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Mutual Funds

Mutual Fund

What Is A Mutual Fund ?

Like most developed and developing countries the mutual funds cult has been catching on in India. There are various reasons for this. Mutual funds make it easy and less costly for investors to satisfy their need for capital growth, income and/or income preservation. Simply, Mutual Fund is a financial vehicle

And in addition to this a mutual fund brings the benefits of diversification and money management to the individual investor, providing an opportunity for financial success that was once available only to a select few.

Understanding Mutual funds is easy as it’s such a simple concept: a mutual fund is a company that pools the money of many investors — Mutual Funds shareholders — to invest in a variety of different securities. In mutual funds investments may be in stocks, bonds, money market securities or some combination of these. Those securities are professionally managed on behalf of the shareholders, and each investor holds a pro rata share of the portfolio — entitled to any profits when the securities are sold, but subject to any losses in value as well.

For the individual investor, mutual funds provide the benefit of having someone else manage your investments and diversify your money over many different securities that may not be available or affordable to you otherwise. Today, minimum investment requirements on many mutual funds are low enough that even the smallest investor can get started in mutual funds.

A mutual fund, by its very nature, is diversified — its assets are invested in many different securities. Beyond that, there are many different types of mutual funds with different objectives and levels of growth potential, furthering your chances to diversify.

Mutual funds have two important terminology :

  1. Asset Management Company
  2. Net Asset Value

What is an Asset Management Company in Mutual Fund?
An Asset Management Company (AMC) is a highly regulated organisation that pools money from investors and invests the same in a portfolio. They charge a small management fee, which is normally 1.5 per cent of the total funds managed.

What is NAV in Mutual Fund?
NAV or Net Asset Value of the fund is the cumulative market value of the assets of the fund net of its liabilities. NAV per unit is simply the net value of assets divided by the number of units outstanding. Buying and selling into funds is done on the basis of NAV-related prices.

Types Of Mutual Funds

What Are The Different Types Of Mutual Funds(A) On the basis of ObjectiveEquity Funds / Growth Funds

 

Funds that invest in equity shares are called equity funds. They carry the principal objective of capital appreciation of the investment over the medium to long-term. The returns in such funds are volatile since they are directly linked to the stock markets. They are best suited for investors who are seeking capital appreciation. There are different types of equity funds such as Diversified funds, Sector specific funds and Index based funds.

Diversified Funds
These funds invest in companies spread across sectors. These funds are generally meant for risk-taking investors who are not bullish about any particular sector.

Sector Funds
These funds invest primarily in equity shares of companies in a particular business sector or industry. These funds are targeted at investors who are extremely bullish about a particular sector.

Index Funds
These funds invest in the same pattern as popular market indices like S&P 500 and BSE Index. The value of the index fund varies in proportion to the benchmark index.

Tax Saving Funds
These funds offer tax benefits to investors under the Income Tax Act. Opportunities provided under this scheme are in the form of tax rebates U/s 88 as well saving in Capital Gains U/s 54EA and 54EB. They are best suited for investors seeking tax concessions.

Debt / Income Funds
These Funds invest predominantly in high-rated fixed-income-bearing instruments like bonds, debentures, government securities, commercial paper and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seek capital preservation. They provide regular income and safety to the investor.

Liquid Funds / Money Market Funds
These funds invest in highly liquid money market instruments. The period of investment could be as short as a day. They provide easy liquidity. They have emerged as an alternative for savings and short-term fixed deposit accounts with comparatively higher returns. These funds are ideal for Corporates, institutional investors and business houses who invest their funds for very short periods.

Gilt Funds
These funds invest in Central and State Government securities. Since they are Government backed bonds they give a secured return and also ensure safety of the principal amount. They are best suited for the medium to long-term investors who are averse to risk.

Balanced Funds
These funds invest both in equity shares and fixed-income-bearing instruments (debt) in some proportion. They provide a steady return and reduce the volatility of the fund while providing some upside for capital appreciation. They are ideal for medium- to long-term investors willing to take moderate risks.

Hedge Funds
These funds adopt highly speculative trading strategies. They hedge risks in order to increase the value of the portfolio.

(B) On the basis of FlexibilityOpen-ended Funds
These funds do not have a fixed date of redemption. Generally they are open for subscription and redemption throughout the year. Their prices are linked to the daily net asset value (NAV). From the investors’ perspective, they are much more liquid than closed-ended funds. Investors are permitted to join or withdraw from the fund after an initial lock-in period.

Close-ended Funds
These funds are open initially for entry during the Initial Public Offering (IPO) and thereafter closed for entry as well as exit. These funds have a fixed date of redemption. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but the discount narrows as maturity nears. These funds are open for subscription only once and can be redeemed only on the fixed date of redemption. The units of these funds are listed (with certain exceptions), are tradable and the subscribers to the fund would be able to exit from the fund at any time through the secondary market.

