In a way, both are supposed to help with your investment decisions, which may include selection of Mutual Fund schemes. However, as the name itself suggests, a Mutual Fund distributor is more likely to be focused on Mutual Fund products, whereas an investment adviser may have a broader basket of products and services.
We have all heard: “Mutual Fund investments are subject to market risks.” Ever wondered what are these risks?
The image on the left talks about the various types of risks.
Making a mistake while investing happens across all investments, and Mutual Funds are no different.
Some of the common mistakes while investing in Mutual Funds are:
KYC is an acronym for "Know Your Customer" and is a term used for Customer Identification Process as a part of Account Opening process with any financial entity. KYC establishes an investor’s identity & address through relevant supporting documents such as prescribed photo id (e.g., PAN card, Aadhar card) and address proof and In-Person Verification (IPV).
Risks appear in many forms. For example, if you own a share of a company, there is a Price Risk or a Market Risk or a Company Specific Risk. The share of just that company may dip or even crash due to any of the above reasons or even a combination of these reasons.
There is a beautiful Chinese proverb, “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, except, of course, when there is no money to invest. Within that, it is always better to use Mutual Funds than to do-it-oneself.
Risks could be controlled. And Mutual Funds can be rewarding!
Mutual Funds invest in securities and the nature of securities depends on the scheme’s objective.
For instance, an equity or growth fund would invest in company shares. A liquid fund would invest in Certificates of Deposit and Commercial Paper.
Every individual investor is unique. Not only with regards to investment objectives but even in approach and view of risk. This is what makes Risk Profiling absolutely crucial before investing.
A Risk Profiler is essentially a questionnaire that seeks an investor’s answers to questions about both “ability” and “willingness”.
All mutual fund ads contain a message: “Read all scheme related documents carefully.” What are these documents?
There are 3 important documents: Key Information Memorandum (KIM), Scheme Information Document (SID) and Statement of Additional Information (SAI).
In Mutual Funds, one often hears, ‘more the risk, more the return’. Is there truth in this?
If ‘risk’ is measured as either, probability of loss of capital or as swings and fluctuations in investment value, then asset classes like equity are undoubtedly the riskiest, and money in a savings bank account or in a government bond is of course least risky.
Many of us dread the thought of managing our own investments. With a professional fund management company, people are put in charge of various functions based on their education, experience and skills.
As an investor, you can either manage your finances yourself, or hire a professional firm. You opt for the latter when:
Do you visualize roller-coasters or toy trains first when you think of an amusement park? Probably the former. These rides are usually the biggest attractions in such parks which create a certain perception about amusement parks. ‘Mutual funds’ too carry a similar perception that they invest only in stocks and hence are risky.
Every investment we make involves a risk, only its nature and degree varies. The same applies to Mutual Funds too.
All Mutual Fund schemes do not carry the same risk when it comes to returns on investment.
“My son is in the 9th grade. I am not sure what his interests are or what stream in education he should pursue. Should he go for Science, Commerce or Arts? Can someone help?” Many parents have such concerns. That is where one may approach an education, or a career, counselor, who has evaluated various options available for youngsters.
Yes, there are several types of Mutual Fund schemes – Equity, Debt, Money Market,
When a Mutual Fund Company shuts down or gets sold off, it is a serious matter to note for any existing investor. However, as Mutual Funds are regulated by SEBI, events of such kind have a prescribed process.
If you are wondering how to invest in a Mutual Fund, remember it is mandatory to have an account with any bank, KYC / CKYC, PAN and Aadhaar cards. This has been made mandatory to ensure Mutual Funds are not used for money laundering purposes by few unscrupulous investors.
The answer is a huge, resounding YES! It is important to note that experience in managing money/making investments plays a vital role in generating good performance. The more the experience, the better is the probability of making profitable investment decisions.
Imagine you have to fly to a country far away and a plane is the only choice.
Under what circumstances do you need to understand the various controls for flying the plane? Or the various signals that the pilot receives from the different control towers? Or how to operate the radio system?
Banks are in the business of savings and loans while Mutual Funds are for investments. When you put your money in a savings account or in a fixed deposit, you are making savings whereas when you put your money in Mutual Funds, you are making investments. Banking and Mutual Funds are two completely different businesses, requiring specific domain and organizational expertise.
