Mutual funds have recently received the tag of emerging asset classes to create funds for several financial purposes, retirement being one of them. More people nowadays are opting to invest in mutual funds, be it for their short-term or long-term goals. MFs not only help in transforming your portfolio, but they also help you build wealth for various life goals. However, you need to keep an eye on your portfolio to continue to get the needed results.
Mutual Funds are concerned, SEBI formulates policies, controls, and supervises Mutual Funds to protect the interests of the investors. SEBI notified rules for mutual funds in 1993. Later, mutual funds sponsored by private sector entities were allowed to enter the capital market.
Mutual funds are managed by professional money managers, who assign the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment aim
Mutual funds provide small or individual investors with access to a professionally managed portfolio of equities, bonds, and other securities. Therefore, each shareholder takes part proportionately in the profit or loss of the fund. Mutual funds invest in many securities, and performance is tracked as the changes in the total market cap of the fund—derived from the total performance of the underlying investments.
What is Mutual Fund?
A mutual fund is a company that collects money from many investors to invest in securities such as stocks, bonds, money market instruments, or other assets. The joined holdings of stocks, bonds, money market instruments, or other assets owned by a fund are known as its portfolio. Investors buy shares in mutual funds. Each share acts for the investor’s part of ownership in the fund and the income it generates.
Types of Mutual Funds:
MUTUAL FUND CLASSIFICATION IS BASED ON THE SUBSCRIPTION PERIOD
There are three types of mutual fund schemes based on the subscription period. These schemes are as follows –
- Open-ended mutual funds
These mutual funds are those which do not have any limit on the subscription or redemption date. You can buy or redeem open-ended mutual fund schemes whenever you want to.
- Close-ended mutual funds
Close-ended mutual funds are those which have a time limit on investments into the fund as well as on the maturity of the scheme. Investment in these funds is allowed during the period of New Fund Offer (NFO) when the fund is first launched on the market. Moreover, redemption is also allowed after a specified period.
- Interval funds
Interval mutual funds are combinations of open-ended and close-ended schemes. Buying and selling of mutual fund units are allowed only during pre-decided intervals.
MUTUAL FUND CLASSIFICATION IS BASED ON THE INVESTMENT PORTFOLIO
Based on the investment portfolio of the scheme, mutual funds can be broadly classified into three categories –
- Equity Mutual Funds will invest your money in the stock markets. These funds are a great investment option for capital valuing they have the potential for long-term wealth creation. Investors looking to invest for the long term and who want to gain exposure to the stock market can choose to invest in equity funds. Equity mutual fund categories are further divided into sub-categories:
- Large-cap funds
Large-cap funds that invest a major part of their collection in companies with large market capitalization are called large-cap funds
- Mid-cap funds
A mid-cap fund is a joint investment, like a mutual fund, which focuses on companies with a market capitalization in the middle range of listed stocks. Mid-cap stocks offer investors more growth potential than large-cap stocks, but with less uncertainty and risk than small-cap stocks.
- Small-cap funds
Small-cap equity funds are those that invest in equity shares of companies whose market capitalization is less than Rs 5,000 crore.
- Dividend yield funds
Dividend yield funds are a type of mutual fund that invests in several companies that have the potential to provide regular dividend payouts. As per the Securities and Exchange Board of India (SEBI) norms, a dividend-yielding fund invests at least 65% of its portfolio in dividend-paying instruments.
- Sectoral funds
Dividend yield funds are a type of mutual fund that invests in several companies that have the potential to provide regular dividend payouts. As per the Securities and Exchange Board of India (SEBI) norms, a dividend-yielding fund invests at least 65% of its portfolio in dividend-paying instruments.
- Value funds
Value funds are mutual fund schemes that try to find favor and discounted businesses. The fund manager believes that the value of these stocks is much higher than the price at which they are available.
- ELSS schemes
Equity Linked Savings Scheme (ELSS) is an open-ended equity mutual fund that primarily invests in equity and equity-related products. They are a special category among mutual funds that qualify for tax deduction under Section 80C of the Income Tax Act, 1961.
