Mutual Funds

 

Mutual FundsMutual fund is not an alien term nowadays. Mutual funds are, in simple terms, investment vehicles comprising of the capital of various investors who share a mutual fiscal goal. These funds comprise of a pool of money accumulated for many investors to make investment in various securities such as money market instruments, bonds, stocks, and other assets. Professional money managers known as the fund managers operate mutual funds. Fund’s assets are allocated by these fund managers and they also attempt to generate income and capital gains for the investors of the funds.

The portfolio of mutual funds is structured and designed to match the financial goals mentioned in the prospectus and the fund managers ensure to maintain these standards.

Let’s have a look at Mutual Funds Schemes in detail:

What is a Mutual Fund?

Mutual Fund refers to a pool of money collected by various investors who intend to save and make money through their investment. The financial corpus so formed is invested in different asset classes, namely, liquid assets, debt funds etc. Much like profits and rewards earned during the tenure of investment, losses are also equally distributed among all the investors, i.e. in accordance with the proportion of their contribution to the financial corpus.

Mutual Funds are registered with the Securities and Exchange Board of India (SEBI). SEBI is responsible for regulating security markets prior to the accumulation of the funds from the investors. Making investment in Mutual Funds can be as simple purchasing or selling stocks or bonds online. In addition, the investors can also sell out their shares whenever they want or need.

The Basics of a Mutual Funds Investment

Mutual funds investment pool investors’ and make use of that money to purchase other securities basically bonds and stocks. Mutual Fund Company’s value depends on the performance of securities it decides to purchase. So, while buying a share or unit of a MF scheme, you’re purchasing the performance of the portfolio of the mutual funds or to be more exact, a part of the value of the portfolio. Making investment in a share of a mutual fund is quite different from making investment in shares of stock. Different from stocks, MF shares don’t give voting rights to its holders. A share of mutual fund represents investments in various stocks (or other securities) despite just single holding.

This is the reason why mutual funds price is called Net Asset Value (NAV) per share. A NAV of fund is a derivative of division of securities’ total value in the portfolio by the total outstanding amount of shares. Outstanding shares are the ones held by the institutional investors, company officers, insiders, or the shareholders. Shares of MF can usually be bought or redeemed as required at the current NAV of the funds, which – unlike the price of stock – does not vary during the market hours, but is settled at the end of the trading day.

Most Popular Mutual Funds Investment Plans

Many investors wonder which is the best mutual funds investment plan? They often get confused with a plethora of mutual fund schemes in the market. Moreover, once they’ve chosen a fund to invest in, they’re not so sure whether they’ve picked up the right scheme or not.

This is the reason that we’ve decided to compile a list of the most popular mutual funds investment plans. This list is not in any particular order; however, we’ve picked two schemes from five different categories namely, mid and large cap, multi-cap, ELSS, aggressive hybrid scheme, tax saving schemes, and value schemes.

Here’s a table showing the top mutual funds investment plans:

Fund Name AUM(in Rs. Crore) NAV Expense Ratio Returns
3 Months 6 Months 1 Year 3 Years
ICICI Prudential Bluechip Fund – Growth 22,182.14 42.6500 1.76 2.01 4.87 5.96 13.01
SBI Bluechip Fund – Growth 22754.43 39.9885 1.83 3.71 7.47 4.24 10.38
Aditya Birla Sun Life Tax Relief 96 – Growth 8912.66 30.4900 2.03 -2.40 -1.03 -3.62 11.34
ICICI Prudential Equity & Debt Fund – Growth 26036.43 134.8900 1.69 1.88 5.51 6.86 12.37
L & T India Value Fund – Growth 8404.03 35.7320 1.86 0.99 3.34 -0.72 12.07
SBI Magnum MultiCap Fund – Growth 7582.94 49.3271 1.93 2.99 7.44 4.35 12.47
L & T Tax Advantage Fund – Growth 3420.69 53.5830 2.05 1.48 0.92 -2.98 11.66
Motilal Oswal Mutlicap 35 Fund  Regular – Growth 13634.94 26.1049 1.56 0.90 3.24 -1.77 13.65
Mirae Asset Emerging Bluechip Fund Regular – Growth   7616.50 53.0880 2.0 0.98 5.48 7.95 17.33
DSP Equity Opportunities Fund – Growth 5720.56 217.7410 1.92 -0.56 4.11 1.65 12.28

Disclaimer: This table is not in any particular order.

Types of Mutual Funds in India

There are various kinds of mutual funds in India. They are categorized based on the asset class, their investment objective and the structure. There are different mutual funds nearly for every type of investment approach or investor. Here’s a rundown to the types of mutual funds in detail:

Types of Mutual Funds Based on Asset Class

Based on Asset Class, there are three types of mutual fund schemes. They are:

Equity Funds

Above all making investment in stocks, equity funds are also referred to as stock funds. The money collected from different investors from different backgrounds is invested in shares of the companies or the equity stocks. The losses or returns are determined on the basis of their performance (price-drops or price-hikes) in the stock market. These funds offer a higher return that is why they are considered as the high-risk funds.

Debt Funds

As the name suggests, debt funds are the mutual funds that are invested in the debt or fixed income securities like company debentures, government bonds fixed income assets, and treasury bills – Gilt Fund, Fixed Maturity Plan (FMP), Short-term Plans, Monthly Income Plans, Liquid Funds, and Long-term Bonds with maturity date and fixed rate of interest. Debt funds are best suited for passive investors who’re looking for small but regular income with minimum risks. As they offer fixed returns, they are considered to be a safe investment instrument.

Money Market Funds

Just like a few investors invest in stock markets, some of the investors in money markets. These are also referred to as cash market or capital market. Money market funds are generally run by government, corporations, or banks issuing money market securities (liquid instruments) such as T-bills, bonds, certificate of deposits, and dated securities. The fund managers of these mutual funds invest money of the investors and distribute regular dividends in return. If an investor wishes to invest his or her abundant funds then money-market funds are the best choice for him or her.