All Mutual Funds in India are regulated by the Securities and Exchange Board of India (SEBI). Mutual Fund regulations clearly define the roles and responsibilities of Asset Management Companies (AMC) and Custodians. It’s vital to remember that every investor has to complete an effective KYC process before investing.
Once an investor has decided to invest in Mutual Funds, he has to make a decision of which scheme to invest in – Fixed Income, Equity or Balanced and which Asset Management Company (AMC) to invest with?
Firstly, discuss freely with your advisor what your objective is, what time period you’re comfortable with, and what your risk appetite is.
4-6 years is considered medium-term in savings and investment decisions and hence capital appreciation should be your objective here. Corporate bond funds and hybrid funds are best suited for capital appreciation as they are less volatile compared to equity funds which are ideal for wealth creation over long-term.
To many people, Mutual Funds can seem complicated or intimidating. We are going to try and simplify it for you at its very basic level. Essentially, the money pooled in by a large number of people (or investors) is what makes up a Mutual Fund. This fund is managed by a professional fund manager.
Invest for long term – an advice routinely given by many Mutual Fund distributors and investment advisors. This is especially true in case of certain Mutual Funds – such as equity and balanced funds.
Let us understand why the professionals give such advice. What really happens in the long term? Is there a benefit of staying invested for long term?
The performance of a particular scheme of a Mutual Fund is denoted by Net Asset Value (NAV). In simple words, NAV is the market value of the securities held by the scheme. Mutual Funds invest the money collected from investors in securities markets. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis.
An open end fund permits redemptions on all business days. If a redemption request is handed over at an Investor Service Centre on a non-business day, or after a specified cut-off time, say 3:00 p.m., then it is processed on the next business day. Redemptions are processed at that particular day’s Net Asset Value (NAV).
Investments in Mutual Funds require the appropriate time horizon. Having the right time horizon, not only provides a better chance of getting expected, investment returns, but also lowers the risk in the investment.
Majority of Mutual Fund schemes are open end schemes, which allow an investor to redeem the entire invested amount without any time restrictions.
Only under few instances schemes impose a restriction on redemption, under extraordinary circumstances, as decided by the Board of Trustees.
Imagine asking: At what speed do vehicles run?
Can you generalize the answer for the whole category? Different vehicles run at different speeds – even within one category, e.g. cars, while a car made for city roads may run at a certain maximum speed, the one made for racing can run much faster.
In Mutual Funds, money doesn’t get locked up. It gets invested!
When investing in Mutual Funds, one of the most common questions is, ‘Does my money get locked up?’
It is important to note two facts:
An investor has no restriction on redeeming money from an open ended scheme. While there may be an exit load in certain cases, which impacts final amount realised, all open end schemes offer liquidity as a great benefit.
One of the biggest advantages of Mutual Funds is liquidity – the ease of converting an investor’s units into cash.
Mutual Funds are one of the most liquid assets, i.e. it is one of the easiest to convert into cash. In order to redeem funds through offline mode, the unit holder needs to submit a signed Redemption Request form to the AMC's or the Registrar’s designated office. The form requires details like unit holder’s name, folio number, scheme name, and number of units to redeem.
An investment in an open end scheme can be redeemed at any time. Unless it is an investment in an Equity Linked Savings Scheme (ELSS), wherein there is a lock-in of 3 years from date of investment, there are no restrictions on investment redemption.
There are so many elements involved in providing an investor various services so that he/she can achieve their financial goals.
On a long-distance road journey, sometimes a toll is charged when you enter the road or the bridge, and sometimes when you exit. In many cases, the toll bridge company is allowed to charge the toll only for a certain number of years to recover the building costs. After that period is over, the company is not allowed to charge the passengers any toll.
One of the biggest advantages in a Mutual Fund scheme is Liquidity, i.e. ease of converting investment into cash.
Equity Linked Savings Schemes (ELSS), which offer tax benefits under Sec 80C, are required by regulation to ‘lock-in’ units for a period of 3 years, after which, they are free to be redeemed.
