The bull run started in the stock market after the fall of March 2020 has attracted a lot of new players in the crypto market as well as stocks and mutual funds also. Due to the simplicity in the nature of mutual funds, it is becoming one of the most popular investment instruments of 2021. As per a report released by the securities and exchange board of India SEBI liquidity in mutual funds is at all-time high.
Due to the popularity, Mutual funds are gaining in 2021 new brokers have also emerged. Many mobile apps that we use on a daily basis like Paytm, freecharge, phonepe have also started services from which you can easily invest in mutual funds.
A mutual fund is an investment scheme where multiple investors, financial institutions pool their money together, and then a professional fund manager further invests that money to purchase securities like stocks, Government bonds, or commodities for example gold, etc. The company which forms a mutual fund is called an asset management Company is popularly known as AMC.
It is the job of the fund manager to invest that hold money in a way so that the fund manager can generate income from it. Fund manager also creates a Prospectus in which writes down his investment objectives and then tries to meet those. A mutual fund gives a chance to every small individual investor to access a professionally managed portfolio.
Types of mutual funds
Before you invest in any Mutual fund it is highly advised that you must have knowledge about how many types of mutual funds are out there. And in which mutual fund you should invest. Because every mutual fund has its own risk to reward ratio. In some Mutual funds you may see low risk and low reward ratios. But Mutual funds like small-cap funds may have a higher risk-reward ratio. Let’s deep dive into these 3 major types of funds.
As you may know that there are three different types of major funds and in those major funds equity fund is one of the famous fund. It has different subcategories like small-cap, mid-Cap, large-cap, multi-cap funds, etc. These types are actually index available in the national stock exchange (NSE) and Bombay Stock Exchange (BSE). This includes a few companies which are small in market cap.
- Small cap fund invest money collected from investors into small cap companies as a equity investment. As you know that securities and exchange Board of India issue a list of companies which are small in nature typically top 251-500 rank.
- Mid Cap funds are similar to the small cap funds fund manager invest all the pooled funds into mid Cap companies via the equity market. Securities and exchange Board of India issue a list of companies and these are tip 101-250 rank.
- Large cap funds invest in top 100 companies listed on any Indian stock market exchange preferably National stock exchange (NSE) and Bombay Stock Exchange (BSE).
- Multi cap funds all the combination of two or three funds which are listed above. It is the duty of fund manager to allocate the assets depending on the condition of the market. And fund manager try to do his best to get the maximum returns possible for the investors.
- Sectoral funds mainly focus specific sectors for the investment like pharmaceutical information technology, FMCG etc. And even if there is any opportunitie available other than the sector they major. Fund manager may not invest in that.
- Index mutual fund try to mimic the performance of any popular stock market index such as sensex and Nifty 50. Therefore they allocate the funds in the way index is build. If index have weightage of 30% of company ABC then fund manager will also buy that stock in same 30% weightage.
- ELSS is the only fund which gives you benefit while feeling your income tax report. And investors can claim tax deduction of upto 1 lac 50 thousands a year. (but remember these type of funds do have a locking period also).
A debt fund is one of the safest mutual funds out there. A mutual fund is considered a debt mutual fund if the fund manager invests at least 65% of its portfolio into debt securities. These types of funds are not influenced much by the fluctuation of the equity market. And most of the funds can also predict how much return they are going to generate.
- Dynamic bond funds invest and create their portfolio depending on the fluctuation in the interest rate.
- Income fund invest in securities which have long maturity period that is why the provide stable income. Typically income Mutual fund invest in securities which have a maturity time of 5 years or more.
- Short term and ultra short funds invest in those securities which have maturity period of 1 year.
- Liquid funds are those funds which invest in securities that mature within 91 days. Liquid funds invest in high rated instruments and they are great to invest your surplus funds. As they offer higher returns than a regular savings bank account.
- Gilt funds high rated government securities and possesses lower levels of risk.
- Credit opportunities funds are one of the riskiest fund in the debt fund class. Credit opportunity fund invest in low rated securities in order to provide higher returns.
Balanced or hybrid funds
Balanced or hybrid mutual funds use both equity and debt market instruments to invest the pooled money in order to generate higher returns with lower risk. Here the fund manager diversifies the portfolio according to the condition of the market. These types of funds usually generate better income than debt funds with lower risk levels.
- Equity oriented hybrid funds invest at least 65% of portfolio in equity market and rest 35% in a fixed income securities.
- Debt oriented hybrid funds allocated 65% of its portfolio into fixed income instruments such as bonds. And the rest of money in equities to generate higher returns.
- Arbitrage funds aim to increase the income by purchasing securities in one market at lower price and sell those at higher price in the other Market.
Benefits of investing in mutual funds
Investing in any type of mutual fund has several benefits for any kind of investor. It doesn’t matter you do a lump sum investment or a systematic investment plan (SIP). Let’s take a look at a few of these.
- No Lock-in period
You may be aware that most mutual funds come with no lock-in period. That means you can cash out anytime you want. As you may have seen in fixed deposits that you cannot withdraw your investment without any charges if you do not follow the lock-in period. Other than equity-linked saving schemes no mutual fund has lock-in period.
- Start with as low as possible
In normal circumstances when you think about investment, you think big money. But when you talk about investment in mutual funds it gives you the benefit of starting with as low as possible like 500 rupees. It is the ease of starting which attracts new people every day.
- Experienced Management
When you manage your investment on your own, you miss out on the opportunity which mutual funds provide as an experienced fund manager. Every asset management Company hires a fund manager who is experienced. And gather a team of experts who collect money and invest further as per their experience and policy, terms.
