A mutual fund is a type of investment vehicle that pools money from multiple investors to invest in different financial instruments like stocks and bonds. It is an attractive option for investors who lack the funds or time for detailed market research. The funds are managed by professional fund managers who ensure that they align with the scheme's investment objectives. After deducting the applicable expenses and charges, the profits generated are distributed proportionally among the investors. The fees levied by fund houses are subject to regulatory limits set by the Securities and Exchange Board of India (SEBI). In essence, a mutual fund is a unified pool of funds from multiple investors that is expertly managed by a proficient fund manager. Looking for a diverse investment portfolio that is professionally managed and provides you with the intended returns? Look no further than Investorsarthi! Our team of experts can provide amazing insights and guidance to help you make the most of your investments. Contact us today and start investing in your future!
Resisting the urge to monitor a fund's performance with every market surge or drop is wise. When dealing with actively managed equity schemes, cultivating patience and allowing a reasonable span, typically 18 to 24 months, provides the fund the needed time to generate returns within its portfolio.
Entering the realm of mutual funds involves amalgamating your funds with those of numerous other investors. Mutual funds issue "Units" corresponding to the invested amount based on the existing Net Asset Value (NAV). Returns from mutual funds encompass dividends, interest, capital gains, or other forms of earned income. Additionally, buying and selling mutual fund units can result in capital gains or losses, akin to selling an asset for more or less than your original investment.
Here's an alternative analogy to grasp the concept of a Mutual Fund Unit:
Imagine a shared picnic among four friends. Each contributes ₹100, but they need to buy a picnic basket worth ₹400. They pool their resources, resulting in a combined contribution of ₹400. Consequently, they are each entitled to a "Unit" of the picnic basket.
Calculating the cost per unit involves dividing the total contribution by the number of units: 400 / 4 = ₹100 per unit.
This arrangement makes each friend a unit holder in the collective ownership of the picnic basket. Similarly, mutual fund units represent shared ownership among investors, each holding a portion.
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Mutual funds offer a range of investment options tailored to various financial goals. These goals – be it retirement planning, education funding, or a major purchase – come with corresponding products designed to achieve them. The Indian mutual fund landscape is replete with schemes catering to diverse investor needs.
While mutual funds present an opportunity to tap into the growth potential of capital markets, selecting the right fund requires careful consideration. Conducting thorough research, weighing risk-return dynamics, and consulting financial experts are prudent steps. Furthermore, maximizing the benefits of mutual funds involves diversifying across different fund categories like equity, debt, and gold.
While investors of varying profiles can independently navigate the securities market, choosing mutual funds offers a comprehensive package of benefits.
Mutual Funds are suited for investors who -
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Given India's robust savings culture, it becomes essential for investors to diversify beyond traditional avenues like fixed deposits and gold. Although awareness might be limited, mutual funds offer an appealing investment avenue.
In accordance with the guidelines set forth by SEBI regarding the Categorization and Rationalization of schemes in October 2017, mutual fund schemes are distinctly categorized as follows:
Within the Equity category, specific definitions have been outlined for Large, Mid, and Small-cap stocks. A notable adjustment has been made to the nomenclature of schemes, especially those in the debt domain, aligning names with the risk level of the underlying portfolio. For instance, the previously designated 'Credit Opportunity Fund' has been rebranded as the "Credit Risk Fund."
Furthermore, Balanced or Hybrid funds have been methodically segmented into three sub-categories: conservative hybrid fund, balanced hybrid fund, and aggressive hybrid fund. This division underscores the diverse risk and reward profiles associated with each variant.
Categories of Equity Funds
An Equity Scheme entails a fund that:
The fundamental objective of an equity fund is usually to achieve long-term capital appreciation. Such funds might specialize in specific market sectors or adopt distinct investment styles, such as focusing on value or growth stocks.
| Type of Equity Mutual Fund | Investment Principal |
|---|---|
| Multi Cap Fund | At least 65% investment in equity & equity-related instruments. |
| Large Cap Fund | Minimum 80% investment in large-cap stocks. |
| Large & Mid Cap Fund | At least 35% investment in large-cap stocks and 35% in mid-cap stocks. |
| Mid Cap Fund | At least 65% investment in mid-cap stocks. |
| Small Cap Fund | Minimum 65% investment in small-cap stocks. |
| Dividend Yield Fund | Primarily invests in dividend-yielding stocks, with at least 65% in stocks. |
| Value Fund | Adheres to a value investment strategy, with at least 65% in stocks. |
| Contra Fund | Adopts a contrarian investment approach, involving at least 65% in stocks. |
| Focused Fund | Concentrates on a limited number of stocks (maximum 30), with at least 65% invested in equity & equity-related instruments. |
| Sectoral/Thematic Fund | Minimum 80% investment in stocks from a specific sector or theme. |
| ELSS | Contains at least 80% of stocks in accordance with the Equity Linked Saving Scheme, 2005, as notified by the Ministry of Finance. |
(Also referred to as Diversified Equity Funds) – These funds, also known as Multi Cap Funds, allocate investments across diverse sectors and market segments. This diversification strategy mitigates the risk of overexposure to a few select stocks, sectors, or segments.