- Debt Mutual Funds are also known as fixed-income funds. They invest a particular portion of your money in fixed-income securities like government securities, debentures, corporate bonds, and other money-market instruments. These investments make sure you have a fixed rate of return. Debt mutual fund categories are further divided into sub-categories:
- Overnight funds
An overnight Fund is a type of open-ended debt scheme that invests in debt securities maturing on the next day. This means the securities in the portfolio mature every day and the fund manager uses the proceeds to purchase new securities for the portfolio maturing the next day.
- Liquid funds
Liquid funds are a type of mutual funds that invest in securities with a residual maturity of up to 91 days. The assets invested are not tied for a long time as there is no lock-in period in liquid funds.
- Ultra-short-term funds
Ultra-short duration funds are fixed income mutual fund schemes that invest debt and money market securities such that the Macaulay Duration of the scheme portfolio is 3 months to 6 months. These funds are suitable for short-term investments since they are less uncertain and aim to produce a more stable income compared to funds with longer duration profiles.
- Short term debt funds
A short-term debt fund refers to a mutual fund scheme with an investment of approximately one to three years, though it can be extended up to four years as well. This investment usually comes with fixed returns and risk.
- Money market funds
A money market mutual fund is a type of mutual fund that invests in high-quality, short-term debt instruments, cash, and cash equivalents. Although not exactly as safe as cash, money market funds are considered an unusually low risk on the investment and thus carry a near risk-free rate of return.
- Dynamic bond funds
Dynamic bond funds are debt mutual funds that invest in debt and money market instruments such as government securities, corporate bonds, etc. of various durations There are no restrictions with regard to the duration or maturity of the securities they can invest in these funds.
- Corporate bond funds
Corporate bond funds are open-ended debt funds that invest at least 80% of their assets in the highest-rated corporate bonds. Corporate bond funds utilize credit opportunities of the corporate debt papers to earn returns. These funds are subject to interest rate risk due to their long durations.
- Gilt Fund
Gilt funds are debt funds that invest in government securities. The government bonds used to be issued in golden-edged certificates. The nickname gilt comes from gilded edge certificates. iStock. As per Sebi norms, gilt funds have the mandate to invest at least 80% of their assets in government securities.
- Balanced Mutual Funds, also known as hybrid funds, are a class of mutual funds that have a bond (debt) component and a stock (equity) component in a specific ratio in the same portfolio. These mutual funds help investors to diversify their portfolios by investing in asset classes such as equity and debt. Usually, hybrid mutual funds stick to a relatively fixed mix of bonds and stocks. Balance mutual fund categories are further divided into sub-categories:
- Conservative funds
Conservative Hybrid Funds are hybrid mutual funds that invest 75% to 90% of their total assets in debt instruments, and the rest 10% to 25% in equity. It is prefixed with conservative because a majority of its assets are invested in debt securities, which are considered to be highly safe avenues.
- Aggressive funds
Aggressive Hybrid Funds are mutual funds that invest mainly in stocks along with a limited allocation in debt instruments. These funds can have maximum exposure in equity up to 75 percent with at least 25 percent allocation to FD-like instruments.
- Dynamic asset allocation fund
Dynamic asset allocation funds, also known as balanced advantage funds, are actively managed and invested in a mix of debt and equity depending on market movements. They increase/decrease their allocation to equities and debt depending on their view of the stock markets.
- Arbitrage funds
An arbitrage fund is a type of mutual fund that leverages the price differential in the cash and derivatives market to generate returns. The returns are dependent on the volatility of the asset.
OTHER TYPES OF MUTUAL FUND CLASSIFICATION
Besides the above-mentioned funds, there are other types of mutual fund schemes as well which are as follows –
- Index Funds
An index fund is a type of mutual fund or exchange-traded fund that seeks to track the returns of a market index.
