A Mutual fund is a type of professionally managed, collective investment facility that pools-in money from numerous investors who wish to save or make money. The money collected is invested in securities like Equity, Debt, and Gold etc.
Typically in India majority of house-hold saving goes either in bank fixed deposits, gold or in buying home.
At the same time there exist other rewarding asset classes which can give good returns, such as, Equity and Debt. However, these markets generally draw less enthusiasm from many investors considering the knowledge, expertise and involvement required to do decide what scripts to buy, sell and when?
Lot of people take a chance and speculate, some get lucky, most don’t. This is where mutual funds come handy.
Advantages of Mutual Fund:
Investing requires skill of understanding the dynamics of markets, different industries and companies within them. Many people may have money to be a stake holder in a company but may not have time and astute business skills to run companies on a day- to -day basis like a CEO.
Similarly, investors who lack investing skills need to find a qualified fund manager who can effectively manage their hard-earned money in order to give promising returns.
Fund Managers get timely, analytical inputs from qualified research team in the areas of economy, market, industry and regarding credentials, performance, prospects or just about anything which is required to make a sound decision before buying or selling any company shares, keeping in-line with overall objectives and theme of the particular mutual fund scheme.
Fund Manager’s performance is evaluated with respect to the performance of the scheme. Hence, they put their mind and soul to get the best returns for your investments.
Mutual funds collect money from innumerable investors and thereby can achieve economies of scale. It’s similar to some companies offering huge discounts on bulk purchases of their products i.e. more of one product you buy; cheaper that product becomes.
This trading concept is also applicable in purchase and sale of securities. If you buy only one security at a time; the transaction fees will be relatively high. The cost of running a mutual fund is divided amongst a larger pool of money and hence, mutual funds can offer a low cost alternative to managing funds on your own, as they are able to take advantage of their buying and selling size, thereby reducing transaction costs for investors.
The performance of a mutual fund is reviewed by various publications and rating agencies, making it easy for investors to compare a fund to another. An investor can get update on the performance of any fund on-line from various mutual fund tracking sites.
Here it means spreading your money across large number of securities thus, minimizing risk on account of fluctuations of individual securities in the fund's portfolio.
One needs to invest in different type of securities in a manner that they do not move in similar fashion. Normally equity and debt market perform in opposite direction i.e. when equity markets is doing great, debt markets do not give good returns and vice-versa. Also one needs to look at other asset classes for effective diversification such as, investment in real estate, gold or international securities.
For an individual to do quality diversification of portfolio would mean immense amount of money and research. However, with mutual funds you can diversify across asset classes even with a very low value of investment i.e. Rs.500/-. Within the various asset classes also, mutual funds hold hundreds of different securities (e.g. a diversified equity mutual fund would typically have around hundred different shares).
Diversified portfolio may have stocks of top performing companies, of different market capitalizations, coming from various industries. It would also have rated bonds with varying maturities from reputed corporations.
Another advantage of mutual funds is it’s ability to get-in and out with relative ease. One is able to sell mutual funds units and realize the proceeds in 2-3 working days of filing the redemption request.
It is an important tool that helps investors to get maximum value out of their investment in a volatile market. It’s a known fact that nobody can time the market movement with certainty. This is where concept of Rupee-cost averaging comes into picture.
With rupee-cost averaging, you invest a specific amount at regular intervals, regardless of the investment's unit price. As a result, your money buys more units when the price is low and less units when the price is high, which means a rupee cost averaging on every unit bought.
Rupee-cost averaging is a disciplined way of investing in stock market through Mutual Fund SIPs (Systematic Investment Plans) every month or quarter, rather than making sporadic investments.
Mutual Fund schemes are subject to different Tax Rates, Tax and Indexation benefits, basis the composition and nature of scheme viz. Equity, Debt, Hybrid, ELSS, tenure of investment etc.
In India mutual funds are tightly regulated and functions under watchful eyes of SEBI (Securities and Exchange Board of India). They are obliged to follow strict regulations to protect investors as designed by SEBI.
This leads to transparency in the overall functioning of the Fund houses, and they are required to publish Scheme Information Document (SID), Key Information Memorandum (KIM) for the investors to help them make an informed decision before investing in a scheme.
