A mutual funds scheme is a shared pool of professionally managed money, giving a more comprehensive range of choices available to the investor for investment in mutual funds different asset classes, i.e., Equity, Debt & Gold, etc., the requirement and risk appetites of the investor.
Here are the looks of Asset classes.
In India, Mutual funds started in 1963 with the formation of the Unit Trust of India, at the initiative of the Reserve Bank of India and the Government of India. Today It has become the first preferred investment avenue among the Domestics and Foreign Investors. The volume of the industry stands at more than 27lakh crore.
Here are the looks of the mutual fund Industry.
Open-Ended funds form the most significant part of the mutual funds market. Therefore, investment in mutual funds in an open-ended scheme allows investors easy liquidity, due to which investors are more attracted to invest in open-ended mutual funds. They need to keep in mind that the only thing that they need to keep in mind is to invest according to their financial goals, risk tolerance, and investment horizon.
A closed-end scheme is for a fixed period or tenor.It offers units to investors only duringthe new fund offer(NFO). The scheme is closed for transactions with investors after this. The units allotted are redeemed by the fund at the prevalent NAV when the term is over and the fund ceases to exist after this.In the interim, if investors want to exit their investment they can do so by selling the units to other investors on a stock exchange where they are mandatorily listed.
An actively managed fund is a mutual fund scheme in which the fund manager “actively” manages the portfolio and continuously monitors the fund's portfolio, deciding on which stocks to buy/sell/hold and when, using his professional judgment, backed by analytical research. In an active fund, the fund manager aims to generate maximum returns and out-perform the scheme’s benchmark.
A passively managed fund, by contrast, simply follows a market index, i.e., in a passive fund, the fund manager remains inactive or passive since, they do not use their judgment or discretion to decide as to which stocks to buy/sell/hold, but simply replicates/tracks the scheme’s benchmark index in the same proportion. Examples of Index funds are an Index Fund and all Exchange Traded Funds.
Equity funds invest in a portfolio of equity shares and equity-related instruments.
In the Indian context, as per current SEBI Mutual Fund Regulations, an equity mutual fund scheme must invest at least 65% of the scheme’s assets in equities and equity-related instruments.
Debt fund invests in a portfolio of debt instruments such as government bonds, corporate funds bonds, and money market securities. Debt instruments have a predefined coupon or income stream. Debt instruments may also see a change I prices or values in response to changes in interest rates in the market.
A type of Mutual Fund that directly or indirectly invest in gold reserves. Investments are usually made on stocks of gold producing and distributing syndicates, physical gold, and on stocks of mining companies. These funds can also be used as a hedge to protect an
An investment vehicle offered by many mutual funds to investors, allowing them to invest small amounts periodically instead of lump sums.
A plan that allows investors to give consent to a mutual fund to periodically transfer a certain amount/switch (redeem) certain units from one scheme and invest in another scheme of the same mutual fund house. This facility thus helps in deploying funds.
A plan which allows investors to withdraw from his/her mutual; fund schemes every month on a set date. The amount could be fixed or variable amount and the withdrawal could be annually, semi-annually, quarterly, or even monthly.
Investment in equities is considered as an owner of the particular company that you have invested in, to the extent of the investment. So naturally, like any answer, profit is linked with the performance of the company. The higher the profits of the company, the better is the share price and hence the better your gains. You have absolutely no assurance whatsoever on the principal, rate of interest, or tenure when investing in equity mutual funds.
Like with any high-risk action, Equity funds also carry the potential to deliver high returns. And to help counter this risk, Mutual Funds are invested in multiple companies that usually don't belong to one or correlated sectors. This is known as diversifying.
In the long run, one needs to be guarded against inflation, and in the short run, market fluctuations. Equity, though volatile, has proved to be a better bet against inflation, provided one has a long term investment.
Diversified Equity Fund: These funds invest in equity shares across sectors, sizes, and industries. The portfolio is spread across sectors and stocks, with no single security dominating the portfolio. They are less risky because of the diversified nature of the portfolio. Some diversified funds may focus only on large and established stocks, reducing the risks further by investing in very stocks with a good track record.