- Fund of Funds
A fund of funds (FOF) is a pooled fund that invests in other funds. FOFs usually invest in other hedge funds or mutual funds. The fund of funds (FOF) strategy aims to achieve broad diversification and minimal risk. Funds of funds tend to have higher expense ratios than regular mutual funds.
- Solution-Oriented Funds
Solution-Oriented Mutual Funds are illiquid close-ended funds with a lock-in period of five years. Accordingly, these funds are suitable for investors who are looking for investment for a longer duration investment with a specific objective in mind. Investors enjoy tax savings by investing in solution-oriented funds.
Why do people buy mutual funds?
Mutual funds are a popular option among investors as they usually offer the following features:
- Professional Management -There are fund managers doing the research for you. They determine the securities and keep track of the performance.
- Diversification or “Don’t put all your eggs in one basket.”- Mutual funds usually invest in many companies and industries. This helps to reduce your risk if one company breaks down.
- Affordability– Most mutual funds set an approximately small dollar amount for the initial investment and subsequent purchases.
- Liquidity– Mutual fund investors can easily redeem their shares whenever they want to, at the current Net Asset Value (NAV) and without any redemption charges.
How do Mutual Funds work?
A mutual fund is formed when an asset management company (AMC) aggregates investments from various individual and institutional investors with common investment purposes. A fund manager professionally manages the collecting investments by making strategic investments in securities to generate maximum returns for the investors in line with the investment purpose.
Fund managers are professionals who have an outstanding track record of managing investments and have a deep acknowledge of the markets. Fund houses charge an expense ratio, which is the annual fee for governing a mutual fund.
Investors earn money by regular dividends/interest and capital gain. They can choose to either reinvest the capital gains through the growth option or earn a steady income by the dividend option.
Why should you invest in Mutual Funds?
- Suitability
Investing in Mutual Funds is a paperless and simple process. Investors can keep an eye on the market and make investments as per their condition. Moreover, switching between mutual fund schemes and portfolio readjustment helps to keep returns in line with expectations.
- Minimum initial investment
You can build a diversified mutual fund portfolio by investing as little as Rs 500 per month from SIP in Mutual Fund schemes of your choice. You also have the choice of investing in a lump sum or as a Systematic Investment Plan (SIP). However, when compared to lump sum investment, a SIP is able to reduce the overall cost of investment while releasing the power of adding to profits.
- Tax saving
You get a tax deduction up to a maximum limit of Rs 1.5 lakh per financial year under Section 80C of the IT Act, for specific financial instruments, and tax-saving mutual funds are one of them. Equity Linked Savings Scheme (ELSS) has become a popular tax-saving option for Indians over the years, owing to its high returns and the shortest lock-in period of three years among all Section 80C options.
- Professional fund management
Your mutual fund investments are managed by a professional fund manager. The fund manager does the research for you. They determine the securities and keep track of the performance.
Things to Consider as a First Time Investor
- Set investment goal
- Choose the right fund type
- Shortlist and choose one mutual fund
- Diversify your portfolio
- Go for SIPs instead of lump-sum investments
- Keep KYC documents updated
- Open a Net Banking Account
- Consulting with a financial advisor
Method of Investing in Mutual Funds
These are the different methods of investing in mutual funds.
Systematic Investment Plan (SIP):
- A SIP is an option of investing a fixed sum in a mutual fund scheme on a regular basis i.e. predefined regular intervals. It is like a regular saving scheme like a recurring deposit.
- It is a disciplined investment plan and cost averaging helps to reduce the impact of market uncertainty.
- With SIP, one impatience is to increase wealth in the long run with small sums of money.
Systematic Withdrawal Plan (SWP):
- SWP is a smart way to plan for your future needs by systematically withdrawing an amount from your existing portfolio either to reinvest in another portfolio or to meet your expenses.
- It is suitable for retirees who are looking for a fixed amount of income. SWP helps investors who need liquidity as it allows them to access their money when needed.
Systematic Transfer Plan (STP):
- STP is a plan that allows the investor to give authority to the fund to transfer a fixed amount/ number of units periodically and systematically from one scheme and invest in another scheme.
