Mutual funds allows all investors, including those with minimal/no knowledge about equities, bonds or securities, access to a diversified portfolio. A Mutual Fund pools money from numerous investors with a common investment objective. This money is invested by Mutual Fund companies, better known as AMC, into various capital market instruments such as shares, debentures and other securities, based on fund’s objective. For example, an equity fund would invest in stocks and equity-related instruments, a debt fund would invest in bonds, debentures, etc, while a hybrid fund will invest in both equity and debt instruments. Each investor is allocated units at the time of purchase based on fund’s Net Asset Value (NAV) on the purchase day. The income earned from these investments and/or the capital appreciation of these investments is shared by the unit holders in proposition to the number of units owned by them.
Benefits of Mutual Funds
By starting early, an investor can take advantage of time and compounding interest, the combination of which can multiply one’s wealth beyond imagination.
The rule is simple, the sooner you start, the more time you give to your money to grow.
Inflation beating returns play a vital role in improving one’s financial circumstances over the period of time.
Returns on Equity Mutual Funds attract short term capital gains of 15% on SIP/Lumpsum, if the investment is redeemed within 12 months. After one year, the returns are tax free.
Why Invest In Mutual Funds ?
Most Mutual Funds invest in 50 to 100 different investments based on market capitalization, sectors and many other demographics. Only on a rare occasion do all stocks decline at the same time and in the same proportion. Hence, Mutual Funds offer a diversified investment portfolio even with a small amount of investment that would otherwise require big capital.
Mutual Fund schemes are managed by qualified experienced professionals who work towards the fund’s defined objective. These financial experts are accompanied by a specialized investment research team. The experts and their teams diligently and judiciously study companies, their products and performance.
A mutual fund invests generally buy and sell various asset classes in large volumes allowing investors to benefit from lower trading costs. Investors can get exposure to such portfolios with an investment as modest as Rs.500/- in mutual funds through a Systematic Investment Plan. Such small portfolio would otherwise be extremely expensive to purchase and maintain for an investor investing directly in stock market.
With open ended funds, investors can redeem (encase) all or part of their investments at prevailing net asset value, at any point of time. Mutual Funds are more liquid than most investments in shares, deposits, and bonds.
All Mutual Funds are required to register with Securities Exchange Board of India (SEBI). With investor interest at the helm, SEBI has laid down strict regulations to safeguard investors against possible frauds. It is even mandatory for Mutual Fund distributors to register with Association of Mutual Funds in India (AMFI) and abide the norms laid by the Securities and Exchange Board of India (SEBI) and AMFI for the distributors.
Types of Mutual Funds
Growth/ Equity oriented schemes invest predominantly in equity and equity related instruments. These schemes aim to provide capital appreciation over medium to long term. It makes a great buy for investors who plan to invest for at least five years or more. These schemes are not for investors seeking regular income or looking to conserve capital.
The main objective of debt-oriented funds is to provide regular and steady income to investors. These schemes mainly invest in fixed income securities such as Bonds, Money Market Instruments, Corporate Debentures, Government Securities (Gilts) etc. Debt-oriented schemes are suitable for investors whose main objective is safety of capital along with modest growth. These funds are not affected because of fluctuations in equity markets. However, the NAV of such funds is affected because of change in the interest rate in the country.
Income Funds invest in fixed income securities such as debentures and company fixed deposits. The main aim of these schemes is to provide regular and steady income to investors. While these funds provide stability, they are sensitive to interest rates. As interest-rates go up or down, the prices of income fund shares, particularly bonds, will move in the opposite direction.
These funds are predominantly debt-oriented schemes aimed at preservation of capital, easy liquidity and moderate income. These schemes mainly invest in short-term instruments like commercial papers, certificate of deposits, treasury bills, government securities and interbank call money etc. While these schemes pose very little risks, they rarely yield returns better than inflation, technically, eating the power of your money over the years.
Hybrid funds are a combination of equity and debt funds. The aim of Hybrid funds is to provide both capital appreciation and stability of income to the investor. While equities provide growth potential, the exposure to debt provide stability to portfolio during volatile times in the equity markets. The proportion of investment made into equities and fixed income securities is pre-defined and mentioned in the offer document of the scheme. Hybrid Funds have low to high risk based on the Debt –Equity Ratio and are suitable for investor looking for moderate growth over the period of at least three to five years.