Mutual Funds have emerged as a popular investment option in India. This has been possible because of the plethora of options for investment offered to you by professionally managed Asset Management Companies (AMC). Apart from the cool efficiency, they have lured you with a multiplicity of options to suit your specific needs, at the same time provided you with consistently high returns. As an investor, instead of relying totally on your fund manager, it is in your interest to learn the nitty-gritty to invest in Mutual Funds. It will not only hold you in good stead but also will be an important tool for your financial planning. You can actively pursue your objectives and dreams, like many others who own them.
Definition of Mutual Funds
An investment that allows a group of investors with a shared objective a portfolio manager by pooling their money is known as a Mutual fund. The manager in turn on their behalf uses this money to invest in Mutual Funds. The mutual funds are the fund’s assets in bonds, securities and stocks or other investment securities or a combination of bonds, securities, and stocks. The buy and sell stocks, and securities activity is performed by the fund manager continually according to the style dictated by the fund’s prospectus.
Technically there are four basic types of Mutual Funds.
- Open-end funds
- Closed-end funds
- Exchange traded funds
- Unit investment trusts
Set-up of Mutual Fund
In India, Mutual Funds are governed by the Securities Exchange Board of India (Mutual Fund) Regulations 1996 with the exception of Unit Trust of India (UTI) which is governed by the UTI Act. It is compulsory for all mutual funds to be registered with SEBI. There are three mainstays in the structure of a Mutual Fund. They are:
Mutual Fund Houses
A trust is established by the patron belonging to a company which is required to be mandatorily registered with the Securities and Exchange Board of India (SEBI).
Mutual Fund Trustees
The property is held by the trustees in the best interests of the unitholders. They oversee the functional aspects of the Asset Management Company (AMC) comply with SEBI regulations and also monitor the performance of the fund.
Asset Management Company (AMC)
It is an entity endorsed by the Securities and Exchange Board of India (SEBI) who act as administrator of the fund.
Mutual Funds Terminology
Building a portfolio of mutual funds is not an easy task. You must acquire knowledge of the various terms and jargons in use else you will be at sea and groping in the dark when you invest in Mutual Funds. You must thoroughly understand the nuances and keep them in mind, the various types of assets and the different types of mutual funds. This will help you in determining how much of one asset or one mutual fund type to allocate in your portfolio, in order to make it one that will ensure a regular and consistent return to you if you invest in Mutual Funds.
Mutual Funds Asset Class
Something that is owned or capable of being owned is an asset. Examples of an asset include financial currency or money in cash, stocks, bonds, gold, and real property. In Mutual Funds asset class, about investments when you invest in Mutual Funds, are the three basic types of assets: stocks, bonds, and cash.
Asset allocation is determined by what proportion your investment assets are divided into the three basic investment types, comprising of stocks, bonds, and cash, within an investment portfolio. As a simple illustration, when you invest in Mutual Funds as an investor you might have three different mutual funds in your investment portfolio: Half of your money is invested in a stock mutual fund, and the other half is allotted equally among two other funds, a bond fund, and a money market fund. Thus, this portfolio would have an asset allocation of 50 percent stocks, 25 percent bonds, and 25 percent cash.
Financial instruments that are normally traded in financial markets are called securities. They are classified as two broad classes or types: equity securities or equities and debt securities. Commonly, equities are referred to as stocks. Debt securities can be in the form of bonds, certificates of deposit (CDs), preferred stock, and more complex instruments, such as collateral securities.
Mutual fund Categories
Asset classes determine how Mutual funds are organized into categories like stock, bonds, and cash or money market and then further categorized by style, objective, or strategy. By learning how exactly the categorization of mutual funds is done helps you to ascertain how to choose the best funds for asset allocation for the purposes of Illustratively, there are stock mutual funds, bond mutual funds, and money market mutual funds. Primary fund types are stock and bond funds which have dozens of subcategories that further describe the investment style of the fund.
As the name suggests, sector funds focus on specific industry, social objectives, or sectors such as healthcare, real estate, or technology. Concentrated exposure to specific industry groups called sectors is their investment objective. You use sector funds to invest in Mutual Funds to increase exposure to certain industry sectors you believe will perform better than other sectors in your Mutual fund portfolio. By comparison, diversified mutual funds, those that do not focus on one sector obviously will already have exposure to most industry sectors. For example, an SP 500 Index Fund provides exposure to sectors, such as healthcare, energy, technology, utilities, and financial companies.
Mutual Fund Holdings
Holdings represent the security instruments like stocks or bonds held in the mutual fund. All of the included holdings combine to form a single portfolio. It is like an imaginary bucket filled with rocks. If the bucket is the mutual fund, and each rock is a single stock or bond holding, the sum of all rocks in the shape of stocks or bonds equals the total number of holdings when you invest in Mutual Funds.
Types of Mutual Fund
Your risk craving, economic aims and time range determine how to invest in Mutual Funds.
Funds fashioned on maturity period:
- Open-ended funds: They are flexible with time and easy redemption which allow you to cash in your units on Net Asset Value (NAV) on a need basis.
- Close-ended funds: Maturity vehicle for a predetermined period of usually between 3 and 6
- Interval funds: This is an amalgam of close and open-ended Though a blend of the two, they bear the characteristics of close-ended funds.
