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.
You must properly evaluate before picking up the right Mutual Fund scheme to invest your hard-earned money. While investors often go by scheme category and top performing schemes in the category, they ignore risk indicators for these schemes. When you are comparing schemes to choose from, don’t miss out comparing their riskiness.
Most investors look at past performance while choosing a Mutual Fund to invest in. But that’s the wrong way to go about mutual fund investing because performance doesn’t give you the complete picture. Return comes with risk. A riskier fund is likely to give higher return than a less risky fund. Risk in a fund depends on the kind of portfolio the fund has invested in.
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.
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).
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.
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.
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.
Mutual Fund investors with long-term investments through SIPs constantly worry about market falls during this period. SIPs are well-designed to overcome some of the Mutual Fund risks like market timing and volatility.
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.
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.
Many investors worry about loss in Mutual Funds if they are unable to make SIP payments during its tenure. Such situations can arise due to many reasons like you are undergoing some financial difficulty or uncertainty about job or business income. It’s natural that under such situations you may not be able to continue with your regular SIP payments.
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?
4-6 years is considered medium-term in savings and investment decisions and hence capital appreciation should be your objective here.
Mutual Fund schemes usually don’t have a maturity date unless you have invested in a close-ended ELSS or other close-ended schemes like FMPs. Even in case of a SIP, there is a term for which investments need to be made regularly.
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.
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:
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.
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”.
In a way, both are supposed to help with your investment decisions, which may include selection of Mutual Fund schemes.
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).
Invest for long term – an advice routinely given by many Mutual Fund distributors and investment advisors.
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.
Like other asset classes, Mutual Funds returns are calculated by computing appreciation in the value of your investment over a period as compared to the initial investment made. Net Asset Value of Mutual Fund indicates its price and is used in calculating returns from your Mutual Fund investments.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Market capitalisation is the average of full market capitalisation of the stock on all recognised stock exchanges where it’s listed, or the full market capitalisation of the stock on the single exchange where it’s listed. Fund managers invest in companies as per the fund’s investment objective and investors know what they are investing in.
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.
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.
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.
Pension plans provide a guaranteed source of income in the form of annuity during retirement. However, they don’t provide immediate liquidity for emergencies and offer limited choice in terms of diversification and investment styles. The premium paid towards a pension plan is tax deductible.
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.
Long-term investments aim to finance distant future goals, like college education, home, retirement, etc. Hence, choose a fund suitable for wealth creation. Long-term goals have a horizon beyond 10 years and equity-oriented schemes(>=65% equity allocation) are the one of the best long-term investment option.
“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.
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.
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.
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.
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.
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.
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 investments are subject to capital gains tax. It’s paid on the profit we make while redeeming / selling our Mutual Fund holdings (units).
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.
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.
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.
There are several ways to start investing in a Mutual Fund scheme.
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.
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:
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.
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.
Yes! Even for an investor with modest savings or small beginnings, Mutual Funds are an ideal investment vehicle.
Are Mutual Funds ideal for short term or long term Investment?
“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.
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.
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.
Investing in Mutual Fund through SIP offers a lot of flexibility. Investors can control the amount they want to invest, tenure for which they want to invest, frequency with which they want to invest (weekly, monthly, quarterly, etc.).
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:
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:
There are different equity funds catering to various needs of investors. The broad objective of all is to generate appreciation over long periods.
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.
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.
The minimum tenure for investment in Mutual Funds is a day and the maximum tenure is ‘perpetual’.
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 Fixed 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.
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.
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.
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.
If two students pass class X board exam with 95% from two different boards (CBSE and ICSE), whom would you consider a better performer? The one who scored 95% from CBSE board or the one from ICSE? You obviously can’t compare their scores since they had different syllabus, question paper pattern and evaluation system.
Gold ETFs invest in 99.5% purity gold bullion that is as good as investing in the physical metal. If you are looking to accumulate gold for the long-term, investing in Gold ETFs is a wiser option than holding it in physical form or investing in a gold fund.
Mutual Funds and Index Funds provide diversification by investing across many stocks. While mutual funds have the flexibility to choose stocks in order to generate returns in line with their stated investment objective, Index Funds track a specific index. Hence Index Funds invest in the same stocks that are included in the index.
Index Funds are passively managed Mutual Funds that simply copy a popular market index like the Sensex or Nifty. While Index Funds carry relatively lower market risk as compared to actively managed funds, the fund manager has limited ability to manage sharp corrections because the fund must hold all the securities in the index in the same proportion.
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.