Sectoral funds are investments that zero in on specific sectors of the economy, such as infrastructure, banking, technology, pharmaceuticals, and more.
Examples of Sector-Focused Funds:
| Type of Debt Funds | Investment principal |
|---|---|
| Overnight Fund | Invests in overnight securities with a maturity of 1 day. |
| Ultra Short Duration Fund | Invests in debt and money market instruments with a Macaulay duration of the portfolio between 3 months and 6 months. |
| Low Duration Fund | Involves investments in Debt & Money Market instruments with a Macaulay duration portfolio ranging from 6 months to 12 months. |
| Money Market Fund | Focuses on investments in Money Market instruments having a maturity of up to 1 Year. |
| Short Duration Fund | Invests in Debt & Money Market instruments with a Macaulay duration of the portfolio between 1 year and 3 years. |
| Medium Duration Fund | Includes investments in Debt & Money Market instruments with a Macaulay duration of the portfolio ranging from 3 years to 4 years. |
| Medium to Long Duration Fund | Involves investments in Debt & Money Market instruments with a Macaulay duration portfolio ranging from 4 to 7 years. |
| Long Duration Fund | Engages in investments in Debt & Money Market Instruments with a Macaulay duration of the portfolio exceeding 7 years. |
| Dynamic Bond Fund | Adjusts the portfolio's securities duration based on interest rate expectations. Duration is extended if interest rates are projected to decrease and vice versa. |
| Corporate Bond Fund | Invests a minimum of 80% in corporate bonds rated AA+ and above. |
| Credit Risk Fund | Allocates at least 65% to corporate bonds rated AA and below. |
| Banking and PSU Fund | Commits a minimum of 80% to Debt instruments from banks, Public Sector Undertakings, Public Financial Institutions, and Municipal Bonds. |
| Gilt Fund | Invests a minimum of 80% in G-secs (Government Securities) across various maturities. |
| Gilt Fund with 10-year Constant Duration | Invests at least 80% in G-secs to achieve a portfolio Macaulay duration of 10 years. |
| Floater Fund | Allocates a minimum of 65% to floating rate instruments, including swaps/derivatives to convert fixed rate instruments to floating rate exposures. |
Dynamic Bond funds adjust the duration of the securities within the portfolio in accordance with the anticipated movements in interest rates. If there's an expectation of declining interest rates, these funds extend the duration of the portfolio; conversely, if interest rates are projected to rise, the duration is reduced. This strategy allows dynamic bond funds to optimize their performance in response to changing market conditions.
Floating rate funds invest in bonds with periodically reset interest rates to match current market rates, significantly reducing interest rate risk.
Hybrid Fund Categories per SEBI Guidelines on Categorization and Rationalization of Schemes
| Type of Hybrid Fund | Investment principal |
|---|---|
| Conservative Hybrid Fund | This category entails an allocation of 10% to 25% in equity & equity-related instruments, along with 75% to 90% in debt instruments. |
| Balanced Hybrid Fund | In this category, the allocation ranges from 40% to 60% in equity & equity-related instruments, and 40% to 60% in debt instruments. |
| Aggressive Hybrid Fund | An allocation of 65% to 80% in equity & equity-related instruments is coupled with 20% to 35% in debt instruments. |
| Dynamic Asset Allocation or Balanced Advantage Fund | These funds dynamically manage investments, with allocations ranging from 0% to 100% in equity & equity-related instruments, and 0% to 100% in debt instruments. |
| Multi Asset Allocation Fund | This category involves investing in a minimum of 3 asset classes, with at least 10% allocation to each asset class. |
| Arbitrage Fund | Arbitrage strategy guides this category, with a minimum of 65% investment in equity & equity-related instruments. |
| Equity Savings | This category comprises equity and equity-related instruments (minimum 65%), debt instruments (minimum 10%), and derivatives (minimum for hedging, as specified in the SID). |
Hybrid funds blend equities and debt securities in their portfolios. By investing in both asset classes, they strive to strike a balance between growth and income.
