Mutual Funds

What is a Mutual Fund?

The term Mutual Funds refers to a pool of money accumulated by several investors who aim at saving and
making money through their investment. The corpus of money so created is invested in various asset
classes, viz. debt funds, liquid assets and the like. Just like gains and rewards earned over the period of
investment, losses are also shared by all the investors in equal proportion, i.e. in accordance with their
proportion of contribution to the corpus.
Mutual Funds are registered with SEBI (Securities and Exchange Board of India) that regulates security
markets prior to the collection of the funds from the investors. Investing in a Mutual Funds can be as
simple buying or selling stocks or bonds online. Moreover, investors can sell out their shares whenever
they want or need.
Types of Mutual Funds in India
There is a wide range of mutual funds in India, which is categorized on the basis of investment objective,
asset class, and structure.

Types of Mutual Funds Based on Asset Class

Equity Funds
These funds are invested in equity stock or shares of the companies. They provide a higher result, that’s the reason
they are considered as high-risk funds.

Debt Funds
These funds are invested in the debt like government bonds, company debentures, and fixed income assets. As they
provide fixed returns, they are known to be a safe investment instrument.

Money Market Funds

These funds are invested in liquid instruments, such as CPs, T-Bills etc. They are considered quite safe investment
option, as you get an immediate yet moderate return on your investment. They are a perfect option for investors who
want to invest their abundant funds.

Hybrid or Balanced Funds

These types of funds are invested in different asset c lasses. There are times when the proportion of debt is
lower than equity; it could be another way around as well. In this manner, return(s) and risk(s) strikes a
perfect balance.
Sector Funds
In these funds, investment is made in a particular sector or division of the market. For instance,
infrastructure fund investors make investments restricted to infrastructure companies or investment
instruments offered by the infrastructure companies. Returns on an investment are directly proportionate
to the performance of that particular sector. The risk factor associated with these schemes varies sector to
sector.
Index Funds
These funds are investment instruments that represent specific index on the exchange in order to monitor
the returns and the movement of the index, viz. purchasing shares from the BSE Sensex.
Tax-Saving Funds
These funds make investment majorly in the equity shares. Tax -saving funds make an investor eligible to
claim tax deductions under the Income Tax Act. Risk factor involved in these funds is generally on the
higher side. At the same time, higher returns are offered if the funds’ performance is at par.
Funds of Funds
These funds invest in the other mutual funds and the returns are dependent on the overall performance of
the target funds.

Types of Mutual Funds Based on Structure

Open-Ended Funds
These mutual fund investment instruments deal with units that are purchased or redeemed throughout the
year. Such purchases or redemptions are done at persisting Net Asset Value (NAV). These funds offer
liquidity to the investors, so they are preferred by the investors.
Close-Ended Funds
These mutual funds investment instruments deal with units that can be purchased during initial period
only. The units are eligible for the redemption on a specific maturity date. In order to provide liquidity,
these schemes are listed on the stock exchange for trading purposes.
Types of Mutual Funds Based on Investment Objective
Growth Funds
These schemes let investors invest their money majorly in equity stocks. The objective behind this is that
it provides capital appreciation. Though these funds are considered to be risky, they are considered ideal
for investors having an investment timeline that’s long -term.
Income Funds
These schemes let you invest your money majorly in fixed -income instruments, such as debentures, bonds
etc. They serve the purpose of providing regular income and capital protection to the investors.
Liquid Funds
The money invested in liquid funds is invested majorly in short -term and at times, very short-term
investment instruments like CPs, T-Bills etc. with the sole purpose of providing liquidity. These schemes
are low on the risk factor and they provide moderate returns on investment. These schemes are ideal for
investors having short-term investment timelines.

