In these times of decreasing interest rates, mutual fund investments are resilient and holding its ground. In the Indian scenario, Banks and Post Offices have played a vital role in shaping savings and investment patterns as critical financial planning components. However, mutual fund investment has grown as a popular choice of investment for investors.Read more
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A mutual fund is a type of investment instrument, wherein the fund houses or Asset Management Company (AMC) pool money from various investors and invest in market-linked securities like equity, stock, debt, etc. to gain high returns on investment in the long term. In mutual fund schemes the asset management company professionally manages the funds on your behalf through their expert fund managers. Let’s read further to know in detail about A-Z of mutual funds.
After understanding “What is Mutual Fund” it is time to learn about the different types of Mutual Funds and their varieties. Broadly, the Mutual Fund is classified as Equity, Debt, and Balanced or Hybrid Funds depending on their asset allocation and equity exposure.
Under this fund the investment is made in equity and equity linked securities. The minimum eligibility investment in equity under the scheme is 65% of its total portfolio. Equity funds are potentially the highest yielding investment under the influence of market forces, and thus, bear a matching risk factor. They are further classified as:
Small Cap Fund: As per SEBI norm, investments in companies ranked from 251, and above, constitute small-cap equities.
Mid Cap Fund: The investments in companies ranked under 250 are covered in this scheme.
Large Cap Fund: This scheme covers the companies with market capitalization rank from 1 to 100.
Multi-Cap Fund: Under this scheme, investment covers companies across all market capitalizations depending on market movements to book maximum profit.
Sector Fund: Investments are directed towards companies in a specific sector like FMCG, IT etc.
Index Fund: Here, the investment is linked to the popular stock market index like BSE, SENSEX, NSE, and Nifty.
ELSS: Equity Linked Savings Scheme is the only Mutual Fund that enjoys tax break under Section 80 C of the IT Act, 1961, up to a maximum of Rs.1.5 lakhs.
A mutual fund to be considered as a Debt Fund must invest 65% of its portfolio in debt securities. Some common securities are money market and fixed income treasury bills, government bonds, certificates of deposit, and similar other instruments. It is ideally suited for risk-averse individuals as market fluctuations do not influence its performance. The various types of debt funds are:
Dynamic Bond Fund: These are instruments where the portfolio is influenced by interest rate fluctuation.
Income Fund: These are instruments with a long maturity period of over five years to provide stable returns through their tenure.
Short and Ultra-Term Debt Fund: These are instruments that typically mature in one to three years.
Liquid Fund: Surplus funds are invested in assets and securities that mature in ninety-one days or less, providing high returns.
Gilt Fund: Investment is made in high-rated government securities to prevent the risk element.
Credit Opportunity Fund: Low rated securities with a potential for high returns are the investment target, making it the riskiest among all debt funds.
Fixed Maturity Plan: These are close-ended debt funds where you can invest only during the offer period, like government bonds.
The name suggests that investments are made in a combination of equity and debt instruments to balance the risk-reward ratio. The fund manager diversifies the portfolio in sync with market conditions with the investor benefit’s primary objective while reducing the risk level. The different types of Hybrid Funds are:
Equity-Oriented Hybrid Fund: It is a fund where 65% of the portfolio is invested in equities and the rest in fixed-income instruments.
Debt-Oriented Hybrid Fund: Must invest at least 65% of the portfolio in debt instruments like treasury bills and government securities, and the rest in equity.
Monthly Income Plan: The majority is invested in debt instruments and under 20% of the portfolio in equities for steady return monthly, quarterly or annually.
Arbitrage Fund: The fund manager aims to maximize returns by purchasing securities at low prices in one market and selling them in another market at a higher price to book profit.
Here are some of the reasons why you should invest in mutual funds.
Experts handle your investment:
The fund Houses or the AMC (Asset Management Company) pool in the money for the professional fund manager with excellent financial investment credentials takes over. He heads a team of analysts and experts who sift through the potential earners in the long run to build a portfolio.
Your fund is not locked:
Mutual Fund does not usually have a lock-in-period provision, except ELSS, which is locked in for five years. Most Mutual Fund schemes are open-ended, providing easy liquidity, subject to exit load on redemption.