Hybrid or Balanced Funds

As the name suggests, these funds are an optimum amalgamation of stocks and bonds, thereby tiding over debt funds and equity funds. Balanced or hybrid funds are invested in different asset classes. The ratio between these funds can be fixed or variable. There are situations when the proportion of debt is lesser than the equity; it could be the other way round as well. In such situations, risk(s) and return (s) strike a perfect balance and maintain the equilibrium.

Types of Mutual Funds Based on Structure

Mutual fund plans can be classified basis the different attributes such as asset class, risk profile, etc. Structural categorization – interval funds, close-ended funds, and open-ended funds – are broad in nature. The difference between them is based on the flexibility of the funds, i.e. the sale and purchase of individual MF units. Here are the basic types of mutual fund plans on Structure:

Open-Ended Funds

Open-ended mutual funds do not have any constraints in a period of time or number of units. The investor can trade these funds at their own convenience and exit whenever they feel like at the exiting Net Asset Value (NAV). This is the reason the unit capital keeps on changing with new entries and exits. Open-ended funds provide liquidity to its investors, so the investors prefer to opt for these funds.

Closed-Ended Funds

Closed-ended funds are the type of mutual funds where the unit capital that is to be invested is fixed. Hence, the fund managers can’t sell a more than a pre-decided number of units. Some of these funds come with New Fund Offer (NFO) period, where there’s a deadline to purchase the units. The units qualify for the redemption on a particular maturity date. The fund managers are open to any size of the fund, however large. It is mandatory for the fund managers to either give them the option of repurchase or listing on stock exchanges so they can exit the scheme. So as to offer liquidity, closed-ended schemes are listed on the stock exchange for trading purposes.

Interval Funds

Interval funds possess the traits of both the closed-ended and open-ended mutual funds. The investors can buy or exit these funds only at particular intervals and are closed for the remaining tenure. The fund house decides this interval. The investors cannot carry out transactions for a minimum of 2 years. This is best suited for those investors who plan on saving a lump sum for the immediate financial goal (3 to 12 months).

Types of Mutual Funds Based on Investment Objective

There are different types of mutual funds with a certain goal set. The fund manager sets the investment objectives for the mutual funds investment while making an important, wise and well-informed decision - which funds and bonds should be included in the portfolio of the funds.

For example, Mr. Sharma plans to make investment in the equity market so as to accomplish his set investment objective, which is to obtain a long-term capital appreciation while he meets his long-term financial targets such as his own retirement and the overseas education for his child.

Majorly based on the objective of the investment, mutual funds plans are categorised into five main categories. They are:

Growth Funds

Growth funds generally put a large portion in growth sectors and shares that are best-suited for the investors, usually Millennial who possess a surplus of unused money to be allocated in riskier schemes and plans (notwithstanding with probably higher returns) or are positive about the plan.

Income Funds

Income funds belong to family of debt mutual funds, which let the investors invest their money mainly in fixed-income instruments, like debentures, bonds etc.  Helmed by skilful fund managers who do their best in keeping the portfolio in tandem with the fluctuations without any compromise on the creditworthiness of the portfolio, these funds have usually earned better returns for investors than the deposits. These funds are suitable for risk-averse investors from 2 to 3 years perspective. These funds serve the purpose of offering capital protection and regular income to its investors.

Liquid Funds

The money parked in the liquid funds is mainly invested in short-term and some times, very short-term investment instruments such as CPs, T-Bills etc. with only one aim of offering liquidity. These mutual fund plans are low on the risk factor and they offer moderate returns on the investment. These MF schemes are perfect for the investors who have short-term investment timelines.

Tax-Saving Funds

Another sub-category of mutual funds is tax-saving mutual funds. These funds make investment mainly in the equity shares. These funds make its investor eligible to claim tax deductions under Income Tax Act, 1961. Risk factors involved in the tax saving mutual funds are usually on the higher side. At the same time, these funds also offer higher returns if their performance is at par.

Aggressive Growth Funds

Aggressive growth funds come loaded with higher chances of sudden growth and the value of these funds rises up at a fast pace. Investors make investment in the aggressive growth funds to fetch higher returns. Since these mutual funds witness a sudden growth, involvement of risk factors is extremely high. The reason behind this is the funds with a potential of sudden price appreciation turn out to be losing their value at a high speed during the downfall in the economy.

Investing in such funds is a perfect option for the investors who are ready to invest their hard-earned money for tenure of five years and the investment objective hinges on a long-term perspective.

The investors who cannot afford to lose the value of their investment and whose investment objective is to conserve capital should not buy aggressive growth funds.

Fixed Maturity Funds

The investors choose as the fiscal year ends to take benefit of triple indexation, thereby overthrowing the burden of tax. If the investor is not comfortable with the debt market trends and the issues related to it, Fixed Maturity Plans – making investment in money market, securities, bonds etc. – present a greater opportunity. These funds are the closed-ended plans that function on a fixed period of maturity. This maturity period could range between 1 month and 5 years (such as FDs). The fund managers of these funds ensure to invest money in an instrument with the same period, to yield accrual interest at the maturity of FMP.

Pension Funds

Pension funds can take care of the most contingencies such as children’s wedding or a medical emergency. The investors invest in such funds to accrue over a longer period to provide financial security to their loved ones and self after their retirement from regular employment.

Types of Mutual Funds based on Risk

Depending on the risks they carry, mutual funds are of the following types:

Very Low-risk Funds

Ultra short-term or liquid funds (1 month or a year) are not risky at all, and obviously, the returns from these funds are also low (6% at the best). Investors opt for these funds so as to fulfil the short-term financial goals and to save their money until then.

Low-risk Funds

In case of depreciation of rupee or an unanticipated economic crisis, investors are not sure about making investments in riskier funds. In such situations, fund managers suggest investing money in either one or an amalgamation of arbitrage funds, ultra short-term funds, or liquid funds. Returns from such funds could be between 6% and 8%; however, the investors can switch when the valuation becomes stable.

