Mutual funds 2018-05-21T10:51:40+00:00

Mutual funds


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What are mutual funds?

Mutual funds is an investment programme funded by shareholders who trade in diversified holdings and is professionally managed. Also, it is a kind of common fund created and 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. Mutual funds are registered under 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.

Given are the terms which should be known by applicants of mutual fund:

  • 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.

What are the advantages of investing in Mutual Funds?

Following are the reasons why people invest in mutual funds are outlined below.

  • Mutual funds are managed by fund managers of asset management companies which is important for professional management. Managers generally employ their investment expertise to minimise risks and maximise returns to investors. It has been seen that most of the people find it difficult to decide which assets to invest their savings in due to lack of financial knowledge.
  • 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.
  • An investment can be made by those who do not have sizeable amounts in direct equity or other instruments that require a high initial investment, mutual funds make for an affordable investment avenue. Number of investors lowering individual costs when even transaction costs are spread out over most investors
  • All mutual funds are focused investments 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. To certain securities, a mutual fund investor can access otherwise unavailable to them e.g. foreign sectors or foreign securities which cannot be invested in by individuals.
  • 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.
  • Easily bought and sold fund units can be prevailed at unit prices or NAVs. But it can happen, unless there is a lock-in period, it is easy for investors to buy into or out of a fund thereby providing liquidity.
  • There are no. 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.
  • Mutual funds are popularly known worldwide known to provide good high returns on medium and long-term investments since investors can diversify risk to enhance overall returns.
  • SEBI ensures regulated investments and dealings are as per regulations. This provides an element of safety to investments made.
  • It can be hard for investors to regularly review their investment portfolios. Therefore, with the help of Mutual funds investor can have clear statements of all investments which makes it easy for investors to keep a tab on. Balanced and high quality provide investors an avenue to access both equity and debt funds at one go in a proportion of choice.
  • Systematic Investment Plans options 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.
  • Mutual funds offers flexibility which is very important 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?

Those who can invest in mutual funds in India are 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. These are the ways by whih applications can be made:

  • Agents: Agents are the Professionals who reach out to customers to provide information on the various funds provided by a company. They help in dealing with related issues and process applicationse.g. redemption, cancellation, transfer of units and other dealings with the company. 6% of agent commission is added on to the purchase price of fund units
  • Direct: Customers can circumvent agents and apply to a scheme themselves. If they wish to do so, they can visit to the nearest office of the mutual fund company or by going online. Forms can downloaded or availed from the company website and submitted at the office. Alternatively, applications can be processed online.

Why applying for the mutual funds online becoming popular?

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

  • Convenience: Applying for mutual funds is convenient as one can apply for Schemes from the comfort of one’s own office or home.
  • Compare and choose: There are a number of online financial services providers besides company’s website which act as single-point portals for viewing and comparing funds and schemes from multiple companies.
  • Affordable: If we talk about affordability then yes the 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.

What are the types of Mutual Funds in India ?

As an investor you have a choice as there are different types of mutual funds categorised based on structure, asset class and Based on asset class

Types of mutual funds in India

Based on asset class-

  • Equity Funds: Equity funds come under the stocks/shares of companies. These are considered high-risk funds but also tend to provide high returns.
  • Debt Funds: Company debentures, government bonds and other fixed income assets are the examples of debt funds. They are considered safe investments and provide fixed returns. Also, these are the funds that invest in debt instruments.
  • Money Market Funds-They are called and considered as safe investments for those looking to park surplus funds for immediate but moderate returns. e.g. T-Bills, CPs etc.(liquid instruments)
  • Hybrid or balanced Funds: Such funds are mix of asset classes and 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:Such funds means investment in a particular sector of the market e.g. Infrastructure funds invest only in those instruments or companies that relate to the infrastructure sector. The risk involved in these schemes depends on the nature of the sector and the returns are tied to the performance of the chosen sector.
  • Index Funds: Buying shares representative of the BSE Sensex are examples of Index funds. To mirror the movement and returns of the index, there are instruments that represent a particular index on an exchange.
  • Tax-Saving Funds: Investments made in these funds qualify for deductions under the Income Tax Act. These are funds that invest primarily in equity shares. Highly risky but also offer high returns if the fund performs well.
  • Fund of funds: Such funds can be invest by an individual in other mutual funds and returns depends on the performance of the target fund.

