. These holdings usually replace any kind of investing directly in stocks, bonds and other types of securities. The main strategy of fund of funds is to achieve broad diversification and appropriate asset allocation with investments in a variety of funds which are wrapped in one portfolio. The types of fund of funds include hedge fund, mutual fund or a private equity fund or an investment trust.
Real Estate Funds
The outstanding growth of real estate in India has led to the introduction of real estate funds. Despite the boom in the sector, many investors are wary about investing in such projects owing to multiple risks. This fund can be the perfect alternative as investors are affected indirectly as the investment will be parked in real estate companies or trusts and not in the projects managed by them. Investment for a long period will negate the risk factor.
Commodity Focused Stock Funds
This fund is ideal for those who can take sufficient risk appetite and are looking for a diverse portfolio. The commodity-focused stock funds give a chance to multiply and expand trades. The returns from this fund are not periodical and are either based on the performance of the stock company or a particular commodity itself. Gold – the yellow metal is the only commodity in India wherein mutual funds can invest directly. Others will invest either in units or shares of commodity-based businesses.
If you are an investor then you can invest in mutual fund schemes. If you have just started your career, then one can opt for equity-related mutual funds which mainly park their funds in shares. The risk factor is high and so is the returns. The probability of losing money is high in equity-related mutual funds, but in the long term, they do fetch superior returns when compared with other forms of investment including bank deposits.
For individuals who are in their middle age say the 40s to 60s, it is better to opt for debt rated mutual funds. This fund, unlike equity ones, will provide guaranteed returns. In the case of medium risk investors, one can choose hybrid funds which will form a diversified portfolio as the investment will be distributed in both equities and debt.
The following are the list of advantages of investing in mutual funds
1. Diversification of funds
The mutual funds have their share of risks as the performance of funds is mainly based on the market movements. Hence the fund manager will invest in more than one asset class to spread out the risk factor. This is known as diversification. If in case, if one of the asset class does not perform, then one can compensate with higher returns from the other one to avoid the loss for investors.
Only if investors choose to invest in close-ended mutual funds, it is easy for them to purchase and exit a scheme. One can sell their units at any point. Always not to keep an eye on surprises like exit load or pre-exit penalty. Mutual fund transactions can happen only once in a day after the release of the day’s net asset value (NAV) by the fund house.
3. Professional Management
Investment in mutual funds is one of the favoured forms of investment as it is run by a fund manager who takes care of it and makes decisions based on the investors risk adverseness. The professional money manager will decide on how to invest your money based on a good deal of research and works out an overall strategy for making money. The fund manager will decide to either invest in debt or equities. They also decide on whether to hold them or not and also on the tenure of holding them.
4. Cost Efficiency
The investors have an option to pick up zero-load mutual funds which have fewer expense ratios. The expense ratio refers to the fee meant for maintaining the fund and it is a useful tool to assess the mutual fund’s performance. An individual investor can check the expense ration of different mutual fund and choose the one which fits his/her budget and financial goals.
5. Tax Efficiency
Investment in mutual funds helps individual investors to claim tax deductions. Investment of up to Rs 1.50 lakh per financial year in tax saving mutual funds which are mentioned in Section 80C of the Income Tax Act is eligible for tax deductions. The best example of this is the ELSS. One should keep in mind that a 10% Long Term Capital Gains (LTCG) is applicable if the returns are more than Rs 1 lakh after one year. Investment in mutual fund fetches more returns when compared to other tax-saving instruments like FD in recent years.
6. Automated Payments
The mutual funds provide automated payments options to investors with this forgetting or delay in payment of SIPs or prompt lump sum investment can be avoided. One can opt for paperless automation by giving in standing instructions to the agent or fund house to make automated payments. The timely SMS and email notifications will help to counter negligence.
7. Meet Financial Goals
The mutual funds in India are designed in such a way that every individual can make their part of the investment to reach their respective financial goals. Irrespective of the income level of the individuals, one should always set aside a part of their earnings towards savings. It is simple to find a mutual fund which matches the income pattern, investment goal, risk appetite, expenditure, growth pattern and so on.