- Systematic investment plan (SIP)
Most mutual funds allow you to invest even via the systematic investment plan (SIP). And it also allows you to start a sip on a monthly, quarterly, or bi-annual basis. Not just the systematic investment plan, mutual fund also give you free hand to increase or stop the sip.
Every investor knows the importance of diversification in the portfolio. Because the market moves in a cycle for a time there is a bull run and similarly, there could be a fall in the market. So it is always a wise decision to allocate your fund in different fields. So that your investment can have a steady growth.
- Easy to switch investment
With the help of Mutual funds, you can easily switch between equity fund, debt fund, or commodity focus fund whenever you feel like going. For example, if you are invested in a small-cap fund and you feel like the market may fall from these levels you can easily switch to gold or debt fund without any hustle. And it helps to safeguard your investment.
- High liquidity
Unlike any other investment scheme, Mutual funds are highly liquid. That means you can only withdraw your investment at times of financial crisis or emergency. Your withdrawal request for your funds gets process in 3-7 business days.
All of your investments made in any mutual fund scheme is under the radar of the securities and exchange board of India along with the Reserve Bank of India. Both of the bodies have a different set of rules to safeguard the investment of a regular investor.
- Easy to track
Tracking your investment in any mutual fund is very easy. Every Mutual fund and asset management Company prevails Net asset value commonly known as NAV. A regular investor who is going to invest in the mutual has only one thing to track and that is NAV. Because the mutual fund is going to issue units as per the NAV when you invest in it. Eg: if NAV of a fund is 100 and you invest 1000 rupee in it. You get 10 units of Mutual funds. And when you withdraw your funds they multiply the current NAV into the units you hold.
- Rupee cost averaging
In general, investment averaging can be bad for your investment. Because you are averaging a company that is going down and eventually you may lose more money than you anticipated. But in the case of mutual funds, it is always advised to keep averaging because all of your eggs are not in one basket. That means you are investing in different companies and different instruments. If one goes bad others can balance it. And ups and down of the market give you huge benefits.
- Tax saving
If you mutual fund schemes like equity-linked savings scheme provide new tax deductions of October 150000 year. And this also comes with only 3 years lock-in period. Other than that your increase in NAV of the fund also provides you with the benefits of investing.
Disadvantages of investing in mutual funds
Do Mutual funds have so many advantages then we have to talk about the disadvantages of mutual funds. Because without knowing disadvantages you cannot make the best decision for your investment.
- No stability
A mutual fund does not guarantee any return on your investment. And there are a few types of investment that do guarantee returns on your investment. As you know that mid-Cap and small cap funds are one of the riskiest funds available out there. If you invest in those funds and the equity market does not perform well then you may see depreciation in your investment.
- Cash in hand
As you know that mutual funds guarantee that you can withdraw your funds anytime you want from the scheme. For that every mutual fund has to have a lot of cash in hand to proceed with the withdrawal requests. This means if a mutual fund has 5% of the total investment as cash in hand that means you are losing opportunities and not getting the best results out of your investment.
- Higher exit cost
You may be surprised to know that there are many Mutual funds that levy a charge on you. If you withdraw your funds before a certain period and it could be 1% of your overall investment. So always make sure that you are not making any mistake of withdrawing sooner. It can be prevented only if you select no exit cost funds. It is commonly described as exit load.
Which mutual fund is for you?
There are a couple of things that you need to understand before you select any Mutual fund. After that, you can decide which is suitable for you
- Your investment Goal plays a vital role in the selection of mutual fund. If your goal is a retirement plan then investing in hybrid fund can be beneficial for you. Because they have most diversified portfolio to handle ups and downs of all the segments.
- Your investment size also becomes a great factor in the selection of mutual fund. If your investment is big then investing in a single or multiple mid Cap small cap funds may not provide you the best results. And these are considered to be one of the riskiest mutual funds.
So if you are a small investor and looking for quick gains with low to moderate risk then you can invest in small-cap and mid Cap funds. Because they provide high returns but at the cost of high risk.
But if you are a risk-averse investor then investing in debt funds is the best thing for you. Because debt funds are considered one of the safest funds.
Can you have a loss after investing in mutual fund?
Yes, you may face loss after investing in mutual fund because Mutual funds are not guaranteed for profit.
How much profit can you have with mutual fund?
Profit depends on the type and timing of the investment you made while investing in a mutual fund.
Which is the safest mutual fund?
Debt funds are considered one of the safest Mutual funds which provides stable returns which much fluctuation.
Can you save tax with mutual funds?
As per the Tax saving investment under section 80c, you can save up to rupee 46,800 in taxes by investing in equity-linked saving Scheme (ELSS).
What is the NAV?
NAV is the net asset value of the mutual fund. In general term, NAV is like a Share price it goes up and down based on funds asset to liability ratio.
How does Fund manager earn?
Fund managers charge a fee called expense ratio which should be under 2.5% as per the guidelines by the securities and exchange board of India.
Are mutual funds taxable?
Yes, interest earned with the investment in mutual funds is taxable as per the Indian tax department.
Which is better Lump sum or SIP?
It all depends on the individual who is going to invest in it. If you want to start any time irrespective of market conditions start a SIP. And if markets are at low levels invest with a Lump sum.
Who can invest in mutual funds?
Any individual who has completed the KYC process is eligible to invest in mutual funds. You can start investing with e-kyc also.
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