Mutual Fund

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Mutual Fund

Mutual fund is a collective pool of investible surplus funds of individual investors managed by expert fund managers to meet the common investment objective.

When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the corpus (the total amount of the fund).

What are the Advantages of Investing in Mutual Funds?

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Mutual Funds provide higher returns that can beat inflation to grow your money in the long run.

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Mutual Fund investment decisions are taken by expert fund managers based on the intensive research and analysis of the companies where the funds are invested.

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Indian Mutual Fund industry has very strict regulations and guidelines laid by SEBI.

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Investments can be done in diversified industries hence they provide safer returns

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Maintenance of mutual funds are cheaper since they do not require any demat account.

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Money is liquid as payments are made by cheques or credited directly through to the bank account.

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Some of the mutual funds ELSS (Equity Linked Savings Schemes) provide tax benefits under Sec 80C.

Classifications of Mutual Funds:

Based on Tenure:

Open Ended Schemes

They can be bought or sold at any time at the prevailing NAV and do not have any fixed tenure.

Close Ended Schemes:

They have a fixed tenure with a fixed corpus available during a specified period of time with a defined maturity date.

Based on Asset Class

Equity Funds

They are invested in stocks.

The Equity Funds are sub-classified depending upon their investment objective, as follows:

Large Cap Funds

Invests at least 80% of its total assets in stocks of large-cap companies (top 100). These schemes are considered more stable than mid-cap or small-cap funds.

Mid Cap Funds

Invests around 65% of total assets in equity stocks of mid-cap companies (companies ranked 101-250 by market capitalization).

These schemes tend to provide better returns than large cap schemes but are more volatile than them.

Small Cap Funds

Invests about 65% of their total assets in equity shares of small-cap companies (companies ranked 251st and below by market capitalization). This is a huge list and more than 95% of all companies in India fall under this category.

These schemes tend to provide better returns than large-cap and mid-cap schemes, but are more volatile.

Multi Cap Funds

Invests around 65% of its total assets in varying proportions in stocks of large-cap, mid-cap and small-cap companies. In these schemes, the fund manager restructures the portfolio to match the market and economic conditions and the investment objective of the scheme.

Equity investments are meant for a longer time horizon; thus, Equity funds rank high on the risk-return matrix.

Debt Funds

A debt fund may invest in short-term or long-term bonds, securitized products, money market instruments or floating rate debt.

Liquid Fund

Invests in money market instruments with a maximum maturity of 91 days. Liquid funds tend to offer better returns than savings accounts and are a good alternative for short-term investments.

Money Market Fund

Invests in money market instruments with a maximum maturity of 1 year. These funds are good for investors looking for low-risk debt securities for the short term.

Dynamic Bond Fund

Invests in debt instruments of varying maturities based on the interest rate regime. These funds are good for investors with moderate risk tolerance and an investment horizon of 3 to 5 years.

Banking and PSU Fund

Invests at least 80% of its total assets in debt securities of Public Sector Undertakings (PSUs) and banks.

Gilt Fund

Invests at least 80% of the investment amount in government bonds of various maturities. These funds carry no credit risk. However, interest rate risk is high.

Floater Fund

Invests at least 65% in floating rate instruments. These funds have low interest rate risk.

Overnight Fund

Invests in debt securities with a maturity of 1 day. These funds are considered very safe as both credit risk and interest rate risk are very low.

Ultra-Short Duration Fund

Invests in money market instruments and debt securities with a Macaulay duration of three to six months.

Low Duration Fund

Invests in money market instruments and debt securities with a Macaulay tenure of six to twelve months.

Short Duration Fund

Invests in money market instruments and debt securities with a Macaulay tenure of one to three years

Medium Duration Fund

Invests in money market instruments and debt securities with a Macaulay tenure of three to four years.

Medium to Long Duration Fund

Invests in money market instruments and debt securities with a Macaulay tenure of four to seven years

Long Duration Fund

Invests in money market instruments and debt securities, with a Macaulay tenure of over seven years.

Corporate Bond Fund

Invests at least 80% of its total assets in corporate bonds with the highest ratings. These funds are good for investors with low risk tolerance and seek to invest in high-quality corporate bonds.

