Mutual fund is a financial instrument that pools money from different investors. The pooled money is then invested in securities like stocks of listed companies, government bonds, corporate bonds, and money market instruments.
As an investor, you don’t directly own the company’s stocks that mutual funds purchases. However, you share the profit or loss equally with the other investors of the pool. This is how the word “mutual” is associated with a mutual fund.
You get the advantage of the expertise of the fund manager and regulatory safety of the Securities Exchange and Board of India (SEBI). The professional fund manager ensures a maximum return to investors.
Now you get the understanding about what is mutual funds. Let’s explore how it works.
Mutual fund investment is simple. You invest in a fund consisting of several assets. Thus, you need not risk putting all eggs in one basket.
Additionally, the headache of tracking market movements is not there. The mutual fund house takes care of the research, fund management, and market tracking. This makes the mutual fund a highly popular investment option for all types of investors.
A mutual fund is managed by the asset management company (AMC). Mutual fund investment starts with the pooling of money from several investors.
The pooled money is invested in a meticulously built portfolio of different asset classes like equity, debt, money market instruments, and other funds. Hence, you have the advantage of diversification, the time tested market mantra.
Additionally, your money is invested in instruments like Government bonds, that you wouldn’t be able to afford individually.
The best part about mutual funds is that a team of experts along with the fund manager picks all the investments to build a portfolio. The investments are made according to the defined objective of the mutual fund.
Expert and professional fund management help you outperform the returns of traditional investment vehicles like a bank savings account and fixed deposits.
As an investor, you are allotted units for your contribution to the pooled fund.
The portfolio value depends on the price movements of the underlying assets. The portfolio value is net assets divided by the number of outstanding units which is called the net asset value or NAV.
The gains are reflected in higher NAV and lower NAV indicates a loss in portfolio value.
Investors should pick mutual funds based on their financial objectives and risk appetite. Proper mutual fund selection helps you meet your life goals in the defined time period.
Mutual fund type depends on the defined objective and the underlying asset. The three broad categories of mutual funds are:
Equity mutual funds invest the pooled money majorly in stocks of different companies. Hence, equity mutual funds have an inherent higher market risk.
Factors like earnings, revenue forecasts, management changes, and company & economic policy impact price movements and the returns.
Who Should Invest in Equity Funds?
Equity mutual funds are suitable for long-term wealth creation. Hence, choose equity funds if you want to achieve a long-term life goal like creating a corpus for retirement and children’s education.
Returns from equity mutual funds have high fluctuations. Hence, you should invest, if you have a fair understanding of the asset class risks associated with equity.
Equity fund can be further categorized depending on market capitalization and sectors.
A. Based on Market Capitalization
Large-cap Equity Funds – Invest in shares of large-cap companies that are well-established with a track record of performing consistently over a longer time period. These companies have sound fundamentals and are least affected by business cycles.
Mid-cap Equity funds – Invest in shares of mid-cap companies. Mid-sized companies have relatively lower stability in terms of performance. But have the potential to grow more than the large-cap companies.
Small-cap Funds – Invest in shares of small-cap companies. Small-cap companies have the highest potential to grow or fail. Thus, small-cap funds have a high-risk exposure but also offer an opportunity to generate the highest returns.
Multi-cap funds – Invest in a defined proportion across all market caps. Based on cues and trend analysis, the fund manager allocates aggressively to capitalize on the volatility.
B. Sector Based Equity Funds
Sector-based equity funds invest in stocks of a specific sector. For example, sectors like FMCG, technology, and pharma. Sector funds are prone to business cycle risk and sector getting out of focus.
A debt mutual fund invests a major portion of the pooled corpus in debt instruments like government securities, corporate bonds, debentures, and money-market instruments.
The bond issuers “borrow” from investors by giving an assurance of steady and regular interest income. Thus, debt funds are less risky compared to equity funds.
The debt fund manager ensures that the fund is invested in the highest-rated securities. The best credit rating signifies the creditworthiness of the issuer in terms of regular interest payments and principal repayment.
Who Should Invest in Debt Funds?
Debt funds have less volatility and range bound returns as compared to equity funds. Thus, debt funds are safer for conservative investors who are looking to grow wealth with minimal risk.
In fact, the interest income and maturity amount are known beforehand. Thus, debt funds are best for short-term (3 to 12 months) and medium-term (3 to 5 years) investment horizon.
