Mutual Funds are among the hottest favourites with all types of investors. Investing in mutual funds ranks among one of the preferred ways of creating wealth over the long term. In fact, mutual funds represent the hands-off approach to entering the equity market. There are a wide variety of mutual funds that are viable investment avenues to meet a wide variety of financial goals. This section explains the various aspects of Mutual Funds.
What are Mutual Funds?
Professional expertise : Fund managers are professionals who track the market on an on-going basis. With their mix of professional qualification and market knowledge, they are better placed than the average investor to understand the markets
Diversification : Since a Mutual Fund scheme invests in number of stocks and/or debentures, the associated risks are greatly reduced.
Relatively less expensive : When compared to direct investments in the capital market, Mutual Funds cost less. This is due to savings in brokerage costs, demat costs, depository costs etc.
Liquidity : Investments in Mutual Funds are completely liquid and can be redeemed at their Net Assets Value-related price on any working day.
Transparency : You will always have access to up-to-date information on the value of your investment in addition to the complete portfolio of investments, the proportion allocated to different assets and the fund manager’s investment strategy.
Flexibility : Through features such as Systematic Investment Plans, Systematic Withdrawal Plans and Dividend Investment Plans, you can systematically invest or withdraw funds according to your needs and convenience.
SEBI Regulated Market : All Mutual Funds are registered with SEBI and function within the provisions and regulations that protect the interests of investors. AMFI is the supervisory body of the Mutual Funds industry.
Types of Funds
There are a wide variety of Mutual Fund schemes that cater to your needs, whatever your age, financial position, risk tolerance and return expectation. Whether as the foundation of your investment program or as a supplement, Mutual Fund schemes can help you meet your financial goals. The different types of Mutual Funds are as follows:
Diversified Equity Mutual Fund Scheme : A mutual fund scheme that achieves the benefits of diversification by investing in the stocks of companies across a large number of sectors. As a result, it minimizes the risk of exposure to a single company or sector.
Sectoral Equity Mutual Fund Scheme : A mutual fund scheme which focuses on investments in the equity of companies across a limited number of sectors – usually one to three.
Index Funds : These funds invest in the stocks of companies, which comprise major indices such as the BSE Sensex or the S&P CNX Nifty in the same weightage as the respective indice.
Equity Linked Tax Saving Schemes (ELSS) : Mutual Fund schemes investing predominantly in equity, and offering tax deduction to investors under section 80 C of the Income Tax Act. Currently rebate u/s 80C can be availed up to a maximum investment of Rs 1,00,000. A lock-in of 3 years is mandatory.
Monthly Income Plan Scheme : A mutual fund scheme which aims at providing regular income (not necessarily monthly, don’t get misled by the name) to the unit holder, usually by way of dividend, with investments predominantly in debt securities (upto 95%) of corporates and the government, to ensure regularity of returns, and having a smaller component of equity investments (5% to 15%)to ensure higher return.
Income Schemes : Debt oriented schemes investing in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments.
Floating-Rate Debt Fund : A fund comprising of bonds for which the interest rate is adjusted periodically according to a predetermined formula, usually linked to an index.
Gilt Funds : Funds invest exclusively in government securities.
Balanced Funds : The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. They generally invest 40-60% in equity and debt instruments.
Fund of Funds : A Fund of Funds (FoF) is a mutual fund scheme that invests in other mutual fund schemes. Just as fund invests in stocks or bonds on your behalf, a FoF invests in other mutual fund schemes.
How to choose the right Mutual Fund scheme
Once you are comfortable with the basics, the next step is to understand your investment choices, and draw up your investment plan relevant to your requirements. Choosing your investment mix depends on factors such as your risk appetite, time horizon of your investment, your investment objectives, age, etc.