Mutual funds are new-age investments that offer investors flexibility and more options. Mutual funds help diversify the investment horizon by offering different types of mutual funds based on short-term or long-term financial goals. The risk portfolio of investment funds is clearly divided into several asset classes, such as equity, debt and money market.
What Are Mutual Funds?
A mutual fund is an investment instrument that collects money from several investors and invests the collected in several different asset classes, such as stocks, equity, debt, gold, foreign securities, etc. In India, mutual funds are becoming increasingly popular due to the different benefits they come with. Mutual funds offer attractive returns, with returns higher than those of traditional investment instruments. Mutual funds allow investors to create diversified investment portfolios with only Rs investments as low as Rs. 500.
Another feature that makes mutual funds a preferred option among investors is the professional management of the funds. A mutual fund is managed by a fund manager who is an expert with years of experience in the investment industry. This gives investors the assurance that their money is in good hands. Another fact that further enhances investor confidence in mutual funds is that they are regulated by the Indian Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI).
Types Of Mutual Funds
Types of mutual funds depend upon different factors:
- Types Of Mutual Funds Based on Asset Class
- Based on Structure
- Based on Specialty
- Based on Investment Objective
- Based on Risk
1. Types Of Mutual Funds Based on Asset Class
- Equity Funds: These funds invest in stocks. These funds aim to grow faster than the money market or bond funds. Therefore, there is generally a greater risk of losing money. You can choose between different types of equity funds, including growth-focused actions (which generally do not distribute dividends), income funds (which distribute high-dividend shares), value shares, large-cap stocks and medium-cap shares, of small-capitalization Shares or combinations thereof.
- Debt Funds: Debt funds are mutual funds that generally invest in government securities, corporate bonds, etc. Debt funds are more stable and less volatile than market conditions.
- Money Market Funds: A money market refers to investment funds that are highly liquid and invested in short-term investments, such as certificates of deposit, treasury bills, etc. You can invest your money in money market funds for a period of approximately one day.
- Balanced or Hybrid Funds: Balanced or hybrid funds are a mixture of equity and debt funds. Typically, they invest equal shares in equity funds and debt funds to keep the level balanced in investment.
2. Types Of Mutual Funds Based on Structure
- Open-Ended mutual funds: Open-Ended Mutual Fund is the most common type of mutual fund. It maintains units of investment funds in NAV (Net Asset Value). Open-Ended funds provide the investor with an exit at any time and pay based on the daily NAV published by the fund houses.
- Close-Ended Mutual Funds: These are funds in which the Shares can only be purchased during the initial offer period. Shares can be redeemed on a specific due date. To guarantee liquidity, these systems are often traded on a stock exchange. Unlike open-ended mutual funds, stocks or shares can no longer be bought back to the investment fund after purchase but must be sold through the stock market at the prevailing share price.
- Interval Funds: Funds with a combination of open-ended and close-ended funds are called interval funds. Interval funds are closed funds with the option to directly process the funds for a predecided period. It has an open function during this predecided period of time and is closed for the rest of the time.
Read Informative: Top 10 Mutual Fund Providers In India 2019
3. Types Of Mutual Funds Based on Specialty
- Sector Funds: When investing sector funds are the funds that stick to one sector of the industry. Suppose – Real Estate mutual funds will only invest in those companies which are in real estate business. The factor on which returns of the investment also depend is the performance of the particular sector.
- Index Funds: It is a type of investment which is made to match the working of a market index like the Bombay Stock Exchange. These funds provide broader exposure to the market, less operating cost and low portfolio turnover.
- Fund of Funds: Fund of funds are the types of mutual funds that invest in other mutual funds. The returns depend upon only the performance of the target fund. These types of funds are also known as multi-manager funds.
- Emerging Market Funds: In emerging market funds, the investment is made in the developing countries which are growing economically at a good rate. These funds are considered risky as a lot of other factors depend on the performance of political and economic situations of the particular developing country.
- International Funds: In emerging market funds, the investment is made in the developing countries which are growing economically at a good rate. These funds are considered risky as a lot of other factors depend on the performance of political and economic situations of the particular developing country.
- Global Funds: These are similar to international funds and invest their money in the companies located in all parts of the world. The only difference from international funds is that investment can also be made in the same country as the mutual fund investment.
