What are Mutual Funds?
A mutual fund is a pool of savings contributed by multiple investors. The common fund so created is invested in one or many asset classes like equity, debt, liquid assets etc. It is called a ‘mutual’ fund because all risks, rewards, gains or losses pertaining to, or arising from, the investments made out of this savings pool are shared by all investors in proportion to their contributions.
A mutual fund is in essence a Trust with a sponsor. They are registered with SEBI (Securities Exchange Board of India) who approves the Asset Management Company (AMC) managing the fund. The AMC is under the purview of the trustees who have to ensure the fund complies with regulation.
Types of Mutual Funds in India
There are many different types of mutual funds categorized based on structure, asset class and
Based on Asset Class
# Equity Funds: These are funds that invest in equity stocks/shares of companies. These are considered high-risk funds but also tend to provide high returns.
# Debt Funds: These are funds that invest in debt instruments e.g. company debentures, government bonds and other fixed income assets. They are considered safe investments and provide fixed returns.
# Money Market Funds: These are funds that invest in liquid instruments e.g. T-Bills, CPs etc. They are considered safe investments for those looking to park surplus funds for immediate but moderate returns.
# Balanced or Hybrid Funds: These are funds that invest in a mix of asset classes. In some cases, the proportion of equity is higher than debt while in others it is the other way round. Risk and returns are balanced out this way.
# Sector Funds: These are funds that invest in a particular sector of the market e.g. Infrastructure funds invest only in those instruments or companies that relate to the infrastructure sector. Returns are tied to the performance of the chosen sector. The risk involved in these schemes dependS on the nature of the sector.
# Index Funds: These are funds that invest in instruments that represent a particular index on an exchange so as to mirror the movement and returns of the index e.g. buying shares representative of the BSE Sensex.
# Tax-Saving Funds: These are funds that invest primarily in equity shares. Investments made in these funds qualify for deductions under the Income Tax Act. They are considered high on risk but also offer high returns if the fund performs well.
# Fund of funds: These are funds that invest in other mutual funds and returns depend on the performance of the target fund.
How is a mutual fund set up?
A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.
SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme.
How to invest in Mutual Funds
So, you know what Mutual Funds are and their associated costs. It’s time to know more about how to invest in them.
The first thing here is to understand what kind of portfolio you need. Your funds will need to be divided between different asset classes to achieve the returns that you want. This is known as asset allocation. The ideal asset allocation route would help you to invest in a number of funds that are based on your risk profile. Your risk profile will also help determine the extent to which you should invest in each asset segment such as equity and debt.
Your asset allocation should have a healthy mix of high-risk and low-risk components. The usual rule is that the percentage of funds you allocate to low-risk debt instruments should be equal to your age. For instance, if you are a 30 year old, then 30% of your fund allocation should go toward debt instruments. This will cushion you against any downturns due to investments in high-risk assets. This might be true when you are young but as you grow older, you must reduce your high-risk investments. A golden rule here is that the younger you are, the more you can invest in equities and other high-risk Mutual Funds. Up to a certain age, your risk profile can be moderately high as you have certain flexibilities to invest in high-risk, high-return funds without getting too worried about potential losses.
Shortlisting fund types
Shortlisting and zeroing in on the right funds represents the most important part of investing in Mutual Funds. Once you are done with the asset allocation that best reflects your needs, the next step is to look for and compare different Mutual Funds on the basis of their past performance and investment philosophy. For this, you should refer to the shareholder reports and prospectuses provided by AMCs. The prospectus will detail the information related to the Mutual Fund from a legal perspective while the shareholder report can help you understand the past performance and consistency of returns.
Before investing in a fund, you should first be certain about what your ultimate financial goals are. Are you investing to substitute your current income or planning for retirement or are you looking to save for child’s marriage?
Next, you need to determine what the horizon for these goals will be. The more money you need, the more risk you might need to take if you don’t have much time. You can afford to take lower risks if your goal is a long-term one. However, understand that when you invest in high-risk funds for the long term, the risks will become considerably lower as your goal nears. You should choose your Mutual Funds accordingly.
Some Mutual Funds are open-ended while others are close-ended. In case of the latter, you won’t be able to liquidate the funds until the fund has matured. Therefore, you need to be careful about the time frame you’re investing for. In general, the shorter the period of investment, the lower the risks that you should take, while a higher time frame will help you overcome downturns in case of high-risk instruments.
Finally, ensure that your risk profile is right. This may seem daunting but once you have charted out your future requirements and the time frame, you can find out what kind of risk profile you are comfortable with. Are you comfortable with the dynamics of the stock market and can you accept both ups and downs? Or are you looking for safe and assured bets that will meet your needs and still keep you safe? These depend on your personal outlook. If you aren’t comfortable with an asset class even though it’s aligned directly with your goals, you should drop that option.
Why Mutual Funds?
When you can invest in stocks or government securities on your own, you may feel that you don’t need professional help to manage such investments. You could be wrong. Investing in the markets is not simply choosing stocks and forgetting about them. The process becomes fairly complex when more than a couple of stocks and fixed-income securities are involved and almost impossible for any run-of-the-mill investor. With professionally managed Mutual Funds, you can be assured that your investments are managed by people with many years of experience with market analysis. They will have enough knowledge to take calls on buying and selling those stocks and other investments. You might not actually have that kind of knowledge or time to handle individual stock or fixed-income investments. Fund managers can easily identify laggards and prevent the portfolio from becoming stagnant due to underperformers. With Mutual Funds, you get:
Right amount of diversification
Mutual Funds allow you to diversify your investment across assets and asset classes, something that is very difficult to do on your own.
