English 
Hindi What are Mutual Funds
Mutual Funds are currently the most popular market investment instruments. A Mutual Fund is an investment tool, managed by professional fund managers, that pools the investors’ money and invests it in financial instruments such as equities, bonds, etc, or a mix of various instruments, to generate returns for the investors.
The combined holding of the fund, or its portfolio, is structured, managed, and adjusted in line with market trends by professional fund managers so that it can continue to match the objectives promised to its investors.
Mutual Funds are easily available and have a highly flexible minimum investment range. In India, investment in Mutual Funds can start with as little as INR 500, and go up to any limit.
Mutual Funds are, thus, a convenient avenue for small or individual investors to access equities, bonds, and other securities through professionally managed portfolios, which they may not have been able to access in their individual capacity. The investors participating in the gains or losses of the fund in proportion to their investment.
The functions of Mutual Funds are quite straightforward. The fund manager invests the pool of money into the portfolio which includes different asset classes such as Equity, Bonds, Money Market instruments, etc and distributes particular units to investors in proportion to their investment. The future value of investments will depend on the underlying assets performance in the portfolio. The management and working of Mutual Funds are regulated by the Securities and Exchange Board of India (SEBI). Mutual Funds are formed as Trusts with a three-tier core mandated by SEBI, which comprises the Sponsor, the Trustee, and the Asset Management Company (AMC).
The Sponsor, who is the promoter of the Mutual Fund, has to approach SEBI for permission to start a fund and fulfill the eligibility criteria laid down by SEBI.
Trustees act as guardians of the investors and ensure that the funds are managed in accordance with their defined objectives, to protect the interest of the investors. The trustees appoint the AMC to manage the portfolio of the Mutual Fund.
The AMC manages the investors’ money in the Mutual Fund, in return for a service fee. It also handles the day-to-day operations of the fund, launches various schemes in accordance with the market dynamics and the investors’ needs, and oversees their development.
What are the Benefits of Investing in Mutual Funds
There are various advantages of Mutual Funds and investing in them:
Diversified Market Exposure: First and foremost, it is a low-cost avenue for a diversified investment portfolio, especially for small or retail investors. Starting with an investment of as little as Rs. 500, investors get exposure to around 30 to 40 stocks with a single fund.
Professional Portfolio Management: It is an especially attractive option for those who wish to invest in the markets, but do not possess the requisite knowledge Since allocation and management of funds amongst various financial instruments is done by experts after careful market analysis, the investors’ money is in safe hands and is likely to yield higher returns.
Transparent Functioning: Mutual Funds are required to disclose all details of their portfolio and operations on a regular basis, which makes investing in them both reliable and transparent.
Wide Range of Options: Since there is a large variety of various types of Mutual Funds available in the market, with different portfolio mixes, returns and risk parameters, virtually every investor can be sure of finding the ones that suit their objectives with regard to returns, investment amount and risk appetite.
Multiple Avenues of Returns: Investors earn returns on their Mutual Fund investments in three ways:
- Dividends on stocks and interest on bonds that are a part of the portfolio of the fund.
- Capital Gain that is passed on by the fund to the investors, in the event of sale of securities that have increased in price.
- Increase in share price of the stocks in a fund, which the investor may then sell in the market to make a profit.
Types of Mutual Funds
There are a number of ways to classify Mutual Funds. The primary classification is Open-ended and Closed-ended Funds, based on redemption format. They can also be classified on the basis of types of portfolio, such as Equity Funds, Debt Funds, and Hybrid Funds. Hybrid Funds can be Balanced, Aggressive or Conservative funds, etc. Further, on the basis of returns, Mutual Funds may be Fixed Income Funds or Indexed Funds. Additionally, for the civic-minded investors, there are also Regional Funds and Socially Responsible funds.
Redemption-based Classification
- Open-ended funds: These are funds that can be redeemed at any point of time.
- Closed-ended Funds: These funds do not provide the investor the option of redemption before maturity.
Portfolio-based Classification
- Equity Funds: Equity or Stock Funds, i.e., funds that principally invest in stocks, comprise the largest category of Mutual Funds. They are further sub-categorized on the basis of the market capitalization of the companies they invest in, such asas Small-cap, Mid-cap or Large-cap funds. Equity Funds may also be classified by their investment approach, into Aggressive Growth, Income-oriented, Value, etc.
Funds can also be differentiated on the basis of the fundamentals of the companies in their portfolio. Value Funds are typically characterized by investment in high-quality, low-growth companies that have low price-to-earnings (P/E) ratios, low price-to-book (P/B) ratios and high dividend yields.
As opposed to these, Spectrum Funds are growth funds that invest in companies with a proven track record as well as good prospects of growth in earnings, sales, and cash flows. These are companies with high P/E ratios, which do not pay dividends.