While both Mutual funds and Portfolio Management Services (PMS) allow investors to invest in stocks and bonds by investing their money in a pooled investment vehicle that is managed by professional fund managers, they both are two different investment options serving different objectives and are meant for two different kinds of investors.
Just like a school report card shows the score of a child in various exams held during the academic year across different subjects that are taught by different teachers, a Consolidated Account Statement(CAS) is a physical statement that captures all financial transactions done by an investor across different mutual funds during a month.
We’ve all read about stories of kings and their great desire for a suitable heir in history and story books. Just like kings passed on their kingdom to the rightful heir, it’s advisable to name an heir for each of your assets by way of a legally enforceable will. Most people don’t create a will during their lifetime.
Currently dividends from Mutual Funds are tax-free in the hands of investors. Investors don’t have to pay income tax on the dividend income from their Mutual Fund investments. The fund house deducts a Dividend Distribution Tax (DDT) from the distributable surplus (profit) of the fund to calculate net distributable surplus.
Whatever may be your current age and financial position, you never know what’s in store for tomorrow. If you aren’t sure about tomorrow, can you be sure that what you’ve saved for retirement will see you through till your last day?
Imagine you’ve booked an 8 am flight from Bengaluru to Chennai on FlyIndia Airlines. You realise that the wrong flight was booked and needs rescheduling. What kind of charges do you think FlyIndia will charge you? You will have to pay a penalty for changing your mind even though it is the same airline, same date of travel, same destination and the same passenger!
The best time to start planning and investing for your retirement is to start today whatever may be your current age and financial position in life. The sooner you start investing for a goal, the more time your money gets to compound itself. Suppose, you are 30-year-old today and start a monthly SIP of INR 2000 for next 30 years. Your money gets a long time to compound and grow.
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?
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.
If someone asked you which car should I buy, an SUV or a premium hatchback, what would your advice be? You probably would ask, what is your main reason for buying this car? Do you need it for a long haul along with family or you need something convenient for yourself to suit the city roads for regular driving?
Index Mutual Funds and ETFs are passive investment vehicles that invest in an underlying benchmark index. Index Funds operate like Mutual Funds while ETFs trade like shares. Hence it depends on your investment preference to choose one over the other for the same passive investment strategy.
Debt Funds invest our money in interest-bearing securities like bonds and money market instruments that promise to pay regular interest. These interest payments are received by the fund which in turn contributes to the total return we, as investors of the fund, earn.
There are many fintech companies that offer Direct Mutual Fund investment platforms either for free or for a fee. Most of these platforms are registered with SEBI, thus well-regulated and governed by security and privacy guidelines mandated by SEBI. Today even Fortune 500 companies can get hacked and similarly so can Mutual Fund platforms. However, it is highly unlikely.
“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.
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.
You’ve lent 5 lakhs to your friend who owns a start-up @8% interest (higher than current bank rate of 7%). Even though you’ve known him for years, you still run the risk that he may not return your money on time or may fail to pay back. Also, the bank rate may rise to 8.5% while you are stuck with 8%.
Minors can invest in Mutual Funds through their parents/guardians. The minor is the first and sole account holder in this case and is represented either by a natural guardian (father/mother) or legal guardian (court appointed).
If you are looking for a Mutual Fund that has no risk of loss, there aren’t any! All mutual funds are subject to some risk factor or the other. While Equity Mutual Funds are subject to market risk, debt funds are subject to interest rate risk and default risk. Amongst the debt funds, the degree of risk is different depending on the average maturity of the portfolio.
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.
Open-ended Mutual Funds allow investors to redeem their units after certain period at no cost. If an investor wishes to redeem his/her units before this stipulated period, an exit load is levied. Mutual funds charge exit load if investors sell their investments before having completed a specified time in the fund.
Overnight funds rank a notch below liquid funds amongst debt funds in terms of time horizon and risk profile. Overnight Funds invest in debt securities maturing the next day. Liquid Funds invest in securities maturing within 91 days.
ETFs are a low cost means to gain exposure to the stock market. They offer liquidity and real time settlement as they are listed on an exchange and trade like stocks. ETFs are a low risk option as they replicate a stock index, offering diversification as opposed to investing in few stocks of your choice.
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?
When you order a ‘Large’ pizza over a ‘Regular’ one, do you find any difference in the taste of the two? Obviously not! Both are prepared using the same recipe and process. They just differ in their size and price. You get the same taste of a Farmhouse Pizza irrespective of the size you order from the menu.
Have you heard people talking about their real estate investments, “I bought that house for 30 lakhs in 2004. It’s worth 1.2 cr today! It has grown 4 times in 15 years.” This is an example of an absolute return.
When you compare the final value of an investment with the price at which you invested in it, the growth experienced over time is a measure of absolute return.
