Mutual Funds are one of the most popular and convenient vehicles for investment. Depending on your risk appetite and investment objective it offers you a wide range of options to choose ranging from stability, growth and high returns. With over thousand of mutual fund schemes to choose from, mutual funds offer investment option for every type of investor from risk averse to someone who wants to take high risk for high returns. For someone seeking for safe investment vehicle to get steady returns the debt scheme works best and for those who can take high risk in order to get high returns then there are several equity scheme options to choose from.
To help you make the right mutual fund investment decision, we have explained the basics of mutual funds in simplified language. This section explains the basics of mutual funds, different types of mutual fund schemes and their suitability for different investors, how to choose top performing mutual fund schemes, power of compounding and how it works with SIPs. In case you have any queries or want to start investing with the help of our advisor, fill in the Request a Call Back form on the right and our advisor will get in touch with you.
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Simply put, a mutual fund is an investment company wherein many investors like you pool in different sums of money to make up a large lump sum. The money collected is invested by the fund manager in shares, bonds and other securities - across companies, industries and sectors. As an investor, you are issued units in proportion to the money invested.
The fund is managed by professionals, known as fund manager, with years of experience of managing portfolio and research in the equity markets. All the analysis and strategic thinking that goes into investing is not your worry. The fund manager does it all for you – from identifying stocks, to tracking economy, company and the global markets to investing in fundamentally good companies, exiting when the need be and also booking profits on them. But they charge you a nominal fee for this, known as ‘expense ratio’. After all there are no free lunches in this world.
You can make money from a mutual fund in three ways
Funds will also usually give you a choice either to receive a cheque for distribution or to reinvest the earnings and get more shares.
- Income is earned from dividends on shares and interest on bonds.
- If the fund sells securities that have increased in price, the fund has a capital gain.
- If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund units for a profit.
Funds will also usually give you a choice either to receive a cheque for distribution or to reinvest the earnings and get more shares.Track Performance of Mutual Fund Schemes
Mutual funds provide a relatively easy way to invest. Most funds have a minimum investment of Rs 5,000. Most of the funds also offer a Systematic Investment Plan wherein you can invest a pre-determined amount every month which can be as low as Rs 100.SIP: All you need to know about Systematic Investment Plan
Here are seven key reasons to invest in mutual funds
Diversification: The pooled money of mutual funds is invested in a number of different stocks or bonds, in different asset classes or sometimes even in different countries around the world. Diversification reduces the overall risk of a portfolio; as losses incurred in a particular company/sector can be offset by gains made in other areas.
Expert management: Your money is in the hands of experienced, professional managers who are there to try and make sure that the fund delivers on its objective. The average consumer does not have the time or resources to gain enough knowledge to become a confident stock picker. Mutual fund portfolio managers have the expertise and resources to do the required in-depth research to make profitable investments.
Choice: You can choose from thousands of funds - you're sure to find one that suits your investment objective and risk profile. And you can get information on them easily. You will often have the option of choosing between income and growth while in your chosen fund.
Liquidity: Unlike other asset classes, mutual funds provide you the convenience to redeem your funds at market price anytime you need cash
Access to new markets: Certain funds allow you to invest in foreign markets that otherwise would be inaccessible. Not only accessibility but even expertise of fund managers comes handy while investing in new markets.
Convenience of small investments: If you invest directly in shares, you may not be able to diversify across a wide array of securities due to small size of your investments and inherently higher transaction costs. However, a mutual fund allows you to invest in a diversified array of securities even with amounts as low as Rs. 100*.
Tax Benefits: Mutual funds offer a variety of tax benefits to investors. For example, dividends earned through investment in mutual funds are tax-free. Investments upto Rs 1.5 lacs in Equity Linked Saving Scheme (ELSS) are exempt from tax under section 80C.
There are various types of mutual funds to choose from depending on your investment objective, time horizon and profile.
Funds that invest in equity or shares are called equity funds. The principal objective of equity funds is to earn capital appreciation on investments over long-term (> 5 years). The returns in such funds are volatile since they are directly linked to the equity markets. There are five major types of equity funds, which are as follows:
Diversified funds: They diversify their fund allocation across various sectors and thus minimize the risk of over-concentration in any one particular sector. Over the long term, diversified equity funds have the best track records.
