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Mutual Fund

Meaning-

A Mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. Mutual funds are also classified by their principal investments as money market funds, bond or fixed income funds, stock or equity funds, hybrid funds or other.

Benefits of investing in mutual funds-

1- Small investments- With mutual fund investments, your money can be spread in small bits across varied companies. This way you reap the benefits of a diversified portfolio with small investments.

2- Professionally managed- The pool of money collected by mutual fund is managed by professionals who possess considerable expertise, resources and experience. Through analysis of markets and economy, they help pick favourable investment opportunities.

3- Spreading Risk- A mutual fund usually spreads the money in companies across a wide spectrum of industries. This not only diversifies the risk, but also helps take advantage of the position it holds.

4- Choice- A wide varieties of schemes allow investors to pick up those which suit their risk/return profile.

5- Regulations- All the mutual funds are registered with SEBI .They function within the provisions of strict regulation created to protect the interests of the investor.

Mutual fund classification-

Every investor has a different investment objective. Some go for stability and opt for safer securities such as bonds or government securities .Those who have a higher risk appetite and yearn for higher returns may want to choose risk bearing securities such as equities .Hence, mutual funds come with different schemes, each with a different investment objective.

They have been categorised as-

By structure: - Closed –Ended, Open- Ended Funds, and Interval Funds.

By nature: - Equity, Debt, Balanced or Hybrid.

By investment objective: - Growth Schemes, Income Schemes, Balanced Schemes, Index Funds.

Types of equity mutual funds-

  • Diversified equity funds
  • Mid-cap & Small cap funds
  • Large-cap funds
  • Sector specific funds
  • Thematic funds
  • Tax savings funds (ELSS)

Types of debt mutual funds-

  • Gilt funds
  • Income funds
  • Accrual Debt Funds
  • MIPs
  • Short Term funds
  • Liquid funds
  • Fixed Maturity Plan (FMP)

Types of Mutual Funds by Investment Objective-

a) Growth Schemes- Equity schemes, these schemes aim at providing capital appreciation over medium to long term. These schemes normally invest a major portion of their fund in equities and are willing to withstand short-term decline in value for possible future appreciation.

b) Income schemes- Debt schemes, they generally invest in fixed income securities such as bonds and corporate debentures. These schemes aim at providing regular and steady income to investors, However capital appreciation in such schemes may be limited.

c) Index Schemes- These schemes attempt to reproduce the performance of a particular index such as BSE Sensex or NSE Fifty. Their portfolio will consist of only those stocks that constitute the index. The returns from such schemes would be more or less equivalent to those stocks.

 

Balanced Funds-

 A balanced fund aims to balance the risk & return of the portfolio by investing in more than one asset class. Generally these funds have allocation to asset classes such as equity & debt. Where Equity endeavour to provide Capital appreciation & generate Returns above inflation  & debt  endeavour to provide Stability in the portfolio & generate Consistent income from coupons. Thus a Balanced fund aims to strike a balance between growth & stability.  This way, investors get to taste the best of both funds.

Benefits of Balanced Funds-

a) Diversification – Balanced Funds are mix of equity and debt funds and carry lesser risk when compared to pure equity oriented funds. Spreading the investments will reduce overall risk. Balanced funds provide capital appreciation as well stability of the investments with debt component of it. With a minimum amount of 500Rs SIP a month it would help you diversify your investments.

b) Rebalancing-You may worry about churning your portfolio when you invest in a basket of equity and debt asset classes. There comes the role of fund manager he does disciplined rebalancing of the fund targeting the equity allocation to be at 65% which makes this product superior.

c) Taxation- Coming to tax impact, having an exposure more than 65% in equity funds balanced funds enjoy tax-free income after a  holding period of 1year.In case you hold debt funds the capital gain is as per indexation after 3 years and capital gain is taxed as per tax slab. Having tax free income after 1 year is making this fund category more lucrative.

 

Accrual Debt Mutual Fund V/s Fixed Deposits-

Accrual funds are a type of debt mutual funds which usually invest in short to medium maturity papers.  These papers are of medium to high quality, while focusing on holding securities until the maturity. The fund ideally focuses to earn interest income in terms of coupon offered by bonds. These funds are suitable for investors who want to earn desire stable returns. It is advised to invest in accrual funds for least a 1-3 year horizon and provides returns 100 – 200 bps over the Fixed Deposits.