Let’s consider a Balanced Fund, which aims to provide growth and capital appreciation from the equity portion, and income and stability from the debt portion. This scheme still carries considerable risk, as the portion of equity could be as high as 75%. This is recommended only for investors with a healthy risk appetite and long term time horizon.
A Dividend is a distribution of earnings from a stock or a Mutual Fund. In Mutual Fund schemes dividends are distributed when the fund has booked profits on sale of securities in its portfolio.
Imagine asking a travel agent, “How should I choose my mode of transport?” The first thing he/she will say is, “Depends on where you want to go.” If I were to travel to a distance of 5 kms, an auto rickshaw might be the best option, while for a journey from New Delhi to Kochi, a flight might be the best.
Do different types of Mutual Fund schemes offer different kinds of returns?
“Why should one invest in Mutual Funds? We keep hearing about poor performance of many Mutual Funds. And Mutual Funds offer no guarantees. Given these limitations, is there any reason why someone should consider investing in Mutual Funds at all? Do they perform at all?”
What is wealth? What purpose does it serve?
Many answer these questions as “living a life of one’s dreams”, or “not having to worry about money”, or “having financial freedom”. Being wealthy means having enough money to spend for one’s responsibilities and dreams.
Simply put, inflation is the rise in prices over time, relative to the money available. In relatable terms, a certain amount of money buys you much less today, than it did years ago.
If you are looking for a regular income inflow to manage your monthly household expenses, you should go for Systematic Withdrawal Plans (SWPs)in a Mutual Fund. All you need to do is invest a large lump sum amount in a suitable scheme and then start a SWP after a year, so that short-term capital gains tax doesn’t apply.
Some people like to play safe and opt for familiar options. Suppose you are in a new restaurant. The menu has exotic dishes, but you still order something familiar just to be sure you don’t regret it later. You may choose a regular ‘Paneer Kathi Roll’ over a ‘Couscous Paneer Salad’ to be safe.
Recurring Deposits (RDs) and Fixed Deposits (FDs) are some of the most popular savings instruments in our country. They are safe and offer a guaranteed rate of return.
Business and commerce allows us to create wealth by investing our money with those who are on the path to creating wealth. We can be investors in businesses of entrepreneurs, by investing in stocks of various companies. As the entrepreneurs and the managers run their businesses efficiently and profitably, the shareholders get the benefits.
The returns in a Mutual Fund portfolio are a function of many things, like the avenues one has invested in, the way various markets move, the ability of the fund management team, and the investment period.
Since many of these factors are uncertain, the returns cannot be guaranteed, unlike a fixed deposit where these factors are absent, at least to some extent.
Every Mutual Fund scheme has an investment objective and is managed by a designated fund manager, who is responsible for the fund performing optimally to achieve that objective.
We grew up listening to the famous hare and tortoise story that taught us - slow and steady wins the race. This moral takeaway finds relevance in all spheres of life including investments. No wonder, we have Systematic Investment Plans (SIPs) becoming popular among investors. SIP is a great means of steady saving and investment for accumulating wealth over long-term.
Narendra aims to accumulate enough to make the down payment for his dream house. He started an SIP in some Mutual Fund schemes. Though he was falling a tad short, he was comfortable with what he had accrued.
He got a pleasant surprise when his company announced a big cash reward for some star employees, and he was one of them.
Yes, Mutual Funds are ideal to help you plan your life goals!
· Mr. Rajput eventually wants to move away from the city, into a farmhouse on a hill station when he plans to retire after 15-20 years.
Retired people usually have their savings and investments locked up in bank FDs, PPFs, gold, real estate, insurance, pension plans etc. Most of these options are difficult to convert to cash immediately. This may lead to undue stress in case of medical or other emergencies.
One must keep in mind that the regular expenses as well as the cost for various financial goals rise over a period. If the inflation is at 6% per year, the cost of a goal doubles over approximately 12 years. However, if the inflation is at 7%, the doubling happens roughly in ten years.
In this digital and information age, it has become relatively easy to keep track of investment and portfolio performance. While advisors are irreplaceable partners in your financial journey, it is best for investors to have a little knowledge about their own investments. Don’t worry, you don’t have to sit with mind-boggling spread-sheets and graphs.
With so many Mutual Funds schemes in the market, often one may wonder which scheme may be the best. But, understanding the meaning of “best” is more important.