- This helps ensure that your money is not affected by any market uncertainty in the short term.
How to invest in mutual funds through SIP online?
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You must first complete your KYC before investing in a mutual fund.
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You may do so at a KRA (KYC Registration Agency) online by filling out the KYC registration form and submitting the verification of identity proof and address proof.
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You then visit the website of the fund house and choose the mutual fund scheme of your choice.
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You may fill out an application form with required details such as name, mobile number, PAN, and create a username and password.
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You then enter your bank account details and set up the SIP auto-debit amount.
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You may log on to your account created at the fund house and choose the mutual fund scheme.
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You must make the first SIP installment online and the next installment after 30 days for monthly SIPs. (The AMC will intimate you on the requisite date).
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You may continue the SIP till the end of the chosen tenure. (You may decide the tenure of the SIP).
How to invest in mutual funds directly?
You may invest in mutual funds directly by visiting the branch office of the mutual fund house. You will need to complete your KYC online at KRA (KYC Registration Agency) by filling up the KYC registration form and uploading verified identity proofs such as PAN card and address proof such as passport/driving license/voter ID and passport size photograph. You will also have to complete IPV (In-Person Verification) by SEBI-approved agencies. After completing, all the formalities make a cheque for the first investment and invest in the mutual fund scheme of your choice.
Point of convergence:
KYC Registration Agency (KRA) is an agency registered with SEBI under the Securities and Exchange Board of India [KYC (Know Your Client) Registration Agency] Regulations, 2011. The KRA will maintain KYC records of the investors centrally, on behalf of capital market intermediaries registered with SEBI.
What is the difference between physical and Demat folio in the case of a mutual fund?
Mutual funds work with the concept of the folio which is like a file maintained by a given Asset Management Company (AMC) for the investments made by a single client in the specific scheme offered by the AMC. These folios help in two concern modes i.e. physical and Demat.
The physical mode was the default mode that was available for investing in mutual funds and continues from the age when mutual fund investments were tracked using paper. In today’s time, mutual funds can be bought online, however, they are arranged and recorded by different AMCs and RTAs (registrars and transfer agents).
In the case of Demat mode, settlement is very similar that units purchased are settled in folios maintained by AMC and RTA. However, this folio itself is linked to the Depository Participant (DP) account of the customer and thus is available in Demat form as compared to the physical form of the physical folio.
Some of the distinct advantages of a Demat folio are that it is kept electronically with a central recordkeeping agency and does not depend on individual RTAs to maintain accurate records. In addition, it can consolidate and show you that holdings are at a central ledger level as compared to RTA, where you need to convert a Consolidated Account Statement (CAS) to a consolidated account before viewing the units held in separate physical accounts. Description (CAS). Folio is. AMC cross.
Note: Asset management company (AMC) is a firm that invests collective funds from clients, settles the capital to work through various investments including stocks, bonds, real estate, master limited partnerships, etc.
Advantages
- Increased Opportunity for Diversification: A fund diversifies by holding multiple securities. This diversification minimizes the risk.
- Daily Liquidity: In the United States, mutual fund shares can be redeemed for their net asset value within seven days, but in practice, redemptions are often much faster. This liquidity can create an asset-liability mismatch that poses challenges, which prompted an SEC liquidity management rule in 2016.
- Professional investment management: Open-ended funds employ portfolio managers to oversee the fund’s investments.
- Ability to participate in investments that may only be available to large investors. For example, individual investors often find it difficult to invest directly in foreign markets.
- Service and Convenience: Funds often provide services such as check writing.
- Government oversight: Mutual funds are regulated by a government body
- Transparency and Ease of Comparison: All mutual funds are required to report the same information to investors, which makes it easy to compare them against each other.
