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    Mutual Funds

    Mutual Fund

    What are mutual funds?

    A mutual fund is a pool of savings contributed by multiple investors. The common fund so created is invested in one or many asset classes like equity, debt, liquid assets etc. It is called a ‘mutual’ fund because all risks, rewards, gains or losses pertaining to, or arising from, the investments made out of this savings pool are shared by all investors in proportion to their contributions.

    A mutual fund is in essence a Trust with a sponsor. They are registered with SEBI (Securities Exchange Board of India) who approves the Asset Management Company (AMC) managing the fund. The AMC is under the purview of the trustees who have to ensure the fund complies with regulation.

    There are some terms unique to mutual funds which investors should be aware about.

    • Fund Units or Shares - Investments in a mutual fund are made by buying units or shares of a particular fund. The more the units bought the higher the investment.
    • Net Asset Value - This is the unit price or price per share of the fund. The NAV of a fund changes depending on the fund’s performance. Units are purchased or sold/redeemed at the prevailing NAV or unit price at the time of purchase/sale.
    • Lock-in Period - Certain funds stipulate a period during which units cannot be sold i.e. investors cannot liquidate their investment during this period. If allowed, it is subject to a penalty or loss of benefits.
    • Entry Load / Exit Load - These are charges levied by AMCs on purchase / sale or transfer of fund units by investors. These are amounts paid in addition to the NAV on purchase / amounts deducted from the NAV on redemption/transfer.
    • Offer document - This is a formal document that outlines the basic features of the fund. The objective of the fund and the asset classes that the fund will invest in is mentioned in the offer document. It also contains terms and conditions of the fund and other details such as who will manage the fund, risk factors, the fund’s performance history and other financials. Investors should read the offer document carefully before investing in a fund.
    • Assets Under Management (AUM): This refers to the total market value of funds being managed by a mutual fund company.
    • Expense Ratio: This indicates the expenses incurred by the fund in relation to the total assets.
    • New Fund Offer (NFO): New fund offers are new funds/schemes launched in the market by an AMC. Investors can buy units of these new funds at the offer price, which is usually very low. Subsequent purchases in these funds will have to be made at prevailing NAVs.
    • Redemption: This is when fund units are sold/transferred/cancelled.

    Advantages of investing in mutual funds

    Mutual funds have become a very popular investment option in India and this trend still continues with new funds and schemes being introduced in the market regularly. Some of the key reasons why people invest in mutual funds are outlined below.

    • Professional management: Mutual funds are managed by fund managers of asset management companies. These managers employ their investment expertise to minimise risks and maximise returns to investors. Individuals often find it difficult to decide which assets to invest their savings in due to lack of financial knowledge.
    • Diversification of risks: Since funds invest in a number of securities, risk is diversified. The chances of all stocks performing badly at the same time is low. Losses suffered on some stocks are offset by gains made on others. This leads to minimization of risks.
    • Affordable investment option: For those who don’t have sizeable amounts to invest in direct equity or other instruments that require a high initial investment, mutual funds make for an affordable investment avenue. Also, transaction costs are spread out over a number of investors thereby lowering individual costs.
    • Focused investments: All mutual funds feature schemes clearly specifying which assets are targeted for investments, allowing investors to direct savings to different asset classes in an organised and focused manner. It also gives investors access to certain securities otherwise unavailable to them e.g. foreign sectors or foreign securities which cannot be invested in by individuals.
    • Choice of assets: There are various types of funds e.g. equity funds, debt funds, money market funds, hybrid funds, sector funds, regional funds, fund of funds, index funds etc. giving investors a wide range of choice.
    • Easy purchase and redemption: Fund units can be easily bought and sold at prevailing unit prices or NAVs. Unless there’s a lock-in period, it is easy for investors to buy into or out of a fund thereby providing liquidity.
    • Tax benefits: A number of funds/schemes have been designed to act as tax-saving instruments e.g. ELSS or equity linked saving schemes. Investments made in these schemes qualify for income tax deductions.
    • High returns: Mutual funds have been known to provide good returns on medium and long-term investments since investors can diversify risk to enhance overall returns.
    • Regulated investments: All funds come under the purview of SEBI (Securities Exchange Board of India) which ensures dealings are as per regulations. This provides an element of safety to investments made.
    • Easy to track: It can be hard for investors to regularly review their investment portfolios. Mutual funds provide clear statements of all investments which makes it easy for investors to keep a tab on. Hybrid or balanced funds provide investors an avenue to access both equity and debt funds at one go in a proportion of choice.
    • SIP options: Systematic Investment Plans let individuals invest small amounts on a regular basis to avail benefits of rupee cost averaging. It’s an alternative to those who cannot invest lump sum amounts thereby appealing to investors across income levels. Mutual funds accept initial investments as low as Rs.500.
    • Flexibility through fund switching: Many funds offer investors flexibility by letting investors switch between schemes or between funds to avail better terms and/or better returns.

