Table of Contents
- Mutual Fund meaning
- What are the advantages of investing in Mutual Funds?
- What are the disadvantages of investing in Mutual Funds?
- What are the types of plans in mutual fund schemes?
- What are the types of mutual funds?|Classification of mutual funds
Mutual Fund meaning
A mutual fund is a professionally managed investment vehicle, through investment in a mutual fund, an investor can get access to equities, bonds, money market instruments, and/or other securities
A mutual fund is a vehicle (in the form of a “trust”) to mobilize money from investors, to invest in different markets and securities, in line with stated investment objectives. The primary role of mutual funds is to help investors in earning an income or building their wealth, by investing in the opportunities available in securities markets. It is possible for mutual funds to structure a scheme for different kinds of investment objectives.
There are various schemes or funds offered by mutual funds characterized according to different needs of investors which may be safety, liquidity, and returns. Each fund has its own objective see the below example of objectives.
|TYPE OF MUTUAL FUND SCHEME
|The scheme intends to provide reasonable income along with high liquidity
by investing in overnight securities having a maturity of one business day.
|To generate capital appreciation/income from a portfolio,
predominantly invested in equity and equity-related instruments
|The primary objective of the scheme is to generate long term capital
appreciation by investing predominantly in equity and equity-related
securities of companies across the market capitalization spectrum. The
the fund also invests in debt and money market instruments with a view to
generate regular income
|The primary objective of the scheme is to generate a steady stream of
income through investment in fixed income securities
|Long Duration fund
What are the advantages of investing in Mutual Funds?
1. Professional Management – The best part of investing in a mutual fund is that it is managed by a team of professionals who are experienced and skilled in investing studies and different methods. That too at a minimal cost
2. Portfolio Diversification – Diversification is the most important advantage offered by Mutual funds, By investing just Rs 500 also an investor becomes part of diversified securities and investment types proportionately, but if an investor directly goes to invest in such securities without a mutual fund he may have to invest lakhs to get those securities.
3. Economic and Cost-saving – A mutual fund collects many investors money and invests them with professionals help and management, taking professionals help may be costly for a single investor to seek directly without a mutual fund but as mutual fund collects and make a pool of investors money the cost is divided among all the investors.
4. Transparency – investing in a mutual fund is totally transparent, an investor can always check any details he may want to know in the scheme details provided by every mutual fund like SID, SAI, and KIM and the NAV of the scheme, he may also know the current position and profitability of his invested fund
5. Liquidity – Sometimes, investors directly invest in the financial markets and at last stuck as the company is either bankrupt or no buyers are available, this makes it difficult in redeeming their investments but Investors in a mutual fund scheme can recover the market value of their investments, from the mutual fund itself by selling their units purchased.
6. Tax Benefits – Specific schemes of mutual funds (Equity Linked Savings Schemes) give investors the benefit of deduction of the amount subscribed (up to Rs. 150,000 in a financial year under Section 80C), from their income that is liable to tax. This reduces their taxable income, and therefore the tax liability.
7. Investment Comfort – Once an investment is made with a mutual fund, they make it convenient for the investor to make further purchases with very little documentation. This simplifies subsequent investment activity.
8. Regulatory Comfort – The regulator, Securities, and Exchange Board of India (SEBI) has mandated strict checks and balances in the structure of mutual funds and their activities. Mutual fund investors benefit from such protection.
9. Systematic investment & withdrawal option: Investors can invest regularly in an interval through SIP: Systematic investment plan and also withdraw regularly in an interval through SWP: Systematic withdrawal plan or they can also transfer their invested money into other schemes through STP: Systematic transfer plan
What are the disadvantages of investing in Mutual Funds?
1. Dependent on the fund manager – Once an investor invests in a mutual fund his responsibility is over and now the fund manager of the specific mutual fund will look over any changes in it, whether to buy or sell any securities. So the investor becomes totally dependent on the decisions of the fund managers
2. Confusion in choice – As there are many mutual fund schemes offered by several mutual fund houses and within those schemes, there are also different options, so sometimes investors become confused upon choices.
3. No control over costs – As many investors’ money is pooled in a mutual fund so the cost of managing the funds is divided among all the investors. But at the same time, investors have no control over the costs of managing a fund.