Mutual Fund Investment Goals

There are various kinds of a mutual fund with a specific goal set. Mutual fund investment objec tives are
the goals set by the fund manager for the mutual fund investment while making a crucial decision - which
bonds and funds should be included in the funds’ portfolio.
For instance, Mr. Gupta plans to invest in the equity market to accomplish his in vestment objective, i.e. to
get long-term capital appreciation while meeting his long-term financial targets like child’s overseas
education and his own retirement.
Depending majorly on the objective of the investment, mutual funds are classified in 5 categories. The
following are these categories:
1. Aggressive Growth Funds
Aggressive growth fundshave the higher chances of sudden growth and their value rises up at a fast
speed.Investors invest in aggressive growth funds with the objective of fetching higher returns. Since the
funds witness a sudden growth, the risk factor involved is extremely high. It is because funds with sudden
price appreciation potential end up losing their value at a high speed at the time of downfall in the
economy.
Investing in these funds is an ideal option for the investors who are willing to invest their money for a
time period of five years and their investment objective revolves around a long -term perspective.
The investors who can’t afford to have the potential to lose the value of their investment and whose
investment objective is to conserve capital are recommended to not to buy aggressive growth funds.
2. Growth Funds
In aggressive growth investment, the growth fetches higher returns on investment. The investment
portfolio will comprise a blend of small, medium and large sized corporations. The fund portfolio would
include that in order to make an investment in a well -established and stable corporation. In addition to
that, the fund manager would invest a small proportio n of funds in a freshly set up small scale company.
The fund manager would select growth stock, which will make use of the growth to make profits instead
of paying the dividends. Holding onto growth funds most of the times proves to be profitable for the
investor(s).
3. Balanced Funds
It is the fusion of the income and growth funds, which is known as balanced funds. These funds have a
mixture of goals to accomplish. The goal is to aim at providing the investors with the present income and
at the same time, it offers the possibility of growth. These funds aim to accomplish various objectives that
investors look forward to.
Balanced funds’ stability ranges from low to moderate but its potential for growth and current income is
moderate.
4. Income Funds
The funds that normally make an investment in a range of fixed income securities are known as income
funds. These funds ensure regular income for the investor(s). These funds are ideal for the investors who
are retired, as they will have a regular supply of div idends. The fund manager will invest in company
fixed deposits; debentures etc. and that will provide a regular income to the investors. It is a stable
investment option yet it has moderate risk factor involved. With the fluctuations in the rate of interes t, the
prices of income share funds, bonds will be affected accordingly. Also, the rate of inflation takes a toll on
the income funds.
5. Money Market Mutual Funds
These funds strive on the maintenance of capital prevention. That’s the reason why the investors
investing in these funds should be extremely cautious. Though money market mutual funds have the
potential of yielding a higher rate of interest as compared to the bank deposits’ rate of interest, profits are
not there. Also, the risk factor involved is very low.
Due to higher liquidity, the investors are able to alter and mold their investment strategy.

How to Invest in Mutual Funds

If you invest only and only in one mutual fund investment instrument, by default the risk factor becomes
higher. If you invest your capital in different mutual fund investment instruments, then you end up
stabilizing the risk involved. If one fund is not yielding great returns, you will be protected by the other
investment instruments.

Start With Your Financial Needs

Investment needs vary person to person, as the investment objectives vary person to person. Factors like
financial goals, risk threshold, time period and capital affect the investment decisions.
Even before you select your mutual fund investment instrument , analyze your fiscal goals and decide your
time frame and risk threshold accordingly. On the basis of that, zero down the investment options that are
in sync with them.