    Who can invest in mutual funds in India?

    Mutual funds are open to a wide range of investors including Resident Individuals, NRIs, PIOs, HUFs, Companies, Partnership Firms, Trusts, Cooperative Societies, Banking and Non-Banking Financial Institutions, registered FIIs, QFIs etc. This is not an exhaustive list but represents the more commonly known types of investors in mutual funds in India.

    How to invest in mutual funds

    Mutual funds are made easily accessible to investors. Applications can be made in the following ways.

    • Agents: These are professionals who are trained to reach out to customers to provide information on the various funds provided by a company. They help process applications and deal with related issues e.g. redemption, cancellation, transfer of units and other dealings with the company. Agent commissions, which normally range up to 6%, are added on to the purchase price of fund units.
    • Direct: Customers can circumvent agents and apply to a scheme themselves. They can do this by visiting the nearest office of the mutual fund company or by going online. Forms can be availed and submitted at the appropriate office or downloaded from the company website and submitted at the office. Alternatively, applications can be processed online.

    Applying for Mutual Funds Online

    Online transactions are becoming increasingly popular for many reasons, as mentioned below.

    • Convenience: Schemes can be applied from the comfort of one’s own office or home.
    • Easy comparison: Besides company websites, there are a number of online financial services providers which act as single-point portals for viewing and comparing funds and schemes from multiple companies.
    • Affordable: By circumventing agents, investments are cheaper since commissions aren’t added on to purchase costs.
    • Independence: All required information, including brochures and other material, are provided online for easy perusal. This lets investors avoid misselling by agents and make informed, independent decisions.

    Types of mutual funds in India

    There are many different types of mutual funds categorised based on structure, asset class and

    Based on asset class

    • Equity Funds: These are funds that invest in equity stocks/shares of companies. These are considered high-risk funds but also tend to provide high returns.
    • Debt Funds: These are funds that invest in debt instruments e.g. company debentures, government bonds and other fixed income assets. They are considered safe investments and provide fixed returns.
    • Money Market Funds: These are funds that invest in liquid instruments e.g. T-Bills, CPs etc. They are considered safe investments for those looking to park surplus funds for immediate but moderate returns.
    • Balanced or Hybrid Funds: These are funds that invest in a mix of asset classes. In some cases, the proportion of equity is higher than debt while in others it is the other way round. Risk and returns are balanced out this way.
    • Sector Funds: These are funds that invest in a particular sector of the market e.g. Infrastructure funds invest only in those instruments or companies that relate to the infrastructure sector. Returns are tied to the performance of the chosen sector. The risk involved in these schemes dependS on the nature of the sector.
    • Index Funds: These are funds that invest in instruments that represent a particular index on an exchange so as to mirror the movement and returns of the index e.g. buying shares representative of the BSE Sensex.
    • Tax-Saving Funds: These are funds that invest primarily in equity shares. Investments made in these funds qualify for deductions under the Income Tax Act. They are considered high on risk but also offer high returns if the fund performs well.
    • Fund of funds: These are funds that invest in other mutual funds and returns depend on the performance of the target fund.