Following are the debt funds available in India:
Dynamic Bond Funds
Dynamic bond fund investment basket comprises of both shorter and longer maturities.
The debt fund manager aggressively tweaks the portfolio composition based on changing interest rate regime. This aggressiveness makes the debt fund dynamic, hence the name.
The short maturity of the underlying securities (not more than 91 days) makes the liquid funds almost risk-free. It is better than parking funds in saving bank accounts as it gives better returns with much-needed liquidity. You can redeem liquid funds almost instantly.
If you are short-term investors then debt funds like liquid funds could be better as you get returns in the range of 6.5 to 8%. Liquid funds are an effective tool to meet emergency fund needs.
Fund managers invest majorly in securities with longer maturities to have more stability and regular interest income flow. Most of the income funds have an average maturity of 5 to 6 years.
Short-Term and Ultra Short-Term Debt Funds
There is another category in the maturity range of 1 to 3 years. The fund manager takes a call on interest rate regime and invests in securities with maturity of the said range. This is suitable for those investors who are risk-averse and looking for interest rate movement safety.
Gilt funds invest only in high-rated government securities. Since the government rarely defaults, it has zero risks. You can park your money in this instrument to have assured returns in longer maturity range.
Credit Opportunities Funds
Credit Opportunities Funds are a relatively riskier instrument that focuses more on higher returns by holding low-rated bonds or taking a call on credit risks. The fund manager of credit opportunity funds relies more on interest rate volatility to earn higher returns.
Fixed Maturity Plans
These closed-ended debt funds invest in fixed income securities like government bonds and corporate bonds. You invest only during the initial offer period and your money remains locked-in for a fixed tenure, which could be months or years.
Since mutual funds are all about the mutuality of common goals, mutual fund schemes are also categorized based on the objectives of investors.
Here are some popular types of mutual funds based on investor objectives:
As the name suggests the primary goal of this type of mutual fund is to ensure wealth creation in the medium and long-term.
Aligned with the objective, the fund manager allocates the corpus predominantly (over 65%) in equities. With a focus on higher returns, the manager aggressively shuffles the portfolio to reap the benefits of market movements.
The objective of the regular income could be achieved only when the underlying assets assure a steady return.
To meet the objective, fund manager of income funds allocate a major portion of the corpus in fixed income securities such as government securities, bonds, corporate debentures, and money market instruments.
Lesser risks and assured return makes it safe for regular income as dividends. However, these products have very limited potential for wealth creation in the defined period.
The name comes from the asset allocation as the fund is allocated in both equities and debt instruments in defined proportions. The objective of the balanced fund is to have reasonable growth and regular income with the lowest possible risk.
Fund managers of these funds normally allocated approx 60% in equities and rest on debt instruments. NAV of balanced funds is less volatile as compared to equity funds.
The balanced objective is suitable for those who want to have advantages of market movements and the safety of the debt market.
The objective of these schemes is to ensure liquidity, capital protection, and reasonable income in the short-term.
Most of the pooled fund is invested in short-term safe instruments like government securities, treasury bills, certificates of deposit, commercial paper, and inter-bank call money.
Since there isn’t much volatility, these funds are suitable for investors who want to park money for short-term and earn better returns compared to savings bank accounts.
There are over 8000 mutual funds in different categories to meet the objectives of all types of investors. The right mix of growth, income, and safety makes mutual funds suitable for everyone.
Below are the advantages of investing in mutual funds:
Your pooled money is managed by a team of experts. So, you have the advantage of expert guidance in creating wealth. The fund manager does meticulous research in deciding equities, sectors, allocation, and of course the buy and sell.
If you calculate the benefits of expertise, diversity, and other options of return, then mutual funds are definitely a very cost-effective instrument of investment.
There is a regulatory cap of 2.5% on the expense ratio.
Systematic Investment Plan (SIP) gives you the flexibility to invest at an agreed interval which could be weekly, monthly, quarterly. You can start investing in mutual funds with an amount as low as Rs. 500.
If you are not happy with the performance of a particular mutual fund scheme, then some mutual funds do offer you an option to switch funds. However, you need to be very cautious while opting to switch.
Mutual funds offer you the benefit of diversification in such asset class which otherwise isn’t possible for an individual investor. You reap the dividend of maximum exposure with minimum risk.
Now, it is pretty easy to buy, sell, and redeem fund units at NAV. Just place the redemption request and you will get your money in the desired bank account within a few days.