Medium-risk Funds

Medium-risk funds involve medium level of risk factor. This is because fund managers put a portion of money in debt funds and the remaining portion is invested in equity funds. The net asset value is not that volatile. The average returns from these funds could be between 9% and 12%.

High-risk Funds

High-risk funds are best-suited for the investors with zero risk aversion and aim for huge returns in the form of dividends and interest. High-risk mutual funds require active fund management. Regular reviews on the performance of the funds are necessary as they have vulnerable market volatility. 15% returns from these funds can be expected, though many high-risk MFs usually offer 20% returns (and up to around 30% at the best).

Specialised Mutual Funds Types:

Apart from the aforementioned classification, mutual funds have a specialised category. They are:

Sector Funds

In these funds, investment is made in a particular sector or division of the market. For instance, infrastructure fund investors make investments restricted to infrastructure companies or investment instruments offered by the infrastructure companies. Returns on an investment are directly proportionate to the performance of that particular sector. The risk factor associated with these schemes varies sector to sector.

Index Funds

These funds are investment instruments that represent specific index on the exchange in order to monitor the returns and the movement of the index, viz. purchasing shares from the BSE Sensex.

Funds of Funds

These funds invest in the other mutual funds and the returns are dependent on the overall performance of the target funds.

Emerging Market Funds

If an investor invests in the developing markets, it is considered a steep bet. This has undergone a negative return also. India is an emerging and dynamic market and the investors are to yield higher returns from the domestic stock market, they are susceptible of falling prey to various volatilities of the market. Nevertheless, with a long-term perspective, it is proved that the developing economies will contribute to most of the global growth in the next decade as the rate of economic growth is far superior to that of the UK and the US.

Asset Allocation Funds

Combining equity, debt, and gold in an optimal ratio, this is a significantly flexible fund. Basis the predetermined formula or the inferences of the fund managers based on the current trends of the market, the equity-debt distribution can be regulated by the Asset Allocation Funds. These funds are almost similar to the Hybrid Funds but needs huge expertise in selecting and allocation of the stocks and bonds from the fund managers.

Top Performing Mutual Funds in India for 2019

There are a plethora of mutual funds in the market. The best mutual funds in India 2019 are as follows:

Equity Funds

The following sub-types of Equity funds are explained in the table below with their returns:

ELSS

Fund NAV* 3 Years(%) 1 Year(%) 6 Months (%) 3 Months(%) 1 Month(%)
Mirae Asset Tax Saver Direct – G 18.7300 20.54 11.70 7.60 3.40 1.85
DSP Tax Saver Direct Plan – Growth 50.7620 14.27 8.91 8.51 2.80 1.17
Motilal Oswal Long-term Equity Fund Direct – Growth 18.2104 16.20 -1.53 3.90 1.70 0.66
Mirae Asset Tax Saver Reg – G 17.8330 18.90 9.99 6.62 2.89 1.68

*NAV keeps changing on a daily basis. This NAV is as on June 24, 2019

Large-Cap

Fund NAV* 3 Years(%) 1 Year(%) 6 Months (%) 3 Months(%) 1 Month(%)
DHFL Pramerica Large Cap Fund Direct Plan – Growth 185.4800 12.65 8.20 11.87 4.39 -0.17
JM Core 11 Direct – Growth 9.7933 16.88 7.11 9.95 -0.41 -0.61
Mirae Asset Large Cap Fund Direct – Growth 54.6040 16.99 10.71 9.35 2.52 -0.65
Axis Bluechip Direct – Growth 32.0600 17.35 11.06 12.29 6.94 0.98

*NAV keeps changing on a daily basis. This NAV is as on June 24, 2019

Multi-cap

Fund NAV* 3 Years(%) 1 Year(%) 6 Months (%) 3 Months(%) 1 Month(%)
DSP Focus Direct Plan – Growth 24.5290 11.29 5.38 9.90 3.65 -1.10
Aditya Birla SL Equity Direct – Growth 762.4900 14.74 3.03 4.56 0.39 -2.60
Kotak Standard Multicap Regular – Growth 35.9560 14.86 8.48 9.81 3.31 -1.40
Kotak Standard Multicap Direct – Growth 38.3170 16.13 9.59 10.38 3.39 -1.32

*NAV keeps changing on a daily basis. This NAV is as on June 24, 2019

Mid Cap

Fund NAV* 3 Years(%) 1 Year(%) 6 Months (%) 3 Months(%) 1 Month(%)
DSP Midcap Direct Plan – Growth 56.1710 12.16 0.24 4.45 -0.06 -1.14
Kotak Emerging Equity Direct – Growth 41.1640 12.61 -0.31 4.94 1.11 -0.61
L&T Midcap – Growth 128.7300 13.04 -6.66 -1.67 -2.54 -2.28
L&T Midcap Direct – Growth 135.9500 14.09 -5.68 -1.10 -2.26 -2.19

*NAV keeps changing on a daily basis. This NAV is as on June 24, 2019

Debt Funds

The following are the top debt funds with their NAV (as on June 24, 2019) and their respective returns:

Liquid Funds

Fund NAV* 3 Years(%) 1 Year(%) 6 Months (%) 3 Months(%) 1 Month(%)
DSP Liquidity Direct – Growth  2717.0281 7.18 7.55 3.62 1.81 0.57
Franklin India Liquid Super Inst – Growth 2834.6610 7.16 7.64 3.71 1.87 0.58
Mahindra Liquid Direct – Growth 1231.6053 NA 7.67 3.72 1.88 0.59
DHFL Pramerica Insta Cash – Growth 246.1090 7.15 7.61 3.72 1.88 0.61