    Based on structure

    • Open-Ended Funds: These are funds in which units are open for purchase or redemption through the year. All purchases/redemption of these fund units are done at prevailing NAVs. These funds are preferred since they offer liquidity to investors.
    • Close-Ended Funds: These are funds in which units can be purchased only during the initial offer period. Units can be redeemed at a specified maturity date. To provide for liquidity, these schemes are often listed for trade on a stock exchange.

    Based on investment objective

    • Growth funds: Under these schemes, money is invested primarily in equity stocks with the purpose of providing capital appreciation. They are considered to be risky funds ideal for investors with a long-term investment timeline.
    • Income funds: Under these schemes, money is invested primarily in fixed-income instruments e.g. bonds, debentures etc. with the purpose of providing capital protection and regular income to investors.
    • Liquid funds: Under these schemes, money is invested primarily in short-term or very short-term instruments e.g. T-Bills, CPs etc. with the purpose of providing liquidity. They are considered to be low on risk with moderate returns and are ideal for investors with short-term investment timelines.

    Mutual funds offer investors many benefits. However, the onus of making a sound investment lies on the investor. Funds should be chosen keeping in mind investment objective, liquidity requirements. investment timelines and affordability.

    Mutual Fund Investment Facts

    Investment and returns

    • Mutual funds offer higher interest rates when compared to FDs and RDs
    • Returns on international funds come with two risks i.e., the fund itself and the currency exchange value
    • Mutual fund returns range from 10% to 20% percent
    • Growth stocks come with the most risks as they rise or fall first when a market situation changes
    • Not all your money will be invested in mutual funds

    Read Mutual Fund news or Enjoy it on the go

    • Learn to select the best mutual fund scheme in India

      When you are planning to apply for a mutual fund scheme, you should assess and fix your financial investment goals, evaluate your investment horizon, and gauge your risk profile. There is a broad array of mutual funds for you to choose from and hence, you may get confused.

      If you have long-term goals with a high appetite for risks and an investment horizon of 5 years and above, then you can choose an equity mutual fund scheme.

      Among the various equity schemes, you can go for a large-cap mutual fund scheme or an equity-oriented balanced scheme if you are a conventional investor. You can select small-cap or mid-cap schemes if you are an aggressive investor. To maintain a balance, you can go for multi-cap or large-cap schemes if you are a moderate investor.

      20th July 2017

    • AUM of Mirae Asset Mutual Fund goes above Rs.10,000 crore

      The AUM of Mirae Asset Mutual Fund has gone above the significant limit of Rs.10,000 crore on July 5. This increase was approximately 50% in the calendar year and extremely high compared to the AUM of Rs.3.4 crore in March 2016.

      Mirae Asset MF has been in India for over 9 years and has experienced a massive increase in the number of new customers. The number of investor folios went above Rs.5 lakh. The SIP flows also rose excellently from Rs.29 crore in March 2016 to Rs.115 crore (in the form of monthly inflows) in May 2017.

      19th July 2017

    • RIL and SBI shares sold highly through mutual funds in June

      Reliance Industries Ltd (RIL) sold the highest number of shares in the month of June in the sector of domestic funds. According to reports, the company sold Rs.1.4 crore with the help of mutual funds.

      From the beginning of this year until June, the stock of RIL went up to 27.79%. This has been the company’s best performance until the year 2009. It is the highest valued company in the nation.

      Meanwhile, in the case of State Bank of India (SBI), one of the most popular lenders in India, had shares that were mostly purchased by these mutual funds. Mutual fund houses purchased a net of Rs.3.3 crore of SBI stocks in the month of June.

      18th July 2017

    • Applications for new mutual fund offers made in May

      Over the past few years, mutual funds have become very prevalent among a lot of retail investors in India. A few asset management companies filed draft with the Securities and Exchange Board of India in May 2017 launch 15 new mutual fund schemes. The companies have filed applications for debt, equity, balanced and fixed maturity plans (FMPs).

      Some of the companies that have filed applications include Birla Sun Life MF, Reliance MF, HSBC MF, HDFC MF, Union MF, Franklin Templeton MF, and DSP BlackRock MF.

      These new schemes will soon be offered once the required clearances are done.