As per SEBI mandate, the Fund Houses are required to disclose their portfolios once in six month, which helps investors to keep track whether the fund is investing in line with it’s stated objectives or not. Also, most mutual funds voluntarily disclose their portfolio composition once a month.
Major part of the fund is channelized towards G-Sec, Debentures, and other debt instruments. These are low risk-low return investment scheme.
These funds invest in money market instruments, which are fixed income securities with a short to ultra-short time to maturity, and high credit quality. Investors often use money market funds as a substitute for bank savings accounts.
Money Market instruments includes commercial papers, commercial bills, treasury bills, Corporate Debt, Government Securities / State Development Loans having residual maturity up to one year, call or notice money certificate of deposit and any other alike instruments as specified by the Reserve Bank of India from time to time.
Mutual funds have both debt and equity oriented funds. Among debt schemes, there are those which invest in papers of very short duration.
Predominantly invests in very short term instruments between 1-day and 30-days. The returns from these funds have been generally 1-1.5% above the savings bank rate in the past. Most of these liquid funds also do not have any exit loads. This means one could invest in any day and exit on any day without any penalties. This gives an investor tremendous flexibility in managing their money optimally and keeping their liquidity intact, at the same time earning good returns.
Equities are popular mutual fund category amongst retail investors. Although it could be a high-risk investment in the short term, investors can expect capital appreciation in the long run. Young investors, in their prime earning age can invest in growth schemes for long term wealth creation.
Money Market instruments includes commercial papers, commercial bills, treasury bills, Corporate Debt, Government Securities / State Development Loans having residual maturity up to one year, call or notice money certificate of deposit and any other alike instruments as specified by the Reserve Bank of India from time to time.
Sectoral funds invest in a specific sector like Infrastructure, IT, Pharmaceuticals, Banking etc. or segments of the capital market like Large caps, Midcaps, Small cap, Multicaps. These scheme provides a relatively high risk-high return opportunity.
An index fund or passively-managed fund seeks to match the performance of a market index, such as the S&P 500 index or NSE top 50, BSE 30.
These schemes offer tax benefits to investors. The funds are invested in equities thereby offering long-term growth opportunities. Tax saving mutual funds called ELSS (as described below) have 3-year lock-in period.
Equity Linked Savings Scheme (ELSS):
ELSS is a type of diversified equity mutual funds which gives best avenues to save tax under Section 80C. The investor also gets the potential upside of investing in the equity markets. Also, no tax is levied on the long-term capital gains from these funds. Moreover, compared to other tax saving options, ELSS has the shortest lock-in period of three years.
There is no upper limit on investments. However, investments of only up to Rs.150,000 per year are allowed to be claimed as deductions under Section 80C of IT Act.
If you are not sure to choose between equity and debt, and do not want the hassle of investing in a basket of products that needs to be rebalanced at regular intervals, you can opt for hybrid funds.
Hybrid funds allow you to invest in a combination of equity and debt. Equity hybrid funds, for instance, offer more than 65 per cent exposure to equity, and the rest to debt. Debt hybrid funds invest at least 75 per cent funds in debt and the rest in equity.
Based on their objectives and strategy these funds come in three forms-monthly income plans (MIPs), Asset allocation funds and Capital protection funds.
The main objective of these funds is to offer you the best of both worlds-equity and debt.
The primary objective of this scheme is to safeguard the principal amount while trying to deliver reasonable returns by investing a part of it in fixed-income instruments such as bonds, T-bills and certificates of deposits (CDs); the rest would be invested in equities.
FMPs are close-ended debt funds. Investments can be made in them only during the new fund offer period.
FMPs invest in debt instruments issued by corporates and their investments have a maturity that coincides with the maturity of the FMP. Hence the name - fixed maturity plans.
The investments made by the FMP have an indicative yield. This means, on maturity, there is a possibility of the actual returns deviating from the returns indicated at the time of investing.
Operating as a combination of open and closed ended schemes, making the fund open for sale or redemption during pre-determined intervals.
For example: if a fund has assets of $50 million and liabilities of $10 million, and 4 million shares outstanding, the price-per-share value would be
(50$- 10$) = 10$
4$
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