What is Mutual Fund ?
A mutual fund is an investment vechile where many investors pool their money to earn on their capital over a period of time. This corpus of funds is managed by an investments expert known as a fund manager or portfolio manager. Simply, we can say that mutual fund is an investment tool where we can get the benefits of compounding from the market to build capital in future.
Or, म्यूच्युअल फ़ंड एक प्रोफेशनली मैनेज़्ड इंवेस्टमेन्ट माध्यम है जहां आप छोटी रकम का निवेश करते हैं और बड़े फ़ायदे पाते हैं. इसके लिए बस आपको अपने लक्ष्य बनाते हुए सही स्कीम्स चुननी होंगी. म्यूच्युअल फ़ंड्स आपको अनुकूलता, नकदीकरण क्षमता, टैक्स लाभ और जोखिम का विविधिकरण जैसे कई फ़ायदे, एक छोटी सी कीमत पर दिलाते हैं.
Why invest in Mutual funds ?
There are many reasons/benefits of investing in mutual funds such as....
Professional expertise
A professional fund manager takes care of your investments
and strives hard to provide reasonable returns. And just as you would pay the
driver for his chauffeuring services, you have to pay specific fees for the
professional management of your mutual fund investments.
Higher Returns
You have the opportunity to earn potentially higher returns
than traditional investment options offering assured returns. This is because
the returns on mutual funds are linked to the market’s performance. So, if the
market is on a bull run and it does exceedingly well, the impact would be
reflected in the value of your fund. Unlike traditional investments, mutual
funds do not assure capital protection. So do your research and invest in funds
that can help you meet your financial goals at the right time in life. You can also get the compunding benefits in the long run.
Diversification
"Don’t put all your eggs in one basket"
If you were investing in stocks and had to diversify, you would have to select at least ten stocks carefully from different sectors. This can be a lengthy, time-consuming process. But when you invest in mutual funds, you achieve diversification instantly. For instance, if you invest in a mutual fund that tracks the BSE Sensex, you would get access to as many as 30 stocks across sectors in a single fund. This could reduce your risk to a large extent.
Tax Benefits
Mutual fund investors can claim a tax deduction of up to Rs. 1.5 lakh by investing in Equity Linked Savings Schemes (ELSS). This tax benefit is eligible under Section 80C of the Income Tax Act. ELSS funds come with a lock-in period of 3 years. Hence, if you invest in ELSS funds, you can only withdraw your money after the lock-in period ends.
Types of Mutual Fund Plan
Direct Mutual Funds
Direct Mutual Funds is the type of mutual fund that is directly offered by the AMC or fund house. In other words, there is no involvement of third party agents – brokers or distributors. Since there are no third party agents involved, there are no commissions and brokerage. Hence the expense ratio of a direct mutual fund is lower. Thus, the return is higher due to a lower expense ratio. The direct plan of a mutual fund can be easily identified; the word ‘Direct’ is prefixed in the name of the fund. These mutual funds can be bought through either online or offline mode.
Regular Mutual Funds
Regular plans are those mutual fund plans that are bought through an intermediary. These intermediaries can be brokers, advisors, or distributors. The intermediaries charge the fund house a certain fee for selling their mutual funds. The AMCs usually recover this fee through expense ratio. The expense ratio for regular mutual funds is slightly higher than direct mutual funds. Hence the returns tend to be a little higher for direct plans.
Categorisation of Mutual Funds
|
EQUITY |
BALANCED |
DEBT |
TAX SAVER |
|
Large Cap |
Aggressive |
Corporate Bond |
ELSS |
|
Mid Cap |
Equity Saving |
Gilt |
|
|
Large &
Mid Cap |
Balanced |
Ultra-Short
Duration |
|
|
Small Cap |
Multi Asset Allocation |
Liquid |
|
|
Multi Cap |
Arbitrage |
FMP |
|
|
Flexi Cap |
Conservative |
Short
Duration |
|
|
Thematic Cap |
Dynamic Asset
Allocation |
Floater |
|
|
Technology |
|
Medium to
Long Duration |
|
|
Infrastructure |
|
Long Duration |
|
|
Banking |
|
Money Market |
|
|
PSU |
|
Dynamic Bond |
|
|
International |
|
Credit Risk |
|
|
Pharma |
|
Banking &
PSU |
|
|
Dividend
Yield |
|
10-year Gilt |
|
|
Value
Oriented |
|
Overnight |
|
|
|
|
Medium
Duration |
|
|
|
|
Low Duration |
|
Know your's priority first..!
Know your Investment Objective
Since your personal investment objective is closely linked with the investment objective of your mutual fund, choose that mutual fund scheme which is right for your needs. Regardless of your short-term or long-term goals linked with an event associated with your life or your family member, it’s always a wise decision to read the offer document carefully while you select the right mutual fund for yourself.
Know your Risk Taking Appetite
If you are in the age of 20s without dependent, go for equity mutual fund or go for balanced funds if you are married within the age group of 25-30. Above all the life cycle stages, if you have no clue in deciding the right course of an action plan for yourself. It’s better to assess the level of risk you can take (very high, high, moderately high, moderately low or low risk)while selecting the best scheme for yourself.
How to choose right mutual fund scheme
Know you Asset Management Company
You must know about your company where you going to invest. Returns and capitalisation are mostly depended on the fundamental and technical basis. Their years of experience in mutual fund operations ensure the investors about their decision that they are going to invest in the right hands working under the directives of Securities & Exchange Board of India.