Under the ELSS you have the double benefit of tax saving and wealth creation. Under Section 80C of the Income Tax Act, you can have a deduction of a maximum of Rs. 1,50,000 a year.
Close-ended mutual funds have a lock-in period, meaning as an investor you are not allowed to redeem the fund before a certain period.
You get benefits in terms of long-term capital gain tax.
Thanks to the fast adoption of internet technology, now your MF units are just a few clicks away. Depending on your resources, you have several options to start investing in mutual funds.
You can visit the branch of the concerned mutual fund company and deposit the duly filled form. Alternately, you can download the form and fill it carefully.
You should read the document carefully before handing over the cheque.
For investing online, all you need is your mobile phone and internet connection. There are several platforms that help you in choosing the right mutual fund based on defined objectives, risk appetite, and other factors.
Scripbox is an online investment platform that helps you save your time and energy. The step-by-step process from selection to payment and redemption makes it simple for even a beginner to start investing without any assistance.
All you need is your PAN Card details, Identity details, and an active bank account to link with the mutual fund house.
Your existing Demat account and bank account can be used for investing and transacting in the mutual fund. Your stockbroker needs to be a registered mutual fund distributor providing the facility.
For investing, you need to log-in to your Demat account and look for the option to invest in the mutual fund.
In the next step, you need to choose the fund in which you want to invest. Then you need to complete the investment by transferring the amount online.
You can invest online and offline in mutual funds through registrars like Karvy and CAMS.
In Online Method – You need to visit the website of CAMS or Karvy, create an account, provide folio number, select the scheme and make payment.
In Offline Method – You can invest by visiting the local office and complete the application form, hand over the canceled cheque and the copy of KYC documents.
Investing through agents is a time consuming and costly method that should be avoided. You can call an agent to help you choose and fill the requisite form. Nowadays, agents come with digital devices to help you fill form digitally and activate your account instantly.
However, you should make sure that the agent is genuine. Some agents may charge a commission for services.
Mutual fund investment through Scripbox is a quick, paperless and hassle-free experience. Following are the steps to invest;
Step 1 – Visit Scripbox and Get Started
Click the box “Let’s Get Started” on the Scripbox home page. The page will scroll down to show you different objectives.
Mutual fund schemes fulfill most of the financial objectives. You can pick the objective that aligns with your financial needs.
For example, we have taken “Start a SIP” to invest in the best equity and debt mutual funds.
Step 2 – Create a Plan
Here you will be prompted to create a plan for investing in the mutual funds.
Provide investment amount and number of years to create a plan. The hypothetical example shows a SIP of Rs. 8000 and 10 years as the stay invested period.
Click on “Create a plan” to proceed.
Step 3 – Choose Between “Long Term Wealth” and “Short Term Money”
Scripbox gives you two options to build wealth. You have the option to pick one of them.
Long Term Wealth – The plan invests in risky equity and is for aggressive investors.
Short Term Money – The plan invests in safe debt & money market instruments and is for risk-averse investors.
The example has selected the “Long Term Wealth” option. Where you will get plan details indicating the best mutual funds and the expected returns.
Click on “Continue” to proceed with mutual fund investment.
Step 4 – Account Creation and Login
Create an account for investing through Scripbox. You will need an email ID and password for creating an account.
The account can also be created using your Facebook or Google account.
Step 5 – Plan Confirmation
When you log-in you will get the plan as shown below.
Click on “See Recommended Funds” to proceed with mutual fund investment. Next, you will the list of algorithmically selected best mutual funds and investment amount.
You can either go with the selection or can change the funds and the amount. For that, you need to click “I Want to change funds/amount”.
Click the tab “Next” to proceed with payment.
Step 6 – Bank Details and Money Transfer
You need to provide Bank account and PAN details necessary for investment. The account will be used for investment and crediting the redemption amount by the mutual fund houses directly into your specified bank account.
A mutual fund is a powerful investment option that has the potential to generate long-term wealth for investors. Mutual funds have schemes for all types of life goals, right from creating a pool of wealth to retirement. You have schemes for risk-averse and conservative investors.
The option has benefits of diversification, low cost, flexibility to invest in smaller amounts and professional fund management.
Combined with online investment platform you have a great tool that makes mutual funds investing a quick and hassle-free experience.
Taxation on mutual funds is a complex topic. Taxes paid on your mutual fund investments vastly depend on factors such as what kind of funds you have invested in, the duration of your investment, which income tax slab you belong to and so on.