*NAV keeps changing on a daily basis. This NAV is as on June 24, 2019

Money Market Funds

Fund NAV* 3 Years(%) 1 Year(%) 6 Months (%) 3 Months(%) 1 Month(%)
Aditya Birla Sun Life Money Manager Direct – Growth 256.3215 7.61 8.60 4.27 2.19 0.68
Aditya Birla Sun Life Money Manager – Growth 254.8894 7.49 8.45 4.21 2.16 0.67
Aditya Birla Sun Life Money Manager Ret – Growth 314.1363 7.49 8.46 4.21 2.16 0.67
DSP Savings Direct Plan – Growth 37.8791 7.03 8.30 4.16 2.16 0.67

*NAV keeps changing on a daily basis. This NAV is as on June 24, 2019

Dynamic Bond

Fund   NAV* 3 Years(%) 1 Year(%) 6 Months (%) 3 Months(%) 1 Month(%)
DSP Strategic Bond Direct Plan – Growth 2183.2132 6.05 6.73 0.31 -1.77 -1.77
Kotak Dynamic Bond Regular – Growth 25.0520 9.18 12.17 6.28 3.77 2.09
Kotak Dynamic Bond Direct – Growth 26.0590 9.81 12.86 6.63 3.95 2.15
Franklin India Dynamic Accrual Direct – Growth 71.1281 9.92 10.33 4.15 1.86 0.62

*NAV keeps changing on a daily basis. This NAV is as on June 24, 2019

Hybrid Funds

The following are the hybrid funds with their NAV (as on June 24, 2019) and their returns:

Dynamic Asset Allocation

Fund NAV* 3 Years(%) 1 Year(%) 6 Months (%) 3 Months(%) 1 Month(%)
Aditya Birla Sun Life Balanced Advantage Direct – Growth 56.3800 11.37 7.72 5.09 1.93 -0.16
Aditya Birla Sun Life Balanced Advantage – Growth 53.2900 10.17 6.59 4.55 1.66 -0.26
DSP Dynamic Asset Allocation Fund Direct – Growth 16.1150 9.21 8.43 4.39 2.17 0.61

*NAV keeps changing on a daily basis. This NAV is as on June 24, 2019

Equity Savings

Fund NAV* 3 Years(%) 1 Year(%) 6 Months (%) 3 Months(%) 1 Month(%)
DSP Equity Savings Fund Direct – Growth 13.3110 9.00 5.10 5.25 2.13 -0.12
HDFC Equity Savings – Growth 37.1920 10.52 6.64 5.47 1.84 0.09
HDFC Equity Savings Direct – Growth 39.5240 12.12 7.96 5.95 2.04 0.16

*NAV keeps changing on a daily basis. This NAV is as on June 24, 2019

Aggressive Hybrid

Fund NAV* 3 Years(%) 1 Year(%) 6 Months (%) 3 Months(%) 1 Month(%)
HDFC Retirement Savings Fund Hybrid Equity Direct – Growth    15.80 8.03 7.49 1.96 -0.30
Mirae Asset Hybrid Equity Direct – Growth   15.47 11.62 8.79 2.92 0.02
Principal Hybrid Equity Fund Direct – Growth   14.85 1.54 2.50 -1.28 -2.84

*NAV keeps changing on a daily basis. This NAV is as on June 24, 2019

Mutual Fund Companies in India:

There is a plethora of mutual funds companies in India. Some of the best Mutual Fund Companies in India are discussed below:

MF Company No. of MF schemes (Inclu options) Financial Corpus as of March 31, 2019 Financial Corpus as of March 31, 2018 Net Chg
ICICI Prudential Mutual Fund 1929 321281.17 308166.48 13114.69
Motilal Oswal 63 19122.39 18605.91 516.48
L&T Financial Services 287 70944.36 69079.95 1864.41
SBI Mutual Fund 572 284123.64 264668.49 19455.15
Aditya Birla Sun Life Mutual Funds 1029 246696.01 242560.68 4135.34
DSP Mutual Funds 498 78362.72 79244.53 -881.81
Mirae Asset Mutual Fund 72 24191.29 21034.68 3156.61

 

Core Benefits of Mutual Funds

Investors’ basic expectation from investing in mutual funds is to reap maximum returns on their investment(s). As an investor, you would also expect this. At times, you don’t have sufficient time to do your research and monitor the stock market thoroughly. A lot of time in hand, knowledge of the stock market and lots of patience is a pre-requisite for trading in the stock business. Opportunities don’t knock at your door; you have to grab them using both of your hands.

To be able to take risks increase your chances of getting maximum returns. It is next to impossible that every chance you take turns out rewarding for you. Sometimes you get lucky, sometimes you don’t. When you don’t, analyse what went wrong and learn from your mistakes. Before buying, use the mutual fund calculator to get quotes regarding your investment, returns, risks etc.

The following are the key benefits of Mutual Funds:

Professional Management

Mutual fund professionals manage your hard-earned money with their skills and experience. They have a qualified research team that assists them by analysing the performance and potential of various corporations. In addition to that, they find suitable investment offers for their clients. Fund managers are qualified to manage your funds in such a manner that they yield higher returns on investment(s).

Professional management is a continuous process and it takes much time to add value to your investment(s).

Diversification

Diversification makes your investment an intelligent investment. It minimizes the risk by investing your money in different mutual funds investment vehicles. Obviously, chances are very slim that all the stocks will decline simultaneously.

Sector funds let your investment spread across a solo industry so that there is less diversification.

More Choices

The biggest advantage of investing in a fund is that it offers a wide range of schemes that match with your long-term expectations. Whenever a new phase begins in your life, you just need to have a discussion with your financial advisor(s) and work on your portfolio to suit your present situation.

Affordability

At times, your investment goal or your capital doesn’t let you invest in the shares of a big company. Generally, mutual funds deal with buying and selling of securities in a large amount that allows investors to get the advantage for a low trading course. Thanks to the minimum fund requirement, even the smallest investor can give mutual funds a shot.

