Mutual Funds

All you Need to Know About Mutual Funds

What is a Mutual Fund?

A mutual fund is an investment vehicle that collects small amounts of money from several investors and invests it in various assets. In lieu of this, the Mutual Fund Company also known as the Asset Management Company also charges a small fee. The assets in which the money is invested are equities, debt, bonds, money markets and many other. The gains and losses earned on this investment are shared by the investors in proportion to their investment.

Mutual Funds are ideal investment vehicle for those who do not have much knowledge about investing but have the discipline and patience to keep parking small amount regularly. Investors also have the option to choose funds based on their risk-appetite and life goals.

These mutual funds are registered with the Securities and Exchange Board of India (SEBI). The AMCs ensures that the investment procedures and principles of the Fund are in compliance with the SEBI norms.

To select the right fund, you need to first know the types of mutual funds available in the market. We have classified the mutual fund types based on the structure of funds and asset class.

Based on the structure of a fund

There are three types of mutual funds based on their structure. This particularly determines when you can buy and sell the units.

(1) Open-ended schemes: You can buy and sell the units of these Mutual Funds at any time of the year. These funds do not have a fixed maturity period and allows you to invest as long as you want. If you want more liquidity, an Open-ended scheme is for you. These funds are not listed on stock exchange, and they are purchased and redeemed at prevailing Net Asset Values (NAV).

(2) Close-ended schemes: You can buy these funds only during the initial offer period and have to hold it till the fixed maturity date. After the initial offer stage, the funds stop issuing units for sale. Close-ended funds are listed on the stock exchange and could be sold at a price different from the NAVs. The market forces of demand and supply determine this price.

(3) Interval Funds: This type of mutual fund is a cross between open and close-ended funds. Interval funds are open for repurchase and redemption at regular intervals during the tenure of the fund.

Based on asset class

Equity funds

Equity Funds invest more than 60% of the assets in listed equities. Rest of the funds are invested in debt securities to balance the risk profile and support redemption. These funds are riskier but generate high-return over a long-term. Here are a few Equity mutual fund types:

• Capitalization based: Equity funds can be Large-cap, Small-cap or Mid-cap based on the capitalization of the stocks in which it invests. If you who want exposure to Equities, but aren’t confident about stock picking, a Large-cap fund is the ideal pick. Large- cap funds invest in the stocks of top 100 companies which have a history of stable returns over a long period. If you are ready to take slightly higher risks, you can also choose small or mid-cap funds.
• Tax-Saving: Equity Linked Savings Schemes have a lock-in of 3 years and the investments are eligible for exemption under section 80C. The risk element for these funds is higher, but they also generate higher returns.
• Sectoral/Thematic Funds: These funds invest in stocks of a particular sector only, say FMCG, Banking, IT or Infrastructure. The returns of these funds depend directly on upon the performance of the particular sector. The scheme could also invest funds in a promising theme like Emerging Markets, Global Markets, and Commodities etc. Since they invest only in a particular sector/theme, these funds are slightly riskier.
• Diversified Funds: The scheme invests funds in equities across sectors and capitalization. The risk factor is well-distributed in this fund. In fact, it offers a perfect balance between risk and returns.
• Index-based Funds: The allocation of assets for these funds replicate a particular index listed on the stock exchange, let’s say the Sensex or Nifty. For e.g.: If a particular stock has a weightage of 5% in the index, the scheme will also have 5% of funds invested in that stock. The returns also mirror the performance of that index.

Debt Funds

This mutual fund type is less risky and invests in debt-market instruments like bonds, debentures, government securities and other fixed income securities. Debt funds can be short-term or long-term. The returns will be in the form of interest income and capital appreciation. Various types of debt funds are:

• Fixed Income fund: The scheme invests money only in fixed-income assets like bonds or debentures. The sole purpose of this fund is to offer capital protection and assured returns.
• Gilt Funds: Gilt fund invests money primarily in Government securities over long-term. Government debt is normally devoid of credit-risk. So, if you do not want to any worries about risk, Gilt funds are for you.
• Money Market Funds: Money market assets such as Certificate of Deposit (CD), Commercial Paper (CP), Call Money and T-Bills, are highly liquid and risk-free. This scheme allocates funds to these instruments. Money Market Funds are best suited to those who want to invest safely over short-term.

Hybrid Funds

Hybrid or Balanced Funds are schemes which invest money across asset classes. In some cases, the exposure to equities is more than debt securities, while in other cases it is vice-versa. The rationale behind the allocation of assets is to strike an ideal balance between risk and returns.