Often, people tend to select the “best” performers of a recent past period – schemes that have delivered highest returns in the recent past.
From where do you get the vegetables for dinner? Do you grow them in your backyard, or purchase it from the nearest mandi/supermarket depending on what you need? Growing your own veggies is a great way of eating healthy food, but effort is spent on seed selection, manuring, watering, pest control, etc.
To begin with, it is important to select the right scheme for your investment need. Look at it this way.
How do you decide what mode of transport you should take when you travel? Whether you want to walk it up, take an auto rickshaw, a train or a flight, it all depends on your destination, on your budget and travel time available.
The best part about Mutual Funds is that no matter what your financial goal is, you can find an appropriate scheme for it.
So if you have a long term financial goal like planning for your retirement or your child’s future education than equity funds could be a choice to consider
While banks and certain small savings schemes issue a passbook, Mutual Funds do not issue a passbook, they issue an Account Statement instead. The main purpose of a passbook is to keep track of all transactions with a bank: deposit, withdrawals, credit of interest etc.
A ULIP is Unit-Linked Insurance Plan. It is a life insurance policy with an investment component that is invested in various financial markets. The returns generated by the investment component determine the value of the policy. However, the sum assured on the death of the policy holder may not be a function of the market – the minimum sum assured may remain unaffected.
Anyone under the age of 18 (minor) can invest in Mutual Funds, with the help of parents/legal guardians until the age of 18. The minor must be the sole account holder represented by the parent/guardian. Joint holding is not allowed in a minor’s Mutual Fund folio.
An ELSS is an Equity Linked Savings Scheme, that allows an individual or HUF a deduction from total income of up to Rs. 1.5 lacs under Sec 80C of Income Tax Act 1961.
Thus if an investor was to invest Rs. 50,000 in an ELSS, then this amount would be deducted from the total taxable income, thus reducing her tax burden.
An ETF is an Exchange Traded Fund, which unlike regular Mutual Funds trades like a common stock on a stock exchange.
Investors often wonder how to go about tracking the progress of my investments.
It is like chasing a target in a cricket match. In a cricket match, the team batting second knows the equation – how many runs, how many wickets and how many overs.
Mutual Fund investments are subject to capital gains tax. It’s paid on the profit we make while redeeming / selling our Mutual Fund holdings (units). The gain is the difference in NAV of scheme on the date of sale and date of purchase (Selling Price-Purchase Price). Capital gains tax is further classified depending on period of holding.
The Global Assets Under Management (AUM) of Open-end Mutual Fund schemes exceeded US$ 37.1 trillion, across 100,494 schemes as on Dec 31, 2015.
Systematic Investment Plan (SIP) is an investment route offered by Mutual Funds wherein one can invest a fixed amount in a Mutual Fund scheme at regular intervals– say once a month or once a quarter, instead of making a lump-sum investment.
Invest in SIP or a one-time investment (lumpsum)? Choosing one depends on your familiarity with Mutual Funds, the fund you want to invest in and your goal. If you want to invest regularly to accumulate sufficient capital for a goal, invest in a suitable equity scheme through SIP.
You can start investing in Mutual Funds with just ₹ 500 a month!
People feel that to earn meaningful returns, large sums must be invested in Mutual Funds. Well, you can start by investing as little as ₹ 500 per month and gradually increase your investment as your income rises.
There are several ways to start investing in a Mutual Fund scheme.
While most Indian Mutual Funds invest only in India, there are quite a few schemes that invest in overseas securities.
Imagine a 50-overs cricket match in which #6 batsman walks in to bat only in the 5th over. His job is to first ensure he does not lose the wicket, and then focus on scoring runs.
To many, the power of compounding seems like a difficult topic. But it is not so. We’ll help you understand this in a simple manner.
Once you invest in a Mutual Fund scheme, you will get an account statement with details like the date of the transaction, the amount invested, and the price at which the units are bought and the number of units allotted to you.
The popular investment concept for creating wealth is ‘Start Early. Invest Regularly. Stay invested for Long Term’. Even if the investment is as low as ₹ 500, it is important as it marks the beginning of a journey.