A multi-asset fund provides investors with exposure to a wide range of asset classes, thereby offering a diversification level commonly linked with institutional investing. These funds have the flexibility to invest in various traditional strategies such as equities and fixed income, as well as index-tracking funds, financial derivatives, and even commodities like gold.
This diverse investment approach empowers portfolio managers to potentially find a balance between risk and reward. It enables them to deliver consistent, long-term returns to investors, especially during periods of market volatility. Arbitrage Funds execute the simultaneous purchase and sale of an asset to capitalize on price differences in various markets or forms.
Index funds construct a portfolio that replicates a particular market index. The holdings within the portfolio and their allocation weights precisely match those of the chosen index. The fund manager refrains from rebalancing the portfolio based on personal market or sector opinions.
Index funds follow a passive management approach, wherein the fund manager undertakes minor, periodic adjustments to maintain alignment with the index. Consequently, an index fund delivers returns and risks in line with the represented index.
The fees associated with an index fund are restricted to a maximum of 1.5%, promoting cost-effectiveness for investors.
Investors are provided with the assurance of being well-informed about the constituent stocks forming the portfolio, as the index's composition is publicly disclosed and transparent.
An ETF represents a tradable security that mirrors the performance of an index, commodity, bonds, or a collection of assets, akin to an index fund.
Fund of Funds refers to mutual fund schemes that invest in units of other schemes within the same mutual fund or across different mutual funds.
The selection of schemes for investment is guided by the investment objective of the Fund of Funds.
Fund of Funds entails two tiers of expenses: those associated with the scheme whose units are invested in by the Fund of Funds, and the expenses of the Fund of Funds itself. Regulations prescribe an upper limit for the combined expenses across both tiers, outlined as follows:
Gold ETFs are Exchange-Traded Funds that are backed by gold as the underlying asset.
Investing in mutual fund schemes comes with inherent risks that investors should be aware of. While mutual funds offer the potential for returns, they are not guaranteed or assured products. Here are some standard risk factors associated with investing in mutual funds:
It's important to note that every mutual fund scheme carries its own set of risks depending on its investment objectives and portfolio composition. Investors should thoroughly read the scheme-related documents and prospectus to understand the specific risks associated with the scheme they intend to invest in. Additionally, consulting with financial advisors can help investors make informed decisions based on their risk tolerance and investment goals.
A Systematic Investment Plan (SIP) represents a method offered by Mutual Funds for investing, where individuals commit to regularly investing a fixed sum into a mutual fund scheme at predetermined intervals—such as monthly—instead of making a lump-sum investment all at once.
The SIP contribution can start from as low as ₹500 per month, mirroring the concept of a recurring deposit, wherein a fixed amount is deposited each month.
SIP offers a user-friendly avenue for mutual fund investment, employing standing instructions to debit the investor's bank account each month. This eliminates the need for writing checks for each investment installment.
SIP's popularity is soaring among Indian mutual fund investors due to its merits in terms of Rupee Cost Averaging and disciplined investing, all while sidestepping market volatility and the intricacies of market timing. Within the sphere of long-term investments, mutual funds' Systematic Investment Plans serve as the optimal entry point. Unlock financial growth with ease—choose SIPs through Investorsarthi, your trusted investing partner.
The principle of "Buy low and sell high" seems prudent for garnering satisfactory investment returns. Nonetheless, executing this strategy proves challenging, even for seasoned investors. The intricacies of markets, be it debt or equity, involve various interconnected factors.
SIP, as a straightforward approach to long-term investing, involves adhering to a fixed investment sum for a defined duration, irrespective of market conditions. This approach steers clear of the impulse to halt investments in a declining market or excessively invest in a bullish market.
An essential benefit of long-term investments resides in the concept of compounding, which stands as one of the most significant mathematical revelations.
To simplify, compounding takes place when the interest or income earned on an investment is reinvested in the original corpus. The cumulative corpus continues to earn, fostering a gradual accumulation of funds, which multiplies over time.
Suppose you start investing ₹2000 every month in a mutual fund that generates an average annual return of 10%. Over a period of 20 years, your consistent commitment to investing adds up.
Initially, your investment may seem modest. In the first year, you've invested ₹24,000. By the end of the second year, you've invested ₹48,000. As the years roll on, your investment grows, and the magic of compounding starts to take effect.
