Mutual Funds

Mutual Funds in India

Mutual funds are basically investment vehicles that comprise the capital of different investors who share a mutual financial goal. A fund manager manages the pool of money that is collected from various investors and invests the money into a variety of investment options such as company stocks, bonds, and shares. Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI), and investing in mutual funds is considered to be the easiest way through which you can increase your wealth.

Types of Mutual Funds in India

Mutual funds in India are classified into different categories based on certain characteristics such as asset class, structure, investment objectives, and risk. Here, we will help you understand in detail the various categories and the kinds of funds under each category.

Equity funds make investments mainly in stocks of companies. Equity funds are the most preferred investment options among the majority of investors as these offer high returns and quick growth.

2. Debt Funds

Debt funds chiefly invest in low-risk fixed-income instruments such as government securities. Since these funds come with a fixed maturity date and interest rate these are ideal for investors with low-risk appetite.

3. Money Market Funds

Money market funds invest in easily accessible cash and cash equivalent securities and offer returns as regular dividends. These funds come with relatively lower risk and are ideal for short term investment.

4. Hybrid or Balanced Funds

Balanced or hybrid funds invest a certain amount of their corpus into equity funds and the rest in debt funds. Though the risk involved with these funds is relatively high, the generated returns are equally high.

Based on Structure

1. Open-ended Mutual Funds

Open-ended mutual funds have no constraints as far as the number of units that can be traded or the time period is concerned. Investors are allowed to trade and exit from the funds at their own convenience.

2. Closed-ended Mutual Funds

The unit capital that is to be invested in closed-ended mutual funds is fixed and therefore, it is not possible to sell more than the predetermined number of units. The maturity tenure of the scheme is fixed.

3. Interval Funds

Interval funds can be bought/exited only at specific intervals as determined by the company. These are open for investment for a certain period of time only. Usually, the investors need to stay invested for at least 2 years.

Based on Investment Objectives

1. Growth Funds

Growth funds invest a large portion of their capital into stocks of companies having above-average growth. The returns offered by these funds are relatively high, but the risk involved along with is also quite high.

2. Income Funds

The corpus of income funds is invested in a combination of high dividend generating stocks and government securities. These funds focus to offer regular income and impressive returns to investors investing for more than two years.

3. Liquid Funds

Similar to income funds, liquid funds also make investments in money market and debt securities. However, the tenure of these funds usually extends to 91 days and a maximum amount of Rs.10 lakh can be invested in them.

4. Tax-saving Funds

Equity-Linked Saving Schemes (ELSS) mainly invest in equity and equity-related instruments and offer dual benefits of tax-saving and wealth generation. These funds, usually, come with a three-year lock-in period.

5. Aggressive Growth Funds

Aggressive Growth funds carry a relatively high level of risk and are designed to generate steep monetary returns. Although these funds are prone to market volatility, they have the potential to deliver impressive returns.

6. Capital Protection Funds

Capital protection funds which chiefly invest in debt securities and partly in equities aim to protect investors’ capital. The delivered returns are relatively low and the investors should remain invested for at least 3 years.

7. Pension Funds

Pension funds are great investment options for individuals who wish to save for retirement. These funds offer regular income and are ideal for meeting contingency expenses such as a child’s wedding or medical emergencies.

8. Fixed Maturity Funds

Fixed maturity funds make investments in money markets, securities, bonds, etc. and are closed-ended plans that come with fixed maturity periods. The tenure of these funds could extend from a month to 5 years.

Based on Risk Profile

1. High-risk Funds

High-risk funds are funds which carry a high level of risk but generate impressive returns. These funds require active management and their performance must be reviewed regularly as these are prone to market volatility.

2. Medium-risk Funds

The level of risk associated with medium-risk funds is neither too high, nor too low. The corpus of medium-risk funds is invested partly in debt and partly in equities. The average returns offered by these funds range from 9% to 12%.

3. Low-risk Funds

The corpus of low-risk funds is spread across a combination of arbitrage funds, ultra-short-term funds, and liquid funds. These funds are ideal in times of unexpected national crisis or when the rupee depreciates in value.

4. Very Low-risk Funds

These funds could be ultra-short-term funds or liquid funds whose maturity extends from a month to a year. Such funds are virtually risk-free and the returns they offer are generally around 6% at the best.

Specialised Mutual Funds

1. Index Funds

Index funds invest in an index, and rather than a fund manager managing the fund, these replicate the performance of the index. The stocks in which investments are done are similar to that of the corresponding index.

2. Sector Funds

Sector funds are theme-based funds which invest their corpus in a specific sector to deliver impressive returns. Since these funds invests in a specific sector with a limited number of stocks, these have a high risk profile.

3. Fund of Funds

Fund of funds invest in a diversified portfolio and the fund manager invests in one fund that makes investments in several funds rather than investing in various funds as this helps in achieving diversification of portfolio.

4. Foreign/International Funds

Foreign/international funds make investments in companies located outside the investor’s country of residence. These funds have the ability to deliver good returns at times when the Indian stock markets perform well.

6. Global Funds

Global funds primarily invests in markets across the world as well as in the investor’s home country. Global funds are universal and diverse in approach and carry a high level of risk due to the currency variations and different policies.