- Debt Funds: These, as the name suggests, are Mutual Funds that invest principally in bonds or debt instruments. They usually yield a fixed income, but can be risky, as they could face interest rate risk, or default risk if the debt instruments in which they invest are high risk ones.
- Hybrid Funds: Hybrid Funds, also known as Balanced Hybrid/ Aggressive Hybrid/ Conservative Hybrid Funds, are Mutual Funds whose portfolios are a judicious mix of equity and debt instruments. These are further classified into:
- Dynamic Asset Allocation/ Balanced Advantage Fund
- Conservative Hybrid Fund
- Aggressive Hybrid Fund
- Multi Asset Allocation
- Equity Savings
- Arbitrage Funds
Returns-based Classification
- Fixed Income Funds: These are usually Debt Funds that focus investments on Government Bonds, Corporate Bonds and other debt instruments to generate an income for the investors by way of interest payments. They typically seek to invest in undervalued bonds with the objective of selling them at a profit. However, despite their usually higher returns than other funds, they can also carry higher risk, depending on the type of debt instruments in which they invest.
- Indexed Funds: These are an increasingly popular category of Mutual Funds that seek to mimic market trends by mapping their investments to a major market index such as NSE, BSE, S&P 500 or Dow Jones Industrial Average (in case of Global Funds). In this way they save on their research and analysis expenses, and have more to distribute to their investors. These funds are especially attractive for cost-sensitive investors.
- Thematic/ SectorFunds: Thematic/ SectorFunds are Mutual Funds that concentrate on a certain segment of the economy or a targeted strategy.
- Sector Funds: These are targeted at stocks pertaining to specific sectors of the economy, such as financial, technology, health, etc. Due to their single point focus and lack of diversification, these can be highly volatile.
- Regional Funds: Regional Funds invest in stocks that focus on a specific geographic area. While they facilitate investment in foreign stocks, they come with the high risk of the region going into recession.
- Socially Responsible Funds: Also known as Ethical Funds, they invest exclusively in companies that meet their stated ethical or social responsibility criteria. This usually means that they do not invest in industries such as tobacco, alcoholic beverages, weapons, or nuclear power. Some such funds invest primarily in green technology, such as solar and wind power, recycling, etc.
Other common types of Mutual Funds include Alternative Investment Funds, Smart-Beta Funds, Target-Date Funds and Funds of Funds, i.e., Mutual Funds that buy shares of other Mutual Funds.
Why Should You Invest in Mutual Funds
Investment in Mutual Funds can be a wise decision, especially in the long term. Here’s why:
- Tax-friendly: For those investors who are in the higher tax brackets, ELSS funds are suitable owing to rebate advantages under Section 80.The tax amount for Mutual Fund investments is much lower than other investment options such as fixed deposits.
- SEBI Regulation: All Mutual Fund schemes are under strict regulation by SEBI, which requires them to regularly update the details of their portfolios and operations. Thus, they are the most transparent investment instrument in the market.
- Long term Profitability: Due to their diverse investments which hedge the risks of losses over time, in the long term, Mutual Funds are empirically found to be more profitable than more traditional investment avenues such as fixed deposits or individual company stocks.
- Wide Range of Options: With a multitude ofMutual Fund schemes available in the market, virtually every investor is sure to be able to find the ones that suit their investment objectives, affordability and risk appetite.
- Easily Accessible: Since Mutual Funds are traded on all the major stock exchanges, they can be accessed quite easily, which also makes them highly liquid assets.
- Money Growth: Investing in Mutual Funds is a lucrative option because the value of investment grows over time as a result of the compound interest. Buying a unit or share of a Mutual Fund translates to buying the performance of its portfolio or a part of the portfolio’s value. In other words, a share of a Mutual Fund represents investments in many different stocks, which in turn, means important diversification at a low price.
Mutual Fund Investment Guide
Investors can participate in Mutual Fund schemes through lump sum investment, or they may take the SIP/ STP route. Once in, they can exercise options such as Redemption or SWP, or else, Switch funds.
Lump- Sum Investment: This is a one-time investment, in which the investors deposit the entire amount that they wish to invest in a single transaction.
SIP/ STP: Under Systematic Investment Plan (SIP), the investors invest fixed amounts at regular periods – monthly, quarterly or semi-annually. The amount can start from as little as INR 100, and can be transferred automatically from the investor’s registered bank account via the banks’ auto-debit service.
Under Systematic Transfer Plan (STP), a fixed amount from the investor’s balance in a particular scheme can be transferred to another target or destination scheme at regular intervals.
Redemption and SWP: To redeem one’s Mutual Fund investments, investors can sell their Mutual Fund units. The process of redemption is initiated by specifying the number of units, or the amount, whereupon the redeemed amount is credited directly into the investors’ bank account.