- Real Estate Funds: As the name sounds, the real estate funds invest their money in real estate business. The investment in a real estate project can be made at any phase of the project.
- Commodity Focused Stock Funds: The investment is done in companies that are working in the commodities market, for example, mining companies or producers of commodities. Performance of these funds is directly linked to the performance of those commodities in the market.
- Market Neutral Funds: These funds do not invest directly in the market. They invest in securities, treasury bills with the aim of steady and fixed growth.
- Inverse/Leveraged Funds: These funds don’t operate as a normal mutual fund. They make a profit when the market falls and incur a loss when the market does well. The risk factor in such funds is very high as they can make you huge loss or profit as per the market conditions.
- Asset Allocation Funds: These funds allow the portfolio manager to adjust the allocated assets to achieve results. The amount of investment gets divided into such funds to invest in different instruments like bonds and equity.
4. Types Of Mutual Funds Based on Investment Objective
- Growth Funds: The money will be invested in growth funds, with the main objective of achieving capital growth. Although growth funds are risky, they tend to offer high long-term returns.
- Income Funds: The money is invested in fixed income instruments, such as government bonds and debt securities of income funds. The objective of the income fund is a stable income from capital investments with modern capital growth.
- Liquid Funds: The money is invested in short-term financial instruments, such as treasury bills and certificates of deposit, to facilitate the withdrawal of funds at any time. Liquid funds are considered the low risk with average returns and are ideal for people looking for a short-term investment.
- Tax-Saving Funds or ELSS: The ELSS or investment funds with tax efficiency are included in Section 80C of the Income Tax Act of 1961 and can be deducted for a financial year of up to INR 1, 50,000. Most of the investment is invested in shares. The ELSS investment has a blocking period of 3 years.
- Capital Protection Funds: The primary objective of these funds is to protect the money invested and thus the funds get split in between equity and fixed-income investments.
- Fixed Maturity Funds: In fixed maturity funds, the investment is made in closed-ended debt funds having a fixed date of maturity.
- Pension funds: The money invested in pension funds is designed for a long period, taking into account the long-term objective of providing the investor with a regular pension when withdrawing. The money in the pension fund is invested in equity and debt securities, where equity promotes growth and the debt maintains a balanced investment in the investment. The income of the pension fund can be obtained in a lump sum, as a regular pension or in a combination of both.
5. Types Of Mutual Funds Based on Risk
- Low Risk: These types of mutual funds invest in debt market where the risk to the investment is very low. The investments tend to be long-term but due to the low risks associated with it, the returns are also moderate. Example of a low-risk mutual fund will be debt funds where the investment is made in very safe government securities.
- Medium Risk: These investments carry medium risk to the investor. Medium risk mutual funds are ideal for those who are willing to take some risk to get good returns on their investment. The investment portfolio is a mixture of debt funds and equity funds.
- High Risk: These investments are high and are for those who are willing to take a high risk on their investment for an expectation of high returns. High-risk investment invests a majority of the money (investment) in equity stocks of the company.
Benefits of Mutual Fund Investments
The following are the benefits of investing in mutual funds:
1. Flexible Investment Amounts
An investment in mutual funds can be initiated with a number of only Rs. 500, while there is no limit to the maximum amount you can invest. However, keep in mind that you only get Rs on ELSS investments. And you get tax benefit only up to Rs. 1.5 lakh 80C limit in a financial year.
Mutual funds allow investors to access a broad and diversified investment portfolio that can include equities with different market capitalizations and debt and money market instruments for up to Rs 500 investment amount.The diversified investment portfolio allows a mutual fund to provide an unmatched balance between risk and return.
3. Professional Management of Funds
For mutual funds, an investor can benefit from the professional management of their funds through an experienced fund manager. Fund houses charge a nominal fee for the administration and management of an investment fund called Expense Ratio. The expense ratio of a mutual fund is generally between 0.5% and 1.5% and cannot exceed the limit established by the SEBI of 2.5%. The fund houses always return the income of an investment fund after deduction of the applicable expense ratio.
4. Systematic Investment Option
A Systematic Investment Plan (SIP) is a mutual fund investment method that allows investors to invest a fixed amount in an investment fund at fixed intervals (daily, weekly, monthly, bi-annual or annual). SIP investments reduce the potential financial risk of a lump sum investment. It also allows an investor to increase/decrease the investment according to the current financial situation of the investor.