7. Emerging Market Funds

Emerging Market Funds invests in developing markets. These funds are risky investment options. Since India is also an emerging and dynamic market, these funds are susceptible to market volatilities.

8. Real Estate Funds

Real estate funds are special share funds which invest in high-quality real estate directly or through companies which purchase real estates. Though these funds have high associated risk these offer long-term returns.

9. Market Neutral Funds

Market neutral funds are great options for those investors who want to be safe from unfavourable market fluctuations while also sustaining healthy returns from their investment at the same time.

10. Asset Allocation Funds

These funds invest in equity instruments, debt securities, and even gold. These are highly flexible in nature and can regulate the distribution of funds into equities and debt instruments.

11. Gift Funds

The investors can gift these funds to their family in order to secure their financial future. These can be used to pay all portion or a part of down payment or closing costs. However, these can’t be used to buy an investment property.

12. Exchange-traded Funds

These funds which are sold and purchased on exchanges offer exposure to overseas stock markets and specialised sectors. These may be traded in real-time and the prices can increase/decrease many times a day.

Features of Mutual Funds

Investors can accumulate a significant amount of wealth through investment in a diversified portfolio that comprises high-performing schemes. However, there are so many different fund houses and schemes to choose from that it can be overwhelming to select the right portfolio. This is when a professional fund manager can come to your rescue and ensure that your money is invested in the funds that will offer maximum returns. Here are some of the key features of mutual funds:

• Smart, practical, and strategic investment instrument
• Professionally managed by qualified and experienced fund managers
• Risk mitigation through investments done in a diverse portfolio of securities
• More liquid than other investment options in deposits, shares, and bonds
• Relatively lower expenses and fees regardless of the fund’s performance
• Consistent in performance over a short, medium to long term period
• Highly flexible in terms of financial objectives, liquidity, and tenures
• Ample choice of investment catering to varied investor needs
• Ease of trading and transacting the units on all the working days

Mutual Fund Eligibility

Investments in mutual funds can be made by a variety of investors such as individuals, partnership firms, Qualified Foreign Investors (QFIs), registered Foreign Institutional Investors (FIIs), Persons of Indian Origin (PIOs), Non-Resident Indians (NRIs), cooperative societies, Hindu Undivided Families (HUFs), etc. To invest in mutual funds, applicants are required to be KYC compliant.

How to Invest in a Mutual Fund in India

An increasing number of individuals in India have taken to investing in mutual funds, but a good percentage of the investors have no idea how to go about it. Here are some tips to help you kick-start your investment in mutual funds:

• • Identification of Goals : Before you put your money into an investment vehicle, it is important to identify your financial goals. You must know how much money you wish to invest in order to achieve your goals. In case you have short-term goals and require funds in say, two to three years, debt schemes would be the way to go. In case you have long-term goals and require funds after say, five years or so, equity schemes can help you achieve your goals. Once you identify your goals, choosing the right funds becomes much easier.

• • Understanding the Various Schemes : As you already know, there is a wide variety of mutual fund schemes within the equity and debt fund universe. In order to choose the right scheme, you will have to take into consideration your risk appetite, your investment horizon, and your financial goals. Compare different schemes to find the ones that are in line with your risk profile and your investment horizon.

• • Approaching Advisors : If you are investing in mutual funds directly by yourself, a fund advisor can be of great aid in helping you achieve your financial goals. Experienced advisors not only help in taking care of the formalities, but they also suggest schemes that can help you generate returns. Many advisors also tend to keep track of your investments, thereby enabling you to switch in case one of your investments is underperforming.

• • Keeping your Documents Handy : All transactions made in the mutual funds domain must be well documented. It is necessary to be KYC compliant when transacting with mutual funds, which is just a due diligence of certain personal information such as furnishing your photograph, address proof, PAN and DOB certificate. Ensure that you have a PAN Card as it is one of the requirements for investing in mutual funds.

• • Considering the Risk Factor : Considering the wide variety of mutual funds on offer, make sure you pick only those that cater to your risk appetite. The higher the returns offered by a scheme, the higher the risk associated with it, therefore, making it important to ensure that you choose your funds wisely.

• • Plans and Options : Most mutual fund schemes come with options such as growth and dividend. When choosing a scheme and the options under it, it is essential to consider your financial objectives to get the most out of your investment. Growth options are ideal for those who want a large amount of money to meet their financial objectives. Dividend options, on the other hand, are ideal for those who require profits at regular intervals of time.

• • Considering your Age : The time-frame for achieving your investment objective must be finalised before you invest in mutual funds. As you grow older and approach retirement age, your exposure to stocks must be limited as it will ensure that your capital is preserved. A professional fund manager can help you better understand where to invest your money.

• • Past Performance of Funds : The past performance of funds does not necessarily give you an insight into how it will perform in the future. For example, IT and pharma funds were known for generating attractive returns over the past five to ten years, but have been underperforming over the past year or so. The returns accrued by funds in the past does not guarantee their excellent performance in the future. However, their performance can be assessed when choosing a scheme as schemes that have performed well in the past have better potential to generate healthy returns in comparison with other funds. Studying a scheme’s performance over different market cycles will help you better understand which ones could help you achieve profits.