Beginners Guide To Mutual Funds

What are Mutual Funds?

Mutual fund can be considered as the financial instrument which pools the money of diverse people and invest them in bonds, stocks, etc.

Each investor in mutual fund scheme own units of the fund, which represents a part of the holdings of the scheme.

The investment goal of this scheme are taken into consideration depending upon which, the securities are selected. Mutual funds are usually managed by asset management companies (AMCs).

What Type of Investment is Mutual Fund?

Why Mutual Fund is known for feasible decision for investors? There are quite a few questions in our mind which comes when we desire to make investment in market. Let’s try to know first concerning Mutual Fund.
1) Mutual Fund investment offers a chance to invest in a diversified, competently managed basket of securities at a moderately low cost
2) It is extremely liquid
3) Managed by qualified Fund Manager
4) Attracts Capital Gain Tax by way of indexation benefit

How Mutual Fund Functions?
• Each investor own units, which represent a portion of the holdings of the fund
• Money is invested in bonds, equities, and / or other securities
• Income / gains obtained from this communal investment is distributed proportionately in the midst of the investors after deducting definite expenses, by calculating a schemes Net Asset Value (NAV)

Lets’ Know about variety of Mutual fund investment available in market-

1] Debt Fund

• Liquid Fund
• Corporate Bond Fund
• Short Duration Bond Fund
• Ultra Short Duration Fund
• Medium Term Bond Fund
• Long Term Bond Fund

2] Equity Funds

• Equity Linked Saving Scheme (ELSS) Fund also known as Tax Saving Fund
• Large Cap Fund
• Mid-Cap Fund
• Multi-Cap Fund
• Small-Cap Fund

3] Hybrid Funds

• Equity-Oriented Hybrid Mutual Funds
• Debt-Oriented Hybrid Mutual Funds
• Arbitrage Funds

Types of Mutual Funds available in Market

A} Liquid Fund

Nature: This is debt group of Mutual Fund means investment in a extremely short term market instruments like government securities, treasury bills, and call money.

Investment: Government Securities & AAA Rates CP and / or Bonds for period not more than 91 days.

Features:
• Instant Redemption
• High Liquidity

Advise – Investors who would like fixed return can invest in such type of fund since this is the safest option that gives better returns as compared to bank FD, fixed deposits.

B} Corporate Bond Fund (Debt Scheme)

Nature: Is an open-ended debt plan which invests at least 80% of its total assets in highest-rated company bonds.

Features:
• High Returns
• Low Risk
• Credit Risk
• Fund Return for last three to five years – 8% to 10% (Approximately)
• Typically identified as Fixed Income Security

C} Short Duration Bond Fund

Nature: A debt scheme with an aim to make the most of Income while maintaining a finest balance of yield, liquidity and safety.

Features:
• Low risk low return
• Average maturity period is one year to three year
• Credit Risk
• Fund Return for the Last three to five years – 7% to 9% (Approx.)

D} ELSS Fund (Tax Saving Fund)

Nature: An ELSS is just the other mutual fund scheme intended to invest primarily in the stock market. The only variation is that an ELCC comes with a three year lock in, that implies you cannot sell your asset before three years from the date of you purchase them. Each payment is locked in for 3 years for ELSS SIP, also means each instalment will have a unlike maturity date.

Maximum investment of Rs. 1.5 lakh in ELSS per annum qualifies for income deductions under section 80 C of the Income Tax Act.

Features:
• Better post-tax returns
• Highest returns among other 80C options
• Lowest lock-in period of 3 years
• Investment as low as Rs.500 per month
• Long term wealth creation & tax saving tool
• Get instant investment proof

E} Large Cap Fund

Nature: its aim is to create long term capital appreciation by investing mainly into equity and equity related instruments of large cap companies. These funds choose stocks for investment from the largest hundred stocks listed in the Indian markets (highest market capitalization).

Steady and low-risk returns are obtainable by large-cap fund investments. Large-cap funds benefits investors with low risk tolerance. They are competent of withstanding a bear market.

Feature:
• Low-risk returns
• Steady wealth creation
• Higher returns in 5 to 8- year investment period
• Pay out dividends regularly

F} Mid Cap Fund

Its focus is on investment in mid-cap companies which be likely to exhibit higher growth rates than well-established big size companies. This mutual funds choose stocks for investment from the mid-cap category – stocks ranked between 100 to 250 by size (Market Capitalization). The investment of these companies in India is between Rs. 5,000 to Rs. 20,000 cr.

The common insight of mid-cap stocks is that the mid cap stocks are highly unstable and risky, and however, not all stocks act as same. Fund houses curate mid-cap portfolios in a way that helps investor lighten risks associate with fluctuating NAV and unstable stock prices.

Features:
• Higher return than large cap fund in longer investment period.
• These mutual funds select mid cap category stocks.
• Steady wealth creation for longer period
• Investor should invest money for at least 5 to 7 years to have higher returns

G} Small Cap Fund :

Small Cap is term used to classify companies with comparatively small market capitalization. It focuses on investment in equity shares which have smaller capitalization and listed under the 250^th rank of the underlying benchmark. Generally, a company with market capitalization of less than Rs. 100 cr is measured as Small Cap.

Historically, small cap stocks have typically underperformed Large Cap Stocks during recessions but have outperformed Large Cap Stocks as the Economy has emerged from recession.

H} Multi Cap Fund :

Multi Cap funds provide the advantage of diversification by investing in companies extend across sectors and market capitalization. It deals with investment in stocks of companies across the stock market despite of its size / sector.

They are usually meant for investors who wants coverage across the market and do not want to get involved in any type of risk in any meticulous sector. They invest in companies with obvious market caps and for this reason reduce the amount invested in the fund.

I} Hybrid Mutual Fund

Hybrid mutual fund method is one of the best scheme that includes invest of 65% of its corpus in equities. After this the outstanding in debt is then called and Equity-Oriented Hybrid Mutual Fund. The method by which the scheme invests across asset classes (bonds, cash, gold, equities, etc.) is called asset allocation.

Types of hybrid mutual funds:

Depending on asset allocation, there are number of dissimilar types of hybrid mutual fund schemes listed below:

• Debt-Oriented Hybrid Mutual Funds:
Hybrid fund schemes (also known as Monthly Income Plans) that invest over 75 % of their resources in the bonds, treasury bills, money market instruments, and other debt assets that are called debt-oriented hybrid schemes. And the remaining part of 25 percent or less is invested in equity stocks on companies and cash equivalents.

• Arbitrage Funds:
These Funds at the same time purchase in addition to sell the same shares in dissimilar markets, exploiting variation in trade cost of the shares to produce profitable gains. Shares are purchased in the cash market and sold in the futures market, based on the price gap to make a desired profit.

• Equity-Oriented Hybrid Mutual Fund:
Equity-oriented hybrid schemes (also known as Balanced Fund) allocate over 65 % of their investment resources towards purchasing the equity stock of companies. The remaining 35 percent is invested in debt securities or other opportunities. These funds lead to the opportunity of high returns and reduce the risk revelation simultaneously.

Recommendation:

1. Investors must spend or invest in mutual funds only after checking Crisil star rating.
2. It is recommended to invest in equity mutual funds through SIP. Keep the investment period of at least five to seven years for gaining better performance.
3. Before Investing you money, it is recommended to review expense ratio and exit load of respective Scheme fund.
4. For Lump sum investment in Equity fund, please consult with a professional financial advisor.