Table of Contents
- A Brief History of Mutual Funds in India
- What are Mutual funds?
- Some of the key things about mutual funds an investor should know:
- Types of Mutual Funds in India
- Equity Mutual Funds
- Debt Mutual Funds
- Hybrid Mutual Funds
- Why Should invest in Mutual Funds?
- Who should invest in the Mutual Funds?
- When Should You Invest in Mutual Funds?
- Taxation of Mutual Fund
A Brief History of Mutual Funds in India
The first introduction of a mutual fund in India occurred in 1963, when the Government of India launched Unit Trust of India (UTI).UTI enjoyed a monopoly in the Indian mutual fund market until 1987, when a host of other government-controlled Indian financial companies established their own funds, including State Bank of India, Canara Bank and by Punjab National Bank.
What are Mutual funds?
Mutual funds are right now one of the popular investment of this generation. Right now according to AMFI ( The Association of Mutual Funds in India) In mutual funds AUM is rupees 30.01 Trillion on 30th Nov 2020 compare to 12.95 trillion on 30 Nov 2015 , That’s over 2.5 times in just five years
So We will know what are mutual funds in details
A mutual fund is an investment vehicle formed by Asset management Company (AMC) or fund house to take investments from several individuals and institutional investors with common investment objectives or Goals.These AMC appoint fund manager who is profession do research on behalf of these investors & purchase /sell different financial instruments like stocks of various companies, bonds, commodities, gold, or even international equities and bonds according to investment objectives of these investors
As you can see above mutual funds are excellent resource for the investors who want to get expert advice of fund manager & achieve their financial goal according to their risk bearing capacity.
Individual Investor get benefits of expert managed portfolio. Investor will get portion of portfolio according to their investment amount . They will get units of mutual funds according to their investments.So each investor would get profits or losses that are directly proportional to the amount they invested in particular mutual fund scheme.
The main goal for fund manager is to get optimum return for the particular fund’s objective. The performance of the mutual funds is based on the underlying assets of the fund.For All these activities Asset management companies(AMC) charges which you can check from the expense ratio of the particular fund.
Investor get return in the mutual funds by capital appreciation & dividend distribution
Some of the key things about mutual funds an investor should know:
- Mutual funds do not invest only in a particular share. Instead, a mutual fund plan would invest across several financial investment options to provide investors with the best possible return
- Investor just choose mutual funds according to risk capacity rest things are done by fund manager . Investor don’t need to research stocks
- By Holding mutual funds units Investor don’t get Voting rights of the particular stocks hold by Mutual funds scheme
- Since mutual funds are invest in many financial instruments , therefor mutual funds are excellent way to mitigate Risk
- Investor Invest money at Net Asset Value (NAV) for the particular scheme NAV is computed at scheme portfolio divided by total number of units
- All Investments are bought and sold at particular NAV of the mutual funds
Types of Mutual Funds in India
Mutual funds are broadly categorised into
- Equity Mutual funds
- Debt Mutual funds
- Balanced mutual funds
A risk and return should be expected from the category of the funds available
Equity Mutual Funds
Equity Mutual funds are as Name suggest Invest into 65% or more into equity instruments of the market.Equity funds have high potential to offer the highest returns among all classes of mutual funds. The returns provided by equity funds depend on the market movements , which are influenced sevaral political ,economical factors.
Equity Mutual funds further classified into
Large Cap Mutual funds:
Large caps are top 100 companies in terms of market capitalisation. So Large caps are big companies and due to their size you can expect much lower volatility .
As recent guidelines by SEBI Large cap funds are funds which has Minimum investment in equity & equity related instruments of large cap companies – 80% of total assets.
Mid caps are companies with rank from 101 to 250 in terms of Market capitalisation . So Midcap companies are small companies compare to large cap ones so you can expect higher volatility & higher return.
SEBI defines Midcap Funds are funds with Minimum investment in equity & equity related instruments of mid cap companies – 65% of total assets of the scheme.
Small Cap Funds
Small cap are the companies which are from 251st in terms of market capitalisation. So Small cap are tiny companies which have very high volatility with higher expected return.
SEBI defines small cap funds are funds with Minimum investment in equity & equity related instruments of small cap companies – 65% of total assets of the Scheme.
Multi Cap Fund – An equity mutual fund investing across Large Cap, Mid Cap, Small Cap stocks according to situation of the market .The fund manager would change the asset allocation depending on the market condition to reap the maximum returns for investors and reduce the risk levels.
However as per SEBI guidelines in Multi cap funds Minimum investment in equity & equity related instruments–65% of total assets of the funds . So fund manager can’t go lower than the above percentages in any market situations.
ELSS funds are the special kinds of the funds which are cover under section 80c of The Income Tax Act 1961. Investor can claim upto Rs 150000 by Investing these kind of ELSS funds.