Credit Risk Fund

Invests at least 65% of the investment amount in corporate bonds with ratings lower than the highest quality corporate bonds.

Therefore, these funds carry a degree of credit risk and offer slightly better returns than the highest quality bonds.

Hybrid Funds

They are invested partially in stocks and partially in money market

Equity-oriented Hybrid Funds

An equity-oriented hybrid fund invests at least 65% of its total assets in equity and equity-related instruments of companies across various market capitalizations and sectors.

The remaining 35% is invested in debt securities and money market instruments.

Debt-oriented Hybrid Funds

A debt-oriented hybrid fund invests at least 60% of its total assets in fixed income securities such as bonds, debentures, government bonds etc.

Remaining 40% is invested in stocks. Some funds invest a small portion of their corpus in liquid schemes.

Balanced Funds

These funds invest at least 65% of their total assets in equity and equity-related instruments and the rest in debt securities and cash. For taxation, they are treated as equity funds with long term capital gains of Tax exemption up to Rs.1 lakh

The fixed income component makes it a good option for equity investors as it helps mitigate the volatility of equity investments.

Monthly Income Plans

Monthly income schemes are hybrid funds that invest primarily in fixed income securities and allocate a small portion of their corpus to equity and equity-related instruments.

This allows these schemes to generate better returns than pure debt schemes and allows the fund to provide regular returns to investors. Most schemes offer a growth option, where the income grows on the corpus of the fund.

Arbitrage Funds

Arbitrage funds buy stocks at a low price in one market and sell them at a high price in another market. The fund manager constantly looks for arbitrage opportunities and maximizes the fund's returns. However, there are times when good arbitration opportunities are not available.

At such times, the fund primarily invests in debt securities and cash. Arbitrage funds are considered as safe as debt funds. However, long-term capital gains are taxed like equity funds.

Real Funds

They are invested in commodities

Based on Investment Philosophy

Diversified Equity Funds

The funds are diversified across sectors to reduce the overall portfolio risk.

Sector Funds

They are invested in a particular sector, like Manufacturing

Index Funds

Track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500).

Exchange Traded Funds

Exchange Traded Funds (ETFs) are open ended mutual funds that are passively managed and most of them seek to mirror the return of an index, a commodity or a basket of assets.

Fixed Maturity Plans

They invest in fixed income instruments, like bonds, government securities, money market instruments having a fixed maturity date. It could be 15 days, 30, 90, 141, 180 or even 365 days.

Steps to Make your Portfolio Perform Better in the Market

Create the portfolio with your goals in mind

The biggest risk is not taking any risk

You need liquidity, but not too much of it

Focus on a passive rule-based approach

Keep rebalancing your portfolio at regular intervals

Always plan your portfolio in post-tax terms

What is a SIP?

A Systematic Investment Plan or SIP is a smart and hassle-free mode for investing money in mutual funds. SIP allows you to invest a certain pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.). A SIP is a planned approach towards investments and helps you inculcate the habit of saving and building wealth for the future

How does it work?

A SIP is a flexible and easy investment plan. Your money is auto-debited from your bank account and invested into a specific mutual fund scheme. You are allocated certain number of units based on the ongoing market rate (called NAV or net asset value) for the day.

Every time you invest money, additional units of the scheme are purchased at the market rate and added to your account. Hence, units are bought at different rates and investors benefit from Rupee-Cost Averaging and the Power of Compounding.

Types of SIP

Top-up SIP

Top-up SIPs allow you to increase your SIP amount at regular intervals. This is called a step-up SIP because you can increase your SIP contributions as your income increases. You can accumulate substantial corpus over time and achieve financial goals faster with top-up SIP.

Let's see how a top-up SIP works with an example. Suppose you invest Rs.20,000 per month for 20 years and expect a return of 12%. An investment of 48 lakhs can create a corpus of nearly 2 crore rupees.Every year your SIP is Rs. Let's say you decide to raise to 2,000. You can raise a corpus of Rs 3.17 crore against investments of Rs 93.6 lakh. Increasing your SIP by Rs 2,000 per annum is an additional corpus of around Rs 1.17 crore.