8. Quick and Hassle-free Process
Individual investors can initially start with one mutual fund and can diversify slowly at a later stage. It has become easier to identify and handpick the most suitable fund which suits an individual’s financial goals. With the help of fund manager, the task of regulating and maintaining the funds becomes easier and their team will decide as to when, where and how to invest in mutual funds. The job of a fund manager is to consistently beat the benchmark and to deliver maximum returns on the investor's investment.
9. Systematic or One – Time Investment
Individuals can now plan their mutual fund investment as per their convenience and budget. One can initially start with either a monthly or quarterly based SIP investment which best suits them with less amount and can expand gradually as per their convenience.
Investment in mutual funds also has its share of disadvantages. The following are the disadvantages of investing money in mutual funds
1. Lock-in Periods
Some of the mutual funds have a lock-in period which ranges between 5 years to 8 years, investing in such mutual funds is quite a risky affair as exiting such funds before maturity will be pretty expensive. Usually, the mutual funds will keep a certain portion of the fund in cash to pay the investors if they prefer to exit and this will not fetch any kind of interest to the investors. The Equity Linked Savings Scheme or ELSS have 3 years lock-in period.
2. Managing Costs of Mutual Funds
The salary paid by fund houses to their fund managers and market analysts usually comes from investors. An individual investor should consider the total fund management charge as it acts as one of the main parameters while choosing a mutual fund. The higher management fee will not guarantee the investor with better returns. Usually, mutual funds pay its investment advisor a fee ranging between 0.5% to 1% of the fund’s asset value. Most of the mutual fund houses in India charge different types of fee which includes sales charge or commission, expense ratio, short-term trading fee, redemption fee and 12(b)1 fee or distribution fee, service fees.
3. Dip in Profits
Investors in mutual funds will diversify their investment to minimize risk factor, but this can even lead to falling in the profits and hence one should not invest in more than 7 – 9 mutual funds at a time. Investors are therefore advised that they should carefully pick the investment options after doing clear research and analysis.
There are mainly two types of returns which an investor can get from a mutual fund. One is the capital appreciation and the other one is the dividends. One has to choose either for a growth plan or for a dividend plan at the time of investment.
In case of a growth plan, the money is not distributed like dividends, but it is added back to the scheme and the plan grows. For example: If you start investing in a mutual fund at a price of Rs 10. If you opt for dividend, then your net asset value will hardly move because the mutual fund has distributed the profit.
In the case of a growth plan, the dividend amount is added back to the scheme and the plan grows. If your initial investment is Rs 10, you may witness the net asset value of Rs 17 in some years down the lane. This means you can sell the units at a higher price of Rs 17 and encash the profit.
The beginners in the mutual funds should understand and know as to how to save tax. One can either opt for growth or dividend distribution. In case of a dividend distribution plan, the dividends earned by the investor is tax-free in the hands of the investor. This is the same even for the equity shares as well wherein dividends are tax-free in nature up to a maximum of Rs 10 lakhs. On the other hand, if you opt for a growth plan, there are capital gains that apply to the units that are sold at a profit. It is advised to go for dividend distribution.
There is no tax liability in case of equity mutual funds if it is sold off before a period of one year. If one sells it before a year, then a tax of 15 per cent will be levied on the seller.
It is very important to understand the tax liability before investing in a particular mutual fund.
The initial investors in mutual funds should know the various popular mutual funds in India. Most of the equity mutual funds will give good returns when the markets are rallying. Currently, there are many mutual funds in India.
The best mutual funds are primarily categorized based on their past performance, fund managers track record, financial ratios, and AUM of the scheme.
Some of the best performing mutual funds in India includes Axis Mutual Fund, SBI Mutual Fund, ICICI Prudential, DSP Black Rock Mutual Fund, HDFC Mutual Fund, Kotak Mutual Fund, Birla Sunlife, Franklyn India, Reliance Mutual Fund and so on.
The top mutual funds in India include - ICICI Prudential Equity and Debt Fund, Axis Bluechip Fund, Mirae Asset Hybrid Equity Fund, L&T Midcap Fund, HDFC Mid-Cap Opportunities Fund, Motilal Oswal Multicap 35 Fund and so on.
The type of scheme than an investor chooses usually varies based on age and risk-taking ability.
As a beginner, one should know some of the prominent terms used in case of mutual funds and should know the basic meaning of the same. Some of these include SIP, NAV, AMC, Load Fund, Portfolio, AUM and so on.