Mutual Funds Benefits

As an investor, you have a plenty of mutual fund instruments to choose from. It is quite a task to select an
investment instrument that gives you the benefit of every mutual fund vehicle in one option. That’s a
good enough reason to widen the umbrella of mutual fund vehicles to reap the benefits offered by mutual
funds.
Apart from providing the flexibility to formulate investment plans based on the individual investment
goals, mutual funds are beneficial in the terms of professional management, diversification, and
affordability.
How Beneficial is investing in a Mutual Fund?
Investors’ basic expectation from investing in mutual funds is to reap maximum returns on their
investment(s). As an investor, you would also expect this. At times, you don’t have sufficient time to do
your research and monitor the stock market thoroughly. A lot of time in hand, knowledge of the stock
market and lots of patience is a pre-requisite for trading in the stock business. Opportunities don’t knock
at your door; you have to grab them using both of your hands.
To be able to take risks increase your chances of getting maximum returns. It is next to impossible that
every chance you take turns out rewarding for you. Sometimes you get lucky, sometimes you don’t. When
you don’t, analyze what went wrong and learn from your mistakes. Before buying, u se the mutual fund
calculator to get quotes regarding your investment, returns, risks etc.
The Following are The Benefits Offered by the Mutual Funds
1. Professional Management
Mutual fund professionals manage your hard -earned money with their skills and experience. They have a
qualified research team that assists them by analyzing the performance and potential of various
corporations. In addition to that, they find suitable investment offers for their clients. Fund managers are
qualified to manage your funds in such a manner that they yield higher returns on investment(s).
Professional management is a continuous process and it takes much time to add value t o your
investment(s).
2. Diversification
Diversification makes your investment an intelligent investment. It minimizes the risk by investing your
money in different mutual fund investment vehicles. Obviously, chances are very slim that all the stocks
will decline simultaneously.
Sector funds let your investment spread across a solo industry so that there is less diversification.
3. More Choices
The biggest advantage of investing in a mutual fund is that it offers a wide range of schemes that match
with your long-term expectations. Whenever a new phase begins in your life, you just need to have a
discussion with your financial advisor(s) and work on your portfolio to suit your present situation.
4. Affordability
At times, your investment goal or your capital doesn’t let you invest in the shares of a big company.
Generally, mutual funds deal with buying and selling of securities in a large amount that allows investors
to get the advantage for a low trading course. Thanks to the minimum fund requirement, ev en the smallest
investor can give mutual funds a shot.
5. Tax Deductions
You get tax benefits if you invest for a period of one year or more in capital gains. Mutual fund
investments also make you eligible for the benefits of the tax deduction.
6. Liquidity
Open-end funds make you eligible to redeem total or partial investment anytime you want to, and you can
receive the present value for your shares. Funds give you more liquidity as compared most of the
investments in the shares, bonds, and deposits. Thi s follows a standardized process and it makes the
process efficient and smooth. Because of that, you get your money as soon as possible.
7. Averaging Rupee-Cost
Irrespective of the investments’ unit price, you make an investment in a particular rupee amou nt at
frequent intervals with averaging rupee-cost. Resulting, you are able to buy more units when the prices
are less; fewer units when the prices are high. Averaging rupee -cost enables you to maintain your
investment discipline by frequent investments. I t also prevents you from making any unpredictable
investment.
8. Ensures Transparency
Various esteemed publications and rating agencies review the performance of mutual funds, which makes
it easier for investors to compare one fund to another. It is benef icial for you as a shareholder, as it
provides you with latest updates, including funds’ holdings, managers’ strategy etc.
9. Regulations
As per the regulations by The Securities and Exchange Board of India (SEBI), all the mutual fund
corporations are required to register with SEBI, as they are obliged to adhere to the strict regulations
formulated to safeguard investors. The overall trading operations are monitored by the SEBI on a regular
basis.
Investment Approach in Equities
Investment in equities is no rocket science. All you need to do is to follow the investment approach given
below. It runs through the sector and diversified equity funds.
1. Bottom-Up Approach
The bottom-up approach is ideal when your goal is to invest in the best corporations, irr espective of the
domain. When the fund managers are sure about the corporations’ potential and their prospects, they give
you a green signal. On an average, top 5-10 corporations are there in a portfolio account of the overall
total fund assets. It is recommended to keep an eye on sector exposure in individual stock exposure and
diversified funds to assure that the exposure does not incline way too much towards one particular stock
or sector.
2. Fundamental Investors Approach
For a fundamental investor, in-house literature or research cements the foundation of the investment
decision-making power. The research does not revolve around financial numbers only; it goes above and
beyond published literature or reports. The fund managers accompanied by research a nalysts meet
employees of their company to get a better perspective and explore unobvious data that can turn out to be
a golden opportunity over a period of time.
3. Quality First Approach
When you focus on the quality, you are on the right path. There are times when the quality of fiscals is
ignored. Later, that turns out to be a disaster. Shift your entire focus on the quality, as it will help you to
avoid losses. The quality first approach allows your funds to perform well.
4. Long-Term Investment Approach
As an investor, being patient works in your favor and it makes you immune from market unpredictability.
Analyze the value of funds, and then make investment decisions accordingly. It leaves no room for
negative decisions. Long-term investors use the unpredictable times to their advantage because sooner or
later, share market will realize the potential of the funds and the stock will make its come back.
5. Deliberate and Methodical Approach
This investment approach lays emphasis on the emerging theme s and doesn’t pay much attention to the
so-called tips and tricks.
6. What’s Trending Approach
Look out for what’s trending, as it can be rewarding in the long run. It is of utmost importance to
understand the present financial situation as well as the fu ture financial potential of the companies so that
in future, you can make best investment decisions in coordination with the changing times.
Debt Investment
The best approach to investing in debt is by focusing on fetching returns consistently and at the same
time, neutralizing risk threats. It is a sure -fire way to give returns in the form of a fixed income.
While investing in debt, keep the following point in your mind:
1. Safety First
Don’t get carried away and give safety the utmost importance. W hen it comes to back off short-terms
gains, don’t shy away and be firm about your decisions.
2. Risk Management
Carefully analyze ratings, value, integrity, effectiveness, efficiency, management, finances etc. of the
company; it will help you to reduce the risk factor. The lesser risk is better for your investment.
3. Interest Rate Risk Management
Focus on managing interest-rate risk with the help of the portfolio at the intermediate level and refrain
from timing the market rate of interest.
4. Prudent Balance Maintenance
Work on maintaining a prudent balance among corporate bonds and government securities. Along with
that, don’t forget to diversify strict limits on single corporation exposure(s).
5. Rely on Research
Take advantage of strong equity research in order to identify the strong debt issuing companies and
explore unexplored domains. It will unveil the best mutual funds plan for you.
6. Liquidity Norms
Maintain rigorous liquidity norms to make sure that your portfolio can be liquefied whenever you want to
make redemptions.
What is ELSS?
ELSS is popularly known as Equity Linked Savings Scheme. It is a type of diversified equity mutual fund
scheme. Investing in ELSS mutual funds gives you the double benefit of tax deduction and capital
appreciation. Section 80C of the Income Tax Act makes you eligible for tax exemption. By default, Equity
Linked Savings Scheme has a lock-in period of three years.
Why Should You Invest in ELSS?
When planned efficiently, investing in Equity Linked Savings Scheme helps you to save your money.
Generally, tax saving investment vehicle comes with a lock -in period of 3-15 years. ELSS comes with the
minimum lock-in period of three years. As compared to other tax-saving instruments, the period of three
years is lesser. The icing on the cake is that capital gains from ELSS funds are tax-free. No tax is levied
on the interest, principal amount or the maturity amount.
When it comes to withdrawals, it is also free since the hold period for such funds is more than 12 months.
It means no levying of taxes on capital gains. As per your preference, you can select from the following
plans:

1. Growth Plan
2. Dividend Plan
3. Dividend Reinvestment Plan
The growth plan is an investment plan that allows your investment to grow until you take it out. If your
fund’s Net Asset Value (NAV) has increased, the dividend plan allows your fund to give an amount back to
you. Last but not the least; the dividend reinvestment plan lets your dividend payout to be re -invested in
some additional units of the plan.
How to Make a Fund Selection?
Plenty of mutual fund instruments are available to you. But, before you dive deep the ocean of mutual
funds, it will be great if you mix and match your bond, stock and money market funds according to your
preference. Experts recommend that this is the best investment decision any investor can take. Don’t
forget to compare mutual funds before buying.
As an investor, the following are points that you should keep in mind while formulating your investment
strategy:
1. Diversification is the key
It is best to divide your investment between mutual funds that deal in a wide variety of stocks, money
market securities, and bonds. Every instrument brings pros and cons to the table. Diversifying in the same
domain of securities is ideal. Over a long period of time, it proves to be beneficial. If one sector is not
doing well, still diversification would allow your funds to yield the best r esults.
2. Keep Inflation In Mind
The money you invested today would be used later. Over the time, inflation spreads its wings and it starts
flying high. So, you need to consider the after effects. Money market funds have gained popularity, as
they maintain the value, but the returns can be very low.
3. Patience Please
The value of shares fall and rise unpredictably. What is rising today can fall tomorrow, so be mentally
prepared to face fluctuations. In case you don’t require money right now, don’t panic if your funds fall
short of its value. Rise and fall are parts of the sweet -bitter reality of the stock market.
If a fund is underperforming, it can do really well too. So, be patient and let your funds recover.
4. Consider Your Age
Younger investors invest plenty of time in stock funds. Why? It’s because they have a lot of time in their
hands. Their investment in stock funds let them fetch return over a long period of time.
On the contrary, people who are supposed to be retiring soon look forward t o safeguarding their money
from any drops in prices. In order to maintain the value, it is ideal for that age group to make an
investment in the money market fund or bonds.
5. Determine Age Appropriate Investment Mix
Subtract your age from 100, the remainder/ answer could be a good option to start an investment with. It
will help you to decide the share of your total funds to invest into mutual fund stocks.
6. Risk Threshold
While selecting mutual funds, ensure that you keep in mind how much your risk thr eshold is. Don’t go out
of your comfort zone. Another thing to keep in mind is your retirement, closer you are to your retirement.
If it will be upon you soon, then you should neutralize the risk factor.
To get maximum mutual fund benefits, younger investors having the time on their hands can afford to
explore aggressive investment strategies.
Mutual Funds - FAQ's
Q1. Are mutual funds safe?
A1. Mutual fund safety is ascertained in two ways:

 Safety in terms of institution or company disappearing with the money of investors

 Safety regarding offering guaranteed returns and capital protection.
While no investment form comes with a 100% risk-free guarantee, mutual funds are subject to market
risks. The government agencies such as Association of Mutual Funds in India (AMFI) and Securities and
Exchange Board of India (SEBI) regulate and supervise Mutual Funds in India. Therefore, one can rely on
these investment tools.

Q2. What is a good growth mutual fund?

A2. A growth mutual fund is a varied portfolio of stocks with capital appreciation as its prime goal, with
a little or no dividend payout. The portfolio primarily includes companies with a growth above average.
These companies reinvest their returns into research and development, acquisitions, and expansion.

Q3. Are mutual funds high or low risk?

A3. The level of risk in mutual funds depends on the objective of the investment and the type of mutual
fund the investor invests his/her money. Generally, the higher the possible returns, the higher the risks
and vice-versa. Mutual funds investing in stock market instruments are not considered risk -free as the
investment in shares and debentures come with risk by nature. However, mutual funds, which invest in
fixed-income investment instruments, are comparatively come with low-risk.

Q4. Are mutual funds aggressive?

A4. Yes. There is a type of mutual fund scheme termed as Aggressive Growth Fund. This type of fund is
not risk-averse in choosing the investment and intends to achieve the maximum capital gains. An
aggressive growth fund is the best option for the investors with a higher risk appetite.