Tax Benefits of Mutual Funds

You get tax benefits if you invest for a period of one year or more in capital gains. Mutual funds investments also make you eligible for the benefits of the tax deduction.

Liquidity

Open-end funds make you eligible to redeem total or partial investment anytime you want to, and you can receive the present value for your shares. Funds give you more liquidity as compared most of the investments in the shares, bonds, and deposits. This follows a standardized process and it makes the process efficient and smooth. Because of that, you get your money as soon as possible.

Averaging Rupee-Cost

Irrespective of the investments’ unit price, you make an investment in a particular rupee amount at frequent intervals with averaging rupee-cost. Resulting, you are able to buy more units when the prices are less; fewer units when the prices are high. Averaging rupee-cost enables you to maintain your investment discipline by frequent investments. It also prevents you from making any unpredictable investment.

Ensures Transparency

Various esteemed publications and rating agencies review the performance of the funds, which makes it easier for investors to compare one fund to another. It is beneficial for you as a shareholder, as it provides you with latest updates, including funds’ holdings, managers’ strategy etc.

Regulations

As per the regulations by The Securities and Exchange Board of India (SEBI), all the mutual funds corporations are required to register with SEBI, as they are obliged to adhere to the strict regulations formulated to safeguard investors. The overall trading operations are monitored by the SEBI on a regular basis.

Disadvantages of Mutual Funds

Besides a plethora of advantages of mutual funds in India, there are some disadvantages also. The drawbacks of investing in mutual funds are as follows:

Cost to Manage Mutual Funds

Fund manager and market analysts’ salary usually comes from the investors. The overall fund management charge is the key parameters to take into consideration while choosing a fund. Higher management fees do not guarantee a better performance of the funds.

Lock-in Periods

Many mutual fund plans come loaded with long-term lock-in periods. The lock-in period can range between 5 and 8 years. It can be an expensive affair to exit such funds before their maturity. Interest for investors cannot be earned from this share in cash.

Dilution

While branching out averages the risks of loss, it can also reduce the profits. Therefore, you must not invest in over 7-9 mutual funds at one time.

As mentioned above, the potential and benefits of mutual funds can certainly take priority over the disadvantages, if the investors make a well-informed and wise decision. Nevertheless, the investors might not have time, patience, or knowledge to analyse and research different mutual funds. If an individual wishes to invest in mutual fund plans, s/he must go through this page to get his/her head clear of all the doubts about mutual funds.

Types of risks associated with mutual funds

People always look for means to make money. One of these ways is through investment. But no investment comes risk-free. Though mutual fund offers wider diversification along with value-for-money to its investors, there are some risks associated with mutual funds investment.

Risks arise in mutual funds as MF invests in various financial instruments such as government securities, corporate bonds, debt, and many more. In addition to this, the cost of such instruments keeps changing owing to various factors such as change in rate of interest, inflation, supply-demand, etc.

Because of the price volatility or fluctuation, the Net Asset Value (NAV) of the individual drops resulting in losses. Simply put, NAV is typically the market of all the MFs an individual has invested in per unit after nullifying the liabilities.

Therefore, it becomes important to determine the risk profile and invest in the best and suitable fund.

Various risks that are associated with MFs are as follows:

Market Risks

Mutual Funds always come with a tag line ‘Mutual Funds are subject to Market Risks’.

The market risks are basically the risks that may result in losses for an individual investing in mutual funds due to its poor performance in the stock market. There are certain factors affecting the market. Some of the factors are – recession, inflation, natural disaster, fluctuation of the rates of interest, and political unrest. Market risk is also referred to as systematic risk. Diversification of the portfolio of the investor does not help in such cases. The only thing that the investor can do is waiting for the storm to calm.

Concentration Risk

Concentration usually means to focus on one thing. Investing a huge sum of money of the investment in one specific fund is not a good bet. Profits and returns will be huge (if lucky), but there will be more of losses. The best way to reduce this risk is by diversification of the portfolio of the investor. Concentration and huge investment in one sector is also loaded with risks. The more divers the investor’s portfolio, the lesser the risk is.

Interest Rate Risk

Changes in the rate of interest depend on the credit available with the lenders and the demand from the borrowers. These two are inversely proportional to each other. Escalation in the rates of interest during the tenure of investment may result in a decrease in the cost of securities.

For instance, an investor decides to put Rs. 100 with an interest rate of 5% for x years. If the rate of interest changes because of the changes in economy becomes 6%, the investor will no longer be able to get back Rs. 100 s/he invested owing to the fact that the rate of interest is fixed. The only choice left is reducing the bond’s market value. If the rate of interest comes down to 4% on the other hand, the bond can be sold at the price above the invested amount.

Liquidity Risk

Liquidity risk refers to the difficulty to redeem the investment without incurring any loss in the value of instrument. It can also happen when the seller is not able to find a buyer for that security.

Like ELSS, in mutual funds, the lock-in period may result in liquidity risk. The investors cannot do anything during the lock-in period. In another case, ETFs – Exchange-traded Funds may suffer from this risk.

Sometimes because of the lack of buyers in the stock market, the investors may not be able to redeem their investments when they need them the most. The best means to avoid this is to have a diverse portfolio and make fund selection diligently.

Credit Risk

Credit risk typically means that the one who issues the scheme is not able to pay what was promised as the interest. Generally, the rating of the agencies that handle investments depends on these criteria. Hence, the investor will always see that a company with higher rating will pay lesser and vice-versa.

Mutual funds, specifically debt funds, also come loaded with credit risks. In debt funds, the manager has to slot in only investment-grade securities. But there are cases where these might earn a high return; the fund manager might include lower credit-rates securities.

This would boost the credit risk of the portfolio. Before the investor invests in debt funds, they must look for credit ratings of the portfolio composition.

Who should invest in Mutual Funds?

Mutual funds are always an easier investment. Each fund is tailor-made and is designed so as to fulfil varied goals. This is specifically useful for the individuals who do not have the patience or time to carry out thorough research and make a well-informed decision.