Performance Rankings of Mutual Fund
Normally, mutual funds are ranked on the basis of multiple factors with highest weightage to low weightage in returns. You can check the rankings of CRISIL and Value Research before picking the right funds for yourself. As these are the trusted rating agencies on whose performance ranked funds you can keep your funds parked in for a designated time period. Moreover, you can also compare your chosen funds with its peers in the same category (large cap, mid cap, ELSS or sector-specific like pharma, banking & finance, technology etc). However, rankings of your chosen funds can also be tracked from the factsheets of your chosen mutual fund company.
Annualized performance of the scheme
Annualized performance of 1-year, 3-year & 5-years help you out in showing you actual returns irrespective of the market volatility conditions. Always go for a consistent performer that will help you out in generating regular returns.
Total Expense Ratio
Keep track of the expense ratio as it is the charge which investors have to shell out as a payment made towards operation and administration of the particular mutual fund scheme you choose to invest in. The expense ratio also includes the fund manager’s fees for the scheme you have zeroed-in down for your purchase. Normally, the maximum expense ratio varies from 2%-2.25% approximately, so be prepared to choose your fund wisely.
Exit Load
Check the exit load of a mutual fund scheme which you wish to finalize as it is the withdrawal charges that any investor has to pay while on liquidating (or redeeming) your fund. Don’t lose your heart as exit load depends on your timing to stay invested. Be wary of making an exit before one-year from a scheme as you will have to pay 1% as exit load. And if you stay in your existing scheme after 1-year, then you don’t have to shell out any exit load for it.
Fund Manager tenure and experience
Check out the years of experience your fund manager has in managing a particular fund. This will help you to measure the fund manager’s investment expertise across different investment categories. To sum up, the parameters discussed above will be helpful for you in finalizing your best mutual fund. Also, keeping a consistent track record of your chosen mutual fund on a 6-months basis keep you well-informed that you have set your “hopes” on in a right mutual fund for yourself.
Let's know about the Methods of Investment in Mutual Fund...!!
Lump sum investment
It is a one-time investment you make, like say, Rs 1,00,000. If you have a substantial disposable amount in hand and have a higher risk tolerance, then you may opt for making a lump-sum investment.
SIP
You can invest in mutual funds in a staggered manner through a SIP (Systematic Investment Plan). Under SIPs, you invest a small amount regularly, say Rs 10,000 a month over twelve instalments. SIP is an ideal choice if you don’t have a lump sum to invest. As SIPs allow periodic investments, it has gained popularity recently.
Understand SIP vs Lumpsum
SIPs allow you to pump in money into a mutual fund scheme periodically, such as daily, weekly, monthly, quarterly or half-yearly etc. On the other hand, lump-sum investments are a one-time bulk investment in a particular scheme. The minimum investment amount also varies. You can begin investing in SIPs with as little as Rs.500 per month while generally lump-sum investments need at least Rs.1,000.
If you are an investor with a small but regular amount of money available for investment, SIPs can be a more suitable investment option. For investors with a relatively high investment amount and risk tolerance, lump-sum investments may be more beneficial.
List of Measures:
Benchmark Index
A benchmark index is used to evaluate the performance of an investment in the stock market. A benchmark index covers different market capitalizations, sectors and themes. When making an investment, a portfolio manager evaluates the returns of an investment based on the performance of a set or a group of securities called the benchmark index.
Alpha
The alpha is the excess returns over the benchmark index that a fund generates. Alpha is generated by portfolio managers by diversifying their investments and can be positive or negative. An alpha at zero indicates the fund manager has not generated more or less returns compared to the broad markets and the fund’s performance is in line with that of the benchmark index.
Beta
The beta is a measure of the volatility of the mutual fund when compared to the broader market. Beta indicates the risk that a stock or a portfolio carries and it changes as the market swings. When choosing a mutual fund, beta of less than one is considered less volatile when compared with funds that have beta higher than one.
Standard Deviation
The standard deviation is a measure that indicates the volatility of a fund; the higher the standard deviation, the higher is the volatility of the fund and vice versa. When choosing a mutual fund, lower standard deviation of the fund compared to peers’ implies lower risk.
Sharpe Ratio
The Sharpe ratio indicates the return of an investment when compared to its risk. It shows the extra returns you make for the additional risk that you have taken. When choosing a mutual fund, a high Sharpe ratio is preferred when compared with peers’ performance and implies better risk-adjusted returns of the fund.
Methodology
- Expense ratio of the scheme compared to its peers’; comparatively lower expense ratios were considered.
- Performance compared to benchmark indexes over a period of time.
- Fund’s alpha; those with higher alpha than their peers were considered.
- Fund’s beta; those with less than at least one percent were preferred.
- Fund’s standard deviation; those with lower standard deviation than peers were considered.
- Fund’s Sharpe ratio; those with higher ratio than peers were considered.
Ways to invest in Mutual Funds
- Offline investment directly with the fund house(AMC)
- Offline investment through a broker/Advisors
- Online through the official website
- Through an app
Required Documents
- Proof of Address
- Proof of Identity(PAN/ADHAAR)
- Cancelled Cheque Leaf
- Passport Size photograph
Mutual funds are subject to market, or systematic, risk. This is because there is no way to predict what will happen in the future or whether a given asset will increase or decrease in value. Because the market cannot be accurately predicted or completely controlled, no investment is risk-free.
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