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Mutual Fund

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WHAT ARE MUTUAL FUNDS?

Thinking of Investing in a Mutual Fund? Lets know about everything about Mutual Fund.A mutual funds is a financial instrument which draws money from a plethora of investors. This common fund is created with mutual contribution of multiple investors in a variety of assets and securities including debts, equities, government securities, liquid assets like funds, bonds, and others. Since all the gains, rewards, risks, profits, and losses resulting from or pertaining to this type of fund is shared by all the contributors according to their investment proportion, it is named as a mutual fund.In other words, mutual funds can be described as a trust having its own sponsors. Such funds are registered with Securities Exchange Board of India (SEBI) that is responsible for approving the Asset Management Company (AMC) that manages the fund. The trustees ensure that the fund is compliant with all the regulations set by SEBI.

WHAT ARE THE TYPES OF MUTUAL FUNDS IN INDIA?

The mutual funds investors are blessed with different types of investment opportunities based on their asset class, investment objective, and structure. Here are the different types of mutual funds in India:

Based on Asset Class

Mutual funds can be segregated into the following types based on asset class:

Equity Funds-

These funds capitalise the money in the equity shares and stocks of various companies. Though this sort of investment involves high risk, the possibility of getting a huge return in such funds is more.

Debt Funds-

Debt funds invest in government bonds, company debentures, and other fixed income instruments with an objective of providing fixed returns to the investors. This is why these funds are considered to come with very low risk and fixed returns.

Money market funds-

In this type of fund, the money will be invested in liquid assets like CPs, T-Bills etc. These investments are considered to be safe and best for investors who want a quick and moderate return from their investment.

Balanced or Hybrid Funds-

These funds capitalise in a diverse range of high risk and low risk asset classes to balance the risk as well as the return. The proportion of equity is more than debt in certain cases while it is the opposite in others. By distributing your money among multiple securities, it creates a balance between the risk and the return.

Sector Funds-

Such funds make investment only in one specific sector. Sector funds like the infrastructure funds capitalise only in the companies and instruments that are related to the infrastructure sector. As a result, the returns from this type of funds are limited to the performance of that particular sector. However, the associated risk in such schemes is dependent on the nature of the chosen sector.

Index Funds-

The index funds are those funds that capitalise in assets to imitate the performance and the returns of any specific index. For example, purchasing the shares which represent the BSE Sensex.

Tax Saving Funds-

These funds mainly invest in equity shares and all the investments made in this type of fund are eligible for tax benefits under the Income Tax Act. Though these funds come with high associated risk, if the performance of the fund is good then the chances of getting high returns is high as well.

Fund of Funds-

These funds capitalise in other mutual funds and give good returns if the targeted fund does well in the stock market.

Based on Structure

Types of mutual funds based on the structure are detailed below:

Open-Ended funds:

These funds are known as open-ended because these units can be purchased and redeemed at any given point of time. Investors prefer these type of funds because they can encash their unit in real money as per their wish and preferences.

Close-Ended Funds:

These funds are called close-ended funds as these can be purchased only during the initial offer period. After that the units will be locked and can only be redeemed after a predetermined maturity date. These funds are often listed on the stock exchange to bring liquidity in the sector.

Based on Investment Objective

On the basis of the investment objectives, there are 5 different types of mutual funds which are as follows:

Aggressive growth funds

As the name suggests, this type of mutual fund comes with the optimum chance of achieving sudden growth compared to other types of funds. The growth of these funds is really aggressive and its value increases at a quick speed. Investors who are investing in a mutual fund with an intent of getting very high returns mostly invest in this type of fund. But the risk factor associated with such funds is immensely high as there is a sudden spur in their growth. Funds which have a sudden rise in their price appreciation also lose their value at a high speed when the economy faces any instability or downfall. Persons planning to invest their money for a short tenure of 5 years with a long-term investment objective are the ideal ones to invest in this type of mutual fund. This fund is not recommended for investors with an objective of conserving capital and those who are not capable of taking the loss of their investment value.