Exchange Traded Funds (ETF)

Exchange traded funds trade like listed shares on the stock exchange. The track an index and invest in an array of assets like equities, commodities, precious metals, currencies etc.

The simplest way to choose the right mutual fund is to identify your goals, risk appetite, and your investment horizon. But whatever you choose, always remember to read the offer document carefully. It is imperative that you weigh your options well before investing.

Advantages of Mutual Funds

(1) Diversification: Diversification is an important act in portfolio management which means including several assets classes in order to mitigate risks. Through Mutual Funds you can achieve this easily because your money is invested across a wide base of asset classes, that too without even the need of parking a large amount of money.

(2) Liquidity: The ease of entry and exit in an investment avenue is the biggest convenience factor. In a mutual fund, you can purchase a scheme easily and after a short period, you can also sell and get out that scheme is a hassle-free way. High degree of liquidity is one of the biggest advantages of mutual funds.

(3) Professionally Managed: Mutual Funds are professionally managed by some of the best Fund Managers in the country. So instead of worrying about which asset to invest in, you can choose a fund which has a good track record over the years and entrust the rest to the expert fund manager. You can reap the fruits of your investment by being passive participation.

(4) Simplicity in tracking: Once you invest your money in an asset, you must track its performance regularly. However, many a times, the information is not available easily and the investors find it difficult to track even if they want to. For Mutual Funds, the information is easily accessible, and the returns can be tracked over a period of 1 year, 3 year, 5 years and 10 years.

(5) Flexibility: One of the biggest benefits of a mutual fund is to start with an amount as low as Rs 500. This low threshold attracts investors from kinds of income level and helps in capital formation. As and when the earning capacity increases, you can also increase your investment towards the funds.

(6) Safety and transparency: Investment in Mutual Funds is safe as well as transparent. Most of the leading funds come under the purview of SEBI guidelines and are required to abide by the disclosures mandated by the industry body. The Value of stocks, NAVs, historical performance of the fund, qualifications and track record of the Fund Manager are all available for scrutiny by investors.

(7) Cost efficient: Instead of buying one or two units, buying mutual fund in bulk is also cost-efficient. Just as we get discount on bulk purchases in retail stores, the processing fees and charges also reduces on bulk purchase of mutual funds. Expense ratio or the fee for managing your fund is also a key determinant in judging the performance of the fund.

(8) Suitable for most financial goals: As an investor, you could be having various life goals such as purchase of house, purchase of car, marriage, travel, higher education of children, healthcare etc. The investments in mutual funds can be planned according to these goals and risk-appetite. You can fulfil your goals by choosing a mutual fund that matches your income, expenditure, life goals and risk-tolerance.

(9) Hassle-free process: Once you choose your desired fund and submit the required documents, you can be assured that your funds will be managed by professionals who strive to beat the benchmark returns consistently years after years.

(10) Tax-efficiency: With the latest Budget notifying that the LTCG will be taxed in case of mutual funds, there are ways in which mutual funds can help you to beat taxes. Schemes like ELSS has the ability to give more tax-adjusted returns than the traditional Fixed Deposit.

Objectives of Mutual Funds

Steady Returns : One of the main objectives of the Mutual Fund is steady returns. Most of the mutual fund portfolios are diversified and this mode of investment is based on the rupee cost averaging hence the fluctuation of returns in the long run are smoothened. For retired people, specially-abled people, risk-averse people, earning steady returns is more of a priority than excess returns. To fulfil this objective, debt mutual funds or hybrid funds are the best bet.

Capital Appreciation: If you are an aggressive investor, appreciation on capital is a must. Equity Mutual Funds whether large cap, mid-cap or small-cap are all best suited for capital appreciation. If your main objective is capital appreciation, your risk appetite must also be on the higher side.

Regular Monthly income: Monthly income means a lot for salaried people, retired investors, homemakers and senior citizens. The Systematic Withdrawal Plans, Dividend option and Fixed returns from debt schemes are ideal for those who want regular monthly returns.

International Exposure: If you want to reap the benefits of well-performing international stocks in the US or China, you cannot directly invest in their market. But internationally-focused mutual funds have an easier time investing in these shares. If you are an ambitious investor, you must be seeking exposure to overseas stock and international markets and mutual funds are the best way to do so.

Diversification: One golden mantra for investing is diversification. If you put all our eggs in one basket, you are creating a fertile ground for risk and losses. Your portfolio needs to have a good mix of asset classes such that if one performs badly, the others can compensate for the effect and hold the performance of the portfolio.