However equity linked saving scheme(ELSS) funds have statutory lock in of 3 years in order to claim tax benefit.
ELSS funds should have Minimum investment in equity & equity related instruments – 80% of total assets of the fund (as per Equity Linked Saving Scheme, 2005 notified by Ministry of Finance)
Thematic or Sector Funds
Sector funds invest in a particular sector like FMCG,Auto,Steel according to the scheme document.As per SEBI guidelines Minimum investment should be made in equity & equity related instruments of a particular sector/particular theme – 80% of total assets of the fund.
Index funds are the funds which try to replicate particular Index like S&P 500, Nifty etc. Those Index funds has portfolio of the same stocks with same weightage in the Index , So these funds moves according to the movement of particular Index.
However Index funds may have little bit of different return than the index due to various factors like expense ratio , This difference is known as “Tracking error”.Lower the Tracking error better the Index fund.
As per SEBI guideline Index funds should have Minimum investment in securities of a particular index (which is being replicated/ tracked) – 95% of total assets of the fund.
Debt Mutual Funds
Debt mutual funds invest in debt, money market and fixed-income securities such as treasury bills, government bonds, certificates of deposit, and other high-rated securities.
As per SEBI guidelines Debt funds are those funds which invest at least 65% in the Debt Instruments, Debt funds are consider as risk averse because it doesn’t move based on market flactuations.Therefore returns of the debt mutual funds are highly predicatable.
Debt Mutual funds are classified as Below
Overnight funds are invest in the securities with maturity period of One day , Given the short maturity the risk in this funds is minimal. So these funds are consider Safe investment.
Liquid funds invest into the securities with maturity period upto 91 days , So if you want to park money for little bit of time with minimal risk then these funds are better options then the regular saving deposits.
Ultra Short-Duration Funds
Ultra short durations funds invest into the securities with maturity period between 3months to 6months .These funds are carry related to lower interest Risk and give higher return compare to regular Fixed deposits
Short Duration Funds
Short duration funds invest into securities with maturity period between 1-3 years . They are relatively low on risk and ideal for those investor who want to invest in debt instruments with very lower interest rate risk.
Corporate Bond Fund
These funds invest at least 80% of the portfolio into corporate bonds , These bonds give higher return compare to short duration funds but also has higher risk. You should focus on the downgrade of the invested debt securities .
Credit Risk Fund
These credit risk funds are little bit of different than other debt funds , these funds don’t focus on maturity period of the securities but instead it invest in High yield low rated bonds , so default risk in the invested securities is higher in these kind of bonds compare to other debt mutual funds.
Gilt funds invest at least 80% of the portfolio into the government securities & sovereign bonds , So there is virtually no default risk or credit risk in this kind of debt mutual funds , So these kind of mutual funds are the safest among all kind of mutual funds .
Fixed Maturity Plans (FMPs)
Fixed maturity are closed ended mutual funds which has the maturity of some months to years according the initial offer document . These funds tend to give higher tax efficient return with lock in period as pre defined tenure . So FMP is the ideal choice if you want to Invest into these funds for more than 3 years .
Long Duration Funds
These kind of funds aims to invest for the longer terms to generate higher durations so these kind of funds have duration of more than 7 years . These funds are ideal for those investor who are willing to invest for the long period of time with having risk capacity against Interest rate risk .
Dynamic Bond Funds
Dynamic bond funds invest funds into different issuers with different maturity periods , these funds are ideal for those investors who want to invest their money for 3-5 years & have moderate risk apetite.
Hybrid Mutual Funds
Hybrid mutual funds invest in debt and equity instruments across the market. Hybrid mutual funds give better risk and reward ratio by investing into debt and equity . Investor who want to take exposure of the debt and equity should invest in the Hybrid funds . In hybrid funds fund manager invest in the equity and debt in such a way that risk reward ratio give benefits to the investor.
Conservation Hybrid fund
As name suggest conservative debt mutual funds invest equity & equity related instruments – between 10% and 25% of total assets & Investment in Debt instruments – between 75% and 90% of total assets. So these funds are less prone to fluctuate according to market movement.
Balance Hybrid fund
These funds invest Equity & related instruments – between 40% and 60% of total assets & Debt instruments – between 40% and 60% of total assets of the fund. However No Arbitrage would be permitted in this scheme. So there funds ideal for the investor who want to segregate 50-50 money into debt & equity.
Aggressive Hybrid Fund
These funds invest Equity & related instruments – between 65% and 80% of total assets; Debt instruments – between 20% – 35% of total assets. Since these funds invest majority of the investment into equity ,these funds are more volatile subject to market risk.
Dynamic Asset allocation Fund
These funds invest dynamically invest into different asset classes available in the market .Here fund manager use its prudence and invest into equity /debt in such a way that expected return is higher compare to expected risk.