Sector Fund: These equity funds invest only in a specific sector. For example, a banking sector fund will invest in only shares of banking companies. Gold sector fund will invest in only shares of gold-related companies. They are concentrated funds and feature high risk, because as the level of concentration increases risk also increases. Sector performance tends to be cyclical.
Index Fund: Index Fund invests in stocks comprising indices, such as the Nifty 50, which is a broad based index comprising 50stocks.There can be funds on other indices which have a large number of stocks such as the CNX Midcap 100 or S&P CNX 500
Equity Linked Saving Scheme:These funds offer tax benefits u/s 80C of Income Tax Act, 1961.Investment up to Rs 150000 in a year in such funds can be deducted from taxable income of individual investors.ELSS must hold at least 80% of the portfolio in equity securities at all times. There is a lock- in period of 3 years from the date of investment.
Themati fund: These funds invest in line with an investment theme .For example, an infrastructure thematic fund might invest in shares of companies that are into infrastructure construction, steel,telecom,power etc.
LARGE-CAP FUNDS- Invest a large portion of their corpus in companies with large market capitalization are called large cap funds. This type of fund is known to offer stability and sustainable return, over a period of time.
MID-CAP FUNDS- invest in stocks of mid-size companies, which are still considered developing companies. Mid-cap stocks tend to be risker than large-cap stocks but less risky than small-cap stocks.Mid-cap stocks, however, tend to offer more growth potential than large-cap stocks.
SMALL-CAP FUNDS- invest in companies with small market capitalization with the intent of benefitting from the higher gains in the price of stocks. The risk is also higher.
Debt Funds helps bring stability to your investment portfolio since they are lower in risk as compared to Equity Fund, yet riskier than Liquid Funds and their aim itself is to generate steady return while preserving your capital. These would typically invest in government securities, NCD, CDs, CPs bonds, and other fixed-income securities as well as lend money to large organizations or Corporates, in return for a fixed interest rate. Therefore, investing in Debt Mutual Funds would be ideal if you are looking at a potentially higher return than Liquid Funds over a medium-term time horizon between 3 to 24 months.
So the great thing about debt funds is that they are designed primarily to protect your capital and provide stable returns by investing in debt securities.
Gilt funds invest in only treasury bills and government securities, government securities of medium and long term maturities.Since investment is made in government securities, there is no risk of default.These funds are exposed to interest rate risk depending on their maturity.
If interest rate goes up, the value of a debt security goes down.This is because an older debt security issued at a lower coupon rate, say 6% is not attractive if a newer debt security is being issued at current market rate of say 8%.The older security's coupon rate remains unchanged until its maturity; therefore its price falls in response to the higher rate prevailing now in the market.This is called interest rate or mark-to-market risk in debt security.
Fixed Maturity Plans are closed-ended debt mutual fund schemes. Simply put, a closed-ended scheme is one where you can invest only during the new fund offer period, post which it is shut for new subscriptions, it has a fixed time horizon and the money is given back to you upon the expiry of the period.
ETFs hold a portfolio of securities that replicates an index and are listed and traded on the stock exchange. The return and risk on ETF are directly related to the underlying index or asset. The expenses ratio of an ETF is similar to that of an index fund.
ETFs are first offered in a New Fund Offer loke all mutual fund s Units are credited to the Demat account of investors and ETF is listed on the stock exchange . Ongoing purchases and sales are done on the stock exchange through trading portals or stockbrokers. The settlement is like a stock trade, and debit or credit is done through the Demat account.
ETF prices are real-time and known at the time of the transaction, unlike NAV Which is computed end of a business day. Their value change on a real-time basis along with changes in the underlying index.
Gold fund, as the name suggests, invests in various forms of gold. It can be in the form of physical gold or stocks of gold mining companies. Gold funds which invest in physical gold offer investors the convenience of buying pure gold at low cost. There is no possibility of theft and you can sell these units at market linked prices anytime.
