Mutual Funds ........................ Types of Mutual Fund & Benefits of Mutual Funds. #MF #E2

 ◆Types of Mutual Funds ..........

> Equity funds - funds that invest only in stocks and other equity instruments

> Debt funds - funds that invest only in fixed income instruments

> Money market funds - funds that invest in short-term money market instruments

> Hybrid funds - funds that divide investments between equity and debt to create a balance

●Different Types of Mutual Funds

Mutual funds offer one of the most comprehensive, easy and flexible ways to create a diversified portfolio of investments. There are different types of mutual funds that offer different options to suit investors diverse risk appetites. Let us understand the different types of mutual funds available currently in the market to help you make an informed investment decision.

Broadly, any mutual fund will either invest in equities, debt or a mix of both. Further, they can be open-ended or close-ended mutual fund schemes.

>  Open-ended funds

In an open-ended mutual fund, an investor can invest or enter and redeem or exit at any point of time. It does not have a fixed maturity period.

>  Close-ended funds

Close-ended mutual funds have a fixed maturity date. An investor can only invest or enter in these type of schemes during the initial period known as the New Fund Offer or NFO period. His/her investment will automatically be redeemed on the maturity date. They are listed on stock exchange(s).

Let's take a look at the various types of equity and debt mutual funds available in India:

1. Equity or growth schemes

These are one of the most popular mutual fund schemes. They allow investors to participate in stock markets. Though categorised as high risk, these schemes also have a high return potential in the long run. They are ideal for investors in their prime earning stage, looking to build a portfolio that gives them superior returns over the long-term. Normally an equity fund or diversified equity fund as it is commonly called invests over a range of sectors to distribute the risk.

Equity funds can be further divided into three categories:

>  Sector-specific funds:

These are mutual funds that invest in a specific sector. These can be sectors like infrastructure, banking, mining, etc. or specific segments like mid-cap, small-cap or large-cap segments. They are suitable for investors having a high risk appetite and have the potential to give high returns.

> Index funds:

Index funds are ideal for investors who want to invest in equity mutual funds but at the same time don't want to depend on the fund manager. An index mutual fund follows the same strategy as the index it is based on.

For example, if an index fund follows the BSE Index as the replicating index and if it has a 20% weightage in let's say Stock A, then the index fund will also invest 20% of its assets in Stock A.

Index funds promise returns in line with the index they mirror. Further, they also limit the loss to the proportional loss of the index they follows, making them suitable for investors with a medium risk appetite.

> Tax saving funds:

These funds offer tax benefits to investors. They invest in equities and are also called Equity Linked Saving Schemes (ELSS). These type of schemes have a 3 year lock-in period. The investments in the scheme are eligible for tax deduction u/s 80C of the Income-Tax Act, 1961.

2. Money market funds or liquid funds:

These funds invest in short-term debt instruments, looking to give a reasonable return to investors over a short period of time. These funds are suitable for investors with a low risk appetite who are looking at parking their surplus funds over a short-term. These are an alternative to putting money in a savings bank account.

3. Fixed income or debt mutual funds:

These funds invest a majority of the money in debt - fixed income i.e. fixed coupon bearing instruments like government securities, bonds, debentures, etc. They have a low-risk-low-return outlook and are ideal for investors with a low risk appetite looking at generating a steady income. However, they are subject to credit risk.

4. Balanced funds:

As the name suggests, these are mutual fund schemes that divide their investments between equity and debt. The allocation may keep changing based on market risks. They are more suitable for investors who are looking at a combination of moderate returns with comparatively low risk.

5. Hybrid / Monthly Income Plans (MIP):

These funds are similar to balanced funds but the proportion of equity assets is lesser compared to balanced funds. Hence, they are also called marginal equity funds. They are especially suitable for investors who are retired and want a regular income with comparatively low risk.

6. Gilt funds:

These funds invest only in government securities. They are preferred by investors who are risk averse and want no credit risk associated with their investment. However, they are subject to high interest rate risk.

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◆What is the benefit of investing in mutual funds?

One of the key advantages of investing in a mutual fund is that each investor (even with a small investment) gets access to professional money management and expertise. Also, it would be very difficult for an investor to create a diversified portfolio of investments on his own with a small amount of money. With mutual funds, each investor participates proportionally in the return the scheme generates.

Each unit gets a proportional share of gain (or bears loss) from the fund. There is a portfolio report generated for each investor, which tracks all investments and the returns generated by the mutual fund.