Under the Systematic Withdrawal Plan (SWP), investors can withdraw a regular, fixed income from the invested scheme.
Switch: Under the Switch option, the investors can transfer, either a part or the whole of their balance in a particular scheme, to another scheme managed by the same AMC.
When Should You Invest in Mutual Funds
There is no particular right or wrong time for Mutual Fund investments. The key to Mutual Fund investment is matching one’s preferences and expectations with the objectives of the fund that one chooses. Before investing in Mutual Funds, the investor needs to have a clear understanding of the amount of money they wish to invest, the kind of returns they expect, the level of risk they are willing to tolerate, and their desired investment horizon.
This is especially important if one is a beginner. The good news is that with such a wide variety of Mutual Funds in the market, each investor can find their perfect match.
How to Save Taxes with Mutual Funds
Mutual Funds can be a good tax-saving option. Some of the tax benefits are:
- Investment in some kind of Mutual Funds like equity oriented ELSS Mutual Funds is eligible for tax deduction from Gross Taxable Income under Income Tax.
- Tax benefits in the form of indexation from long term investment (more than 36 months) in Debt Funds can help reduce the tax implication faced by an investor.
How to Invest in Mutual Funds With Nivesh
Any investor can enjoy the benefits of investing through Nivesh in the following easy steps:
- Create an account in Nivesh by providing your basic KYC details. (If you already have an account then just login into your account)
- On your portfolio page click on the Buy New tab at the right top corner of the screen.
- Select the category and choose the funds you want to purchase.
- If you already know the name of the fund to buy, then you can search the particular fund through Quick Order.
- Fill the transaction details and confirm. You can place up to 5 orders in one go.
- You can make payment through your registered account through UPI, Direct Pay, or NEFT/ RTGS , Bank Mandate or Cheque. For same-day NAV, select UPI, Direct Pay or NEFT / RTGS as other payment options may take a few days to clear, Nodal account takes about 1-2 days to clear payment from the approved mandate and cheque takes about 2-5 days in clearing due to which you will not get the same-day NAV.
Frequently Asked Questions (FAQs)
1. Are Mutual Funds Safe?
All investments carry some risk, but Mutual Funds are typically considered a safer investment than purchasing individual stocks. Since they hold many companies’ stocks within one investment, they offer diversification at low prices and also mitigate the risk of holding individual company shares.
2. Is SIP Better than a Lump sum?
SIP is generally considered preferable to a lump sum investment in Mutual Funds since SIP allows the investor a degree of control over the investment amount, which they can reconsider or adjust in view of the fund’s performance or their own changing objectives.
Additionally, the investor can benefit from rupee cost averaging while investing through SIP as the units will sometimes be bought at a higher/lower price as per market prices which in the long term averages to a lower overall cost.
3. Which Mutual Fund is Best for Beginners?
There is no particular Mutual Fund that is best for beginners. However, beginners to Mutual Funds need to set out their own objectives, expectations and risk-bearing capacity very clearly, so that they can find the right fund to suit them.
4. Can I Redeem a Mutual Fund Anytime?
If you have invested in an open-ended Mutual Fund, you can redeem your investment any time. However, in case of closed-ended funds, withdrawal can only be done at the time of maturity.
5. Do Mutual Funds Invest Only in Stocks?
No, Mutual Funds are of various types and their portfolios vary accordingly. While Equity Funds invest only in stocks, Debt Funds invest only in debt instruments and Hybrid Funds invest in a mix of debt and equity instruments.
6. Are Fund Managers Necessary?
Yes, fund managers of Asset Management Companies (AMCs) are necessary as they are a part of the three-tier core structure for Mutual Funds mandated by SEBI. Moreover, fund managers are professional experts and analysts whose skills play a large role in enabling Mutual Funds to perform well and earn good returns for their investors.
7. What is an Exit Load?
Mutual Funds charge a fee called the Exit Load in case an investor exits a scheme, either partially or fully, within a certain period from the date of investment which is specified in the Scheme Information Document. The purpose of the exit fee is to discourage investors from premature redemption. However, some schemes do not charge any exit fee. Different Mutual Funds charge different fees for different schemes as an exit load. It is thus important for the investors to understand the exit load structure of the scheme, to be able to make an informed investment decision.
8. What is Net Asset Value (NAV)?
Transactions in Mutual Fund units take place at the net asset value (NAV) of the scheme, which is simply the price of a single unit of that Mutual Fund scheme. It is calculated by dividing the total value of all the cash and securities in a fund’s portfolio, minus any liabilities, by the number of outstanding units.
9. What is an Expense Ratio?
Expense ratios are annual fees charged by Mutual Funds, and these can affect their overall returns. The expense ratios are charged as a percentage of the total assets – usually between 0.5% and 3% – to cover their expenses such as employee salaries, distributor’s commission, marketing costs, and profit for the fund house.