Growth Funds

In growth funds, upon investment, the growth receives higher returns. The investment portfolio will be a combination of small, medium, and large-sized corporations in the investment portfolio of the investor for making an investment in a big-scale stable corporation. But along with that, when you invest in a growth fund a small part of the funds will also be invested in a new small-scale startup. Also, since a growth fund is based on growth investment objective, the investment is made in the growth stocks. The profit derived from the fund’s growth is not paid to the investor as a dividend, instead, it is used to make further profits on the investment. Investors who hold on to the growth funds most often receive good returns on their investment.

Income Fund

Income funds capitalise on various fixed income securities and this is why these give a consistent income to the shareholders. Retired persons willing to derive regular income are the most ideal investors for this fund as they will get dividends on a regular basis. The investments in this type of fund are made in fixed deposits of companies, debentures, and several other securities which the fund manager thinks to be perfect to get regular income for the investor. In spite of being a stable investment option, the income funds come with moderate risk as any kind of price fluctuation or instability is likely to affect the prices of its bonds and shares. Such funds are also vulnerable to the inflation rate.

Balanced Funds

An amalgamation of the growth and the income fund, the balance fund has multiple investment objectives to achieve. This fund pays equal attention to providing the investors with ongoing income while offering them immense growth opportunity. It specifically targets to materialise multiple goals that the investors usually want to attain their investment. While the stability of such funds is low to moderate, its growth and income potential are moderate.

Money Market Mutual Funds

The main objective of money market funds is to maintain capital prevention. As such you need to be watchful and alert after investing in this type of fund. There is little chance of gaining profits in this sort of fund even though the possibility of producing higher interest rate than bank deposits is more. The risk factor associated with such funds is minimal. Also, the money market funds due to their high liquidity factor allow the investors to modify their strategy of investment whenever they want.

WHAT ARE THE ADVANTAGES OF INVESTING IN MUTUAL FUNDS?

Investing in mutual funds is a very popular option in India and this investment channel is getting more and more popularity due to the new funds and schemes that are launched in the market on a regular basis. Here are some of the vital reasons why people these days are more inclined towards investing in mutual funds:

Professional management-

Professional managers are the persons who manage and look after mutual funds in the asset management companies. Using their expertise and ability to manage risks, these managers not only reduce the risk of mutual fund investment but they also boost the returns for the investors. The investors receive great help from the managers to decide which type of asset classes they should invest in, which is otherwise very difficult for investors to understand as most of them have very little knowledge in fund investment.

Diversification of risks-

The risk in mutual fund investment is diversified by investing in a combination of assets and securities. When an investor invests in a wide variety of securities and assets, there is rarely any chance that all the assets will perform badly. While an investor has some loss on a particular asset, his/her loss gets compensated by the profits made from the other stocks. As a result of this diversification of assets, the risks get reduced to a great extent.

Reasonable investment alternative-

Contributing in mutual funds is very good investment options for people from low-income groups as well as for those who are not in a position to invest a large sum of money in one go in direct equity or other securities requiring high preliminary payment. Moreover, as the cost of transaction is divided among multiple investors, the individual cost is relatively low.

Well-organised investment-

As the mutual fund offer document clearly specifies the targeted investment assets, being an investor you clearly know in which assets your money is invested. This helps you to make contributions in a well-organised and focussed manner. Moreover, these types of funds give the investors access to some specific securities which are not otherwise available for direct investment. For example, foreign securities or sectors are barred for individuals.

Unlimited investment option-

The investors are provided with the opportunity of investing their money in a wide range of secured options like regional funds, index funds, equity funds, money market funds, debt funds, sector funds, fund of funds, etc. This wide variety of assets not only help you to diversify your portfolio but saves you from the risk of depending on any particular type of asset class.

Quick purchase and sale option-

If the investors are investing without any lock-in period, then they can sell the fund units anytime at the prevailing NAV or unit prices. This liquidity of mutual funds allows the investors to purchase and redeem their fund units whenever they want to.