The purpose of these types of investments is to create wealth during an investment and create a cushion against market collapse. Because of gold’s varying prices, the performance of its underlying stocks often differ greatly
For example, even a tiny change in gold’s global market price can cause substantial alterations in its stock’s return. The return of the best gold funds can even outgrow the actual price of the precious metal itself, which can create a lucrative opportunity for investors.
Like any other mutual fund, gold mutual funds make returns based on the movement in their underlying investment. In this case, NAV of gold funds change based on the price of the gold ETFs in which they have invested. A gold ETF’s price moves in tune with gold prices. By investing in a gold mutual fund, therefore, you are able to capture the movement of gold prices.
Flexible Investment Amount- Gold funds allow investors to purchase any amount of funds as per the requirement. An investor can invest as low as Rs 500, which allows individuals with low income to invest in this type of fund.Instead of purchasing physical gold, which often carries a significantly high cost
Highly Liquid Investment- Trading these funds is easier than liquidating other types of assets, which makes them ideal as a financial cushion to protect against an unforeseen incident.
Safe Investment- Gold funds are one of the safest investment options, as these mutual funds are regulated by the Securities and Exchange Board of India (SEBI). SEBI periodically monitors and reports on the condition of these funds, which can help investors measure and predict their returns.
Safer than owning Physical Gold- Being an electronic investment, which eliminates the hassle of storing physical gold. Because of its dematerialization form, it is one of the safest alternatives to investing in a physical asset available in today’s market.
Systematic Investment Plan (SIP) is a smart financial planning tool that helps you to create wealth, by investing small sums of money every month, over a period of time. Investing at an early stage of life lets you enjoy the benefits of two powerful strategies, rupee cost averaging and the power of compounding.
How SIP works? SIP is a method of investing a fixed sum, regularly, in a mutual fund scheme.SIP allows one to buy units on a given date each month so that one can implement a saving plan for themselves. A SIP is generally preferred for equity schemes and can be started with a small as Rs 500per a month.
SIPs also helps in availing the benefits of compounding. This means the earlier one starts a SIP and the longer the investment horizon, the larger the benefits. The reason being, each rupee one invests earns a return, which ends up as more rupees to earn a return allowing investments to grow at a fast pace. Higher rates of return or longer investments time period increases the principal amount in geometric proportions.
STP - A plan wherein an investor invests a lump sum amount in one scheme and regularly transfers (i.e. switches) a pre-defined amount into another scheme. Every month on a specified date an amount you to choose is transferred from one mutual fund scheme to another of your choice.
TYPES OF STP:
How does STP work?
Say, if a person wants to invest Rs10 lakhs in an equity fund through STP, he will have to first select a debt fund that allows STP to invest in that particular equity fund. Generally, both the funds are managed by the same fund house.After selecting the debt fund invest all the money that is Rs10 Lakhs in the debt fund.
Benefits of STP
A withdrawal plan is a financial plan that allows an investor to withdraw money from an existing mutual fund portfolio at predetermined intervals. The money can be reinvested in another portfolio or used to pay for something else. Often, this type of plan is used to fund expenses during retirement. However, it may be used for other purposes as well.
How SWP Works?
An investor has 10,000 mutual funds where the NAV is Rs 20.00 and the total value of the mutual fund units is Rs 200,000. Now with The first systematic withdrawal plan, he wants to withdraw Rs 5000, every month. In the first month, he withdraws Rs 5000(Rs 5000/Rs. 20 NAV=250units ). The balance units available would be 9750 units @20.00=Rs 195,000. The second month assuming that the NAV is Rs 20.15=Rs 191.462. If you observe that out of a total investment of Rs 2,00,000, the amount is withdrawn of Rs 10,000, the balance should have been Rs 1,90,000. However, with a systematic investment plan, the amount of balance is Rs 191,462 thereby gaining Rs 1,462. This example is illustrated assuming that the market is rising and hence the NAV has increased. In a growing market, a systematic withdrawn plan works well.
Benefits of Systematic Withdrawal Plan(SWP)
There are various benefits of a systematic withdrawal plan:
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