You are given options to pick any type of fund as per your risk profile, and bundle all of them into a single portfolio. Data about the performance of the funds is easily available for you to take those buy and sell calls.
The fund managers of Mutual Funds are usually highly experienced in their respective fields and will have years of experience handling different types of assets. And what’s more, you will be provided with the profile of your fund manager so that you know who’s actually handling your hard-earned money.
There’s nothing more convenient than a central database providing you with all the required information and even highlighting what’s best for you. This is possible through Mutual Funds.
Your Fixed Deposit may be offering decent returns with little option for liquidity, or the stock market may give you decent returns with easy liquidity and a high probability of losses. A Mutual Fund is a fine balance between the two offering you good returns while providing you with decent liquidity.
There are tax benefits associated with Mutual Funds. You need to invest in Equity Linked Savings Schemes (ELSS) of Mutual Funds for the same.
Investing in Mutual Funds can be very exciting and highly profitable as long as you choose the right funds. If you don’t know how to choose the right funds, Invest India Online is there to help you.
म्यूचुअल फंड क्या हैं?
एक म्यूचुअल फंड बचत के एक पूल है जो कई निवेशकों द्वारा योगदान दिया जाता है। इस तरह के सामान्य फंड को इक्विटी, ऋण, तरल परिसंपत्तियों आदि जैसे एक या कई परिसंपत्ति वर्गों में निवेश किया जाता है। इसे ‘आपसी’ फंड कहा जाता है क्योंकि किए गए निवेश से संबंधित सभी जोखिम, पुरस्कार, लाभ या हानि, या उत्पन्न होने से इस बचत पूल के सभी निवेशकों द्वारा उनके योगदान के अनुपात में साझा किया जाता है।
एक म्यूचुअल फंड एक प्रायोजक के साथ एक ट्रस्ट संक्षेप में है। वे सेबी (भारतीय प्रतिभूति विनिमय बोर्ड) के साथ पंजीकृत हैं जो फंड प्रबंधन के लिए संपत्ति प्रबंधन कंपनी (एएमसी) को मंजूरी देते हैं। एएमसी उन ट्रस्टियों के दायरे में है, जिन्हें यह सुनिश्चित करना है कि निधि विनियमन का अनुपालन करे।
भारत में म्यूचुअल फंड के प्रकार
संरचना, संपत्ति वर्ग और आधारित के आधार पर वर्गीकृत कई अलग-अलग प्रकार के म्यूचुअल फंड हैं
संपत्ति वर्ग के आधार पर
# इक्विटी फंड: ये वे फंड हैं जो इक्विटी स्टॉक / कंपनियों के शेयरों में निवेश करते हैं। इन्हें उच्च जोखिम वाले फंड माना जाता है लेकिन उच्च रिटर्न प्रदान करते हैं।
# ऋण निधि: ये वे फंड हैं जो ऋण उपकरणों में निवेश करते हैं उदा। कंपनी डिबेंचर, सरकारी बॉन्ड और अन्य निश्चित आय संपत्तियां। उन्हें सुरक्षित निवेश माना जाता है और निश्चित रिटर्न प्रदान किया जाता है।
# मनी मार्केट फंड: ये वे फंड हैं जो तरल उपकरणों में निवेश करते हैं उदा। टी-बिल, सीपी इत्यादि। उन्हें तत्काल लेकिन मध्यम रिटर्न के लिए अधिशेष निधि पार्क करने वाले लोगों के लिए सुरक्षित निवेश माना जाता है।
# संतुलित या हाइब्रिड फंड: ये वे फंड हैं जो संपत्ति वर्गों के मिश्रण में निवेश करते हैं। कुछ मामलों में, इक्विटी का अनुपात ऋण से अधिक है जबकि अन्य में यह एक और तरीका है। जोखिम और रिटर्न इस तरह से संतुलित होते हैं।
# सेक्टर फंड: ये वे फंड हैं जो बाजार के किसी विशेष क्षेत्र में निवेश करते हैं उदा। इंफ्रास्ट्रक्चर फंड केवल उन उपकरणों या कंपनियों में निवेश करते हैं जो बुनियादी ढांचे क्षेत्र से संबंधित हैं। रिटर्न चयनित क्षेत्र के प्रदर्शन से बंधे हैं। इन योजनाओं में शामिल जोखिम इस क्षेत्र की प्रकृति पर निर्भर करता है।
# इंडेक्स फंड: ये वे फंड हैं जो ऐसे उपकरणों में निवेश करते हैं जो एक एक्सचेंज पर एक विशेष इंडेक्स का प्रतिनिधित्व करते हैं ताकि इंडेक्स के आंदोलन और रिटर्न को मिरर किया जा सके। बीएसई सेंसेक्स के शेयर प्रतिनिधि खरीदना।
# टैक्स सेविंग फंड: ये वे फंड हैं जो मुख्य रूप से इक्विटी शेयरों में निवेश करते हैं। इन फंडों में किए गए निवेश आयकर अधिनियम के तहत कटौती के लिए अर्हता प्राप्त करते हैं। उन्हें जोखिम पर उच्च माना जाता है लेकिन यदि फंड अच्छी तरह से प्रदर्शन करता है तो उच्च रिटर्न भी प्रदान करता है।
# धनराशि का फंड: ये वे फंड हैं जो अन्य म्यूचुअल फंडों में निवेश करते हैं और रिटर्न लक्ष्य निधि के प्रदर्शन पर निर्भर करते हैं।
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. Before making any investments, the readers are advised to seek independent professional advice, verify the contents in order to arrive at an informed investment decision.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.