Based on structure-

  • Open-Ended Funds:  Units are open for purchase or redemption in such funds through the year. All purchases/redemption of these fund units are done at prevailing NAVs. More people preferred these funds since they offer liquidity to investors.
  • Close-Ended Funds:  Units can be purchased only during the initial offer period in close-end funds. One can redeemed units 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.
  • Income funds: Money is invested primarily in fixed-income instruments e.g. bonds, debentures etc. The main purpose behind doing this is to provide capital protection and regular income to investors.
  • Liquid funds: Money is invested primarily in short-term or very short-term instruments e.g. T-Bills, CPs etc. with the purpose of providing liquidity.

Best Performing Mutual Funds

We have compiled a list of the best performing mutual funds in India according to different categories of mutual funds. This will help you get a clear understanding of the performance of each type of fund. You can accordingly select a fund to invest your money in.

  • Large-cap-oriented equity funds

Mutual funds that invest a bigger part of their set of funds in organisations that have a large market capitalisation, usually with a value of more than $10 billion.

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  • Diversified Equity Funds

Funds that invest individuals’ money in any organisation without looking into its sector or size. It diversifies or distributes investments across the entire stock market for giving the best returns to the investors.

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  • Small and Mid-Cap Equity Funds

Funds which one can invest in a combination of small cap and midcap stocks. These funds distribute their investments in both small cap companies and mid cap companies. The percentage of money invested in small cap and mid cap will differ.

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  • Thematic – Infrastructure Funds

As the name suggests, Invent in a certain sector as per common theme. Thematic – infrastructure funds are funds that are invested in companies that deal in projects or activities associated with infrastructure such as steel, construction, cement, and so on

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  • Consistent Performers – Equity Funds

These are equity funds that have been performing well consistently.

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  • Equity Linked Savings Scheme (ELSS)

These funds are those which assists you in saving income tax of up to Rs.1.5 lakh under Section 80C of the Income Tax Act. These funds come with a lock-in period of 3 years

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  • Index Funds

Index funds are mutual funds where the portfolio is constructed with the objective of matching or tracking market index components like the Standard & Poor’s 500 Index (S&P 500).

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  • Balanced Mutual Funds

These funds enable you to construct a balanced portfolio consisting of stock, bonds and Money market components.

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  • Consistent Performers – Balanced Funds

These are balanced funds that have been performing well consistently.

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  • Monthly Income Plan (MIP) – Aggressive Mutual Funds

It comes under the category of investments that offers a particular payment on a monthly basis to the investor. Aggressive MIP mutual funds are funds that provide higher returns to the investors compared to other MIPs. However, since these funds are aggressive in nature, they carry higher risk.

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  • Long-Term Gilt Funds

Long-term gilt funds are those funds that invest in long-term government securities.

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  • Long-Term Income Funds

Invest in securities over a long period to provide the shareholder with a flow of income via interest or dividend payments.

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  • Consistent Performers – Debt Funds

These are debt funds that have been performing well consistently.

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  • Short-Term Income Funds

Invest in securities over a shorter period of time to provide the shareholder with a flow of income via interest or dividend payments.

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  • Credit Opportunities Funds

These are open-ended debt mutual funds that provide higher returns by absorbing the risk as a result of investing in lower-rated instruments. These funds look for mismatches between the credit rating and fundamentals of a bond.

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  • Ultra-Short-Term Debt Funds

Invest in liquid-income instruments having short-term maturities and also offer higher returns than other money market instruments.

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  • Liquid Funds

Liquid funds are mutual funds characterised by a low maturity period and invest primarily in securities such as treasury bills, commercial papers, and term deposits.

