Mutual Funds

Mutual Funds

Nowadays Mutual fund Investments are becoming more popular among public and investment in mutual funds is growing like anything, owing to its flexibility, good returns and less tax liability over long term period.

Let’s understand mutual funds. Mutual funds are funds collected from public investors by AMC (Asset Management Company) and invested in a number of equities or debts of companies or combination of both, for specified or unlimited time and consequently result in growth of funds, which can provide return to the investor in the form of matured amount or periodic dividend.

The risk involved in mutual funds is lower than direct equity investment and higher than debt securities such as bonds & bank FD. Besides for every single fund, there is a dedicated Fund Manager. The fund manager is basically in charge of the fund and decides what equities, bonds or other assets the fund will buy with investor's money. Essentially, the fund manager will function as a stock-picker. The fund manager will build a portfolio of assets to accomplish the aims of the mutual fund. On a daily basis, the fund manager will often be in charge of actually placing orders and buying/selling individual stocks/bonds. The fund manager analyses and   monitors the markets, make trades and makes sure the fund operates in an efficient and profitable manner.

Majority of Mutual funds have no Lock-in period. One can close the mutual fund and redeem his money any time in his bank account. Normally one day is required for the process after closing the fund.

AMCs are regulated by the Securities and Exchange Board of India (SEBI). AMFI is The Association of Mutual Funds in India. It is the association of all the Asset Management Companies of SEBI registered mutual funds in India.

Classification

Mutual funds can be broadly classified as Equity Funds, Debt Funds and Hybrid Funds. Hybrid funds are the combination of both Equity and Debt funds.

Mutual fund investments can be done as one-time investment that is Lump sum amount or the other popular option is periodical regular investment known as Systematic Investment Plan (SIP), in a particular mutual fund scheme. The period can be weekly, monthly or quarterly.

Equity funds

Equity funds are those funds that invest the money of investors in pure stocks of different companies. Based on capital size of company the equity funds are further classified as Large Cap, Mid Cap, Small Cap, Multi-Cap, ELSS, Sector and Index fund. Large, Mid and Small cap indicate the size of company. Multi-cap funds    invest in all three types that is Large, Mid and small size company.

ELSS stands for Equity linked saving scheme. ELSS Mutual Funds, save Tax under Section 80C of Income Tax Act of India. There is a lock-in period of 3 years for ELSS funds. After 3 years one can either redeem the matured amount or continue with the fund for as long as desired and redeem at any future date. ELSS fund is eligible for tax benefit under section 80 C for the financial year of investment. Returns from ELSS are tax-free.

If the Lock in period is compared with PPF (Private provident fund), lock-in period for PPF is as high as 15 years. PPF too is eligible for 80C Tax benefit. PPF option is described in other section of this blog.

Sector funds are those funds that invest in Stocks/shares of particular segment of industry such as Automobile, energy, tourism, transportation etc

Index funds are those funds, as the name suggests, that invest in Stocks in an Index. These funds purchase all the stocks in the same proportion as in a particular index. An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index. Index is a tool used by investors and financial managers to describe the market and to compare the return on specific investments.

Debt Funds

Debt funds are mutual funds that invest in fixed income securities like bonds and treasury bills, monthly income plans (MIPs), short-term plans (STPs), liquid funds and fixed maturity plans (FMPs). Debt Mutual Funds mainly invest in a mix of debt or fixed income securities such as Treasury Bills, Government Securities, Corporate Bonds, Money Market instruments and other debt securities of different time horizons. Generally, debt securities have a fixed maturity date & pay a fixed rate of interest.

Liquid funds are the type of debt fund that put money in assets with short-term maturity from some days up to 91 days. They invest in instruments such as treasury bills, certificate of deposit, etc. They hold very little risk.  Liquid funds are a good alternative to FD and saving account in order to keep money for short term, with returns normally higher than FD.

Hybrid Fund

Hybrid Mutual Fund also known as balanced funds primarily invests in a combination of equity and debt funds to achieve the perfect blend of maximum diversification and decent returns. The choice of the Hybrid Fund depends on your risk preferences and Investment objective. Hybrid funds can be equity-oriented or debt-oriented. When the fund manager invests 65% or more of the fund's assets in equity and rest in debt and money market instruments, it's called an equity-oriented fund. Conversely, an asset allocation of 60% or more in debt and rest in equity is called a debt-oriented fund.

Systematic Investment Plan (SIP)

Mutual fund investments can be done as a one-time investment, that is a lump sum amount or the other popular option is SIP, wherein there is a periodical auto debit of a fixed amount from your bank account and invested into a specific mutual fund scheme.

The period can be weekly, monthly or quarterly. SIP concept is now becoming more common among investors. Here a fixed amount is transferred from investors bank account each month and invested in SIP mutual fund. SIP can be of different types. One is Steady SIP in which periodic investment amount is not changed. Second is the Flexible SIP in which monthly amount is varying. For instance, if the share market is in temporary high phase, the fund manager will reduce the amount of SIP. Whereas when the market is low, he increases the amount of SIP. The third type is classified on the frequency of SIP that is weekly, monthly or quarterly SIP. If the market is daily in high and low phases, weekly SIP can be advantageous. But monthly SIP is most popular. The other type is Top up SIP in which after one year the SIP amount is increased automatically by a predefined amount as per investors choice. These are the types of SIPs.

To start a SIP, you need an E-mandate, means ECS mandate. This is a form to be submitted to the bank, through which bank transfers a fixed SIP amount from bank account, regularly to mutual fund.

X-SIP - X-SIP or Exchange SIP is the method and forms established by Exchange for investment in SIP mutual funds through bank ECS mandates.

I-SIP - I-SIP or Internet-based SIP is a method of initiating SIP online for which net banking is mandatory, and is a completely paperless way of setting up SIP. In I-SIP, after you have set up the SIP, you will have to add the Asset Management Company (AMC) as a biller in your bank through internet banking.