SIP: The term SIP stands for Systematic Investment Plan and it refers to periodic investment in a mutual fund over a period of time. The investment can be either made on a monthly basis or every three months. The investor will have to commit to investing a fixed amount of money and the same will be used to purchase units. It mainly works on the principle of regular and periodic purchase of shares or units of securities. The payments for SIP can be either made by hand or one can even opt for funding it automatically once in a month, once in a quarter or whatever time frame the investor chooses.
NAV: The term NAV refers to the Net Asset Value. It is the prices of a unit of a fund. It represents the net value of an entity and is calculated as the total value of the entity’s assets minus the total value of its liabilities. The NAV mainly represents the per share or unit price of the fund on a specific time or date. It constitutes the price at which the shares or units of the funds get registered with the regulatory body – Securities and Exchange Commission (SEC) and are traded.
AMC: The term AMC refers to the Asset Management Company (AMC). AMC is a firm that invests funds from clients by putting the capital to work through different investments including equities, bonds, master limited partnerships, real estate and so on. They mainly manage hedge funds, pension plans, create a pooled structure such as index funds and so on.
They are also referred to as money managers or money management firms. Some of the AMU’s which offer public mutual funds or exchange-traded funds (ETFs) are also known as Mutual Fund Companies or investment companies.
AUM: The terms AUM refers to the Assets Under Management. It is the total market value of the investments that a person or entity manages on behalf of its clients. Usually, the definitions and formulas of AUM differ from one company to another. In some calculations, the AUM of some financial entities includes mutual funds, banks, deposits, cash whereas others limit it to funds under discretionary management, wherein the investor assigns authority to the company to trade on his/her behalf.
AUM also helps in evaluating an investment or a company in general. Usually, higher AUM and high investment inflows for a firm are considered as a positive indicator of quality and management experience.
Load Fund: The term Load Fund is a mutual fund which comes in with a commission or sales charge. The fund which an investor pays will form the load as it goes to compensate a sales intermediary including investment advisor, broker, a financial planner who actually invests his time and expertise to select an appropriate fund for the investor. The load is either paid upfront at the time of purchase which is known as front end load, whenever the shares are sold it forms the back-end load or as long as the funds are held by the investors it forms level-load.
Portfolio: The term portfolio refers to the grouping of financial assets including shares, bonds, currencies, cash equivalents. Apart from this they also include fund counterparts such as closed funds, mutual funds and exchange-traded funds. It can also include non-publicly tradable securities like private investments, real estate, art and so on.
These portfolios can either be held directly by the investors or they can be managed by the money managers and financial professionals. An investor can build his/her investment portfolio as per their risk tolerance and investment purpose. Investors can also have multiple portfolios for various purposes.
Acid Test Ratio: The term acid test ratio is obtained on dividing the current assets of a company by the current liabilities. It generally indicates the company’s financial strength. It mainly uses the firm’s balance sheet data as an indicator to check if it has sufficient short-term assets to cover its short-term liabilities. The acid test ratio is popularly known as the quick ratio.
Formulae for calculating Acid Test Ratio:
Acid Test = Cash + Marketable Securities + Accounts Receivable
Back End Load: The term back end load is a fee (either load or sales charge) that an investor pays while selling mutual funds shares and the fee amounts to a percentage of the value of the share being sold. A back end load can be a flat fee or it can gradually diminish over some time usually within 5 – 10 years.
Asset Allocation Fund: The term Asset Allocation Fund refers to a fund that provides investors with a diversified portfolio of investments across various asset classes. It can either be variable or fixed in nature amongst a mix of asset classes, which means that it may be held to a fixed percentage of asset classes or can be allowed to go overweight on some based on market conditions. The popular asset categories for asset allocation funds include equities, bonds, cash equivalents.
Automatic Investment Plan: It is an investment programme which allows the investor to provide funds to an investment account regularly. The investment amount can be deducted directly either from the individual’s salary account or from his/her account. The automatic investment plan is one of the best ways to save money. Many mechanisms have been developed to help facilitate automatic investment plans. Investors can contribute through their employer by scheduling automatic deductions from their salary account for investing in employer-sponsored investment schemes. Individuals can also opt for automatic withdrawal from their respective personal account.