5. Tax Benefit
An equity-linked savings scheme (ELSS) is a type of mutual fund that helps investors obtain a tax benefit in addition to the previous benefits. An ELSS has a lock-in period of 3 years and a tax deduction of up to Rs. 1.5 lakh is granted for each ELSS investment under section 80C of the Income Tax Law. Even with other share plans (not ELSS), capital gains from the redemption of shares up to Rs.1 lakh in a fiscal year are tax exempt.
6. High Returns
Mutual funds offer long-term returns of between 7% and 15% or higher in case of most equity funds over a 5 year period. These inflation-beating returns of mutual funds are one of the main reasons why many of these market-related investments choose fixed-income instruments such as fixed deposits.
Read Informative: Aditya Birla Sun Life Mutual Fund
How Do Mutual Funds Work?
You may have heard from many experts that investing in mutual funds is one of the best ways to increase your wealth, it may be even more important to know how mutual funds work. Let’s understand the operation of mutual funds from the moment an asset management company (AMC) or a fund house decides to launch an investment fund until it generates attractive returns:
- The process begins when a fund house identifies a potential money-making opportunity in the market subject to key risks.
- The fund house then weighs the newly identified opportunity against existing investment opportunities and analyses how it can add further value for current investors.
- The fund house then appoints a fund manager who creates a portfolio of different asset classes including equities, debt and money market securities. The asset allocation of the scheme decides under which mutual fund category the scheme will fall – Equity Fund, Debt Fund or Hybrid Fund.
- The fund manager then compiles all the details including the scheme’s asset allocation, risk level, etc in a document and files the draft with market regulator SEBI for its approval.
- After the approval of SEBI, the fund house will make the program available to the public for subscription through a new fund offer (NFO). An NFO generally lasts 7 to 10 days.
On the basis of the subscription period, mutual funds can be divided into open-ended and close-ended funds. An open mutual fund program allows investors to enter and exit the fund at any time after the closure of the NFO period. While a close-ended fund will only allow investors to participate in the system during the NFO period, they are not allowed to finalize the system for a period of normally 3-4 years from the date of launch.
- After getting the initial subscription, the fund manager manages the scheme actively or passively depending on the scheme’s requirements as well as market conditions.
- A mutual fund investment provides earning to its investors in the form of dividend payouts and capital gains.
Top 10 Most Popular Mutual Fund Houses in India
Below is a list of the Top 10 most popular mutual fund houses in
India on the basis of their total assets under management (AUM) as of 2019-20.
|S.No.||Name of Fund House||AUM (in Crore)|
|1||HDFC Mutual Fund||Rs. 3,42,525|
|2||ICICI Prudential Mutual Fund||Rs. 3,21,281|
|3||SBI Mutual Fund||Rs. 2,84,124|
|4||Aditya Birla Sun Life Mutual Fund||Rs. 2,46,696|
|5||Reliance Mutual Fund||Rs. 2,34,293|
|6||UTI Mutual Fund||Rs. 1,59,694|
|7||Kotak Mahindra Mutual Fund||Rs. 1,50,271|
|8||Franklin Templeton Mutual Fund||Rs. 1,19,933|
|9||Axis Mutual Fund||Rs. 89,768|
|10||DSP Mutual Fund||Rs. 78,363|
Top 10 Most Popular Mutual Fund Schemes in India
Type of Scheme: Debt
|Name of Scheme||AUM (in Crore)|
|1) HDFC Liquid Fund||Rs. 69,397|
|2) ICICI Prudential Liquid Fund||Rs. 59,354|
|3) Aditya Birla Sun Life Liquid Fund||Rs. 57,548|
Type of Scheme: Hybrid
|Name of Scheme||AUM (in Crore)|
|4) HDFC Balanced Advantage Fund||Rs. 37,395|
|5) ICICI Prudential Balanced Advantage Fund||Rs. 28,499|
|6) SBI Equity Hybrid Fund||Rs. 27,907|
Type of Scheme: Equity
|Name of Scheme||AUM (in Crore)|
|7) Kotak Standard Multicap Fund||Rs. 21,628|
|8) Aditya Birla Sun Life Frontline Equity Fund||Rs. 20,664|
|9) HDFC Mid Cap Opportunities Fund||Rs. 20,539|
|10) HDFC Equity Fund||Rs. 20,465|
The 1 year, 3 year and 5-year return details of the above-mentioned top 10 most popular mutual fund schemes are as follows:
|Name of Scheme||1 Year||3 Year||5 Year|
|HDFC Liquid Fund||7.33%||7.09%||7.70%|
|ICICI Prudential Liquid Fund||7.48%||7.20%||7.77%|
|Aditya Birla Sun Life Liquid Fund||7.51%||7.24%||7.81%|
|HDFC Balanced Advantage Fund||-1.30%||18.35%||15.16%|
|ICICI Prudential Balanced Advantage Fund||2.53%||12.78%||12.25%|
|SBI Equity Hybrid Fund||0.76%||12.66%||15.12%|
|Kotak Standard Multicap Fund||-0.19%||17.64%||18.30%|
|Aditya Birla Sun Life Frontline Equity Fund||-2.56%||14.25%||14.35%|
|HDFC Mid Cap Opportunities Fund||-10.69%||16.32%||19.33%|
|HDFC Equity Fund||-1.88%||19.38%||15.25%|
Read Informative: Mutual Funds Investment In 2019
Who Should Invest in Mutual Funds?