At the end of 20 years, your total investment of ₹480,000 has blossomed into an impressive ₹17.71 Lakhs! This remarkable transformation showcases the incredible potential of disciplined, long-term investing and the compounding effect that steadily builds your wealth over time. Your initial investment has grown almost fourfold due to the power of consistent contributions and compounding returns.
To optimize the potential of your investments, it holds the utmost importance to adopt a long-term perspective, implying the need to initiate investments at an early stage. By doing so, you can harness the maximum outcomes from your investment journey.
Let's delve into this concept through an illustrative scenario –
Envision three acquaintances, all aged 25, who decide to embark on an investment journey by contributing ₹2000 each month for a duration of 5 years. The investment capital experiences an 8% compounded monthly interest rate. The differentiating factor lies in their initiation points: one immediately sets out on this venture at 25, another commences a decade later at 35, and the third takes the leap 15 years later at the age of 40. All three individuals commit to retaining their investments until they reach 60.
Even though all acquaintances accumulate a principal investment of ₹1.2 Lakhs within the 5-year span, a marked divergence emerges in their financial outcomes. The investment of the individual who starts early, at 25, burgeons to exceed ₹14 Lakhs. In contrast, the investment of the second acquaintance, who initiates at 35, matures to approximately ₹6 Lakhs. Lastly, the investment of the third individual, who embarks at 40, grows to around ₹3.5 Lakhs. This scenario strikingly illustrates the substantial influence of early initiation, vividly showcasing the advantageous impact of commencing investments at a younger age.
This stark difference vividly underscores the advantageous edge of commencing investments early. Embrace the opportunity. Initiate your investment journey through SIP today itself.
The performance assessment of a specific mutual fund scheme is indicated by its Net Asset Value (NAV). In straightforward terms, NAV corresponds to the market value of the securities held within the scheme's portfolio.
Mutual funds allocate the funds collected from investors in various securities within the markets. Given that the market value of these securities changes daily, the NAV of a scheme also fluctuates accordingly.
The NAV per unit signifies the market value of a scheme's securities divided by the total number of units of the scheme on a specific date.
For instance, if the market value of securities within a mutual fund scheme amounts to INR 200 lakh, and the mutual fund has issued 10 lakh units at INR 10 each to investors, then the NAV per unit of the fund stands at INR 20 (i.e., 200 lakh / 10 lakh). Mutual funds must disclose NAV daily. The NAV per unit of all mutual fund schemes must be updated on AMFI's website and the respective Mutual Fund's website by 9 p.m. on the same day. Fund of Funds have until 10 a.m. on the following business day to update this information.
In contrast to stocks (whose prices fluctuate by the minute), mutual funds do not announce NAVs throughout the day. Instead, NAVs of all mutual fund schemes are declared after the trading day after the market closes, as specified by SEBI Mutual Fund Regulations. Additionally, by these regulations, for all mutual fund schemes except liquid fund schemes, the issuance of mutual fund units takes place at the prospective NAV. This means that the NAV declared at the end of the day, based on the closing market value of the securities held in the respective schemes, is utilized.
Hence, the crucial aspect here is the cutoff time for submitting or receiving transactions. If an investment is made before the cutoff time, the NAV of that particular business day will apply. The cutoff time for purchasing transactions for all mutual fund schemes, except liquid fund schemes, is 3:00 p.m. This implies that investments made until 3:00 p.m. on a given day will reflect the NAV of that day.
While a mutual fund might accept applications even after the cutoff time, the NAV of the subsequent business day will be applicable. Furthermore, these cutoff time regulations are also applicable to redemption transactions.
Liquid Funds
Subscription
Redemption
Other Schemes (excluding Liquid Funds)
Subscription
For amounts less than ₹2 lakh:
For amounts equal to or more than ₹2 lakh:
Redemption
Where Can Someone Find Information About Mutual Fund Navs?
Mutual funds make their scheme NAVs available on their websites. Additionally, individuals can also access the NAVs of all mutual funds on the website of the Association of Mutual Funds in India (AMFI).
To ensure that an investor qualifies for the Net Asset Value (NAV) or price of a particular day, they need to submit a valid purchase or redemption form before a specific time known as the cut-off time. The cut-off time is a designated time that marks the end of the window for submitting the form for the current day's price.
When investing in a mutual fund scheme, the price at which a unit holder purchases units is known as the sales price or Net Asset Value (NAV). On the other hand, the repurchase or redemption price is the price or NAV at which a mutual fund buys back or redeems units from its unitholders. This price may also include any applicable exit load, making it a comprehensive value for unit holders to consider.