Bond: The term bond refers to a fixed income instrument which represents a load made by an investor from a borrower (either corporate or government). A bond can be considered as an I.O.U. (I owe you) between the borrower and lender which includes the details of the loan and its payments. They are mostly issued by the states, companies, municipalities to fund their projects and operations. The owners of bonds are known as debt holders (creditors) of the issuer. The details in the bond will include the end date as to when the principal amount of the loan is due to be paid to the bond owner and it usually includes the terms for fixed and variable interest payments made by the borrower.
If an investor is a beginner and is looking forward to investing in equity funds, then it is better to take some professional advice from experts. For those who have some prior knowledge, it is good to take a look at the exit ratio, NAV, past track record and so on to understand if markets have surged up and you are buying the fund at an extremely high price to earnings ratio.
For example: If in case, if the stock markets have rallied up then it may be time to wait for some time before investing a huge amount in equity mutual funds. One should always remember that the returns from equity mutual funds are mainly dependent on the movement of stock markets. So, if prices are high, then you can delay for some time before starting to invest. On the other hand, if the stock markets have crashed then the possibility is there that it may go down further and hence it is better to delay investing in stock markets for some more time.
For beginners, the Systematic Investment Plan or SIP is a better route to invest in mutual funds. Say, if you invest in a lump sum in any of the equity-based mutual funds and if the equity markets plunge, your NAV of the fund will also crash and eventually you will incur heavy capital losses. In case of SIP, one can invest in small amounts directly from their monthly salary which will get deducted from your bank account regularly. In the first month, you can buy little equity-based mutual funds and the index slips, next month, if you are buying some more at a lower cost eventually this will reduce your average cost. If in case, if the market gains, you have already bought some units at lower prices and this benefits you.
Similarly, if the investor wishes to withdraw the money then they can opt for a systematic withdrawal plan. So one has an option for depositing and withdrawing via the mutual fund way.
The SIP full form stands for Systematic Investment Plan. It is commonly referred to as SIP. It is an investment form which allows the investor to park his/her funds regularly a fixed sum in their chosen mutual fund schemes. In SIP, a fixed amount is deducted from the savings account every month and the investment will be directed towards the mutual fund which an investor chooses.
The very concept of SIP focuses on the philosophy of ‘Save First, Spend Next’. By investing in SIP, the investor can invest small amounts at fixed intervals of time – weekly, monthly or quarterly basis instead of opting for a one-time investment.
Start with just Rs 500
It is very easy for anyone to start with SIP investment as one can start investing with as low as Rs 500 and still manage a burden-free budget plan. Though one has an option to gradually increase the monthly instalments by a factor of 15%.
Power of Compounding
The principle of Compound Interest implies that a small amount of investment made initially will grow into larger returns over some time as against the one – time investment.
The SIP acts as an emergency fund as it provides the investor with an opportunity to withdraw the entire amount for possible contingencies and hence acts as an emergency fund which puts life at ease. There will be no penalty for withdrawing from a SIP fund.
Rupee Cost Averaging
The volatile equity market is unpredictable. An investment in mutual funds through SIP will make you buy many units during plunge and less number of units in a flourishing stage and this will help to reduce the cost per unit and ultimately averaging it.
Become a Disciplined Investor
Investment in SIP will make an investor more disciplined in terms of managing finances. As SIP has automated payments options, one need not have to remember the payment dates every month.
Often investors are confused while choosing between a SIP investment or to go with one-time investment.
In this case, investors will have to invest a considerable amount of money only once and need not think about it till the maturity date.
In this case, the SIP will be a fixed amount of money which will be deposited at a regular interval of time in a mutual fund scheme. If the investor has a regular inflow of money in future, then they can go for this kind of investment which will earn better returns in the long term (better than bank’s FD schemes). The risk factor in more while investing in SIP’s as the returns are linked to market performance.
|One-Time Investment||SIP Investment|
|Investment is made one time (lump-sum)||Periodic investments will be made in a tenure|
|Earnings are better when the market is high||Earnings are better when the market is low|
|It can lead to major loss in the event of a crash of markets (fall of Sensex and Nifty)||SIPs protects the investment from potential market crash and hence a safer option|
With the increase in the number of mutual fund houses, it gets difficult for the investors to choose the best SIP available in the market. To pick the best SIP available in the market, the investor has to look into these things.