Flexible SIP

A flexible SIP allows you to change the amount your mutual fund company wants to deduct every month for your SIP contributions. It provides a facility to inform the mutual fund house to stop your SIP installments till further notice if you are facing cash crunch. Also, if you have surplus money in your bank account, you can increase your SIP contributions over a period of time.

Perpetual SIP

You have to select the SIP tenure while filling the SIP application form. If you do not specify the SIP tenure, your SIP will become a permanent SIP. In simple terms, SIP continues for a period of time until you give instructions to the mutual fund company to stop your investment. Also, if you don't want to limit your SIP contributions with the maturity period, you can opt for the permanent SIP variant in the SIP application form.

Trigger SIP

You can opt for the trigger SIP if you are familiar with stock market movements. It helps you set the SIP start date or switch or redeem your SIP after the selected event occurs. You can set a trigger for a favorable stock market event, a NAV (Net Asset Value) or an index level. However, you must opt for the trigger SIP only if you understand the ups and downs of the stock market.

Benefits of SIP

With a SIP, you can start your investment with a small amount and reap significant returns over a long period of time. The simplest and most convenient way to invest in mutual funds. It also brings financial discipline.

Convenience

You can invest in a disciplined and phased manner through a SIP. It gives you the convenience of starting your investment with as low as Rs 100 a month.

Rupee-Cost Averaging

SIP helps you invest in equity funds without investing time in the stock market. When you invest in equity funds through SIP, you invest a fixed amount regularly at stock market levels. It enables the equity fund to buy more units when the stock markets are falling and less units when the markets are rising. You will average the purchase price of equity fund units over time, thereby reducing the impact of short-term market fluctuations on your investment.

Let's understand rupee cost averaging with an example: Suppose you invest Rs 1000 every month in an equity fund through SIP. Equity markets are highly volatile and the net asset value (NAV) of an equity fund keeps changing. You cannot invest in the same NAV every month. If you invest Rs.10,000 every month from January to June in a given year, your SIP investment will look like this.

Month Nav Number of Units (Rs 10000/ NAV)
January 100 100
February 95 105
March 96 104
April 93 108
May 94 106
June 98 102
Total 576 625

Inference

Judging from the table, Ramesh has accumulated a corpus of over Rs.1.5 crore. This is more than the accumulated corpus of Suresh, Mahesh and Uday. The main reason for this is that Ramesh invested for the long term. Also, the power of compounding pushed Ramesh's investment to a larger portfolio.

Low Initial Investment

You can invest as low as Rs.500 per SIP installment in equity funds. It helps you start investing towards your financial goals without waiting until you accumulate a lump sum. However, if you want to achieve your long-term financial goals faster, investing a larger amount through SIP helps.

2x Higher returns than RD

ELSS mutual funds have the potential to provide higher returns than bank FDs, PPF and other traditional investment options.

Ease of Investing

Investing in equity funds through SIP is a convenient way to build wealth over time. You can spend a minimum per SIP installment of Rs. 500 can be invested so it is pocket friendly. SIP gives your bank fixed instructions to deduct the required amount every month and this amount is invested in an equity fund.

Other Benefits of Systematic Investment Plans

Disciplined Saving

Discipline is the key to successful investments. When you invest through SIP, you commit yourself to save regularly. Every investment is a step towards attaining your financial objectives

Flexibility

While it is advisable to continue SIP investments with a long-term perspective, there is no compulsion. Investors can discontinue the plan at any time. One can also increase/ decrease the amount being invested.

Long-Term Gains

Due to rupee-cost averaging and the power of compounding SIPs have the potential to deliver attractive returns over a long investment horizon.

Convenience

SIP is a hassle-free mode of investment. You can issue a standing instruction to your bank to facilitate auto-debits from your bank account.

How is SIP different from a Lumpsum Investment

Parameter SIP Lumpsum Investment
Cash Flow Regular One Time
Continuously Growing Market Less Recommended More Recommended
Falling NAV More Recommended Less Recommended
Required Risk Appetite Low to Moderate Moderate to High
Time of Investment Quite immune to the volatility of the Market Matters a Lot subject to market conditions
Uncertain Future Income Not Recommended Relatively Recommended
Cost of Investment Less Due to Rupee Cost Averaging High as this is one-time large investment
Flexibility of Investment High Low
Horizon Ideal for Short term Ideal for Long term