Remember the first time you boarded a flight? Did you have butterflies in your stomach or a queasy feeling? Finally, when the flight was air-borne, didn’t you feel reassured? Flying at 30,000 ft, seat belt fastened and a warm cabin crew along with an able pilot to take care of you.
Investing in Mutual Funds requires you to complete a few basic formalities.
Collective and pooled investments have existed in various traditional formats across the world for some time. Mutual Fund as we know it came into existence in 1924, with creation of Massachusetts Investors Trust.
The Mutual Fund industry growth was accompanied by three broad trends:
Yes, Non Resident Indians (NRI) and Persons of Indian Origin (PIO) can invest in Indian Mutual Funds on a full repatriation as well as non-repatriation basis.
Yes! Even for an investor with modest savings or small beginnings, Mutual Funds are an ideal investment vehicle.
Before you make any Mutual Fund investment, you need to complete a KYC process. This is done through submission of certain documents as proof of identity and proof of address. The process of starting or stopping an SIP is extremely convenient and easy. How to start an SIP is explained in the graphics on the left.
Variety is the spice of life. At the same time, you do not seek variety just for the sake of it. Some variety is required simply because the situation demands it. So when you eat food, you’ve got to maintain balance.
An Equity Fund is a Mutual Fund Scheme that invests predominantly in shares/stocks of companies. They are also known as Growth Funds.
All Mutual Fund Schemes offer two plans- Direct and Regular. In a Direct Plan, an investor has to invest directly with the AMC, with no distributor to facilitate the transaction.
Are Mutual Funds ideal for short term or long term?
“Mutual Funds could be a good saving tool for short term.”
“You must be patient with your Mutual Fund investments. It takes time to deliver results.”
People regularly come across both the above statements, which are clearly contradictory.
The minimum tenure for investment in Mutual Funds is a day and the maximum tenure is ‘perpetual’.
Articles about Mutual Funds are usually written for planning to achieve certain long term specific goals, and investors assume that other goals, especially short term cannot be achieved.
Let us break this myth with an example.
Ramesh, a travel junkie got to satisfy his wanderlust, when the company he worked for achieved success and rewarded its employees with bonuses.
A debt fund is a Mutual Fund scheme that invests in fixed income instruments, such as Corporate and Government Bonds, corporate debt securities, and money market instruments etc. that offer capital appreciation. Debt funds are also referred to as Income Funds or Bond Funds.
Our choice of meals when we dine depend largely on the time at hand, the occasion and of course, our mood. If we’re in a hurry, say during an office lunch or eating before boarding a bus/train, we may opt for a combo meal. Or if we know a combo meal is famous, we may not bother to go through the menu. A leisurely meal would mean ordering individual items from the menu, as many as we’d like.
There’s no free lunch in this world. We pay for every product or service we consume, either directly or indirectly. For instance, you pay a parking fee for the time you use the parking space. When you send a courier, you pay for the weight of the courier and the distance it needs to travel to reach the recipient.
Let us understand what could be a proper answer to the above question.
Through numerous interactions with investors, we feel that in most cases the hidden, oft-unexpressed need is to find out the scheme that would deliver outstanding returns over the period that the investor plans to invest.
A Gold ETF is an exchange-traded fund (ETF) that aims to track the domestic physical gold price. They are passive investment instruments that are based on gold prices and invest in gold bullion. In India, Gold is usually held in ornament form, which has a certain making and wastage component (usually more than 10% of bill value). This is eliminated when investing in a Gold Fund.
Investors switch their investment from one open ended scheme to another within the same fund house for better financial planning. To switch within the same fund house, fill up a switch form specifying the amount/no. of units to be switched from the source scheme and name of the destination scheme.
A Mutual Fund invests in various asset classes, as per the Scheme Information Document (SID). Typical examples of proposed asset allocation for a scheme could be:
Various types of Mutual Funds exist to cater to different needs of different people. Largely, they are of three types.
Some people invest in Mutual Funds for a regular income, and they usually look at options of getting a dividend. Thus many schemes, especially debt oriented schemes, have monthly or quarterly dividend options. It is important to note that dividends are distributed from the profits or gains made by the scheme and are in no way guaranteed every month.