Disadvantages
Mutual funds have disadvantages as well, which include:
- Less control over the timing of recognition of gains
- Less predictable income
- No opportunity to customize
Best Apps for Mutual Fund Investment
- Coin by Zerodha
Zerodha might be a well-known investment platform and probably the only app that can allow you to invest in mutual funds with ease. Moreover, the platform has a coin application that is fully compatible if you have already got a Zerodha account. So log in to your account on the app, and that’s it. You are good to go.
With this app, you can create your SIP anytime. Apart from this, it also allows you to modify the SIP whenever you want to change any information. You can find various financial schemes, ELSS funds, tax filing instructions. Coin by Zerodha app has a fine-tuned user interface in terms of app features. It is easy to use; Most importantly, you can easily navigate between financial plans and understand them with a dedicated investment calculator.
- Groww
Grow is another app that you can use only for investment purposes. However, I suggest you use it if you are new to the investment scheme of mutual funds. This easy-to-use app has simple features that allow you to choose and do your financial planning without any hassle. It has a single dashboard that allows you to track all investments, annual returns, etc. All you have to do is urge yourself to register on the app to get account verification through KYC, and you are ready to go.
In terms of security, the application has 128-bit SSL encryption which keeps all your financial details secure. This easy-to-use app can be considered the most effective app for investing in mutual funds and starting a SIP.
- Paytm Money Mutual Funds App
Paytm is a well-known app in the financial sector; We all are using this app regularly. Although the primary use of Paytm is to make payments to the seller, it comes with additional financial services that you can easily opt for. Just install the Paytm Money app and go ahead. On Paytm Money App, you will also get a 1 percent higher return; Apart from this, you will also get various investment plans and your financial portfolio will be ready.
Also, there are no hidden charges in the app if you are buying or selling mutual funds frequently. It takes only 30 minutes to create an account on the Paytm Money app and start your financial investment plan. Paytm ensures that you get quality service when you are signing up for your account and for this the entire registration process is paperless. So, go to the Paytm Money app and plan your financial plan well.
- Kuvera
Kuvera is another great mutual fund investment application that you can use. It has a unique and simple user interface, and you can create an account on Kuvera in just a few steps. You can build your financial portfolio, manage joint family accounts and track investments. Apart from this, the app also has a simple yet informative dashboard where you can get all the information about policy, financial plan, and SIP. It also lets you set life goals and see if you are on the right track. It also recommends you trending mutual funds which can benefit you in achieving your goal.
- ETMoney
ETMoney is probably the best platform where you can invest your money. Developed by Times Internet and managed by Economics Times Publications, the ETMoney App is an award-winning application with various benefits. You can easily set up your account and build your financial portfolio.
The most exciting part about the app is its financial calculator, where all you have to do is set a goal, and the app will automatically suggest various mutual fund investment plans. It has a very easy app integration method with various payment apps like GPay, PhonePe, Paytm, etc. The key feature of this app is the personalized section which will show you the best performing mutual funds to invest in on a historical basis. Performance of Mutual Fund Scheme It can be said that this is the best app to invest in Mutual Funds.
6. INDmoney
INDmoney is the best Money App that brings all your family’s money in one app. Our aim is to enable you to track, save and earn extra by automatically bringing your entire financial life across investments, loans, credit cards & taxes, all in one app.
The app delivers real-time recommendations and actions. Our loans feature gets you to lower your current monthly EMI’s and also get all kinds of loans at the lowest interest rates. Our investments engine has the largest catalogue of investment options across Mutual Funds, Bonds, Fixed Deposits., PMS’es, etc.
The platform is unbiased and helps you to move to better-performing assets at ZERO commissions (like DIRECT Mutual Funds). Our premium members get access to a virtual “Private Family Office”.
INDmoney apps were launched in Apr/ June 2019. It is a product of the parent entity Finzoom Investments, founded by Ashish Kashyap, a technology entrepreneur who previously founded ibibo Group (Goibibo, redBus, PayU India) and was also Google India’s first Country Head.
INDmoney is backed by foreign institutional investors comprising Tiger Global, Steadview Capital, Dragoneer & Tona Investments who have invested a total of $58Mn in the company.