Realizing life goals: Mutual funds are particularly useful in fulfilling your life goals if planned and strategized well. At every point in life whether present or future, you need to fulfil certain obligations towards our materialistic assets or family. There needs to be definite planning for this taking into account many factors and mutual funds help you to achieve this in the most systematic way.

Eligibility to invest in Mutual Funds

Mutual Funds are open to investors from all walks of life. Apart from resident and non-resident individuals, entities like Partnership Firms, HUFs, QIFs, Non-Banking Financial Corporations, registered FIIs, Cooperative Societies and PIOs are eligible for investing in mutual funds. This is a partial list including the most common categories of mutual funds in India.

How to invest in Mutual Funds?

Mutual Funds have now emerged as a must-have investment in an individual’s portfolio. Investing in Mutual Funds is relatively easy and can be done through agents/ brokers or directly. The best part about Mutual Funds is that you can start with a sum as low as Rs 500. The most common methods of investing in a mutual fund are:

Agents/ Brokers: Agents and brokers are professionals dealing with mutual fund sales. They educate you about all the aspects of Mutual Fund investment and allow you to take a pick according to your goals, financial condition and risk-appetite. Not just this, these professionals also help you with the process of cancellation, redemption and transfer of funds. However, these agents charge commission which is around 6% and is included in your purchase price for the mutual fund.

Direct: Today most of the investors are educated, specially the millennial investors. Moreover, with the advent of internet, all the information is just a click away. Investors are themselves conducting all the research and obtaining all the desired information. You can invest in the funds of their choice either through the AMC (offline mode) or by directly visiting the fund portal. You can fill up the application online and make an online payment to start your SIP. All the documents in this case need to be submitted online for KYC fulfilment.

Benefits of investing in Mutual Funds online

The following are the eligibility criteria for land loans

Convenient and quick: The primary benefit of investing in Mutual Funds online is the fact that it is quick and hassle-free. All you need to do it is select a fund, visit the portal, fill up the application and you are done.

Easy comparison: There are numerous independent research portals wherein you can compare the performances of the other mutual funds in the chosen category and take your pick. This is the best way to ward off your doubts and be sure of the fund selected.

Cost-efficient: Since the entire process can be handled by the investor, there is no commission or fees that needs to be paid to the agent or broker. Hence, online investment in Mutual Funds is cost-efficient for the investor as well.

Autonomy: Since the decision for fund selection is made by you, there is less scope for misleading advertisements and sales strategies. All the information and fund performance can be tracked on the website directly. So, you have complete control on the kind of funds you want to invest the money into.

Frequently Asked Questions- Mutual funds

(1) Is investment in Mutual Fund profitable?

As your money is invested in various assets, bad performance by one or two assets will not impact the portfolio much. Therefore, the chances of deriving profit from mutual funds in the long run are quite high compared to other types of investments.

(2) What is the basis of Mutual Fund selection?

There are various schemes of Mutual Funds available in the market. However, as a prudent investor, you must choose the funds on the basis of certain parameters like (1) Age (2) Amount of money at disposal (3) Time Horizon (4) Redemption time (5) Tax planning

(3) What is Systematic Investment Plan?

Systematic Investment Plan or an SIP is a mode through which investors can conveniently invest money through a fixed amount every month which can be as low as Rs 500.

(4) What if I miss my SIP?

It is not a problem if you miss your SIP. You can combine the previous SIP with your current SIP and continue to invest without any hassles.

(5) How to redeem my mutual funds?

Redemption of mutual funds can be done online and offline. For the offline mode, you need to submit a duly filled Redemption Request Form along with the desired redemption amount to the office of the AMC or Registrar. The form needs to be duly signed by all the holders. As soon as it is processed, the redemption amount gets credited to your bank account, the details of which you had provided at the time of starting the investment.

(6) How many mutual funds should I add to my portfolio?

This is a subjective question and the answer for this depends on your life goals and risk appetite. If you are new to mutual funds, you can start with one or two funds and as you get familiar and realise the potential of these funds, you can add a few more based on your requirement.

(7) Whom should I contact in case of redressal?

The name of the contact person to be approached in case of any complaint, query, or grievance can be found in the offer document of the mutual fund scheme which you have invested in. You can directly approach the concerned persons or the Mutual Fund/Investor Service Centre for redressal of your complaints. In more complex cases or unresolved issues, the matter can directly be notified to the SEBI.

(8) What is entry load and exit load?

Entry load can be said to be the amount or fee charged from an investor while entering a scheme, while Exit load is a fee or an amount charged from an investor for exiting or leaving a scheme or selling the mutual fund units. Different Mutual Fund companies charge different amounts as entry and exit load. The exit load is usually charged to dissuade investors from exiting a fund.