About Mutual Funds

A mutual fund is a professionally-managed investment scheme, run by an Asset Management Company that brings together a group of people and invests their money in Stocks, Bonds and other securities, at a low cost.

An investor buys unit of holdings in a particular scheme of Mutual Fund in the form of 'units’. These units can be purchased or redeemed as needed at the scheme's current NAV (Net Asset Value). These NAV's keep changing, according to change in value of the fund's holdings. So, each investor participates proportionally in the gain or loss of the fund.

It is common knowledge that investing in Mutual Funds is better way to put your money to work towards fulfilling your Financial Goals/ Life Goals rather than simply letting your cash waste away in a savings account.

Advantages of Investing in Mutual Funds:

Professional Management
The money is managed by dedicated resources who are the professional Fund Managers and have the expertise and financial market knowledge.

Portfolio Diversification
As Mutual Funds manage large sum of money, they are able to spread the invested amount in various securities and in various sectors thereby reducing risk of being exposed to a few single securities/ sectors and benefit from optimum diversification.

Mutual Funds investments are easy to liquidate, any number of units can be redeemed any time as required and you get your money in your bank account in one to three working days from the date of redemption.

Mutual Funds are required to disclose their portfolio, where the investors money is invested, of every month end in the first 10-15 days of the successive month.

Regulatory Comfort
Mutual Funds are very tightly regulated and closely monitored by SEBI and have to adhere and follow the rules made by SEBI for each and every aspect of Mutual Funds.

An investor can invest in any open ended Mutual Fund scheme either through Lump sum or through SIP (Systematic Investment Plan) on a regular basis. Similarly an investor can also redeem his invested amount either fully or partially at any time from the open ended scheme.

Low Cost
Mutual Funds achieve economies of scale as they collect and invest large sums of money. The cost of running a Mutual Fund is divided between a larger pool of money and hence Mutual Funds are able to offer you a lower cost alternative of managing your funds.

Choice of Investing Various Asset Classes
An investor gets a choice of investing in various asset classes through Mutual Funds, like Equities, Debt and Gold.

All Mutual Fund schemes have a benchmark and one of the mandate given to the Fund Managers is to generate returns that beat the respective Benchmark within the risk parameters of the scheme.

Inflation Beating Returns
Historically Equity and Equity oriented funds have generally given inflation beating returns as Equity asset class has given good returns in the past and mutual fund schemes have mostly outperformed their respective benchmarks.

Financial Goal-Oriented Funds
There are certain Mutual Funds Schemes which are Goal oriented and can be used by investors for achievement of their financial goals or desired outcomes. These funds help the investors to stay focussed on the goal, and allocate the amount on lump sum/ regular basis for achievement of the goals. Some examples of goal oriented funds are as follows:

  • Children’s Investment Funds
  • Retirement Savings Funds
  • Asset Allocation Funds
  • SIP with Free Life Insurance

Tax Benefits of Investing in Mutual Funds

Tax-Free Dividends
Dividend paid to investors by the Mutual Fund schemes are Tax-Free in the hands of the investor. However, in case of the Debt Mutual Funds the scheme deducts a dividend distribution tax before paying the dividend to the investor, whereas in case if Equity Funds, there is no Dividend Distribution Tax.

Appreciation from an Equity Fund is tax - free after 1 year of Investment. The same is also true for any Balanced / Hybrid Fund in which is invested more than 65% in Equity.

In case of Debt Mutual Fund schemes, an investor gets Indexation benefit and a lower tax rate after 3 years of investment, hence it is the most tax efficient Debt instrument.

How to Select Mutual Funds
Before you invest in a Mutual Fund Scheme, you should consider the following three points:

  • Investment Goals
  • Risk Appetite
  • Time Period for Investment

Investment Options in Mutual Fund Schemes

Growth Option
In this option, the scheme does not pay any dividend but continues to grow. The gains are invested back into the scheme and this is seen in rise of the NAV.

Dividend Payout Option
This option is suitable for Investors requiring Regular Income. This option will give the investor the benefit of moderate capital appreciation along with dividend returns over the period of holding.

Dividend Reinvestment Option
In this option, the dividend is not paid to the investor, instead it is reinvested in the fund scheme by purchasing more units on investor’s behalf.

Types of Mutual Funds

Money Market Funds/ Liquid Funds
These Funds invest only in Money Market instruments making it generally most secure which aims at preserving the capital and giving decent return. These funds invest in Bank Certificates of Deposits, Commercial Paper, Repurchase Agreements and Bank Time Deposits

Debt Mutual Funds, Bond/ Income Funds
Income Funds are named appropriately: their purpose is to provide current income on a steady basis. When referring to Mutual Funds, the terms "Fixed-Income," "Bond," and "Income" are synonymous and are a mix of Bonds, Corporate Debentures and Government Securities. While fund holdings may appreciate in value, the primary objective of these funds is to provide a steady appreciation/ regular cash flow to investors.

Fixed Maturity Plans (FMPs)
These are closed ended Debt Funds that invest in Debt instruments with maturities either less than or equal to maturity of the scheme. These are best suited to the conservative investors as they don’t carry interest rate risk and generally offer higher post tax returns than FDs.

Hybrid Funds

Capital Protected Schemes
These funds are oriented towards protection of capital and do not assure returns. The scheme invests largely in Debt Securities, wherein that much amount is invested in Debt which is likely to become equal to the original 100% amount at the end of scheme tenure given the rate of interest on securities and the balance amount is invested in Equity, which aims to provide growth.

Equity Savings Funds
These funds invest mainly in Debt instruments and arbitrage and equity allocation is in range of 20-40%. These funds try to give returns slightly better than Debt schemes by assuming some risk/ reward of equities. Equity saving funds also aim to give regular tax -free dividend to the investors.

Balanced Funds
Balanced Funds is another good option for intermediate-term investors. These funds own both stocks and bonds keeping the balance between the two asset classes –equity and fixed income, pretty steady. Balanced Funds usually keep about 65-75% of their assets in Equities and 25-35% in Debt.

Gold Funds

Better known as Gold Exchange Traded Funds (ETFs), invest in physical gold as underlying security and gold fund of funds invest in Gold ETFs. There is also a hybrid variety that invests in a mix of asset classes such as Equity, Debt and Gold.

Equity Funds

The Funds that invest in Equity Shares are called Equity Funds. In the short term these funds are subject to market volatility and risk, whereas in the long term in the” Equity Mutual Funds” have given higher returns than any other type of investment instrument. Historically these funds have comfortably beaten inflation in the long term and the main purpose of investing in these funds is to set capital appreciation in the long term and benefit from growth in the economy and the corporate sector.

Index Funds

These funds invest in the same pattern as popular stock market indices like CNX Nifty and S&P BSE Sensex.

Investment approach of Equity Funds can be Growth based or Value based or a blend of both.

Growth funds
These funds focus on stocks of the companies that have a potential for large growth.

Value funds
These funds invest in the companies whose stock prices don’t necessarily reflect their fundamental worth/ are undervalued. They also offer potential for long term appreciation if the market recognises the true value of the stocks in which they invested.

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