4. No guaranteed returns – Although a mutual fund objective is to give decent returns to its investors also there is a chance of transferring the risks to the investors, so there is no guarantee to provide sufficient returns over a period of time however, mutual fund houses maintain their reputation by decent returns to investors.
What are the types of plans in mutual fund schemes?
All Mutual fund schemes offer two plans to their investors they are:
1. Direct plan: In a Direct Plan, an investor has to invest directly with the AMC, with no distributor to facilitate the transaction. The direct plan has a low expense ratio
2. Regular plan: In a Regular Plan, the investor invests through an intermediary such as a distributor, broker, or banker who is paid a distribution fee by the AMC, which is charged to the plan. But also gets professional advice in choosing funds
What are the types of mutual funds?|Classification of mutual funds
Mutual funds can be broadly classified into:
1. Open-ended funds: allows the investors to enter or exit at any time, It is highly liquid can be redeemed any time
2. Close-ended funds: has a fixed maturity. Investors can buy units of a close-ended scheme, from the fund, only during its NFO: new fund offer. The investors cannot transact with the fund after the NFO is over. At the end of the maturity period, the scheme is wound up, units are canceled and the money is returned to the investors. However, The close-ended funds are listed in the stock exchanges after the NFO to make it liquid but mostly due to lack of demand the seller does not get a better price.
3. Interval funds: is a mixture of open and close-ended funds. They are largely close-ended but become open-ended at pre-specified intervals. for eg; a close-ended fund may become open-ended between 1 Jan- 15 Jan. At this interval period the investors are allowed to purchase or sell their units freely.
4. Exchange-traded funds ( ETFs ): ETFs are those mutual fund schemes that are traded on a stock exchange just like any other stock. These funds usually track an index or have a fixed portfolio strategy based on some index so they are passive in nature. Eg; gold index, Nifty bank, Nifty 50, etc. ETFs are highly liquid in nature.
5. Active Funds: here the fund manager has the flexibility to change the portfolio from time to time, with an objective to fulfill the investment objective and generate high returns to its investors, and beat the market returns.
6. Passive funds or index funds: It invests on the specific index only and mirrors the index Eg; a passive fund tracking the S&P BSE index only buy shares that are part of the S&P BSE index. Here the fund managers have no role and so there are no fund managers in passive funds
Mutual funds can be specifically classified into:
A. Equity schemes – 11 sub-categories
B. Debt schemes – 16 sub-categories
C. Hybrid schemes – 6 sub-categories
D. Solution-Oriented schemes – 2 sub-categories
E. Other schemes – 2 sub-categories
A. Equity schemes
- Multi cap fund: An open-ended equity scheme investing across large-cap, mid-cap, small cap stocks. The minimum investment in equity and equity-related instruments shall be 75 percent of tota assets. ( 25% large-cap, 25% mid-cap, 25% small cap)
2. Large Cap Fund: An open-ended equity scheme predominantly investing in large-cap stocks.
The minimum investment in equity and equity-related instruments of large-cap companies shall be 80 percent of total assets.
3. Large and Mid-Cap Fund: An open-ended equity scheme investing in both large-cap and mid-cap stocks. The minimum investment in equity and equity-related instruments of large-cap companies shall be 35 percent of total assets. The minimum investment in equity and equity-related instruments of mid-cap stocks shall be 35 percent of total assets.
4. Mid Cap Fund: An open-ended equity scheme predominantly investing in mid-cap stocks.
The minimum investment in equity and equity-related instruments of mid-cap companies shall be 65 percent of total assets.
5. Small-cap Fund: An open-ended equity scheme predominantly investing in small-cap stocks. Minimum investment in equity and equity-related instruments of small-cap companies shall be 65 percent of total assets
6. Dividend Yield Fund: An open-ended equity scheme predominantly investing in dividend-yielding stocks. The scheme should predominantly invest in dividend-yielding stocks. The minimum investment in equity shall be 65 percent of total assets.
7. Value Fund or Contra Fund: In the case of value funds, fund managers tend to look for companies that may be valued lower than their intrinsic value. contra funds select companies that are currently out of favor. If the market is of the view that certain companies are not likely to do well, but the fund manager thinks otherwise, he’s taking a contrarian view as he thinks that these stocks are likely to do better for some reason.
