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?
v Mutual Funds provide higher returns that can beat
inflation to grow your money in the long run.
v 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.
v Indian Mutual Fund industry has very strict
regulations and guidelines laid by SEBI.
v Investments can be done in diversified industries
hence they provide safer returns
v Maintenance of mutual funds are cheaper since they do
not require any demat account.
v Money is liquid as payments are made by cheques or
credited directly through to the bank account.
v 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:
can be bought or sold at any time at the prevailing NAV and do not have any
Close Ended Schemes:
have a fixed tenure with a fixed corpus available during a specified period of
time with a defined maturity date.
Based on Asset Class:
1) Equity Funds:
They are invested in stocks.
The Equity Funds are sub-classified depending upon
their investment objective, as follows:
v 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
v 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
v 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.
v 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.
2) Debt Funds:
A debt fund may invest in short-term or long-term bonds, securitized products,
money market instruments or floating rate debt.
v 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.
v 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.
v 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.
v 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.
v Banking and PSU Fund - Invests at least 80% of its total assets in debt securities of Public
Sector Undertakings (PSUs) and banks.
v 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
v 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.
v Floater Fund - Invests at least 65% in floating rate instruments. These funds have
low interest rate risk.
v 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.
v Ultra-Short Duration Fund - Invests in money market instruments and debt securities with a
Macaulay duration of three to six months.
v Low Duration Fund - Invests in money market instruments and debt securities with a
Macaulay tenure of six to twelve months.
v Short Duration Fund - Invests in money market instruments and debt securities with a
Macaulay tenure of one to three years.
v Medium Duration Fund - Invests in money market instruments and debt securities with a
Macaulay tenure of three to four years.
v Medium to Long Duration Fund - Invests in money market instruments and debt
securities with a Macaulay tenure of four to seven years.
v Long Duration Fund - Invests in money market instruments and debt securities, with a
Macaulay tenure of over seven years.
3) Hybrid Funds:
They are invested
partially in stocks and partially in money market
v 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.
v 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.
v 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.
v 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.
v 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.
4) Real Funds:
They are invested in
Based on Investment Philosophy:
v Diversified Equity Funds: The funds are diversified across sectors to reduce the overall
v Sector Funds: They are invested in a particular sector, like Manufacturing
v Index Funds: track the components of a market index, such as the Standard &
Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad
market exposure, low operating expenses and low portfolio turnover.
v 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.
v 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:
v Create the portfolio with your goals in mind
v The biggest risk is not taking any risk
v You need liquidity, but not too much of it
v Focus on a passive rule-based approach
v Keep rebalancing your portfolio at regular intervals
v Always plan your portfolio in post-tax terms
How to Invest in Mutual Funds?
1. Decide on Your Mutual Fund Investment Goals
2. Pick the Right Mutual Fund Strategy
3. Research Potential Mutual Funds
4. Open an Investment Account
Individual Retirement Accounts
Taxable Brokerage Accounts
Education Saving Accounts
5. Purchase Shares of Mutual Funds
6. Set Up a Plan to Keep Investing Regularly
7. Consider Your Exit Strategy