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?
Gone are the days when people took important steps in their life without much prior information be it buying a car or marrying someone. But today, information is available at our fingertips. Even small things like what to order for the next meal is decided after some amount of research or comparison and Mutual Funds are no exception.
Just like other investments, choosing an ETF depends on your required asset allocation, financial goal, risk preference and time horizon. Choosing an ETF depends on what kind of asset allocation you want to achieve in your portfolio by adding the ETF to it since ETFs are available for different kinds of asset classes like equities, bods, real estate, commodities.
Most people don’t think about their retirement until they are close to retirement. The entire working life is spent attending to one requirement after another right from owning a vehicle, a home, raising a family, on kids' education to their weddings. Once these responsibilities have been taken care of, we start looking at how much is left for the retired life that’s around the corner.
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.
Equity Funds invest in stocks of companies while Debt funds invest in bonds of companies and money market instruments. Since these funds invest our money in different assets, they are impacted by risk factors that affect the underlying asset classes.
Many people are interested in investing in Mutual Funds for their potential to generate better return than most other asset classes over the long-term, but they just don’t know where to begin. Since Mutual Funds are risky, most prospects are skeptical of putting in their hard-earned savings into it.
Returns from Mutual Funds depend on the kind of investment it makes, and the risks associated with these investments. The taste of a cake differs from that of a samosa because both are made up of different ingredients and are prepared differently.
Just the way we have different categories of mutual fund schemes depending on their riskiness, we also group investors into similar categories based on their risk profile. Investors can be classified into aggressive, moderate and conservative risk profiles based on two factors.
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.
ETFs are passive investment tools that track an underlying index and trade on exchanges just like shares. But ETFs need to be bought and sold from the exchange through a broker. You need to have a demat account to trade in ETFs and need to pay commission to the broker for every transaction.
Mutual Funds invest in marketable securities that trade on various exchanges. Hence the NAV of a mutual fund moves up or down daily depending on how the benchmark index moves. This results in volatility in your mutual fund investments over short-term.
Imagine you are planning a holiday to the Maldives and you don’t have much idea about the place. How would you plan your trip? You may either call up a travel agent and book your trip or spend hours researching places to stay, places to visit, modes of transport etc and finally draw up your itinerary, make your bookings.
Index funds suffer from three key disadvantages owing to their passive style. They don’t offer flexibility to the fund manager in managing market downsides. If the index being replicated by the fund is generating negative returns due to unfavourable economic or market conditions, an active fund manager has the option to choose stocks to better manage the downside.
Mutual funds help investors diversify risk by spreading their portfolio across many securities from different industries as opposed to investing directly in stocks of few companies. With a small amount of money, an individual investor can diversify his portfolio across many industries and companies by investing in a mutual fund.
When you park your money in a bank Fixed Deposit (FD), the bank promises to pay fixed interest in return. Here you’ve lent money to the bank, and the bank is a borrower of your money, owes you a fixed periodic interest. Debt Mutual Funds invest in debt securities like Government bonds, Company bonds, Money market securities.
Equity Mutual Funds buy stocks while Debt funds buy debt fund securities like bonds for their portfolio. Securities like bonds aare issued by corporates such as power utilities, banks, housing finance and the Government. They issue bonds with fixed interest rate to raise money from the public (investors) instead of taking a loan for new projects.
Debt Funds invest the money pooled from investors in bonds issued by banks, PSUs, PFIs (Public Financial Institutions), corporates and the Government. These bonds are usually medium to long-term in nature. When a Mutual Fund invests in such bonds, it earns periodic interest from these bonds which contribute to the fund’s total return over time.
Debt Funds invest their investors’ money in interest-bearing securities like bonds, corporate deposits, G-secs, money market instruments, etc. These bonds are like certificates that carry an obligation on the part of the bond issuer to pay regular interests (coupons) to the bond investors.
Debt Funds are categorized into different types based on the kind of securities they invest in and the maturity (time horizon) of these securities. Debt securities include bonds issued by corporates, banks and Government, debentures issued by big corporates, money market instruments like commercial papers and certificate of deposits (CDs) issued by banks.
Debt Funds provide lower but relatively stable returns as compared to equity funds. They provide stability to a portfolio as they trade in the fixed income market which is more stable in comparison to the stock market that impacts equity funds.
Debt Funds invest in fixed income securities like corporate or Government bonds and money market instruments.
Once you invest in a Mutual Fund scheme, any change you wish to make in terms of changing plans (Regular/Direct), options (Growth/Dividend) or changing schemes within the same fund house will be considered as a sale (redemption).