The low-cost service is an added attraction if you are a small investor looking to earn a handsome return on your investment. The expense ratio imposed by the fund houses is in the range from 0.5% to 1.5% of the total investment, whereas SEBI mandates a maximum of 2.5%.
Freedom to exercise switch fund option: You are free to switch your funds within the same fund house if you so desire. With a change in your investment objective, you may choose to invoke the option.
Choose goal-based funds: Your investment objective may have specific goals, and Mutual Fund schemes are designed to cater to every preference in sync with the individual’s risk profile.
Diversify your portfolio: Mutual fund investment is across asset classes spread over several companies to prevent concentration risk. Market volatility impact is hardly felt with assured stability.
Investment Flexibility: The biggest boon is the inherent flexibility in Mutual Funds, where you can enter and exit at any time without any liquidity concerns. This is the primary reason for the millennials to patronize Mutual Funds.
Rupee cost averaging through SIP: You stand to benefit when you use the SIP mode for investment in Mutual Funds. While your amount remains fixed, you get more units if the market is low and vice-versa. Over time your purchase cost is averaged out.
Assured fund safety: Indian Mutual Fund scenario is regulated by SEBI and the RBI, apart from the self-regulatory AMFI formed by the fund houses. Strict compliance with the mandated norms ensures the safety of your invested money.
Mutual funds are lucrative option of investment for individuals who wants to multiply their savings and create a financial cushion in the long-term. Mutual funds offer investors a great way to diversify their portfolio. Thus, for investors who have different risk appetite can consider investing in mutual fund schemes in order to gain profitable returns on investment.
The right time to invest is a question that will crop up now and then far removed from what is Mutual Fund, as by now you are conversant with many of its facets. There is no auspicious time to invest in Mutual Funds. Regardless of the market behavior, the professional fund manager and his team of analysts are fully geared to choose suitable securities at all times to maximize your investment yield.
With the SIP mode, you are already the beneficiary of the rupee cost averaging mechanism. Moreover, there is no defined exit and entry time in Mutual Funds. Whatever your financial goals – short or long term or parking surplus funds, the best time to invest in a Mutual Fund is now.
Once one is clear with what is mutual fund, the investor must know the steps involved in mutual fund investment. Investing in a Mutual Fund is a simple process, but you need to follow a few cardinal steps to end with the suitable instruments to accomplish your financial goals. Before you start investing, you must consider the following:
The purpose of investing: You must initiate the process by identifying your financial goals and the quantum of wealth you are aiming to build. This clarity will help you choose the right instrument in harmony with your goal, timeframe, risk profile, and payment method, along with the lock-in period factored in.
Comply with KYC requirements: You can invest in Mutual Funds by fulfilling the KYC norms. You must submit copies of your PAN card, ID, Address, and age proof.
Assess the risk factors: Any Mutual Fund investment is subject to market risks. Your risk appetite is the critical factor to determine the choice of scheme, whether equity, debt or balanced fund.
The final step: After all the above factors and measures have been fulfilled, you can home in on the chosen scheme and start investing. Many fund houses demand a copy of a cancelled cheque and an ECS mandate to create your Mutual Fund investment, especially in SIP.
*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
Some of the methods to invest in Mutual Fund schemes are:
Directly through the fund house.
All it takes to initiate your Mutual Fund investment is to visit the nearest fund house branch, along with the copies of supporting documents, the latest passport size photograph, and submit the completed application form duly signed.
Through a broker:
Very much like the fund house, the broker will assist you in complying with the initial norms using the same set of documents to start your Mutual Fund investment. However, the broker will charge a small fee for the rendered service.
Through the official web portal:
Most fund houses offer an online facility to help you initiate your Mutual Fund investment. The user-friendly mode will guide and help you navigate through the e-KYC process using your Aadhaar and PAN card.
Through the App:
Fund houses have designed a dedicated app to facilitate Mutual Fund investment and a host of post-purchase services. You have to download the app on your cell phone and navigate as prompted.
In recent times, mutual fund has gained huge popularity among investors. Today, it caters to a large section of the investing population with enormous investments for potentially high returns. Moreover, with the process of SIP one can continue to invest a small amount in mutual funds and gain higher returns in the long-term period. This article on what is mutual fund has covered almost everything to ease your hassles.