Tax Saving Funds (ELSS): These funds offer tax benefits to investors under the Income Tax Act. Equity linked saving schemes (ELSS) offer tax benefits under Section 80C and have a compulsory lock in period of three years. For more information on ELSS schemes, click here.
Index funds: These funds try to mirror the performance and risk characteristics of a particular index, like the S&P CNX Nifty or the Sensex. The value of the index fund varies in proportion to the benchmark index. Indexing, also called as passive management, tries to mirror the performance and risk characteristics of a particular index, like the S&P CNX Nifty or the Sensex. These funds generally have lower expenses since index fund managers do not need to spend time and resource to research and visit companies, nor do they buy and sell securities as frequently and therefore their transaction costs are lowered. Advantages:
- Cost : These funds generally have lower expenses since index fund managers do not need to spend time and resource to research and visit companies.
- Diversification : Index funds can provide exposure to multiple industries.
- Simplicity : Index funds are easy to understand and manage. You don't need to guess the investing styles of different managers.
Sector funds : These funds invest primarily in equity shares of companies in a particular business sector or industry. As these funds take exposure in a single sector, the concentration risk is high. Their performance is aligned with the performance of the sector in which they are investing.
International equity funds: These are similar to diversified equity funds but the difference is that they invest in the stocks of companies listed on international equity markets like Dow Jones, FTSE, etc. Through these funds investors get exposure to international markets, hence diversifying their portfolio. Typically these are fund of funds (FoFs) that invest in international mutual fund scheme on your behalf. These schemes are ideally meant for high risk investor looking for cross-border diversification. Read the 12th answer in this section for details.
Debt funds aim to provide regular and steady income to investors. These schemes predominantly invest in fixed income securities such as bonds, debentures, government securities and commercial papers. Capital appreciation in such schemes may be limited. These are ideal for:
- People with a need for capital stability and regular income
- Low tolerance for risk or looking to diversify with a more conservative investment
- Want to generate income or preserve capital
- Need tax-deferred income
- Have a short investment horizon
Hybrid Funds: They aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest in both shares and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. These schemes are ideal for investors looking for a combination of income and moderate growth. The most popular hybrid schemes include Balanced Funds and Monthly Income Plan. To know more about MIPs, click here.
Gilt Funds : These funds invest in Central and State Government securities and are best suited for the medium to long-term investors who are averse to risk. Government securities have no default risk however since these are mark-to-market related securities they are not risk-free, as per the common misconception.
Liquid / Money Market Funds : These funds invest in highly liquid instruments such as treasury bills, certificates of deposit, commercial paper and inter- bank call money and offer easy liquidity. The period of investment in such schemes can be as short as a day. They have emerged as an alternative for savings and short-term fixed deposit accounts with comparatively higher returns. These funds are ideal for corporates, institutional investors and business houses who invest their funds for very short periods.
Investors with the following profile should invest in money market funds
- Investment goals have a short time horizon
- Low tolerance for risk or looking to diversify with a more conservative investment
- Looking to generate fixed income
- Need liquidity
Here's the Risk-Return Matrix of various mutual fund schemes
Okay, so now you know what mutual funds are, where to find out information about them, and the different types of mutual fund schemes. The next important thing you need to know is how to choose the right mutual fund scheme for investment?
Choosing the right mutual fund scheme out of thousands of schemes available can be daunting. But it is much easier than it looks. Let us tell you how through the following steps:
Identify your investment objective
Different people have different needs. Therefore your choice of mutual fund scheme will vary based on your investment objective, age, lifestyle, risk profile, investment horizon, and family commitments among many other factors. You should ask yourself:
a. Why do I want to invest?
- I need regular income
- I need sufficient funds for my daughter's wedding
- I want to buy a house
- I need to raise fund for my children's education
- I need extra cash
b. How much risk can I absorb?