When to Invest in Mutual Funds?

There are certain factors to be taken into consideration before making investments. They are as follows:

  • Market condition
  • Desired tenure of investing
  • Availability of funds
  • Expected returns

Nevertheless, for a person, it could be quite difficult to take all these into account. Therefore, one must go for a SIP.

The best time to make investment in mutual funds is when there is money. This is not to imply that such funds are expensive. To certain extent, last-minute investments (for example – at the end of the fiscal year) often stalk from rash decisions. Ebb and flow of the stock market as stated can influence the investor’s decisions. Gospel truth is not every mutual fund make investment in stocks.

In case the investor notices poor performance of his/her investments, s/he shouldn’t hesitate to sell it. The fundamental rule of an investment is to start early. More delay in investment can make him/her lose out on the potential returns.

How to Invest in Mutual Funds?

If you invest only and only in one mutual funds investment instrument, by default the risk factor becomes higher. If you invest your capital in different mutual fund investment instruments, then you end up stabilizing the risk involved. If one fund is not yielding great returns, you will be protected by the other investment instruments.

Start with your financial needs

Investment needs vary person to person, as the investment objectives vary person to person. Factors like financial goals, risk threshold, time period and capital affect the investment decisions.

Even before you select your mutual fund investment instrument, analyse your fiscal goals and decide your time frame and risk threshold accordingly. On the basis of that, zero down the investment options that are in sync with them.

Direct Investment

Investors can directly get in contact with the fund houses in order to apply for such funds and save on the brokerage. The investor can obtain the form by downloading it online or get it from the nearest branch of the fund house. The investors must make sure that they go through the policy documents and clear all the queries before making investment.

Through Agents

The agents are sales professionals who reach out to the potential customers and let them know about various fund options. The investors can choose mutual funds based on their risk profile, investment goal, and income. These agents can aid you with redemptions, applications, cancellations, and transactions amongst others. The agents charge a commission for their services.

Online (Distributors/Fund Houses)

Selling/buying of mutual funds online is almost a custom today. This not only saves effort and time but also makes it easy to compare various MFs and make a well-informed and wise decision.

How to calculate return with Mutual Funds Calculator?

Mutual Funds Calculator aids the investors to evaluate mutual fund projected returns on the capital invested. While talking about investments, the most vital aspect is what sort of returns can be expected. The returns from the funds can be quite diverse in nature over a longer period of time. Therefore, it would be a tough task to work out what the eventual financial corpus would be different anticipated rate of returns.

Mutual Funds Calculator takes care of the particular need, so now while concentrating on the financial planning the ready-to-use mutual funds calculator, will disclose how much the net worth of the investors would be down the line, taking into account different variables that include the types of investments such as lump sum or SIP together with the anticipated rate of return and the duration of the investment.

There are different types of returns in mutual funds. Here are examples of types of returns:

Absolute Return

An investor wants to invest Rs. 1 Lakh in mutual funds in January 2016. The value of mutual fund investment stands at Rs. 1.3 Lakh in January 2019. Therefore, the absolute return earned by the investor on his/her investment over duration of 3 years can be evaluated as follows:

Absolute Return = (Final investment value – initial investment amount)/Initial investment amount X 100

Absolute return on the investor’s investment over 3 years = (130000-100000)/100000 X 100 = 30%

Annualised Return

The formula to calculate annualised return is:

Annualised return = (Final investment value ÷ Initial investment amount) ^ (1/number of years) – 1

Annualised return on the aforementioned investor = [(130000/100000) ^ (1/3) – 1] = 9.04%

Weighted Average Return

Here, the investor has invested Rs. 1 Lakh in a MF scheme that has three holdings – A, B, and C. Assuming that the mutual fund has invested 20% of its assets in C, 30% in B, and 50% in A. The annualised return produced by A, B, and C are 50%, 30%, and 20% respectively. Their weighted average can be evaluated as follows:

Weighted Average Return = (PW1xR1) + (PW2 x R2) + …… + (PWN x RN)/Total Portfolio weightage

(PW1 – Portfolio weight of first holding, PW2 – portfolio weight of second holding, R1 – Return from first return, N – Total number of holdings)

Weighted Average Return = (50% x 50%) + (30% x 30%) + (20% x 20%)/(50%+20%+30%) = 250% + 600% + 200% /100% = 10.5%

How to Compare Mutual Funds?

There are many factors that are taken into consideration while comparing two mutual funds in addition to the absolute returns. The investors must look at the other facets such as resilience and consistency of the fund.

Why should one compare mutual funds?

The investors come across a glut of mutual fund options that offer different benefits at economical investment. Nevertheless, at the first instance, all the mutual funds in a specific category look similar making it difficult to take a well-informed and wise decision. After all, investing money is indeed a long-term game and the investor has to be aware of what s/he is getting into. Many of the investors make use of the fund returns as the sole criterion to compare and measure performance across various funds.

Typically, mutual funds returns are the difference between the NAV at the beginning and NAV at the end for a given period. Annualised returns from the funds tell about the value reduction/addition during the given period, but what about the consistency of the returns, risk-adjusted returns, and quality of the fund house? In order to choose the right fund, the investors have to make compare mutual funds on these grounds also.

Comparison of Mutual Funds

Choosing an appropriate fund is the first step to earn returns on the anticipated lines. So as to hash out at the best mutual fund, the investor must know the basics of comparison of the funds. Starting with the objective of investment, the investor can decide what to seek in a fund. The following parameters can be taken into account to compare mutual funds:

Investment Horizon

Investment horizon of the investor becomes a propelling factor in comparison and selection of fund. Investment horizon relates to the period of time for which the investor stay invested in the fund. The type of mutual funds shortlisted for comparison must be according to the investment horizon. Equity funds are best suited for a long-term period of 7 years or more. The objective of fund during this tenure is wealth accumulation and maximization at a comparatively high risk. Simultaneously, in order to invest in surplus funds for liquid funds for a short term give better returns than the savings bank account. The objective of the fund is safety of the capital together with moderate returns.