●◆Benefits of Mutual Funds

You can be spoilt for choice when it comes to choosing an investment product. There is a large variety of options available, right from fixed deposits, stocks, gold or real estate, insurance, public provident fund and mutual funds. Each product has its pros & cons and risks & rewards. However, if you are looking at an investment option that is professionally managed, diversified and offers a good risk-return trade off, mutual funds can be the right choice for you. Let us look at the advantages mutual funds offer that make them a wise investor's choice.

●Why investing in a Mutual Fund is a wise choice?

Diversification

One of the biggest advantages mutual funds give you is that of immediate diversification. You may not have enough money to spread your investments in varied stocks and sectors, but by pooling money from thousands of similar investors, a mutual fund spreads your investment and hence, risk. It is highly unlikely that all the stocks will go down by the same proportion on any particular day. This ensures that you have not kept all your eggs in one basket and are safe from incurring huge losses from a single bad investment.

Professional Management

Another big benefit of investing in mutual funds is the professional expertise it provides for your investments. Asset Management Companies (AMCs) provide qualified fund managers who, with the help of strong research teams and their own expertise, pick the best options to meet the fund's objective. This saves you time and the stress of constantly monitoring your investments and wondering if you made the right buy or sell decision. With mutual funds, you do not have to worry about market swings.

Affordability

You may want to buy shares of large companies or want to invest in big companies in a particular sector of choice. However, you may not have the money to make a big investment. Mutual funds trade in big volumes, giving their investors the advantage of lower trading costs. Anyone can start an investment in a mutual fund through a Systematic Investment Plan (SIP) with as little as Rs 500.

For example, say Pooja has just started her career and wishes to put aside atleast Rs 48,000 annually to go on an overseas vacation after three years. Instead of waiting to collect a lump sum of Rs 48,000 to kick start the investment, mutual funds allow Pooja to invest a small sum of Rs 4,000 every month, in the form of a SIP. This makes it affordable for Pooja and at the same time keeps her goal on track.

Liquidity

You can easily move your money in and out of mutual fund investments. Investments in open-ended funds can be redeemed in part or as a whole any time to receive the current value of the units.

Tax Benefits

There are various tax benefits available on your investments in mutual funds. For example, investments in Equity Linked Savings Schemes (ELSS) qualify for tax deductions under Section 80C of the Income Tax Act. There is no tax on capital gains on units of equity schemes held for more than 12 months.

Schemes other than equity-oriented schemes are treated in the debt category for tax purposes. Short term capital gain is applicable for redemption of debt mutual funds within 3 years. Long term capital gain (more than 3 years) from debt mutual funds is taxable after claiming the benefit of Indexation.

Well Regulated

In India, all mutual funds are regulated by the Securities and Exchange Board of India (SEBI). All mutual funds are required to follow transparent processes, as laid down by SEBI, protecting the interest of investors. Further, SEBI makes it compulsory for all mutual funds to disclose their portfolios every month.

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Mutual Fund ............... What is Mutual Fund ? #MF #E1

What is Mutual Funds ?

What if you could invest your money and have someone else professionally manage it for you? Services like these do exist, but they come with a requirement of high amounts of capital or money to be invested. What if you could avail such a service, even with a small investment and get the advantage of professional money management? Well, this is possible by investing in mutual funds.

Now Come to the main point.........

A mutual fund is essentially a common pool of money in which investors put in their contribution. This collective amount is then invested according to the investment objective of the fund.

The money could be invested in stocks, bonds, money market instruments, gold and other similar assets. These funds are operated by money managers or fund managers, who by investing in line with the specified investment objective attempt to create growth or appreciation of the amount for investors.

For example,  a debt fund will have its specified objective to invest in fixed income instruments or products like bonds, government securities, debentures, etc. Similarly, an equity fund will invest in stocks and other equity instruments.

How is a mutual fund set up?

A mutual fund is set up in the form of a trust, which has a sponsor, trustees, Asset Management Company (AMC) and custodian. The trust is established by a sponsor who is like the promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. The custodian, who is registered with the Securities and Exchange Board of India (SEBI), holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over the AMC. They monitor the performance and compliance with SEBI Regulations.

The AMC employs professional money managers, having expertise in investing in equity, debt or both, who then invest the collected amount from investors and manage it on their behalf.

The AMC may have several mutual fund schemes with their specific investment mandates. An investor can choose which scheme he or she wants to invest in, based on the given mandate or objective.

All AMCs are governed by a Board of Directors and come under the SEBI (Mutual Funds) Regulations, 1996. The regulator or SEBI has set clear mutual fund regulations and requires all mutual fund schemes of an AMC to clearly spell out the fund's objectives in its prospectus that an investor must read before he/she invests in a mutual fund.

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