Based on your risk taking capacity you can be categorised as:
- Very conservative: Liquid and money market funds are best for you
- Conservative: Money market and debt funds are best for you
- Moderate: Balanced funds or a mixture of equity and debt funds is the right solution
- Aggressive: Predominantly equity funds will suit you
- Very aggressive: Equity diversified, international equity and sectoral funds are best for you
c. What is my investment horizon?
- I want to invest my idle funds for two months: Money market funds is the right solution
- I need cash to pay off my load in one year: Debt funds will be more suitable for you
- I want to invest for my child's education in eight years: Equity Funds will be the right solution
Once you have done a self-analysis you need to select a scheme category that matches your investment objectives:
- For Capital Appreciation go for equity sectoral funds, equity diversified funds, index funds or balanced funds.
- For Regular Income and Stability you should opt for income funds/MIPs.
- For Short-Term Parking of Funds go for liquid funds, floating rate funds, short-term funds.
- For Growth and Tax Savings go for Equity-Linked Savings Schemes.
|Investment Objective||Investment horizon||Ideal Instruments|
|Ultra Short-term Investment||1 day- 3 months||Liquid/Ultra Short-term plans|
|Short-term Investment||1- 6 months||Ultra short term/Short-term plans and FMPs|
|Medium-term investment||1-3 years||Bond funds/ G-sec funds|
|Capital Appreciation||Over 5 years||Diversified Equity/ Balanced Funds|
|Regular Income||Flexible||Monthly Income Plans / Income Funds|
|Tax Saving||Over 5 years with 3 yrs lock-in||Equity-Linked Saving Schemes (ELSS)|
Now that you have idea about the category of mutual fund that best suits your needs, the right scheme is just on your way.
Do your homework
Investors often feel that a simple way to invest in a mutual fund is to keep investing in the top performing mutual funds. But they often forget that today's best performing scheme may not give you a consistent performance. It may be by sheer luck that the scheme is currently rated well in performance. Therefore it is important that you choose the Mutual Fund Company, scheme and fund manager with a solid track record of investing in both buoyant and sluggish markets.
When evaluating a scheme consider its long-term track record rather than short-term performance. It is important because long-term track record moderates the effects which unusually good or bad short-term performance can have on a fund's track record. Besides, longer-term track record compensates for the effects of a fund manager's particular investment style. So the best performing mutual funds of today may actually have a few bad schemes that never performed well in the past and may give sluggish performance in the future too. This is where an analysis of long term performance over different periods helps.
But remember not to compare apples to oranges: When measuring past performance, always compare similar funds. This means similar asset class, fund objective and financial market. A fund that invests in services sector for instance, should not be compared to a diversified equity fund.
Click here to get top performing mutual funds detail, latest NAV, mutual fund scheme performance, mutual fund comparison, SIP returns calculator, mutual fund activity, ongoing NFO details and more.
Select the right Fund Manager
Look for a manager who has a track record of outperforming the competition. Levels of excellence vary. Some portfolio managers are better than others. Another factor considered important is consistent portfolio management style. This quality is the discipline by the fund's managers to establish specific investment criteria and stick with them rather than trying out whatever is in vogue. A checklist for choosing a fund manager:
- The fund's performance track record
- Independent ratings of the fund
- The fund manager's strategy
- Awards and industry recognition that have been bestowed on the fund
Other factors to consider
When choosing the right mutual fund scheme also consider the scheme's:
- Stock allocation: A good diversified fund should have less than 40% of net assets spread evenly across the top 10 stocks in its portfolio and no exceptional concentration in any of these. This helps the fund navigate safely during volatile periods. Stock picks must be consistent with no frequent churning of stocks by the fund manager over the past few months.
- Asset allocation: Don't overlook asset allocation. This tells you about the spread of assets across stocks, current assets, and cash. Cash reserves of an equity fund can tell a lot. A high cash level may indicate a fund manager's discomfort in staying fully invested in the market. Consistently high cash levels over a few months may probably indicate lack of good stock-picking opportunities. High cash reserves are a good sign in a crashing market, minimizing loss, but the fund must be fully invested in a rising market, maximizing returns.