8. Focused Fund: An open-ended equity scheme investing in a maximum of 30 stocks (the scheme needs to mention where it intends to focus, viz., multi-cap, large-cap, mid-cap, small-cap). Minimum investment in equity & equity-related instruments shall be 65 percent of total assets.
9. Sectoral/Thematic: An open-ended equity scheme investing in a specific sector such as a bank, power is a sectoral fund. While an open-ended equity scheme investing is in line with an investment theme. For example, an infrastructure thematic fund might invest in shares of companies that are into infrastructure, construction, cement, steel, telecom, power, etc. The minimum investment in equity and equity-related instruments of a particular sector/ theme shall be 80 percent of total assets.
10. Equity Linked Savings Scheme (ELSS): An open-ended equity-linked saving scheme with a statutory lock-in of 3 years and tax benefit. The minimum investment in equity and equity-related instruments shall be 80 percent of total assets
11. Flexi-cap Fund: An open-ended equity scheme where the minimum investment in equity and equity-related assets is 65% of the total assets. This would be a dynamic fund where there can be investment across large-cap, mid-cap as well as small-cap stocks according to the flexible choice of the fund manager
1. Overnight Fund: An open-ended debt scheme investing in overnight securities. The investment is in overnight securities having a maturity of 1 day.
2. Liquid Fund: An open-ended liquid scheme whose investment is into debt and money market securities with a maturity of up to 91 days only.
3. Ultra-Short Duration Fund: An open-ended ultra-short-term debt scheme investing in debt and money market instruments with Macaulay duration between 3 months and 6 months.
4. Low Duration Fund: An open-ended low duration debt scheme investing in debt and money market instruments with a Macaulay duration between 6 months and 12 months.
5. Money Market Fund: An open-ended debt scheme investing in money market instruments having maturity up to 1 year.
6. Short Duration Fund: An open-ended short-term debt scheme investing in debt and money market instruments with a Macaulay duration between 1 year and 3 years.
7. Medium Duration Fund: An open-ended medium-term debt scheme investing in debt and money market instruments with Macaulay’s duration of the portfolio being between 3 years to 4 years.
8. Medium to Long Duration Fund: An open-ended medium-term debt scheme investing in debt and money market instruments with Macaulay duration between 4 years and 7 years.
9. Long Duration Fund: An open-ended debt scheme investing in debt and money market instruments with a Macaulay duration greater than 7 years.
10. Dynamic Bond: An open-ended dynamic debt scheme investing across duration.
11. Corporate Bond Fund: An open-ended debt scheme predominantly investing in AA+ and above rated corporate bonds. The minimum investment in corporate bonds shall be 80 percent of total assets (only in AA+ and above rated corporate bonds).
12. Credit Risk Fund: An open-ended debt scheme investing in below highest-rated corporate bonds. The minimum investment in corporate bonds shall be 65 percent of total assets (only in AA (excludes AA+ rated corporate bonds) and below rated corporate bonds).
13. Banking and PSU Fund: An open-ended debt scheme predominantly investing in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions, and Municipal Bonds. The minimum investment in such instruments should be 80 percent of total assets.
14. Gilt Fund: An open-ended debt scheme investing in government securities across maturity. The minimum investment inG-secs is defined to be 80 percent of total assets(across maturity)
15. Gilt Fund with 10-year constant duration: An open-ended debt scheme investing in government securities having a constant maturity of 10 years. Minimum investment in G-secs is 80 percent of total assets such that the Macaulay duration of the portfolio is equal to 10 years.
16. Floater Fund: Floating rate securities have variable interest rates unlike other debt instruments such as bonds which have a fixed coupon rate. Every floating rate instrument has a specific benchmark, wherein the interest rate of the instrument changes in accordance with the change in its benchmark rate. When the interest rate rises in the debt market, returns from floater funds take a jump.
C. Hybrid schemes
1. Conservative Hybrid Fund: An open-ended hybrid scheme investing predominantly in debt instruments. Investment in debt instruments shall be between 75 percent and 90 percent of total assets while investing in equity and equity instruments shall be between 10 percent and 25 percent of total assets.
2. Balanced Hybrid or Aggressive Hybrid Fund: Balanced Hybrid Fund: An open-ended balanced scheme investing in equity and debt instruments. The investment in equity and equity-related instruments shall be between
40 percent and 60 percent of total assets while investment in debt instruments shall be between 40 percent and 60 percent. No arbitrage is permitted in this scheme.