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Eligibility Criteria for Mutual funds in India

  • Adult Indian Resident Individuals, either single or jointly (not exceeding three)
  • Non-resident Indians (NRIs) and persons of Indian origin (PIO) residing abroad, on a full repatriation basis
  • Parents or Lawful guardians on behalf of Minors
  • Hindu Undivided Families (HUFs) in the name of HUF or Karta
  • Companies (including Public Sector Undertakings), Bodies Corporate, Trusts (through Trustees) and Cooperative Societies
  • Banks (including Regional Rural Banks) and Financial Institutions
  • Religious and Charitable Trusts (through Trustees), Private Trusts authorized to invest in Mutual Fund schemes under their Trust Deeds
  • Foreign Institutional Investors registered with SEBI on repatriation basis
  • Special Purpose Vehicles (SPVs) approved by appropriate authority (subject to RBI approval)
  • International Multilateral Agencies approved by the Government of India
  • Army/Navy/Air Force/Para Military Units and other eligible institutions
  • Unincorporated body of persons as specified by AMC’s
  • Partnership Firms
  • Scientific and Industrial Research Organization’s
  • Trustee, AMC or Sponsor or their associates
  • Such other individuals/institutions/body corporate etc., as may be decided by the AMCs from time to time, so long as they are in conformity with SEBI Regulations.
  • Qualified Foreign Investors (QFI)

Documents Required

For Resident Indians

All customers who intends to invest in mutual fund needs to be KYC compliant. Individual investors will have to produce their proof of identity and proof of address

List of documents admissible as proof of identity:

  • PAN card with photograph. This is a mandatory requirement for all applicants except those who are specifically exempt from obtaining a PAN.
  • Unique Identification Number (UID) (Aadhaar)/Passport/Voter-ID Card/Driving license.
  • Identity card/document with applicant’s photo, issued by any of the following: Central/State Government and its Departments, Statutory/Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, Public Financial Institutions, Colleges affiliated to Universities, Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council etc. to their Members; and Credit cards/Debit cards issued by Banks.

List of documents admissible as proof of address:

  • Unique Identification Number (UID) (Aadhaar)
  • Driving License
  • Passport
  • Voters Identity Card
  • Ration Card
  • Registered Lease/Sale Agreement of Residence
  • Flat Maintenance bill
  • Insurance Copy
  • Utility bills like Telephone bill (only landline), Electricity bill or Gas bill. These should not be more than 3 months old
  • Bank Account Statement/Passbook – Not more than 3 months old
  • Self-declaration by High Court and Supreme Court judges, giving the new address in respect of their own account
  • Proof of address issued by Bank Managers of Scheduled Commercial Banks/Multinational Foreign Banks/Gazetted Officer/Notary Public/Elected Representatives to the Legislative Assembly or Parliament/a document issued by any Government or Statutory Authority
  • Identity card/document with address, issued by any of the following: Central/State Government and its Departments. Statutory/Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, Public Financial Institutions, Colleges affiliated to Universities and Professional Bodies such ICAI, ICWAI, ICSI, Bar Council etc. to their Members
  • For FII/sub account, Power of Attorney given by FII/sub-account to the Custodians (which are duly notarized and/or apostilled or consularised) that gives the registered address should be taken
  • The proof of address in the name of the spouse may be accepted

For Non-Resident Indians

Non-resident Indians residing out of India need to submit the following supporting documents in addition to PAN as proof of identity and address

  • Certified true copy of the passport
  • Certified true copies of proof of overseas address and permanent address

If any of the documents (including attestations/certifications) towards proof of identity or proof of address specified above are in a foreign language, they have to be translated into English before submission.

Tips for getting the right mutual fund

  • You need to look at the past history before going for mutual fund which means be aware about how it has done market upturns as well as crashes.
  • Always look for the best mutual funds in the asset class (equity, debt to hybrid).Make sure that they will help you meet your financial goals in the time frame that your need. They should also be according to your risk profile.
  • Regular checks of the performance of the funds for different time frames (3 months,6 months,1 year and so on). In case of debt funds you can go up to 6 years for equity funds.
  • Shortlisted funds by you will be consistent performers and are most likely managed by exceptional fund managers.
  • Check for the profile of the fund managers and the AMC management. This can be found in the prospectus of the respective Mutual Funds.

Importance of diversification in Mutual Funds

Regardless of risk profile associated with the mutual funds, each investment made by an individual has some elements of risk. You can definitely lower risk extent or minimise the potential losses. Dividing your portfolio is the best way to diversify your investments that are not fully correlated. You should have a healthy mix of equity, debt, money market, sector specific and other type of funds to have a balance portfolio. Even within an asset class such as equity, you should ensure that the funds don’t invest in similar securities. This will help ensure that your portfolio is truly diversified.