On watching the video on the left, you will notice that in all the situations, the money is lying idle for a short period of time. In certain cases, the exact time when the money needs to be taken out may not be known. What does the investor do? Where should the money be parked?
One must consider a few things here:
Debt funds are for investors who seek safety of capital or regular income from investment and/or want to park money for short periods.
But debt funds are of various types.
There are different equity funds catering to various needs of investors. The broad objective of all is to generate appreciation over long periods.
SIP in Mutual Fund is like running a marathon. Marathon runners practice throughout the year but keep stepping-up their targets every year starting from dream run, moving to half marathon and finally a full marathon. The same goes with SIPs.
Mutual Fund schemes investing in a single asset category are like specialist bowlers or batsmen. Whereas certain other schemes, known as hybrid funds, invest in more than one asset categories, e.g. some invest in equity and debt both. Some may also invest in gold apart from equity and debt.
Every open ended scheme offers liquidity with almost complete freedom, i.e. no restriction on time or amount of redemption. However, a few schemes may specify an Exit Load.
Rahim and Suresh moved to Mumbai as opportunities to earn and spend were higher.
Suresh looked at the income opportunity and decided to enjoy life. Rahim, on the other hand, decided to save and invest his earning, in order to survive in the city.
Rahim was concerned when he learnt about Suresh’s lifestyle and tried explaining him the benefits of saving young with numbers.
One should never invest in Mutual Funds, but should invest through them.
To elaborate, we invest in various investment avenues based on our requirements, e.g. for capital growth - we invest in equity shares, for safety of capital and regular income - we buy fixed income products.
You can invest in Mutual Funds through regular periodic investments and/or lump sum investments. In the 1st case, you can choose the frequency at which you want to invest. For daily/weekly/monthly frequency, you can automate your investments through SIP.
One of the most important considerations before choosing an investment avenue is the expected “time horizon”, i.e. time in days, months or years that an investor intends to stay invested.
And why is this so important?
Dividends from Mutual Fund schemes are tax-free in the hands of the investor but are subject to Dividend Distribution Tax (DDT) at source. DDT paid by the scheme reduces the distributable surplus available for investors.
Whether one invests ₹ 500 or ₹ 5 crores, the returns are the same. Confused?
One of the main reasons for KYC to be introduced in financial markets was to limit/prevent cases of fraud, tax evasion and money laundering. In order to do that, the source and destination in case of any financial transaction must be found out. This is where KYC was strengthened and in cases of investments and bank accounts, these processes were made mandatory and stringent.
“Aren’t all Mutual Funds the same? After all, it’s a Mutual Fund, isn’t it?” Asked Gokul. His friend Harish, a Mutual Fund distributor, smiled. He was all too familiar with such a remark coming from many.
Several questions rest in a potential investor’s mind regarding the ideal amount to invest. People consider Mutual Funds as just another investment avenue. Is it really the case? Is a Mutual Fund just another investment avenue like a fixed deposit, debenture or shares of companies?
Usually, when people select a scheme themselves, they do so based on its performance. They don’t consider that past performances may not be sustained. Evaluation of schemes is a function of various attributes of the schemes, e.g. scheme objective, investment universe, the risks that the fund is taking, etc. This requires the investor to put in time and effort.
People think that Mutual Funds are elite investments made only for the wealthy. The fact is: one does not need large sum to invest in Mutual Funds, you can start with a sum as low as ₹ 500, or 5000 depending on the kind of fund you choose.
Why keep the minimum amounts as low as these?
Yes, it is “through” Mutual Funds and not “in” Mutual Funds. What is the difference?
You may indulge in buying and selling stocks and bonds once in a while, but taking help from Mutual Funds to manage your investments may be a much better idea.
After its launch in 1964, Mutual Funds have grown to manage assets over 17.37 lakh crores (as on Jan 31, 2017).
This impressive growth is because of a strong Indian economy, better regulation, entry of reputed Indian and Foreign Asset Managers, and increasing acceptance of Mutual Funds as a preferred asset class amongst Indian investors.
Well, there are multiple options for someone looking to invest online in Mutual Funds. Almost all mutual funds offer online investing through their own website or mobile app Certain distributors of Mutual Funds offer online investing facility through websites or even through mobile phones. Nowadays, there are some portals that also offer online investing for a fee.