Multi Asset Allocation Fund
Multi asset allocation funds invest in different asset classes. Out of these asset classes at least 3 asset classes should have 10% holding . Here foreign stocks also consider as different asset class.
Arbitrage funds try to maximise the returns by purchasing securities in one market at lower prices and selling them in another market at a premium & get risk free profit . However, if the arbitrage opportunities are not available, then the fund manager have to choose to invest in debt securities or cash equivalents for the period till next opportunity arise.
Why Should invest in Mutual Funds?
There are multiple benefits to invest in mutual funds , However few of them are listed below
Investment Managed by Experts
Whenever you purchase any mutual funds , the scheme of mutual funds are managed by the Fund manager and team of analyst who constantly looking for the different companies that provide better return to the investors , Also these experts research for different factors like geo political & economical that impact the investments.
The biggest advantage of investing in the mutual funds is that you can get you can get quality research at very reasonable price , These AMC charge every year between 0.5% to 1.5% of amount invested which is known as expense ratio. However SEBI mandate that Maximum expense ratio can not be over than 2.5% of invested amount .
No lock in Period
Majority of the mutual funds are open ended in nature ,it means that you can redeem you mutual funds at any time. However some mutual funds can charge an exit load if you redeem mutual funds before certain period of time . Only close ended funds are redeem at maturity & Elss funds has statutory lock in period of 3 years .
Rupee Cost Averaging
Whenever you invest in mutual funds via an SIP, you get the benefit of rupee cost averaging over a long period of time. Whenever the markets fall, you will get more units ,while you will get fewer units when the market level are High. Therefore, over time, Due to Harmonic Mean your cost of investment fund units set to lower side. This is called the rupee cost averaging. Investing in mutual funds using SIP gives us benefit on both up & down side of the market, so there is no need to time the markets. This benefit is not available when you invest in mutual funds via a lump sum.
SIP( Systematic Investment Plan)
The biggest benefit of investing in mutual funds is SIP(systematic investment plan). You can invest in mutual funds with small amount at regular interval . This amount can be as small as Rs 100 per month . So you can start your investment journey with very little amount . Each scheme has minimum amount for the SIP investment . So check it , you can not invest lower that it . SIP gives discipline as well as emotion free investing which help to rupee cost averaging in long term for the investor.
Whenever you invest in ELSS funds you deduction under section 80c of The Income Tax Act 1961 . You can invest upto Rs 150000 in a particular year & by investing full amount you can save upto Rs 46,800 a year in taxes. However ELSS funds comes with statutory lock in period of three Years which is the lowest among all the Tax saving instruments . So it provides tax saving as well as wealth creation at the same time .
Switch Fund Option
If you want your money to transfer from one mutual fund scheme to another mutual funds scheme then you can do so by switching between these scheme . So if your invested scheme do not perform as per your expectation then you just quickly switch to another scheme without any hassle .
In mutual funds you can invest in different goal based mutual funds like children’s fund or retirement fund where these funds are specifically created according to the need of the investors. So investors can take benefits of it also these funds make some restriction to help investor for fulfilment of its goals.
e.g Both in Children’ fund & Retirement funds have lock in period of 5 years to increase discipline of the investor.
Most mutual funds provide no lock in & switch option. which means that you can redeem mutual funds at anytime whenever you need money . So because of these benefits mutual funds gain a lot of attraction now days .
Most of the investors have one myth that mutual funds are perform according to market and all mutual funds invest in the stock market,However that is completely wrong . Mutual funds invest in different asset class like Equity , Bond , G-sec , Foreign equity . So by Investing into these mutual funds you can get benefits of these different asset classes.
Mutual funds provide high level of liquidity & no lock in .So in case of financial crisis with just few click you can place redemption order and Majority of AMCs give money into customer’s account within 3-7 working days.
Seamless and Transparent process
All the transaction in the mutual funds are placed at NAV( Net asset value) of the day of the transaction , So the whole process is fully transparent and with age of internet you can place order of mutual funds with your broker’s account with just few clicks. Also you can Invest online in demat mode as well as offline physical mode .
Ease of Tracking
If you invested into mutual funds using demat mode than with just one click you can see the real worth of your investment . Even you invested using physical mode still calculate it by multiplying your units with Nav
No Need to time the market
As saying in the market that
Time is more important than timing in the stock market
By investing in mutual funds using SIP you can invest automatically in the stock market irrespective the stages of the market . So you maintain disciple into your investment so that will help you in the long run.Because the rupee cost averaging which is based on Harmonic mean concept in the long run ensures that your cost of purchase of fund units is on the lower side. Therefore, you can invest in mutual funds whenever you feel like it will not effect your performance in long run. There is no such ‘right time’ to invest in mutual funds. Today is the Best time.
