Mutual Funds

All About Mutual Funds

What are mutual funds

Mutual funds are in the form of Trust (usually called Asset Management Company) that manages the  pool of money collected from various investors for investment in various classes of assets to achieve certain financial goals.  We can say that Mutual Fund is trusts which  pool the savings of large number of investors and then reinvests those funds for earning profits and then distribute the dividend among the investors. In return for such services, Asset Management Companies charge small fees. Every Mutual Fund/launches different schemes, each with a specific objective. Investors who share the same objectives invests in that particular Scheme. Each Mutual Fund Scheme is managed by a Fund Manager with the help of his team of professionals (One Fund Manage may be managing more than one scheme also).

Where do mutual funds invest money

The Mutual Funds usually invest their funds in equities, bonds, debentures, call money etc., depending on the objectives and terms of scheme floated by a particular Mutual Fund scheme. Nowadays there are Mutual Funds schemes which even invest in gold or other asset classes.

What are various types of mutual funds

Mutual Funds can be classified into various categories under the following heads:-

According to the type of investment:- While launching a new scheme,  every Mutual Fund is supposed to declare in the information brochure the kind of instruments in which it will make investments of the funds collected under that scheme. However, there are primarily 3 types of Mutual Fund schemes as categorized according to the type of investments as follows: –

  • Equity-oriented funds / schemes
  • Debt funds / schemes
  • Balance funds (Having a mix of Equity and Debt)

According to the time of closure of the scheme:  While launching new schemes, Mutual Funds also declare whether this will be an open-ended scheme (i.e. there is no specific date when the scheme will be closed) or there is a closing date when finally the scheme will be wind up.  Thus, according to the time of closure schemes are classified as follows: –

  • Open-ended schemes
  • Close-ended schemes

Open-ended funds are allowed to issue and redeem units any time during the life of the scheme, but close-ended funds cannot issue new units except in case of bonus or rights issue. Therefore, unit capital of open-ended funds can fluctuate on daily basis (as new investors may purchase fresh units), but that is not the case for close-ended schemes. In other words, we can say that new investors can join the scheme by directly applying to the mutual fund at applicable net asset value related prices in case of open-ended schemes but not in case of close-ended schemes. In case of close-ended schemes, new investors can buy the units only from secondary markets.

According to the tax incentive schemes:  Mutual Funds are also allowed to float some tax saving schemes.   Therefore, sometimes the schemes are classified according to this also:-

  • Tax Saving Schemes (Have a minimum lock-in of 3 years from date of investment)
  • Non Tax Saving Schemes / other funds

Why invest in Mutual Funds

Professional Money Management

Fund managers are responsible for implementing a consistent investment strategy that reflects the goals of the fund. Fund managers monitor the market and economic trends and analyze securities in order to make informed investment decisions.

Diversification

Diversification is one of the best ways to reduce risk. Mutual funds offer investors an opportunity to diversify across assets depending on their investment needs.

Liquidity

Investors can sell their mutual fund units on any business day and receive the current market value of their investments within a short time period (normally three- to five-days).

Affordability

The minimum initial investment for a mutual fund is fairly low for most funds (as low as INR 500 for some schemes).

Convenience

Most private sector funds provide you the convenience of periodic purchase plans, automatic withdrawal plans and the automatic reinvestment of interest and dividends. We offer our services through demat account through which all transactions are executed online.

Our online system also provides you with detailed reports and statements that make record-keeping simple. You can easily monitor the performance of your mutual funds’ portfolio by using our Client Desk section.

Flexibility and variety

You can pick from conservative, blue-chip stock funds, sectoral funds, funds that aim to provide income with modest growth or those that take big risks in the search for returns. You can even buy balanced funds or those that combine stocks and bonds in the same fund.

Tax benefits on Investment in Mutual Funds

  • 100% Income Tax exemption on all Mutual Fund dividends
  • Equity/Balance Funds – Short-term (less than 1 year) capital gains is taxed at 15%. Long-term (more than 1 year) capital gains is not applicable.
  • Debt Funds – Short-term (less than 3 years) capital gains is taxed as per the slab rates applicable to you. Long-term (more than 3 years) capital gains tax to be lower of – 10% on the capital gains without factoring indexation benefit and 20% on the capital gains after factoring indexation benefit.

Ways of investing in Mutual Funds

  • Lumpsum – Investor can invest his/her entire sum in mutual funds (equity, debt or balanced funds) at one go or small portions at his/her own wish
  • Systematic Investment Planning (SIP) – Investor can invest his/her money in a systematic mode (usually monthly just like EMI) being deducted from his savings bank account at regular intervals. This option helps in gaining rupee cost averaging by purchasing in stock market movements
  • Systematic Transfer Plan (STP) – In this method, the lumpsum amount is transferred to a liquid fund (debt fund), which are very low-risk money market funds and small amounts are transferred to equity mutual funds at regular intervals. This option also helps in gaining rupee cost averaging by purchasing in stock market movements 

Are Mutual Funds suitable for Small Investors or Big investors?  Why Should I Invest in a Mutual Fund when I can Invest Directly in the same stocks/instruments?

Like all other investments in equities and debts, the investments in Mutual funds also carry risk.  However, investments through Mutual Funds is considered better due to the following reasons:-

  • Your investments will be managed by professional finance managers who are in a better position to assess the risk profile of the investments;
  • In case you are a small investor, then your investment cannot be spread into equity shares of various good companies due to the high price of such shares.
  • Mutual Funds are in a much better position to effectively spread your investments across various sectors and among several products available in the market. This is called risk diversification and can effectively shield the steep slide in the value of your investments.

Thus, we can say that Mutual funds are better options for investments as they offer regular investors a chance to diversify their portfolios, which is something they may not be able to do if they decide to make direct investments in the stock market or bond market.  These are particularly good for small investors who have limited funds and are not aware of the intricacies of stock markets. For example, if you want to build a diversified portfolio of 20 scrips, you would probably need Rs 2,00,000 to get started (assuming that you make a minimum investment of INR 10000 per scrip). However, you can invest in some of the diversified Mutual Fund schemes for as low as INR 10,000/-

In whole mutual funds work as a very good option to create/build wealth over a long-term post sailing through the ups and downs of the stock market. This works as a very good tool to help you achieve your financial goals. To find your financial goals and find monthly investment needed to achieve the same click here

We have a great tool to help our clients always remain invested in consistently performing schemes and be stressfree during the ups and downs of market by having automatic rebalancing of mutual fund portfolio.