What are the Benefits of Investing in Mutual Funds
The faith reposed in Mutual Funds as an instrument of investment is growing day by day for some basic reasons that appeal to you in the present generation. There is no denying that the investment savvy individuals like you, look for smart ways to increase your investments where along with higher returns, you also weigh the inherent advantages camouflaged in the ecosystem of Mutual Funds. You are well aware that the returns from Mutual Funds are higher than other vehicles of investments due to the play of the market. This market-oriented risk factor is negated by the spread of your investments in different available asset classes to offset the losses. A setback in one sector is easily recouped from the gains in another. This is achieved in a cool professional way by the Asset Management Company (AMC) you put your trust in. Notwithstanding your reliance on the AMC of your choice, your involvement in the movement of your investments can be an important booster to the growth of your fund. After all, your financial planning is aimed at along term perspective and preferences to meet certain goals and objectives in harmony with your risk appetite. In light of this, it is not out of place to learn about this popular investment module.
Meaning of Mutual Fund
Your investments made from pool money collected from multiple individuals with a shared objective in different assets is called a Mutual Fund. The pooled money so collected is invested in financial securities like shares and money-market instruments in the form of a certificate of deposit and bonds. The asset classes are broadly classified as equity, debt and money-market instruments. These investments can be for the short term, medium term or long term. The risk factor is determined by the kind of assets that comprise the portfolio.
Structure of Mutual Funds
The elementary form of a Mutual Fund can be described as a trust. The configuration of this trust is best understood by the pillars that make the edifice.
This is the entity that sets up the trust. This is very much akin to a promoter of a company. The sponsor draws the contours of the Mutual Fund by appointing the board of trustees, the custodian and sets up the asset management company or the fund house. These are the three main components of the Mutual Fund.
Board of Trustees
The main role of the trustees is to safeguard the interest of the Mutual Fundholders. The board of trustees further arranges all compliances mandated by the Securities Exchange Board of India (SEBI). The trustee board appoints the directors; creates the requisite infrastructure, lays down the processes that will help the fund house to operate. They are also empowered to put the controls, Audit mechanism and other processes in place for the effective functioning of the Mutual Fund.
Asset Management Company (AMC) or Fund House
This is the core that runs the Mutual Fund as its Investment Manager. Approval of SEBI for setting up the AMC is mandatory, and the sponsor is required to contribute at least 40% of its net worth. The AMC manages the day to day operations.
Asset Class influenced Mutual Funds
The popularity of the Mutual Fund as an investment channel requires choosing the right instrument. You must know the different types of Mutual Funds to impact your goal. The most sought-after Indian mutual funds are detailed below:
Equity Growth Fund
If you have a high-risk appetite and a long-term goal, this fund is suitable for you. Here you are putting your money in stocks aimed primarily at long-term capital appreciation. About 65% of their corpus is allocated in equities or equity related instruments.
Debt Income Fund:
They are relatively less volatile than equity funds. Fixed income securities such as corporate debentures, bonds, government gilt securities, and money market instruments attract 65% of the investment in this fund.
Money Market Liquid Fund
This would be choice fund if you aim for capital preservation with a moderate income, This fund is ideal for corporate and industrial investor where the investments focus on safe short-term instruments such as Treasury Bills, Certificates of Deposits and commercial paper of fewer than 91 days.
It is a mix of assets deemed to provide steady, stable returns as well as capital appreciation. Here 60% of the fund is allocated in equity and 40% in debt instruments such as bond and debentures.
Structure influenced Mutual Funds
Units of these funds can be purchased anytime during the year based on prevailing NAV is known as the open-ended fund. This allows you adequate liquidity, and you can keep on investing continuously without any restrictions of limits.
Units of this fund can be bought by you only while the launch period offer is on, and they can be en-cashed at a predetermined date of maturity. These schemes can be traded in the stock exchange as they are often listed to provide for liquidity. Once bought, you cannot sell them back to the mutual fund but selling them on the stock market at the current price of the shares.
This sort of fund has the twin characteristics of both open and close-ended funds which are open for repurchase at diverse periods spanning the entire tenure of the fund. The buy-back offers for units are arranged by the fund management company during intervals from existing unitholders.
Investment Objective Influenced Mutual Funds
- Liquid Funds
With the aim of liquidity, investment is directed towards short or very short-term vehicle under these schemes.
Tax Saving Fund
This is a fund with a lock-in of 3 years such as Equity Linked Savings Schemes (ELSS). You are offered a rebate in your income tax as per provision of the IT Act, 1961.
Capital Protection Fund
To ensure the preservation of the principal investment, funds are split between investment in instruments of fixed income and equity markets.