- Turnover ratio: This shows you the stock churning in a fund's portfolio. It's measured by considering the number of stocks bought and sold over a certain assessment period. A higher or lower Portfolio Turnover Ratio doesn't matter as long as it's aligned with the fund's investment philosophy. A high turnover ratio can be good for equity funds, though high trading costs can lower your returns. A high turnover ratio fund will be suitable for you if you are an aggressive investor. But value funds must have low churning, as investments are usually long term.
- Expense ratio and loads: A high expense ratio indicates that your fund is expensive compared to its peers. Currently the expense ratio has a regulatory ceiling of 2.50% for equity and debt funds. You must check the entry and exit loads charged by the fund at the time of entry into and exit from the fund, respectively. NAVs are declared by funds after factoring in the expenses and loads.
But remember, a fund with an excellent track record but high expenses is a better investment than a fund with lower expenses but an average track record.
Now you know how to choose the right mutual fund scheme for investment. If you still are not sure, call our mutual fund advisor on 022-42254843/44 or email is on email@example.com and our executive will get in touch with
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There are many mutual fund schemes today in the market that invests in various international indices and international funds allowing you to diversify across geographies. It is a good idea to invest in overseas funds as they offer diversification of the portfolio but they are only suitable for investors with a high risk profile and who have a long term horizon. The exposure to these schemes should not be more than 10% of the overall portfolio.
For more details or to invest in international mutual fund schemes, please contact us.
Every mutual fund issues an offer document which describes the fund's investment policies and objectives, risks, costs (very important), historical performance data, and various other legalese-encrusted tidbits. The offer document, in essence, will describe the investment style of the fund. Nowadays, you can also find the essential information about mutual funds on various Internet sites.
You can begin your research (once you've finished reading our basics of mutual funds) on funds under our News and Markets section where you'll find data and analysis on over almost all mutual fund schemes.
There are various types of mutual funds to choose from depending on your investment objective, time horizon and profile.
Investors often get confused with NAV and try to judge it like a share price. It is a common myth that a low NAV is cheap and a good buy, but that is not the case. You cannot view a mutual fund unit like a share. A company's share price may get overvalued if its price shoots up, but that is not the case with a mutual fund. It is irrelevant how high or low the NAV of a fund is. Let's take an example, say you want to invest Rs 10,000. Irrespective of which fund you invest in, this amount stays constant.
Now let's say that your choice is restricted between two funds with identical portfolios. Since they both have identical portfolios, their value will increase in the same proportion. You may buy the units of one fund at a higher price than the other. But, the percentage increase would be the same.
Hence, your investment of Rs 10,000 will increase by the same percentage, irrespective of the fund you invest in.
So the number of units you get as well as a high or low NAV are irrelevant. Thus, it is the stocks in a portfolio that determine the returns from a fund, the value of the NAV being immaterial. The only instance where a higher NAV will get you fewer units that may affect you is where a dividend has to be received. Dividend is given per unit. So the fewer the units you get, the lesser the dividend. But even here, total returns will remain the same.
So from whichever angle you see it, NAV makes no difference to returns. Mutual fund schemes have to be judged on their performance, risk and other such factors.
Click here to get latest NAV, top performing mutual funds detail, mutual fund scheme performance, mutual fund comparison, SIP returns calculator, mutual fund activity, ongoing NFO details and more.
An exchange traded fund (ETF) is essentially an index fund that trades like a stock and is listed on the exchange. Like individual equity securities, ETFs are traded on a stock exchange and can be bought and sold throughout the day through a broker-dealer, just like Infosys or Reliance Industries shares.
An ETF is a single security representing a basket of stocks that corresponds to a particular index, say, the Nifty or Sensex or even Gold. The ETFs trading value is based on the net asset value of the underlying that it represents. Much like an index fund, an ETF offers built-in diversification. But because ETFs can be bought or sold within the trading day, they offer the flexibility of a stock.
For more details on ETFs, read ABC of exchange traded funds.
DISCLAIMER: Mutual funds are subject to market risk. You should consider the investment objectives, risks, charges and expenses of a mutual fund carefully before investing. The fund's prospectus contains this and other important information. Please read the offer document carefully before investing. Terms and Conditions apply.