Tax relief-

Paying tax is a huge burden and keeping this under consideration certain mutual fund schemes are specially designed to offer tax benefits to the investors. For example, investments made in the equity-linked saving schemes or ELSS are eligible for tax deduction benefits.

Best return-

Mutual fund schemes are specially designed to help the investors get maximum return on their investment. Investors can diversify their investment in medium to long-term plans and get the expected return keeping the risk factor within a manageable range.

Government regulated investment-

Since SEBI (Securities Exchange Board of India) manages all the mutual funds and regulates their dealings, the investors can relax as their investment is under the purview of a government regulatory body.

Ease of tracking-

It is not easy for the investors to track each and every investment portfolio individually. To make the process easier, a detailed and clear statement of the investments are provided to the investors so that they can keep track of their invested amount on a regular basis.

Small investment option-

SIP (Systematic Investment Plans) allow the investors to contribute small sum at regular intervals. This is a very convenient option for people who cannot afford to do huge investments at one go. Due to the availability of this option, people from all income levels can invest in mutual funds at a minimum amount of Rs.500.

Fund switching facility-

There are various funds which offer investors the flexibility of switching between funds or schemes for availing better schemes as well as better returns. This facility enables the investors to shift their investment wholly or partially whenever they want in order to avail the maximum output.

Eligibility of Mutual Fund :

Mutual funds welcome every type of investor for investing in various schemes. Some of the entities that are eligible for investing include Partnership Firms, QFIs, Non-Banking Financial Institutions, registered FIIs, Cooperative Societies, NRIs, HUFs, and PIOs. This is not a complete list, rather these are some of the most common types of mutual fund investors in India.

How to Invest in Mutual Funds?

With so many mutual funds available in the market, it has become extremely easy for people to invest in such funds. The best thing is, there is no minimum limit in mutual fund investment. A person can invest as low as Rs.500 based on his/her financial condition and capability. Here is how you can invest in a mutual fund:

Agents:

The mutual fund agents or brokers are specially trained professionals who know how to approach people and enrich them with all the details of the funds to help them take an informed decision. Apart from helping the investors with process application, such people also deal with other associated issues like fund cancellation, redemption, transfer of the units and several other dealings of the company. However, when you take help of the agents while making the investment, an extra agent commission of up to 6% gets added to the purchase price of the fund units.

Direct:

If you have good investment knowledge and are confident about your investment skills, you can avoid taking the help of agents and invest directly with the mutual fund company. This can be done either by visiting the company or online through the company’s web portal. For investing directly, download/collect the form from the company’s website/office, duly fill it with all required information, and submit. Alternately, for conducting the process online, you need to submit the form along with all required documents online and continue with the proceedings.

Applying Mutual Funds Online

Due to several reasons, purchasing mutual funds online has become extremely easy these days. Here are the most vital reasons why the online method has become so popular among the mutual fund investors:

Easy and convenient

The mutual fund plans and schemes can be applied online anytime and anywhere based on your comfort. This ease and convenience of application is one of the vital reasons behind its popularity at present.

Easy to evaluate and compare

Apart from the website of the company, there are several other third-party websites where the investors can view and compare the various funds and schemes right before investing and can take an informed decision thereafter.

Inexpensive

Since online applications for mutual funds can be done directly by the investors, it costs them less, as they can cut off the cost that they would otherwise pay to agents or brokers for this purchase. In other words, when the commissions get deducted from the purchase cost, applying for the fund online turns out to be inexpensive for the borrowers.

Freedom of decision

When you apply to invest in a mutual fund online, you will get all the information and materials on the website of the insurance provider. This not only helps the investors to assess and evaluate their desired fund without any compulsion, there is very less chance of getting confused by the brokers and agents.

Mutual Fund Fees & Structure

The fees of mutual funds are categorised into two different classes namely the annual operating fees and the shareholder fees. The operating fees of annual funds generally range between 1-3% and are levied as an annual percentage of the funds which are under management. On the other hand, the shareholder fees are charged in the form of redemption fees and commissions and are directly paid by the investors while buying or selling their funds.