Fixed Maturity Funds
Debt and money market instruments draw the invested assets in situations where the fund date is earlier or the same as the date of maturity.
Returns are paid out on a regular basis from the time when you are due to retire, keeping your long-term goal in mind. Pension fund pays out the proceeds either in one block, as an annuity or as a blend of both.
Specialty influenced Mutual Funds
Fund of Funds: It is a mutual fund scheme that invests in other schemes of mutual funds. This is very similar to how funds invest in stocks and bonds.
a Specific sector of industry such as banking, FMCG or Pharmaceuticals is chosen for investment. The funds can be spread over different companies within the sector making the risk higher in this fund.
The investments are directed toward government securities exclusively. Fluctuations in rates of interest impact the returns.
When a fund is attached to any particular index such as the BSE, NIFTY or the S&P, it is called the Index Fund. The performance is determined by the results of the index and weight assigned to such stocks.
Emerging Market Funds
Developing countries that are potentially prospective are chosen for investment opportunities. The dynamics of the economy and socio-political environment obtained in the target country imposes higher risks in these investments.
Risk influenced Mutual Funds:
Investment is concentrated in the debt vehicles as enduring investments to ensure lower risk factor. This is ideal if your risk appetite is low. On the flipside, the returns are thin on such investments. An example is investments focused on government securities, which forms the core of gilt funds.
You are burdened with a moderate risk with these investments. Over a longer period of time, you can use these funds as an outlay to create wealth.
If you are ready to shoulder high risk in order building wealth, go in for investment here which is directed towards stocks and its related derivatives. They provide higher returns than any other instrument.
Pick the best Suited Mutual Fund
The multiplicity of mutual funds in the eco-system makes the task of picking one that suits your needs and preferences best is onerous. The trick is to close in at the outset upon your specific needs and the goal you wish to achieve. How you like to build your wealth is of prime importance. Your risk appetite will determine the pace of your wealth building. High risk would be the quickest moderate would be reasonably fast and low would be the slowest. It is necessary for you to go through the fine print of the scheme document with a fair amount of clarity. This will facilitate your purchase of the right mutual fund.
Mutual Fund Benefits
One of the most popular investment channels in India at present by far is the Mutual Fund. There are ample reasons for the popularity of Mutual Funds and its advantages. These are elaborated below:
Professional Management: As an investor, you are in the hands of a Professional Fund Manager. His expertise and acumen is the plus point that is likely to give potentially high returns on your investments as he is entrusted with the responsibility of managing the funds.
Diversification of Risks
Your investments are spread across a wide range of assets and securities in order to distribute the risk factor. Diversification of assets, therefore, reduces the risks to a great extent.
Reasonable investment alternative: Investments in Mutual Funds has been a boon to the low-income group and the small investor. Had it not been for Mutual Fund, you would not have dreamt of playing with top-notch stocks and instruments and reaping the benefit of high returns. You are getting this facility instead of a very nominal fee, as the cost of transaction gets distributed.
Well Organized Investment
You are clear in your mind about the investment objectives and how the allocation is intended to be organized. The scheme document clearly specifies the organization of the investments with a lot of transparency. Moreover, these funds have access to specific investment options where you would otherwise not be allowed as an individual.
Unlimited Investment Option:
You are provided with the opportunity of investing your money in a wide range of secured options spread over all types of funds. This helps you to a portfolio of diverse assets with its inherent advantages.
Quick Purchase and Sale Option
You are in a position to redeem your units at the prevailing NAV, giving you an important benefit of liquidity. However, this does not apply to funds which have lock-in feature like in ELSS.
Certain mutual funds proffer you tax benefits. A scheme like ELSS is eligible for tax deduction benefits.
Mutual fund schemes get you maximum return on your investment despite the element of risk.
Government Regulated Investment
SEBI (Securities Exchange Board of India) governs all the mutual funds making it a safe investment option for you.
Ease of tracking:
You are able to track your investments regularly through the statements to this effect provided by the AMC.
Small investment option
No matter how small an investor you are, Mutual Fund remains within your grasp as an investment option through SIP (Systematic Investment Plans). This is a very convenient option for you as you are in a position to invest a small sum in agreed upon periods according to your capacity to invest, which can be as low as Rs.500.
Fund switching facility:
You can go for some funds which offer you the choice of moving between funds for taking advantage of better returns and better schemes. Whenever you want to avail the maximum output, this facility enables you to shift your investment wholly or partially.
The popularity of Mutual Funds compels you directly or indirectly to participate in the gains and losses of the fund. Towards this end, you are provided with individual portfolios describing your holdings. The portfolio of your mutual fund is designed to align with the investment purpose and is in tune with the objectives mentioned in the fund prospectus.