What is the advantage of mutual funds? Mutual fund in our opinion is one of the best options for people who want to derive the benefit of various class of assets / industries. It does not need to be monitored and you can get exposure to a variety of assets / industries and spread out risk. The key advantages are
→ Professional Management
→ Portfolio Diversification
→ Reduction in Risk
→ Choice of Products
→ Flexibility and Convenience
→ Low Transaction Cost
Mutual funds have wide range products to cater all segment of investor, could be a conservative, moderate, or aggressive investor. It is very good alternate to traditional banking products like saving accounts, recurring fixed deposits accounts etc. There is a flexibility in terms of the duration, could be started on a monthly basis and go on to as long as an investor would want.
Broadly, types of mutual fund are equity mutual funds, debt mutual funds, balanced funds, hybrid funds, sector funds, ETF, thematic funds, gold funds international funds and fund of funds.
Based on your goals, risk bearing capacity and choice your investments can be diversified in these funds.
To do your goal based planning and for wealth creation there are two ways to go about investing your money in a mutual fund:
In this method, funds are invested in a mutual fund at one go. If the value of the mutual fund rises after that, so does the value of your investment and vice-versa.
Systematic Investment Plan (SIP):
In this method, you keep investing smaller amounts of money at regular intervals (usually monthly). So if you invest in a mutual fund through a SIP, you don’t need to time your investment and you become a disciplined investor. SIP and Power of Compounding are eight wonder of world.
In India, mutual funds function as trust created under the Indian Trust Act, 1882. There are three layers of mutual fund in India as follows:
The sponsor is a person who establishes a mutual fund and gets it registered with Sebi. The sponsor forms the Trust, appoints the Board of Trustees, and has the right to appoint the Asset Management Company (AMC) or the fund manager.
The mutual fund is managed by a Board of Trustees. The trustees act as a protector of unit holders’ interests. They do not directly manage the portfolio of securities and appoint an AMC (with approval of Sebi) for fund management. If an AMC wishes to float additional or different schemes, it will need to be approved by the trustees. Trustees play a critical role in ensuring full compliance with Sebi’s requirements
Asset Management Company:
The AMC is appointed by trustees for managing fund schemes and corpus. An AMC functions under the supervision of its own board of directors and also under the directions of trustees and Sebi. The market regulator has mandated the limit of independent directors to ensure independence in AMC workings.
The other constituents are:
Custodian and depositories:
The fund management includes buying and selling of securities in large volumes. Therefore, keeping a track of such transactions is a specialist function. The custodian is appointed by trustees for safekeeping of physical securities while dematerialised securities holdings are held in a depository through a depository participant. The custodian and depositories work under the instructions of the AMC, although under the overall direction of trustees.
Registrar and transfer agents:
These are responsible for issuing and redeeming units of the mutual fund as well as providing other related services, such as preparation of transfer documents and updating investor records. A fund can carry out these activities in-house or can outsource them. If it is done internally, the fund may charge the scheme for the service at a competitive market rate.
An open-ended fund is a fund that is available for subscription and can be redeemed on a continuous basis. It is available for subscription throughout the year and investors can buy and sell units at NAV related prices. These funds do not have a fixed maturity date. The key feature of an open-ended fund is liquidity.
A close-ended fund is a fund that has a defined maturity period, e.g. 3-6 years. These funds are open for subscription for a specified period at the time of initial launch. These funds are listed on a recognized stock exchange.
Interval funds combine the features of open-ended and close-ended funds. These funds may trade on stock exchanges and are open for sale or redemption at predetermined intervals on the prevailing NAV.
Equity/Growth funds invest a major part of its corpus in stocks and the investment objective of these funds is long-term capital growth. When you buy shares of an equity mutual fund, you effectively become a part owner of each of the securities in your fund’s portfolio. Equity funds invest minimum 65% of its corpus in equity and equity related securities. These funds may invest in a wide range of industries or focus on one or more industry sectors. These types of funds are suitable for investors with a long-term outlook and higher risk appetite.
Debt/ Income funds generally invest in securities such as bonds, corporate debentures, government securities (gilts) and money market instruments. These funds invest minimum 65% of its corpus in fixed income securities. By investing in debt instruments, these funds provide low risk and stable income to investors with preservation of capital. These funds tend to be less volatile than equity funds and produce regular income. These funds are suitable for investors whose main objective is safety of capital with moderate growth.
Balanced funds invest in both equities and fixed income instruments in line with the pre-determined investment objective of the scheme. These funds provide both stability of returns and capital appreciation to investors. These funds with equal allocation to equities and fixed income securities are ideal for investors looking for a combination of income and moderate growth. They generally have an investment pattern of investing around 60% in Equity and 40% in Debt instruments.
Money Market/ Liquid Funds
Money market/ Liquid funds invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit and Commercial Paper for a period of less than 91 days. The aim of Money Market /Liquid Funds is to provide easy liquidity, preservation of capital and moderate income. These funds are ideal for corporate and individual investors looking for moderate returns on their surplus funds.
Gilt funds invest exclusively in government securities. Although these funds carry no credit risk, they are associated with interest rate risk. These funds are safer as they invest in government securities.
There are two ways to go about investing your money in a mutual fund:
In this method, you invest an entire chunk of money in a mutual fund at once. If the value of the mutual fund rises after that, so does the value of your investment & vice-versa.
Systematic Investment Plan (SIP):
In this method, you keep investing smaller chunks of money at regular intervals (usually monthly). So if you invest in a mutual fund through a SIP, you don’t need to time your investment and you become a disciplined investor.
☆ Goals & objective
☆ Risk Appetite / Tolerance
☆ Time Horizone
☆ Myth : Mutual Funds are for experts
☆ Myth : Mutual Funds are only for the long term
☆ Myth : Mutual Fund is an equity product
☆ Myth : Mutual Funds with a Rs. 10 NAV are better than Mutual Funds having a Rs. 25 NAV
☆ Myth : One needs a large sum to invest in Mutual Funds
☆ Myth : One needs to have a Demat account to invest in Mutual Funds
☆ Myth : Funds with a higher NAV have reached the peak