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Mutual Funds

Mutual funds are investment vehicles that pool money from multiple investors to purchase securities. They offer diversification and professional management, making them an excellent choice for both novice and experienced investors.

Types of Mutual Funds in India

Types of Funds based on Asset Class

  • Equity Funds: Invest mainly in stocks of companies, offering high returns.
  • Debt Funds: Invest in low-risk fixed-income instruments, ideal for low-risk investors.
  • Money Market Funds: Invest in cash and cash equivalent securities with lower risk.
  • Hybrid or Balanced Funds: Invest in both equity and debt funds, balancing risk and return.

Types of Funds based on Structure

  • Open-ended Mutual Funds: No constraints on trading units; investors can trade at their convenience.
  • Closed-ended Mutual Funds: Fixed unit capital and maturity tenure; limited selling options.
  • Interval Funds: Can be bought/exited only at specific intervals; usually require a 2-year investment.

Types of Funds based on Investment Objective

  • Growth Funds: Invest in high-growth companies, high returns with high risk.
  • Income Funds: Invest in high dividend stocks and government securities for regular income.
  • Liquid Funds: Invest in money market and debt securities, with a tenure of up to 91 days.
  • Tax-saving Funds: Equity-Linked Saving Schemes with a three-year lock-in period.
  • Pension Funds: Designed for retirement savings, offering regular income.
  • Fixed Maturity Funds: Invest in fixed maturity periods with a mix of securities.

Types of Funds based on Risk Profile

  • High-risk Funds: Potential for high returns, but subject to market volatility.
  • Medium-risk Funds: Balanced risk and return, investing in both debt and equities.
  • Low-risk Funds: Invest in arbitrage, ultra-short-term, and liquid funds.
  • Very Low-risk Funds: Minimal risk with returns typically around 6%.

Structure of a Mutual Fund

  • Sponsor: Sets up the mutual fund and appoints trustees and asset management companies.
  • Board of Trustees: Protects investor interests and ensures compliance with regulations.
  • Asset Management Company (AMC): Manages daily operations and invests the funds.
  • Custodian: Holds the securities invested by the AMC.

Benefits of Investing in Mutual Funds in India

  • Liquidity: Easy to purchase and exit from open-ended mutual funds.
  • Managed by Experts: Professional fund managers handle investments.
  • Diversification: Investments across multiple asset classes to spread risk.
  • Meeting Financial Targets: Wide variety of schemes available to meet financial goals.
  • Low Cost for Bulk Purchases: Lower commission charges for larger investments.
  • Systematic Investment Plans (SIPs): Regular investments for steady growth.
  • Easy Investment Process: Simple process to invest towards financial goals.
  • Tax Efficiency: Potential tax benefits under Section 80C.
  • Safety: Assessing fund houses ensures the safety of capital.
  • Automated Payments: SIPs can be automated for timely payments.

Frequently Asked Questions (FAQs) on Mutual Funds

Why are the details of bank accounts required to invest in mutual funds?

According to the current SEBI regulations, investors must include the name of the bank and the account number of the unit holders and repurchase-redemption requests.

Can I designate nominees for my units in mutual funds?

Yes, you can add nominees for your units in mutual funds either singly or jointly. However, non-individuals, such as trusts, societies, HUFs, corporate entities, etc., are not eligible to nominate.

Can NRIs invest in mutual funds?

Yes, NRIs can invest in mutual funds. For more information, please review the offer documents for the relevant mutual fund.

What are cut-off times?

The deadline for investors to submit a valid purchase, withdrawal, or redemption form in order to qualify for the price or Net Asset Value (NAV) on a given day is known as the cut-off timing.

What is a scheme’s Net Asset Value?

The Net Asset Value (NAV) of a scheme reflects its performance. It is calculated by dividing the market value of the instruments held by the scheme by the overall number of units under the scheme.

What are tax-saving mutual funds?

Tax-saving mutual funds provide investors with tax rebates under certain provisions of the Income Tax Act. Investment in specific avenues such as Equity-Linked Savings Schemes (ELSS) can help avail tax benefits under Section 80C.

What are the main factors to consider before choosing the best scheme?

Four crucial factors to keep in mind prior to selecting a mutual fund scheme are:
- Time Horizon
- Risk Tolerance
- Tax Impact
- Performance and Role of the Fund

How can I redeem or withdraw money from my mutual fund account?

You will need to visit the website of the fund house, go to the ‘Online Transaction’ page, log in using your PAN or portfolio number, and select how many units you wish to withdraw from each scheme.

Is lump sum investment better than Systematic Investment Plans (SIPs)?

It depends on your financial situation. If you have a relatively large amount to invest, a lump sum investment may be advisable. However, if you have limited income or prefer to save a portion of your salary regularly, SIPs are a better option.

Is KYC mandatory for investment in mutual funds?

Yes, it is necessary to update your KYC before investing in mutual funds. Once your KYC form is filled, the system retains it, so you won't need to update it each time you purchase new units. KYC updating is free of cost.

Are investments in mutual funds safe?

Investments in mutual funds are exposed to market risks. However, the returns offered by mutual funds can be attractive, making them worth the risk.

How long does it take for a fund house to credit my dividends?

Mutual fund houses are mandated to dispatch the dividend warrants to unitholders within 30 days from the date the dividend is declared.

Can a nominee be appointed for my mutual fund investments?

Investors are allowed to appoint a nominee. However, only individual investors can appoint nominees, and not societies, body corporates, HUFs, trusts, or partnership firms.

What are load funds?

Load funds are those that levy a certain percentage of the Net Asset Value (NAV) when an investor enters or exits a scheme.

Are there any charges when purchasing mutual funds from a distributor?

Mutual fund houses are not allowed to charge an entry load to investors. However, distributors can be compensated for their services.

Can the asset allocation strategy of a scheme change over time?

Fund managers have the option to change the asset allocation strategy of a scheme based on market trends.

What happens when a scheme in which I have invested winds up?

In such a situation, the prevailing NAV of the scheme will be paid to you after expenses have been deducted.

Is there a limit on the amount of money that can be invested in mutual funds through SIPs?

No. There is no limit on the amount that can be invested in mutual funds through a Systematic Investment Plan. You can choose any amount to invest.

Will I have to pay anything for redeeming units from my mutual fund account earlier than the maturity date?

Yes. Mutual fund companies usually charge a fee called ‘exit load’ at the time of exiting from the scheme. The exit load charged varies by company and scheme, but most schemes have an exit load of 1% of the applicable NAV.

Can investments in mutual funds be made through cash?

Yes. Investors are allowed to pay for their investments in mutual funds using cash. However, the limit on cash investments is set at ₹50,000 per financial year.

Mutual Fund Comparison

Fund Name Type Annual Returns Minimum Investment Risk Level Key Benefits
HDFC Equity Fund Equity Fund 12% - 15% ₹500 High Long-term capital growth, diversification, professional management.
ICICI Prudential Balanced Advantage Fund Hybrid Fund 8% - 10% ₹1,000 Moderate Balanced risk, equity and debt exposure, tax benefits.
SBI Gold Fund Commodity Fund 10% - 12% ₹1,000 Medium Invests in gold, hedges against inflation, diversification.
Axis Long Term Equity Fund Equity Linked Savings Scheme (ELSS) 11% - 14% ₹500 High Tax deductions under Section 80C, long-term growth potential.