Rs 500 Crore Asset Under Management
While opting for a SIP, go for a Rs 500 crore asset size which is a reasonable benchmark to select a fund. The ones below Rs 500 crore is not advisable though they are not bad.
The stature of the SIP fund house is also an important attribute to be considered before choosing the SIP as it tells us how well the fund house was able to handle the ups and downs of the market without allowing the investors to feel the impact.
Duration of the SIP
The tenure of the SIP is also one of the important factors from the viewpoint of returns, risk factor and from the tax point of view. The investor should do an analysis of SIP for a minimum of 5 years as a reference point and check for the performance of funds across the market to get a larger picture before investing in SIP.
Every mutual fund has a goal and a purpose. The investor will have to first choose the best SIPs which will suit his requirements to reach their goal.
After setting up investment goals you will have to choose the best systematic investment plan which you prefer to invest in after making a groundwork on the performance of the fund over the last 5 years across the market.
All the investors must submit the KYC documents for investing in mutual funds. So keep all the relevant KYC documents ready with you before filing in the mutual fund's form and duly submit the same to enjoy the fruitful benefits of returns from SIP.
An individual investor can withdraw money from the equity funds, whenever he/she believes that their investment objective has been met. One can also opt to withdraw their money from the mutual funds if they believe that the fund has underperformed and it is the time to switch to other schemes. If an investor is keeping a track on market movements, then one will know as to when to withdraw from mutual funds and when not to do. It's better to take the opinion of experts who have some prior knowledge about the functioning of mutual funds if one lacks knowledge of mutual funds in general. One can make a gradual move from equity to debt schemes or vice versa or even from one mutual fund house or group to another one over some time.
Any investor for that matter will make an investment decision seeking better returns. In the case of mutual funds, the return on investment is better than the bank’s term or fixed deposits. The longer the term, the better will be the returns for mutual funds. Most of the banks in India are providing a meagre 7% interest per annum on fixed deposits. If an investor is looking for long term investment, it is better to opt for equity mutual funds as it gives better returns when compared with gold and real estate. The debt-based mutual funds more or less work similarly to the government securities and bank deposits. One note of caution is the investor has to check the past track record of equities as there is no indication of future performances of stocks in today’s markets.
An investor always has an option to move from one mutual fund scheme to another, if in case the market dynamics change intermittently. For Example, if equities are trading higher and you have made some modest money from it. Now, you can move your money from equity mutual fund to a debt-based one. However, one should keep in mind that the capital gains tax will apply in the case if you have sold and made a profit from an equity-based mutual fund, within one year at a rate of 15 per cent. In the case of debt-based ones, the period of three years will constitute short term capital gains. One should be careful while switching between the mutual funds as an investor should have a prior knowledge while doing so or else you may end up incurring losses.
The term Net Asset Value or NAV represents a fund’s per share market value. It is a price at which investors will buy shares (bid price) from a company and sell them (redemption price). NAV is derived by dividing the total value of all the cash and securities in a fund’s portfolio less liabilities by the number of shares outstanding.
NAV= Fund Assets – Fund Liabilities
Number of Shares Outstanding
The calculation of NAV is undertaken at the end of each trading day and is based on the closing market price of the portfolio’s securities.
For Example: If a mutual fund has Rs 50 million invested in securities and Rs 10 million in cash for total assets of Rs 60 million. The fund has liabilities of Rs 10 million. So the fund will have a total value of Rs 50 million. Suppose, if the fund has 5 million outstanding shares, then the price-per-share value will be Rs 50 million divided by 5 million which comes up to Rs 10 per share and this will form the NAV of the mutual fund.
The total value amount is very important for investors because it is from here that the price per unit of a fund will be calculated. The price per unit is arrived at after dividing the total value of a fund by the number of outstanding units/shares.
Any investor will have to buy a mutual fund based on its NAV and hence it is necessary to check. One has to keep a tab on NAV and see if it has gone higher in the past. A higher NAV means the returns will be limited in the future. For beginners, it is difficult to understand the exact entry and exit that one should make in a mutual fund. It is important to buy systematically on the fall of NAV, to hedge against any large scale loss from falling equity prices.
The regulatory body – Securities and Exchange Board of India is now looking at the possibility of consolidating various schemes of mutual funds in India because currently, there are many mutual fund schemes in the country. Fewer mutual fund schemes will give an opportunity as well as clarity for investors to go for the ones which suit their investment objectives.