Fixed Deposits also called as Term Deposits is an instrument where the interest rate is guaranteed not to change for the nominated term, so you know exactly your investment worth.   Provides returns between 6.5 to 7.5%

Fixed deposits offer you return on investment in the form of interest, and debt mutual funds offer return on investment in the form of capital appreciation or dividend .Fixed deposits have lock in period where as you can withdraw money anytime from debt fund applicable to exit load. Both are taxed differently, Debt funds are taxed on the capital gains whereas FD’s are taxed on the interest earned.  If we stay invested for over 3 years, LTCG Tax Benefit is available in Debt Mutual Funds, yielding better tax adjusted returns.

Benefits of Investing in Debt Mutual Funds-

  • More Liquid than FD as there is not lock-in.
  • They are more Tax efficient
  • You dont lose even a days growth
  • Your returns can be higher.
  • They offer great flexibility.

Liquid Funds V/s Current Accounts-

The liquid fund is a type of debt mutual fund. It invests in instruments like treasury bills, certificate of deposits, commercial papers, government securities, inter-bank call money and term deposits. The risk attached is low as the fund manager deals in high credit rating securities.

The current account is also known as financial account is a type of deposit account maintained by individuals who carry significantly higher number of transactions with banks on regular basis. Parking your money which is required to use on day to day business transactions or to keep liquidity handy liquid funds provide more benefits than current accounts.

The investment objective of Liquid funds is to preserve capital and provide income via creating ample liquidity. For this, the fund manager of liquid fund invests only in investment grade debt instruments.

You can choose to invest for a few days or months depending on your financial needs. The fund returns are according to the prevailing market rates. The best part is that there is no exit load applicable for liquid funds. These are available in variants like Daily/Weekly/Monthly Dividend and Growth option.

You can earn steady returns over a short time intervals. Moreover, you can redeem a part or the entire amount of investment within 24 hours.

Benefits of Investing in Liquid Funds-

  • Emergency Funds- Can be withdrawn anytime in case of emergency.
  • Higher returns- They provide higher returns as compare to the current bank accounts.
  • Provisioning for annual payments- You can provision your annual payments through liquid fund.
  • Strategize the STPs- You can park your money in liquid funds and then start STPs into equity. This way you will earn return on both liquid (debt) and equity.

 Arbitrage Fund-

It is a type of equity mutual fund which leverages the price differential in the cash and derivatives market to generate returns. The funds buy shares in the cash segment and sell futures in the derivative segment of the same company as long as futures are trading at a reasonable premium.

Arbitrage funds are good for those who want to park their money for short term also would like to have equity exposure and equity taxation benefit. Arbitrage funds are safe funds and carry very low risk .Market volatility doesnt entail more risk for the investor in such funds.

Dynamic Balanced Fund-

In the present scenario, especially for the investors who do not intend to invest in Debt Schemes for a period of 3 years (for taking Capital Gain Tax Benefit) and still looking for tax efficient returns with MODERATE RISK, we strongly recommend investment in DYNAMIC BALANCED FUND.

RATIONALE FOR DYNAMIC BALANCED FUND

DYNAMIC BALANCED FUNDS removes the psychological barrier (Greed & Fear) for its investors. The fund allocates higher in equity when the Equity Market Valuation are low and lower when the Equity Market Valuation is high.

How exactly does a dynamic fund work?

A balanced fund also consists of a mix of equity and debt but in that case the proportion is normally 65% in equity and 35% in debt. The variations are normally minimal. The dynamic funds, on the other hand, can even go up to 100% in equity or 100% in debt as the case may be.

Exposure in pure equity is reduced whenever the stock markets are trading at a higher level. Simultaneously, exposure in arbitrage is increased to maintain equity tax benefits. This is basically to protect the investors from the downside risk if the stock market falls sharply.

A Dynamic Balanced Fund will set equity allocations based on a valuations rule and technical formulas of P/E , P/B etc. The upper band of the P/E indicates a sell signal and the lower band indicates a buy signal. This ensures that your profits are automatically monetized at regular intervals and also you are liquid when the market corrects and throws up opportunities.

Dynamic Equity Fund-

DYNAMIC EQUITY FUND is a Fund where the Fund Manager has better Flexibility in Fund Management in terms of Equity Exposure.  The Benefit of Dynamic Equity Fund can be enumerated as :

  • A fund dynamically alters asset allocation based on prevailing market conditions
  • Preference for large-cap stocks to ensure easy liquidity and relative portfolio stability
  • The strategy may not always beat the benchmark when markets rise, but provides cushion when markets fall
  • Few Fund Manager had mandate to reduce Equity Exposure to ZERO at appropriate Market Condition.