The annual operation fees namely the management fee or the advisory fee along with its advisory costs are together known as the expense ratio. In other words, all these fees are summed up as the expense ratio of a fund. Apart from that, sales charge and commissions (also called a load of a mutual fund) is also calculated on the front-end or back-end. For example, fees for a mutual fund having front-end load are calculated after the purchase of the share, whereas, when the fund has a back-end load, the fees are calculated after the shares are sold by the investor or shareholder.

However, sometimes no-load mutual funds without any sales charge or commission are also offered by the investment companies. The companies directly allot these funds instead of taking help of any secondary party for this purpose. There are a few funds which levy fees and penalties for withdrawing the amount early.

Comparison b/w Direct & Regular Mutual Funds

Below are difference in some of the popular Mutual Funds

Fund Name

Regular Plan

Direct Plan

IDFC FocusedEquity Fund Expense –2.4% Expense –0.46%
Axis Long TermEquity Fund Expense –2.51% Expense –1.26%
Aditya Birla SunLife Equity Fund Expense –2.23% Expense –0.98%

Direct Plan

Regular Plan

No commissions Mutual Fund gives commssion to your broker/advisor from your Investment
Higher return on the same Mutual Fund Lower return on the same mutual fund

Direct vs. Regular Mutual Funds

It has been mandated by SEBI from 1 January 2013 that each and every mutual fund should be divided into two broad categories namely, the direct mutual fund and the regular mutual fund. Though these funds encompass the same scheme and are managed by the same fund manager in the same bonds and stocks, these have some differences which are as follows:

Direct scheme-

Direct mutual fund gives no commission to the broker or distributor from the investment of the shareholder. This kind of fund offers higher returns on the same fund. Regular scheme The regular mutual fund offers commissions to the advisor, distributor, or broker from the investment amount. Hence, the investor receives lower returns on this type of mutual fund scheme.

 DOCUMENTS REQUIRED TO PURCHASE MUTUAL FUND

For Resident Indians

All customers who intends to invest in mutual fund needs to be KYC compliant. Individual investors will have to produce their proof of identity and proof of address

List of documents admissible as proof of identity:

PAN card with photograph. This is a mandatory requirement for all applicants except those who are specifically exempt from obtaining a PAN.

Unique Identification Number (UID) (Aadhaar)/Passport/Voter-ID Card/Driving license.

Identity card/document with applicant’s photo, issued by any of the following: Central/State Government and its Departments, Statutory/Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, Public Financial Institutions, Colleges affiliated to Universities, Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council etc. to their Members; and Credit cards/Debit cards issued by Banks.

List of documents admissible as proof of address:

Unique Identification Number (UID) (Aadhaar)

Driving License

Passport

Voters Identity Card

Ration Card

Registered Lease/Sale Agreement of Residence

Flat Maintenance bill

Insurance Copy

Utility bills like Telephone bill (only landline), Electricity bill or Gas bill. These should not be more than 3 months old

Bank Account Statement/Passbook – Not more than 3 months old

Self-declaration by High Court and Supreme Court judges, giving the new address in respect of their own account

Proof of address issued by Bank Managers of Scheduled Commercial Banks/Multinational Foreign Banks/Gazetted Officer/Notary Public/Elected Representatives to the Legislative Assembly or Parliament/a document issued by any Government or Statutory Authority

Identity card/document with address, issued by any of the following: Central/State Government and its Departments. Statutory/Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, Public Financial Institutions, Colleges affiliated to Universities and Professional Bodies such ICAI, ICWAI, ICSI, Bar Council etc. to their Members

For FII/sub account, Power of Attorney given by FII/sub-account to the Custodians (which are duly notarized and/or apostilled or consularised) that gives the registered address should be taken

The proof of address in the name of the spouse may be accepted

For Non-Resident Indians

Non-resident Indians residing out of India need to submit the following supporting documents in addition to PAN as proof of identity and address

Certified true copy of the passport

Certified true copies of proof of overseas address and permanent address

If any of the documents (including attestations/certifications) towards proof of identity or proof of address specified above are in a foreign language, they have to be translated into English before submission.

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