It is always essential and advised investors to read the scheme details of all the mutual funds carefully before investing. This is especially favoured for the equity-based mutual funds as it is riskier.
One should also understand the nomination process in the scheme before making any investment. Frequent switching from one fund to another within a year will result in exit load charges which have to be borne by the investor himself. So, one needs to be extra careful and should read all the offer related documents thoroughly before making an investment decision.
Most of the investors in India lookout for tax savings benefits while making an investment option. The tax savings on financial investments, helps the investor to reap the financial benefits apart from promoting the habit of savings. So, going by the options, the tax saving mutual fund is a good option to save tax. Investments in some of the mutual funds offer tax savings under Section 80C of the Income Tax Act of 1961. One can invest in Equity Linked Saving Schemes (ELSS) and the lock-in period here stands at 3 years and the invested money will be parked in equities.
The best part is the returns from this will be tax-free and you also stand to gain benefits under Section 80C. If investors are looking out to save tax, then they can look at this option. Apart from this, one can also opt for ULIPs (Unit Linked Insurance Plans), wherein you can get the same benefit and will also get insurance coverage. The advantage of ULIPs over Equity Linked Savings Schemes (ELSS) is that the former will give the investor a cover of insurance and an option to invest in debt instruments. In the case of ELSS, the mutual funds will park all their money in equity and related schemes.
The age of an individual investor plays an important aspect due to the presence of a risk factor. If an individual opts to invest in equity mutual funds, then he/she runs the risk of losing the capital amount. For beginners, it is advised to go for debt funds like Gilt Edged funds as it is the safest form of investment.
If an investor has age by his/her side, then once can take advantage of equity-based mutual funds as the long term investment will fetch good returns. However, one should be careful to choose between the small-cap mutual funds, large-cap mutual funds and also balanced funds. One might wish to seek professional advice before making any financial decision.
It is very important to move money away and switch from mutual funds. For example: if an investor has made a reasonable sum of money in equity mutual funds, then one might move money to debt mutual funds to safeguard the earnings.
If you lack expertise in it, then it is always better to approach a professional and seek help. However, while many analysts say that it is ideal to hold on to investment in mutual funds for a long term, it is better to evaluate and switch from one fund to other to safeguard their initial investment.
The beginners of mutual funds may always need help in this matter.
The SBI Mutual Funds is a joint venture between the State Bank of India and Amundi – a European Asset Management Company (a subsidiary jointly created by Credit Agricole and Societe Generale). It is headquartered in Mumbai. The SBI Mutual Fund Trustee Company Private Limited was formed as a trust under the provisions of the Indian Trust Act of 1882. The SBI Mutual Fund is registered with the Securities and Exchange Board of India (SEBI). It is the first bank-sponsored fund which had launched an offshore fund, Resurgent India Opportunity Fund.
An equity fund is a fund which invests majorly in shares or stocks of companies. The SBI equity funds are organized for long-term capital appreciation via investment in extensively researched shares and stocks of top-rated companies. Funds are mainly based on the consistency of performance and are designed for achieving higher returns. They are usually highly riskier funds and one requires careful consideration before investing.
Some of the SBI Mutual Fund Schemes includes:
The mutual funds HDFC is one of the largest mutual funds which is an established fund house in India with the focus on the delivery of consistent fund performance across categories since its launch in the year 2000. The HDFC mutual funds have several products under its umbrella ranging from short-term, medium-term to long-term funds aimed at creating wealth to the investors. Investment in mutual funds is a popular form of investment in India mainly due to the ease with which one can invest in it.
Investors should always look into the following factors before investing in mutual funds. They are:
The Reliance Mutual Funds is one of the well-known fund houses in the country which was established way back in 1995. With its strong performance, it has its presence over 160 cities across the country. It mainly deals with five fund classes – equity fund, retirement fund, gold fund, debt fund and liquid fund. As of now, there are many scheme investment options available for investors to choose from based on their requirements. To provide the investors with an all-round product portfolio, the Reliance mutual funds will offer innovative products to its valued customers. The fund house is one of the top-performing mutual funds in India and was founded under the Indian Trusts Act of 1882, with Reliance Capital Limited (RCL) as its Settler/Sponsor and Reliance Capital Trustee Co. Limited (RCTC) as its Trustee.