Expense Ratio

Investment in mutual funds of the investor comes at a cost known as the expense ratio. The expense ratio is a yearly fee charged by the fund house from the unit holders so as to manage the portfolio on their behalf. The expense ratio level directly impacts the level of fund returns earned by the investors. This is because fund house charges the expense ratio as a percentage of the asset of funds under management. A higher expense ratio eventually dents the gains earned by the investors. The investors must seek a fund with the lowest expense ratio.

While making use of the expense ratio, there are a few things to be kept in mind. The expense ratio of direct plan is lower than in comparison to regular plans’ expense ratio because of the absence of the distributor commission. The investor should compare one direct plan with other and one regular plan with other. They must not compare index funds with an actively managed fund. The index fund’s expense ratio is lower because of low management fee. It is suggested to compare active funds with active funds. The investors must now compare debt fund with equity fund. Owing to the higher brokerage and cost of transaction, equity funds have a relatively higher expense ratio than the debt funds.

Riskiness

Whenever an investor invests in any mutual fund, s/he undertakes some sort of risks. These risks relate to the variability of NAV of the fund according to the overall movements in the market. According to the thumb rule of investment, huge risks need to be rewarded with higher returns. But plain vanilla returns don’t reflect the aspect of mutual funds. Thus, the investor has to make use of a better measure to compare two mutual funds basis their risk-adjusted returns.

The investor can use alpha and beta for this. These are the financial ratio that indicates rewarding potential of mutual funds. Beta tells the amount of risk involved in making investment in a fund. Alpha tells the amount of extra return generated by the fund over and above underlying benchmark.

Key Takeaways for Mutual Fund Comparison:

  • Make comparison of 3 year returns of one mutual fund with 3 year returns of the other fund. Do not compare 3 year returns of one fund with 5 year returns of the other.
  • Compare large-cap funds with the given broad-based index such as BSE Large-cap not with BSE mid-cap index.
  • While making comparison of mutual funds, select funds that have a significant fund history of at least 5 years. This makes sure that the fund remained buoyant in the domain for quite some time.

How Mutual Funds work in India?

Mutual funds in India work in similar way as the mutual funds in the US. Like the American counterparts, mutual funds of India pool the investments of various shareholders and make investment in a variety of securities based on the goals of the mutual fund. Moreover, like the United States funds, there are different types of mutual funds in India for purchase based on the risk appetite and the needs of the investors. Mutual funds are quite popular investment instruments in India as they offer liquidity, professional management, and automatic diversification.

Investment Approach in Equities

Investment in equities is no rocket science. All you need to do is to follow the investment approach given below. It runs through the sector and diversified equity funds.

Bottom-Up Approach

The bottom-up approach is ideal when your goal is to invest in the best corporations, irrespective of the domain. When the fund managers are sure about the corporations’ potential and their prospects, they give you a green signal. On an average, top 5-10 corporations are there in a portfolio account of the overall total fund assets. It is recommended to keep an eye on sector exposure in individual stock exposure and diversified mutual funds to assure that the exposure does not incline way too much towards one particular stock or sector.

Fundamental Investors Approach

For a fundamental investor, in-house literature or research cements the foundation of the investment decision-making power. The research does not revolve around financial numbers only; it goes above and beyond published literature or reports. The fund managers accompanied by research analysts meet employees of their company to get a better perspective and explore unobvious data that can turn out to be a golden opportunity over a period of time.

Quality First Approach

When you focus on the quality, you are on the right path. There are times when the quality of fiscals is ignored. Later, that turns out to be a disaster. Shift your entire focus on the quality, as it will help you to avoid losses. The quality first approach allows your mutual funds to perform well.

Long-Term Investment Approach

As an investor, being patient works in your favour and it makes you immune from market unpredictability. Analyse the value of funds, and then make investment decisions accordingly. It leaves no room for negative decisions. Long-term investors use the unpredictable times to their advantage because sooner or later, share market will realize the potential of the mutual funds and the stock will make its come back.

Deliberate and Methodical Approach

This investment approach lays emphasis on the emerging themes and doesn’t pay much attention to the so-called tips and tricks.

What’s Trending Approach

Look out for what’s trending, as it can be rewarding in the long run. It is of utmost importance to understand the present financial situation as well as the future financial potential of the companies so that in future, you can make best investment decisions in coordination with the changing times.

Investment Approach in Debt Investment

The best approach to investing in debt fund is by focusing on fetching returns consistently and at the same time, neutralizing risk threats. It is a sure-fire way to give returns in the form of a fixed income.

While investing in debt funds, keep the following point in your mind:

Safety First

Don’t get carried away and give safety the utmost importance. When it comes to back off short-terms gains, don’t shy away and be firm about your decisions.

Risk Management

Carefully analyse ratings, value, integrity, effectiveness, efficiency, management, finances etc. of the company; it will help you to reduce the risk factor. The lesser risk is better for your investment.

Interest Rate Risk Management

Focus on managing interest-rate risk with the help of the portfolio at the intermediate level and refrain from timing the market rate of interest.

Prudent Balance Maintenance

Work on maintaining a prudent balance among corporate bonds and government securities. Along with that, don’t forget to diversify strict limits on single corporation exposure(s).

Rely on Research

Take advantage of strong equity research in order to identify the strong debt issuing companies and explore unexplored domains. It will unveil the best mutual funds plan for you.

Liquidity Norms

Maintain rigorous liquidity norms to make sure that your mutual funds portfolio can be liquefied whenever you want to make redemptions.

What is ELSS?

ELSS is popularly known as Equity Linked Savings Scheme. It is a type of diversified equity fund scheme. Investing in ELSS mutual funds gives you the double benefit of tax deduction and capital appreciation. Section 80C of the Income Tax Act makes you eligible for tax exemption. By default, Equity Linked Savings Scheme has a lock-in period of three years.