Funds fashioned on investment objective:
- Equity Growth Fund: This fund allocates around 65% of its corpus in equities or equity related instruments. Therefore, you are outlaying your money in stocks intended chiefly at capital growth in the long run by investing here. If you have a high-risk craving and a long-term goal, this fund is suitable for you as the investment is concentrated in a variety of industrial sectors.
- Debt Income Fund: Almost two-thirds the portfolio contains securities returning fixed income such as company debentures, gilt instruments, bonds and money market vehicles.
- Balanced Fund: It is a mix that provides sound even returns coupled with capital growth. Near about sixty percent of the fund is spent on acquiring Stocks and forty percent debt vehicles such as debentures.
- Money Market Liquid Fund: This fund is ideal for a corporate and industrial investor. The investments are focused in reliable short term vehicles inclusive of Treasury Bills, CDs and commercial paper maturing in 91 days.
- Gilt Fund: The returns depend on fluctuations in rates of interest. Spends are solely concentrated in government securities in this fund.
- Tax Saving Fund: Stocks are the main target of this fund and are appropriate for persons willing to bear high for capital growth over a long period. Equity Linked Savings Schemes (ELSS) is a fund with a lock-in of 3 years. The income tax rebate is permitted by the IT Act, 1961.
- Index Fund: The fund is attached to any particular index such as the BSE, NIFTY or the S&P. Performance is determined by the results of the relative index.
- Sector-specific Fund: The risk is high in this fund. The individual manufacturing sector is the target for investment which may be banking, FMCG or Medical necessities. General functions of the targeted sector impact the returns.
Operation of Mutual Funds
Mutual Funds are in the securities business guided by efficient market research and comprehension. Investment strategies are adopted when the professionally managed trust introduces a scheme. The set objectives determine the focus of allocation of funds:
- Capital progression
- Perpetual monthly income; or
- Sound returns.
- Diversify your portfolio of Mutual Funds:
Is it a good idea to put all your eggs into one basket? In the case you invest in Mutual Funds, the answer is no. It is only with Mutual funds that your single small investment may fetch you units in a diversified range of instruments. Alternatively, you would have to purchase individual securities and then amalgamate them into a single diversified portfolio. You invest in Mutual Funds to reduce your risk perception considerably because of the distribution, which automatically distributes the risk too. Moreover, a loss in an instrument is offset by your gain in others. With a diversified portfolio, you, therefore, do not jeopardize your entire investment.
The SIP in Indian Mutual Funds
One of the best modes to invest in Mutual Funds is a Systematic Investment Plan (SIP) if you are an individual investor. A small sum of monthly investment by you is redirected to your chosen SIP Mutual Fund scheme. The track record is known to give you reasonably good consistent returns. An additional benefit provided is easy liquidity with the flexibility to redeem fully or partly at any time of your choice.
Professional Management of Mutual Funds
You may not have the resources and the wherewithal to indulge in investments in stocks and related instruments. Let it not deter you from being a conscientious investor due to your deficiencies and the paucity of time. You have your fund manager and analyst in the Mutual fund who will wrack his brains to give you the best deal to invest in Mutual Funds. This professional resource in the Mutual fund provider is one big point of attraction to you and other investors.
Mutual Funds Benefits
- Size advantage: A tiny amount at a nominal fee can be your introduction to a mutual fund.
- Convenient trade: You can indulge in stock market trade as you invest in Mutual Funds with relative comfort.
- Specialized Management: You are benefited by the use of time-tested financial techniques to invest in Mutual Funds.
- Fresh investor: Novice investors who have an anathema to actively participate in their money matters are benefited.
- Free choice: You can take the help of your choice fund manager after careful research and analysis in your Mutual fund provider.
- Sundry portfolio: Intra-portfolio diversity of investments and assets reduce risks considerably.
Cons of Mutual Funds
The inherent disadvantages when you invest in Mutual Funds need to be absorbed by you.
- Unpredictable Returns: Market-driven vehicles are always prone to result in irregular returns.
- Cash: Mutual funds are always required to keep some provision of cash compulsorily with your Mutual fund provider due to the perpetual redemption and sales.
- Expenses: The amount of your pay-out depends on the cost of operations of Mutual fund provider, and it is accordingly reduced.
- Opaque: The acumen of the fund manager with you mutual fund provider determines the performance of the fund and is totally dependent on him. There is also some grey area in the functioning of the funds.
- Appraisal blues: It is very complicated and demanding for a commoner to fruitfully do research and perform a comparison of funds.
Best Performing Mutual Funds
Funds that overhaul the yardstick time after time are considered the top Mutual Funds. This is only for an illustration purpose and not advice to invest. Some of the prime in the year 2018 are:
- IDBI Equity Advantage Fund
- L&T Dynamic Equity Fund
- JM Dynamic Debt Fund
- Axis Long Term Equity Growth Fund
- Tata Hybrid Fund Regular Growth Fund
There is no easy road to investments to build wealth. Among the many options available in India, one of the best is to invest in mutual funds. It covers for your shortcoming in the field of fund management that will help you to plan for a healthy corpus. In spite of the professional AMC and mutual fund provider doing the job for you, there is no denying that you must learn the various intricacies of Mutual Funds as it always pays to be involved actively in your investment and the portfolio you hold.