Aggressive Hybrid Fund: An open-ended hybrid scheme investing predominantly in equity and equity-related instruments. Investment in equity and equity-related instruments shall be between 65 percent and 80 percent of total assets while investment in debt instruments shall be between 20 percent and 35 percent of total assets.
3. Dynamic Asset Allocation or Balanced Advantage: It is an open-ended dynamic asset allocation fund with investment in equity/debt that is managed dynamically.
4. Multi-Asset Allocation: An open-ended scheme investing in at least three asset classes with a minimum allocation of at least 10 percent each in all three asset classes. Foreign securities are not treated as a separate asset class in this kind of scheme.
5. Arbitrage Fund: Arbitrage funds work on the mispricing of equity shares in the spot and futures market. Mostly, it takes advantage of the price differences between current and future securities to generate maximum returns. The fund manager simultaneously buys shares in the cash market and sells them in futures or derivatives markets. The difference in the cost price and the selling price is the return you earn. The minimum investment in equity and equity-related instruments shall be 65 percent of total assets.
6. Equity Savings: An open-ended scheme investing in equity, arbitrage, and debt. The minimum investment in equity and equity-related instruments shall be 65 percent of total assets and the minimum investment in a debt shall be 10 percent of total assets. The minimum hedged and unhedged investment needs to be stated in the SID. Asset Allocation under defensive considerations may also be stated in the SID.
D. Solution-oriented schemes:
1. Retirement Fund: An open-ended retirement solution-oriented scheme having a lock-in of 5 years or till retirement age (whichever is earlier). This is meant for long-term planning related to acquiring a corpus for retirement.
2. Children’s Fund: An open-ended fund for investment for children having a lock-in for at least 5 years or till the child attains the age of majority (whichever is earlier). This is meant to invest to build a corpus for the child and their needs in the coming years.
E. Other schemes:
1. Index Funds/Exchange Traded Fund: An open-ended scheme replicating/tracking a specific index. This minimum investment in securities of a particular index (which is being replicated/ tracked) shall be 95 percent of total assets.
2. Fund of Funds (Overseas/Domestic): An open-ended fund of fund scheme investing in other mutual funds. The minimum investment in the underlying fund shall be 95 percent of total assets
1. Units meaning in mutual fund
The investment that an investor makes in a scheme is translated into a certain number of ‘Units’ in the scheme. Thus, an investor in a scheme is issued units of the scheme.
2. Face value meaning in mutual fund
Typically, every unit has a face value of Rs. 10. The face value is relevant from an accounting
3. Unit Capital meaning in mutual fund
The number of units issued by a scheme multiplied by its face value (Rs. 10) is the capital of
the scheme–it’s Unit Capital.
4. Recurring Expenses meaning in mutual fund
The fees or commissions paid to various mutual fund constituents come out of the expenses
charged to the mutual fund scheme. These are known as recurring expenses.
5. Net Asset Value or NAV meaning in mutual fund
The true worth of a unit of the mutual fund scheme is otherwise called Net Asset Value (NAV)
of the scheme. When the investment activity is profitable, the true worth of a unit increases & vice versa
6. Assets Under Management AUM meaning in mutual fund
The sum of all investments made by investors in the mutual fund scheme is the entire mutual
fund scheme’s size, which is also known as the scheme’s Assets Under Management (AUM).
7. Mark to Market meaning in mutual fund
The process of valuing each security in the investment portfolio of the scheme at its current
market value is called Mark to Market (MTM).
8. Expense ratio meaning in mutual fund
The expense ratio states how much you pay a fund as a percentage of your investment every year to manage your money. For example, if you invest Rs 10,000 in a fund with an expense ratio of 1.5 percent, then you are paying the fund Rs 150 a year to manage your money.
9. How much expense ratio is good in a mutual fund?
A good expense ratio, from the investor’s viewpoint, is around 0.5% to 0.75% for an actively managed portfolio.
10. Exit load or Exit ratio meaning in mutual fund
An exit load refers to the fee that the Asset Management Companies (AMCs) charge investors at the time of exiting or redeeming their fund units. 6 % is the maximum exit load that can be levied
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