Mutual Fund

Mutual Fund: Overview

Investing in stock markets directly and making a profit is not everyones cup of tea at least in part because after our day job we have little energy to make in-depth study into the ups and downs of the share market. Therefore such task are best left to professional investors and fund managers, which is what Mutual Funds provide.

A mutual fund is best defined as a pool of funds collected from multiple investors who are interested in making their money grow. This pool of money or corpus is managed by one or full time fund manager who have one basic aim to make the investment grow. Due to this professional support that you get from a mutual fund, it is much easier than buying and selling individual stocks and bonds by yourself. Additionally, you have the flexibility to liquidate your mutual fund investments as and when you need to.

Objectives of a Mutual Fund

A Mutual Funds main objective is to give you maximum returns but with lower risk as compared to individual stock and bond investments. The different types of Mutual Funds and their objectives can be described as below:

Growth: This is the most common objective of a Mutual Fund. It means a fund where you get an increase in your investment over a small or long term. This type of fund is invested in small to large cap stocks

Income: This type of fund is suitable for investors who are looking for a reliable source of income. To ensure steady income, a major portion of the asset is invested in bonds, stocks, fixed interest debentures, preference stocks and dividend paying stocks etc.

Sector Funds: As the name suggests, these mutual funds in India aim to invest only in specific sectors or industries, such as real estate, transportation or healthcare. The objective is to maximize the returns by investing in sectors that are booming at the moment.

Value: This option generally aims of investing in stocks which are undervalued in price. Stocks that have less value because of some problems in the market are expected that once they are rectified, their stock prices will rise. This way, the investor who has invested in these stocks will make a profit.

Advantages of Investing in Mutual Funds

Fund Ownership: When you invest into a mutual fund, you own a stake in the fund itself instead of owning stocks and bonds of separate companies. Additionally, the minimum investment amount is quite small in case of a mutual fund, while there is usually no maximum limit on the total amount you can invest in mutual funds.

Profit Share: By investing into a mutual fund, you share on the profits made through the fund proportional to the amount that you have invested. Therefore, the larger your investment into the fund, the higher your mutual fund returns on investment.

Diversification: When you invest in a mutual fund, you invest in a diversified portfolio comprising stocks and bonds from a variety of sectors. This reduces your total exposure to a specific sector and fluctuations in specific industries have lesser impact on your investments.

Professional Management: As mentioned earlier, mutual funds are managed by professional individuals who are actively involved in choosing and monitoring the portfolio of investments that would help the fund grow and generate profits for the investors. These qualified professionals take great care when choosing money market instruments, bonds and stocks or a combination of those to derive maximum benefits for the mutual fund investors.

More Choices and Greater Transparency: Fund houses provide you with a wide range of mutual fund options that you can invest in. Therefore you get the option of rearranging your portfolio as and when necessary. Furthermore, mutual funds performance is reviewed by numerous agencies both government and private, which ensures a greater degree of transparency as compared to standard stocks and bonds.

Types of Mutual Funds

Mutual funds are classified on various ways. The following are some of the key types of mutual fund based on different classification criteria.

Objectives Based Classification

  • Growth Fund: A growth fund offered by a mutual fund company attempts to generate high returns for its investors. Therefore, these mutual funds invest in stocks that have the potential of high growth but also have a high degree of risk associated with them. Depending on how aggressive the growth targets are, such a mutual fund would choose to invest in a mix of blue-chip (large cap), middle cap and small cap investments. When choosing investments for a fund focused on growth, the fund manager would tend to pick stocks that would use their profits to grow further instead of making dividend payments to their investors.
  • Income Funds: Such funds offered by a mutual fund company usually invest in a variety of fixed-income securities and their key objective is to generate a regular income. These funds are preferred by retired investors as the regular dividends they provide act as regular income source with minimal risk. However, these investments are subject to market forces hence, interest rates can fluctuate leading to changes in the dividend payouts offered. Top investment options for income mutual funds include company fixed deposits and debentures.
  • Balanced Funds: These funds essentially represent a combination of income and growth objectives. These funds are designed to provide investors with the dual benefit of dividend income and potential growth. Balanced funds usually prefer to include stocks and bonds in their portfolio in order to generate income, while also ensuring that the investment earnings supersedes, the inflation observed in the market. The portfolio of a balanced fund commonly features a combination of equity and fixed-income securities. The equity investments provide growth, while fixed-income securities provide stability to the fund during times market volatility.

Subscription-Based Classification

Open-End Funds: An open ended mutual fund is defined as one that an investor may subscribe to at any point of time i.e. the investment subscription is openly available throughout the year. These mutual funds are not listed on the stock exchange and most mutual funds in India are open-ended thus allowing investors to benefit from them. In case of these funds, investors are provided the flexibility of investing and liquidating their investments as and when they desire. The price of buying and selling mutual fund is directly to the NAV (Net Asset Value).

Closed-End Funds: As opposed to an open-end fund, a closed end fund only accepts investments for a specified period and they operate for only a fixed duration usually ranging from 3 years to 15 years. These mutual funds have only a fixed number of outstanding shares and by opening subscriptions for a limited duration, these funds ensure a balance of sellers and buyers. Additionally, closed-end funds are also listed on the stock exchange therefore they are traded similar to stock-exchange traded instruments and their NAV changes daily. The redemption period of closed-end funds is also specified and investors can only redeem their units before the specified cut off dates.

Classification Based on Type of Investment

Equity Mutual Funds: Equity mutual funds also known as equity funds invest in equities i.e. these funds purchase stake in various companies and corporations that raise funds through sale of shares. Equity mutual funds may either invest in exchange traded stocks or in private equity of companies that are currently not traded on the stock market. Mutual funds that have a growth objective usually invest primarily in company equities. Mutual funds in India have further subdivisions such as Small Cap, Mid-Cap and Large Cap. A specific type of mutual fund termed ELSS (Equity Linked Savings Scheme) is favoured by investors as they provide tax benefits under section 80C and also have only a 3 year lock-in period, which is the minimum among all 80C instruments.