Mutual funds in India are highly regulated by SEBI to ensure the rights of the investors are properly managed & Trust of the investors are properly maintained . Also AMFI is another regulatory body for the mutual funds for its management . So Investment in mutual funds are properly safe , Investor don’t need to worry about it .
Who should invest in the Mutual Funds?
Anyone who has any kind of financial goal, whether it’s short-term or long-term, should consider investing in mutual funds. Investing in mutual funds is one of the best way to accomplish your goals faster. There are mutual fund plans that suit all kind of people. Investors need to assess their risk appetite, investment period, and goals before getting started with their mutual fund investment.
For example, if you are risk-averse and planning for children education in next 5-6 years, then you should invest in gilt funds. If you are willing to take some risk and are planning to buy property in a period of fifteen to twenty years, then you may consider investing in equity funds. If your want to invest for a less than two years and you are looking to earn higher returns than a regular savings bank account, then you may consider liquid funds in this case. So different kind of mutual funds fulfils the need different kind of people.
When Should You Invest in Mutual Funds?
There is a famous quote , “The best time to plant a tree was 20 years ago. The second best time is now.”
There is no reason why one should delay one’s investments, unless there is no money to invest. since there is no minimum age to invest in the mutual funds even the kids can invest in the mutual fund using their birthday gift or Diwali gift etc. as well as there is no maximum age for the investment in the mutual funds.
Predicting stock market level for a longer period of time is impossible.If you are an investor then you should forget to predict the stock market level and try to remain invested for a such a long period of the time.you don’t need to wait for any particular time to invest in mutual funds. This is because the fund managers and his team of analysts pick only the right securities and assets at all times and are going to benefit the investors, regardless of the market condition
If you invest in mutual funds using SIP then you will get benefits of rupee cost averaging , so your purchase price will be lower side in the long run.
In such a scenario, it is would be foolish to try to predict the future of the market and link your investments with it. The rule is always the same: invest according to your goals, investment horizon and risk profile. Choose investment options based on these factors, rather than the prevailing market conditions. In such scenario its foolish to predict the future of the market instead you should focus on your investment horizon , risk appetite & Goals.
You should choose investment based on the what is right for you instead of what is trending in the market .
Check this out: Best time to Invest in the mutual funds
Dividends offered by all mutual funds are now taxed normally. its added to your income and taxed as per your income tax slab. Capital gains in the mutual funds investments taxed based on their holding period and their type. The holding period is the duration between you initial purchase date and redemption date.
Equity Mutual Funds
If your holding period in the equity mutual fund is less than one year then you will be charged as short term capital gain at flat rate of 15% . However if you hold for more than one year then you will be charge as long term capital gains and gain upto 1 lac is exempt and above 1lac is taxable at the flat rate of 10% without benefits of indexation.
Debt mutual funds
If you hold debt mutual funds for less than the 3 years then you will income short term capital gain in that case income from the debt mutual funds will be added to your normal income but if you hold it for more than 3 year then you will be charged as 20% with benefits of indexation.
Hybrid mutual funds
If hybrid mutual funds consist more than 65% of the equity exposure than it will be taxed as equity mutual , same way if hybrid mutual funds consist more than 65% then it will be taxed as debt mutual funds . So whenever you invest in the hybrid mutual funds you should check the basic structure of the mutual fund scheme.
Do mutual funds only invest in the stocks?
This is the most common myth, different mutual funds invest in the different asset class like equity , gold , foreign stock , debt instruments etc.
Do debt mutual funds are risk-free?
Debt mutual funds are little bit of less risky when you compare it to equity mutual funds however that doesn’t mean that debt mutual funds are risk-free in nature . Sometime investment of debt mutual funds default in that case it reflects the NAV of the mutual funds.
what are the indicators of the risk in the mutual funds ?
There is no particular indicator which you can use to find riskiness of the mutual funds but you can use the standard deviation to check estimated volatility of return of the fund over the period of time.
What are the Scheme Related Documents?
All mutual fund ads contain a message: “Read all scheme related documents carefully.”
There are 3 important documents: Key Information Memorandum (KIM), Scheme Information Document (SID) and Statement of Additional Information (SAI).
How should one choose the most appropriate mutual fund based ?
Most investor just look at the past performance of the mutual funds at invest in that company which is the wrong approach . Because past performance may or may not be replicate , so investor should choose funds according the risk capacity , goal & investment horizon.
How can you redeem your mutual fund units?
Whenever you want to redeem , you need to place redemption order . within 3-7 days money will be credited into your bank account.
Is SIP better than a lump sum?
Look , there is no proper thing for anyone , if you have large sum of money & market downed significantly & ready to hold for longer period of time then lumpsum is better , But if you regular income and want to invest using that income then SIP is the better option in that scenario.