Why Should You Invest in ELSS?

When planned efficiently, investing in Equity Linked Savings Scheme helps you to save your money. Generally, tax saving investment vehicle comes with a lock-in period of 3-15 years. ELSS comes with the minimum lock-in period of three years. As compared to other tax-saving instruments, the period of three years is lesser. The icing on the cake is that capital gains from ELSS funds are tax-free. No tax is levied on the interest, principal amount or the maturity amount.

When it comes to withdrawals, it is also free since the hold period for such funds is more than 12 months. It means no levying of taxes on capital gains. As per your preference, you can select from the following plans:

  • Growth Plan
  • Dividend Plan
  • Dividend Reinvestment Plan

The growth plan is an investment plan that allows your investment to grow until you take it out. If your fund’s Net Asset Value (NAV) has increased, the dividend plan allows your fund to give an amount back to you. Last but not the least; the dividend reinvestment plan lets your dividend pay-out to be re-invested in some additional units of the plan.

How to Make a Fund Selection?

Plenty of mutual funds instruments are available to you. But, before you dive deep the ocean of mutual funds, it will be great if you mix and match your bond, stock and money market funds according to your preference. Experts recommend that this is the best investment decision any investor can take. Don’t forget to compare mutual funds before buying.

As an investor, the following are points that you should keep in mind while formulating your investment strategy:

Diversification is the key

It is best to divide your investment between funds that deal in a wide variety of stocks, money market securities, and bonds. Every instrument brings pros and cons to the table. Diversifying in the same domain of securities is ideal. Over a long period of time, it proves to be beneficial. If one sector is not doing well, still diversification would allow your funds to yield the best results.

Keep Inflation in Mind

The money you invested today would be used later. Over the time, inflation spreads its wings and it starts flying high. So, you need to consider the after effects. Money market funds have gained popularity, as they maintain the value, but the returns can be very low.

Patience Please!

The value of shares fall and rise unpredictably. What is rising today can fall tomorrow, so be mentally prepared to face fluctuations. In case you don’t require money right now, don’t panic if your funds fall short of its value. Rise and fall are parts of the sweet-bitter reality of the stock market.

If a fund is underperforming, it can do really well too. So, be patient and let your funds recover.

Consider Your Age

Younger investors invest plenty of time in stock funds. Why? It’s because they have a lot of time in their hands. Their investment in stock funds let them fetch return over a long period of time.

On the contrary, people who are supposed to be retiring soon look forward to safeguarding their money from any drops in prices. In order to maintain the value, it is ideal for that age group to make an investment in the money market fund or bonds.

Determine Age Appropriate Investment Mix

Subtract your age from 100, the remainder/ answer could be a good option to start an investment with. It will help you to decide the share of your total funds to invest into mutual fund stocks.

Risk Threshold

While selecting funds, ensure that you keep in mind how much your risk threshold is. Don’t go out of your comfort zone. Another thing to keep in mind is your retirement, closer you are to your retirement. If it will be upon you soon, then you should neutralize the risk factor.

To get maximum mutual fund benefits, younger investors having the time on their hands can afford to explore aggressive investment strategies.

Mutual Funds - FAQ's

Q1. Are mutual funds safe?

A1. Mutual funds safety is ascertained in two ways:

  • Safety in terms of institution or company disappearing with the money of investors
  • Safety regarding offering guaranteed returns and capital protection.

While no investment form comes with a 100% risk-free guarantee, mutual funds are subject to market risks. The government agencies such as Association of Mutual Funds in India (AMFI) and Securities and Exchange Board of India (SEBI) regulate and supervise Mutual Funds in India. Therefore, one can rely on these investment tools.

Q2. What are good growth mutual funds?

A2. A growth mutual fund is a varied portfolio of stocks with capital appreciation as its prime goal, with a little or no dividend pay-out. The portfolio primarily includes companies with a growth above average. These companies reinvest their returns into research and development, acquisitions, and expansion.

Q3. Are mutual funds high or low risk?

A3. The level of risk in mutual funds depends on the objective of the investment and the type of mutual fund the investor invests his/her money. Generally, the higher the possible returns, the higher the risks and vice-versa. The funds investing in stock market instruments are not considered risk-free as the investment in shares and debentures come with risk by nature. However, mutual funds, which invest in fixed-income investment instruments, are comparatively come with low-risk.

Q4. Are mutual funds aggressive?

A4. Yes. There is a type of mutual fund scheme termed as Aggressive Growth Fund. This type of fund is not risk-averse in choosing the investment and intends to achieve the maximum capital gains. An aggressive growth fund is the best option for the investors with a higher risk appetite.

Q5. How do you make money from a mutual fund?

A5. When it comes to making money from mutual funds, you can follow three possible ways:

  • Capital Gain – When mutual funds sell security whose price is gone up, this is a capital gain. Most mutual funds distribute the net capital gains to its investors only.
  • Dividend Payment – When mutual funds receive interest or dividend on the securities in the portfolio, it distributes a relative amount of those earnings to the investors. While buying shares in a mutual fund plan, you can opt to receive your distributions directly, or you can have them invested in the funds.
  • Net Asset Value (NAV) – As the value of the funds increase, so does the purchase price of the shares in that fund. This is like, when the stock price increases – you do not receive an immediate distribution, but the value of the investment is higher, and you’d make money and decide to sell.

Q6. Is investing in mutual funds a good idea?

A6. As an investor you invest money with the main objective of earning positive returns through them. Even though mutual funds are considered one of the safest instruments of investment, the underlying fact is none of the mutual funds are safe.

Q7. Which are better mutual funds or stocks?

A7. There are various reasons why you must prefer mutual funds over stocks. Out of these, the most common benefits are that mutual funds offer lower costs, convenience, and diversification.