The wide range of mutual funds has something to offer each type of investor, regardless of appetite for risk or investment objective. Thus mutual fund investments can be made by individual investors as well as institutional investors.
When to Invest in Mutual Funds?
When to invest in a mutual fund scheme depends on the following factors:
- Availability of Funds
- National Economic Conditions
- Stock Market Conditions
How Can I Invest in Mutual Funds in India?
An investment in mutual funds can be made both offline and online. The following is the process for investing in a mutual fund scheme:
Step 1: If you are investing through the offline mode, you can visit either an asset management company (AMC) branch or a registered mutual fund broker. If you want to go via the online mode, you can visit the website of either an AMC but the option of funds available to you will be limited.
Step 2: After this, as per SEBI guidelines, you need to complete the KYC (Know Your Customer) formalities.
Step 3: The next step is the completion of In-Person Verification (IPV). For IPV you can send documents in paper/applicable digital format to the registered mutual fund intermediary.
Step 4: Select a mutual fund scheme on the basis of your investment time horizon, risk appetite, and other important factors.
Step 5: Submit the mutual fund application form. This can be done after the completion of the IPV which usually takes 5-7 days. With this application form, also submit the investment cheque amount. If you wanted to invest via an SIP (Systematic Investment Plan), fill the SIP form and submit along with the application.
Also Read: Best Performing SIP Mutual Funds
Rate of Tax on Capital Gains of Mutual Funds In India
Asset Class– Equity Fund
- Short Term (Less than 1 Year) – 15%
- Long Term (1 Year and more)* – 10%
Asset Class– Debt Fund
- Short Term (Less than 3 Years) – As per investor’s income tax slab
- Long Term (3 Years and more)* – 20% with indexation
Asset Class– Equity-Oriented Hybrid Funds
- Aggressive hybrid funds are taxed like equity funds.
Asset Class– Other Hybrid Funds
- If more than 65% of assets of these funds are invested in equity, then hybrid funds are taxed like an equity fund. Otherwise, they are taxed like debt funds.
Note -*Long-term capital gains on equity mutual funds are up to Rs. 1 lakh per year.
Top 3 Mutual Funds In India 2019-20
Answer: No, you cannot sell your stocks or shares to a closed mutual fund after a purchase has already been made. However, you can choose to sell units based on the current prices of your shares.
Answer: Investing in a debt fund is the best option for an investor who seeks a fixed return on a safe investment in mutual funds. This fund invests in debt securities such as government bonds, corporate bonds, and other fixed-income assets. However, before investing, you should consult a financial advisor.
Answer: The fund of funds schemes usually invests in other mutual fund schemes to help investors achieve their investment goals.
Answer: Capital protection funds are the best option for people who wish to guarantee the protection of their invested capital. In such systems, the funds are divided between investment in equity markets and fixed income instruments.
Answer: A new fund offer (NFO) is the first subscription offer for a new mutual fund program launched by an asset management company (AMC)/fund house. A period of NFO generally lasts several weeks. During this period, parts of the scheme are generally available at an NFO price of Rs. 10, however, is the minimum application amount for an NFO, usually Rs. 500
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