      14th June 2017

    • SEBI advises fund houses not to depend on credit agencies for portfolio ratings

      Market regulator SEBI has advised fund houses to depend upon their own research for portfolio sorting and to not rely solely on credit agencies for portfolio ratings. SEBI wants fund houses to have their own system of credit risk assessment. The regulator is expected to come out with more guidelines which are sectoral as well as company-specific.

      There are some issues with respect to the rolling of guidelines however, SEBI is confident of resolving those and coming out with the guidelines as soon as possible. This move has been prompted due to some mutual fund schemes facing huge losses in the recent past.

      2nd December 2015

    • New Mutual Fund scheme from Principal Pnb

      Mutual funds have the norm of paying out their worth when considered for a long term investment. Though short term funds are also available, the healthy mix of strong performing funds and secure opportunities in long term mutual funds are a much lucrative option. Keeping the same in view, Principal Pnb, a mutual fund house based out of Mumbai, will be launching its first fund of funds that is aimed at long term wealth generation.

      The mutual fund thus being started will be investing in principal schemes that are already in place. There will a choice of three offerings that offer various options of growth, namely - conservative, moderate and aggressive. While the first will have maximum of 30% stake in equities and the rest in fixed income, moderate option can have a 20-60% stake in performing high-cap equities. As its name suggests, the aggressive option will bank more on the equities share of the portfolio, with a stake of 70-90%.

      1st December 2015

    • Mutual Fund Investments might encounter Limits

      Mutual funds have slowly made their niche quite a sizable one in the investments market and are being considered more readily by the layman as compared to the scenario a few years earlier. That in turn has made institutions offering mutual funds more open towards projecting more financing into various options of investments.

      The downside of the deal is that many MF institutions are not being wary about their own research in their investment regarding debt papers and are relying too much on rating agencies. In order to curb this unhealthy trend, the Securities and Exchange Board of India (SEBI) has a proposal to impose limits on how much investment can be done in a single sector and a single investee company. The concrete decisions regarding the same will be passed soon.

      30th November 2015

    • Strong mutual fund inflows despite a low market

      Domestic mutual funds are continuing to receive strong inflows from investors in the last 18 months. Despite a low in the market, the ownership in Indian equities has witnessed an all-time high of around. According to the latest report by Bank of America Merill Lynch (BofA-ML), there has been an inflow of $18 billion in domestic mutual funds for 18 consecutive months.

      The report also stated that despite negative sentiments and backed by strong inflows, domestic mutual funds have continued to increase at the BSE500 by 4.6%, which is an all-time high. The high inflow of 18 consecutive months has been a first in the last 15 years. Domestic mutual funds are also continuing to receive strong inflows from individual investors.

      27th November 2015

    • Reliance Mutual Fund files offer document with SEBI to launch Children Fund

      Reliance Mutual Fund has filed offer document with SEBI in the aim of launching an open ended diversified equity scheme for children, ‘ Reliance Children Fund’. The new fund offer price is pretty low at Rs.10 per unit. The entry load is nil and the exit load is 1% if it is redeemed or switched before attainment of 18 years of age. There is no exit load if it is redeemed or switched after 18 years of age or after 3 years of lock in period of the policy. The scheme is aiming to collect a minimum target amount of Rs.10 crore. One can avail growth and dividend option with this scheme.

      26th November 2015

    • SBI Mutual Fund launches Debt fund for 1100 days

      SBI Mutual Fund introduced SBI Debt Fund Series B-28 for 1,100 days. This is a close ended income scheme and the NFO opens for subscription on 23rd November, 2015 and it closes on 26th November, 2015. Entry load exit load will not be applicable to this scheme. The minimum subscription amount is Rs.5,000 and thereafter in multiples of Re.1. The performance is benchmarked against Crisil Short Term Bond Fund Index. Rajeev Radhakrishnan the Fund manager. The main objective of this scheme is to provide regular income and enhance capital growth with limited interest rate risk to the investors. The investment portfolio consists of debt instruments such as government securities, PSU, corporate bonds and money market instruments maturing on or before the scheme matures.

      25th November 2015

    GST rate of 18% applicable for all financial services effective July 1, 2017.

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