Debt Mutual Funds: Also known as debt funds, these are mutual funds that are focused on making investments into fixed income and debt securities. Some of the leading investment options for debt mutual funds include money market funds, corporate bonds, government securities and treasury bills. Among these, debt securities are often preferred by fund houses as they provide a fixed rate of interest and have pre-determined maturity date. Debt mutual funds usually generate their returns through income earned on interest as well as capital appreciation through changing market dynamics.

Diversified Funds: These are mutual funds that hold diversified investments in companies that are spread across multiple sectors and different market capitalizations. These funds have the benefit of not having their NAV severely impacted by changes in a specific sector and preferred by investors who do not want high exposure to a specific sector.

Tax Savings Funds: These are mutual funds that offer investors with Income Tax benefits under Sector 80C of the IT Act of 1961. The tax benefits offered under the section have a maximum limit of Rs. 1.5 lakhs inclusive of various tax saving investments such as tax saving fixed deposits, tax savings mutual funds and PPF. Tax savings mutual funds are usually referred to as ELSS or Equity Linked Savings Schemes. To claim the tax benefits, these mutual funds have a minimum lock-in period of 3 years.

Liquid Funds: In case of liquid funds, a major portion of the investments are made into money market funds that can be liquidated with ease as the investment period of these funds may be as short as 1 day. These mutual funds are considered ideal for business houses, institutional investors and corporate entities that favour short-term investment options.

Gilt Funds: Gilt mutual funds are considered to be zero risk investments as they exclusively invest in State and Central Government backed securities. These are considered suitable for risk-averse investors seeking to make a medium term to long term investment at the lowest possible risk. Due to the low risk of this mutual fund investment, the potential rewards are also low.

Hybrid or Balanced Funds: In this type of mutual fund also known as hybrid funds, investments are made in both debt as well as equity instruments in order to provide a regular income along with growth of the invested capital. Balanced funds are a hit among investors who are open to taking moderate risk and are willing to stay invested for the medium to long term.

What is ELSS?

Simply put,ELSSor Equity Linked Savings Scheme is a type of diversified equity mutual fund scheme which qualifies for tax exemption under section 80C of the Income Tax Act. Investments in ELSS mutual funds offer the twin-advantage of capital appreciation and tax benefits. ELSS mutual fund schemes come with a lock-in period of three years.

Why should one invest in an ELSS?

It helps you in saving a lot of money if you plan it efficiently. Usually tax savings options have a lock-in period from three to fifteen years. ELSS has the minimum lock-in period of 3 years which is less than any other tax saving options. No tax is levied on the long-term capital gains from these funds, hence it is classified as EEE i.e. the principal, interest as well as the maturity amount is tax free. Even the withdrawals are free because the holding period for this type of fund is more than a year which means no capital gains tax. You can opt for three different plans Growth, Dividend or Dividend Reinvestment Plan. The Growth plan is an option where your investment will keep growing till you take it out. In the Dividend plan, the fund gives some amount back to you if the fund's Net Asset Value (NAV) has risen. In the Dividend Reinvestment plan, dividend payout is reinvested to buy some more units of the scheme.

How to Select a Mutual Fund?

It is not as simple as going ahead and choosing to make investments in a mutual fund you think is currently having a bullish run in the market (Hint: A higher NAV does not necessarily mean higher future profits). It is best to choose on the basis of your specific requirements. For example, how long are you planning to stay invested? If you would look for a long term investment, then an equity mutual fund is perhaps the best fit for you. If you are a retired person and seek regular income, then you should definitely consider an income fund. You should thoroughly research about a Mutual Fund for its past records and results. This would help you know if the Mutual Fund achieved the gains that were promised. In India, almost all mutual funds are No Load Funds which means that you will not be charged at the time of investing or at the time of liquidating the investment. So first figure out how much risk you are willing to take and how long you plan to stay invested before selecting a fund you want to invest with.

Systematic Investment Plans Vs. Lump Sum Investments

A lump sum investment as the name suggests, involved a one-time investment into a mutual fund of your choice and then you stay invested for a suitable period of time to generate the targeted returns. In case of a lump sum investment, you have to invest a large amount of money at one go and this may strain your finances.

SIP or Systematic Investment Plan is the other option of investing in mutual funds. As opposed to lump sum investment, in case of a SIP, you are required to invest small amounts of money at regular intervals (usually monthly) so that you can reach your investment target without straining your finances. Investing through SIP options is among the top suggestions made by investment experts made in India because it also helps develop financial discipline that can help you later in life.

Why Choose Paisabazaars Mutual Fund Investment Platform?

When you log into your Paisabazaar Mutual Fund Account, you can get up to date data regarding hundreds of mutual funds in India and international ones that you can invest in. Additionally, you can sort your mutual fund investment options into various subcategories of funds across the categories of Equity, Debt, Commodities and Hybrid funds. You can further refine your choices in terms of sector funds such as pharma, auto, petroleum or choose the tax saving route by opting for one or more tax planning (ELSS) mutual funds available in India. If it is liquidity you seek, we got you covered for those too through the numerous Gilt, Liquid, Short term, Ultra Short Term and related debt funds on offer.

Apart from comparing funds and schemes as well as checking out the recommendations of our in house experts, you can also check out available new funds and schemes offers before zeroing in on the fund/funds that suit your investment style. Most importantly, we provide all of these services without any sort of brokerage fees what so ever. With options such as these, applying for mutual funds online was never this simple.

Fill out our simple registration form and starting investing for your future today!