Do’s and Don’ts while investing in mutual funds

Do’s Don’ts
First thing you need to do is to diversify into different asset classes, Small and Mid-Cap Equity Funds Don’t invest in a fund without reviewing its performance and offer document. Don’t invest just because your friend has bought it recently.
Funds which one can invest in a combination of small cap and midcap stocks. These funds distribute their investments in both small cap companies and mid cap companies. The percentage of money invested in small cap and mid cap will differ. Don’t check your fund’s NAV every day or week or even month. NAV may fluctuate in the short term but all that matters is the percentage gain or loss.
That is to determine you want to buy a money-market fund and/or bond fund. Dont put all the money allocted foe a goal into a fund all at once
It is always better to buy a no-laud fund over one that charges a load fee. A load is simply a one-time fee that you pay for the right to buy the fund. Mutual funds charges fee at some extent form investors. So, dont ignorer expenses in such case.
Weigh a fund’s expenses as it can varies from a fund administrative and trading costs. Don’t blindly chase a fund for its current performance or overlook another for its lackluster performance in the near past.

Frequently Asked Questions

Get answers to all your questions

1. What is the use of folio number in mutual funds?
A folio number is like a bank account number, it is unique number to identify your holdings with the respective mutual fund. The unique number differs from fund house to fund house.

2. Are returns from mutual funds guaranteed?
Generally, Mutual Funds do not offer guaranteed returns to investors. Although, SEBI regulations allow Mutual Funds to offer guaranteed returns subject to the Fund meeting certain conditions, most Funds do not offer such guarantees. In case of a guaranteed return scheme, the sponsor or the AMC, guarantees a minimum level of return and makes good the difference if the actual returns are less than the guaranteed minimum.

3. Can the NAV of a debt fund fall?
A debt fund invests in fixed-income instruments. These include Commercial Paper, Certificates of Deposit, debentures and bonds. While the rate of interest on these instruments stays the same throughout their tenure, their market value keeps changing, depending on how the interest rates in the economy move.

4. How are mutual funds different from Portfolio Management Schemes?
The investments made by the investors are pooled to form a common investible corpus and the gain/loss to all investors during a given period are same for all investors. In the case of portfolio management schemes, the investments of a particular investor remain identifiable to him. Here the gain or loss of investors will be different from each other.

5. Who is a custodian?
The custodian, an independent organisation, has the physical possession of all securities purchased by the mutual fund, and undertakes responsibility for its handling and safekeeping. For instance, SCHIL is the custodian for most fund houses in the country.

6. How relevant is the expense ratio?

As is evident from the definition, a lower expense ratio underlines the efficiency of a fund. This is need to apply to gauge the efficiency (or lack of it) between funds.

7. What is cheque-writing facility?

A service enabling investors to write cheques against their mutual fund account balances. Cheques usually must meet a certain minimum amount and the service is restricted to money-market funds.

8. Why should I consider investing in mutual funds?

Mutual funds are a vital tool to ensure your financial well-being. They help you to get better returns even from relatively smaller investment amounts, and are quite flexible in nature. Investment of a small amount at regular intervals or a big lump sum amount at once, you will find a mutual fund product suitable for your needs. With options like SIP (Systematic Investment Plan) and SWP (Systematic Withdrawal Plan), mutual funds can help you plan for short-term as well as long-term goals and financial liabilities.

9. When I receive or download a Scheme Information Document, what are the main things I should check for?
In your Scheme Information Document, watch out for the fund features, risk factors, initial issue expenses, recurring expenses, entry or exit loads, track record of the sponsors, educational qualification and professional experience of the key personnel managing your fund and the performance of other schemes launched by the mutual fund in the past. You should also check and be aware of pending litigations and penalties imposed, if any.

10. How will I know if my mutual fund makes changes to the scheme?

You will receive communication from the mutual fund in case of material changes to your scheme. Also, a quarterly newsletter, revised and updated mutual fund documents at least once in two years and addendums to the document in the interim period till the updated scheme documents are sent out, will let you keep track of any changes made to your mutual funds.

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