Interval Funds
These funds combine the features of both open-ended and close-ended funds wherein the fund is closeended for the first couple of years and open-ended thereafter. Some funds allow fresh subscriptions and redemption at fixed times every year (say every six months) in order to reduce the administrative aspects of daily entry or exit, yet providing reasonable liquidity.

(C) On the basis of Geographic LocationDomestic Funds
These funds mobilise the savings of nationals within the country.

Offshore Funds
These funds facilitate cross border fund flow. They invest in securities of foreign companies. They attract foreign capital for investment.

Is there is any tax applicable on the redemption of mutual funds?
Yes. The tax applicable is called as STT i.e. Security transaction tax which is 0.25%. STT is applicable only in case of redemption of equity linked schemes.

Evaluate Mutual Funds

Evaluate Mutual Funds

 

What are the factors that influence the performance of Mutual Funds?
The performances of Mutual funds are influenced by the performance of the stock market as well as the economy as a whole. Equity Funds are influenced to a large extent by the stock market. The stock market in turn is influenced by the performance of the companies as well as the economy as a whole. The performance of the sector funds depends to a large extent on the companies within that sector. Bond-funds are influenced by interest rates and credit quality. As interest rates rise, bond prices fall, and vice versa. Similarly, bond funds with higher credit ratings are less influenced by changes in the economy.

As a new investor how do I select a particular scheme?
Choice of any scheme would depend to a large extent on the investor preferences. For an investor willing to undertake risks, equity funds would be the most suitable as they offer the maximum returns. Debt funds are suited for those investors who prefer regular income and safety. Gilt funds are best suited for the medium to long-term investors who are averse to risk. Balanced funds are ideal for medium- to long-term investors willing to take moderate risks. Liquid funds are ideal for Corporates, institutional investors and business houses who invest their funds for very short periods. Tax Saving Funds are ideal for those investors who want to avail tax benefits. An important aspect while selecting a particular scheme is the duration of the investment. Depending on your time horizon you can select a particular scheme. Besides all this, factors like promoter’s image, objective of the fund and returns given by the funds on different schemes should also be taken into account while selecting a particular scheme.

It is very often said that Mutual Funds have performed badly. Please explain?
The performance of Mutual Funds is evaluated on the basis of absolute increase or decrease in its Net Asset Value (NAV). However a fund’s performance should be evaluated on the basis of a comparison with the relevant indices and alternative instruments. The NAV varies from fund to fund. Therefore this argument is not entirely true. However some funds have performed poorly with their NAV quoting well below their original IPO price.

Target Investment Plan FAQs

Target Investment Plan FAQsWhat is Target Investment Plan (TIP)?

 

A well designed investment plan can help you achieve your financial goals by aligning your investment strategy within the time frame required to reach your goal.

The Target Investment Plan (TIP) offers to create a simple process that helps an investor to achieve a specific medium to long-term financial goal. The plan helps to achieve the target amount of the goal on a given time frame and budget of the customer.

TIP works on an innovative and intelligent investment strategy that is similar to Systematic Investment Plan (SIP) in terms of a regular periodic investment, but differs in the amount invested in each instalment.

How does TIP work?
Let us take an example to understand the concept. In TIP you start by setting a target amount and an expected growth rate over the period of achieving the target. The longer the period the better is the opportunity to achieve the desired target amount.

Can I Schedule TIP in any of my existing folio?
No. To help you achieve and monitor the plan, a New Folio will be created.

How will my subsequent purchase / instalment be executed?
Subsequent purchase would be calculated on a monthly basis five working days prior to purchase/instalment date.

Will I get intimation on the subsequent purchase/instalment?
Yes, you will get an email giving you details of amount that would get debited and the date on which the same would be done.

What happens in case the calculated minimum amount is lesser than minimum amount for subsequent purchase?
The follow-up investment amount will be the calculated investment or the minimum additional purchase amount, whichever is higher.

Can I cancel my TIP subsequent purchase/instalment?
Yes, you can cancel your TIP subsequent purchase request/instalment, but based on the Target Amount, the subsequent month’s amount purchase/instalment amount will be higher. This is to help bring the investments in line with the Target amount and expected rate of return.

Can I change the details of my existing TIP?
No, you cannot change the details of a TIP once set up, you may choose to start a new TIP in case of any changes.

Can I switch-in or switch-out from any other scheme to TIP or vice versa?
No. Switch in and Switch out are not applicable under TIP.

What are the benefits of Target Investment Plan (TIP)?
bullet Disciplined approach as it invests more when markets are low and less when markets are high bullet Times the market with varying monthly contributions bullet The returns are higher in most cases than normal SIP as the SIP is only based on rupee cost averaging technique bullet In most scenarios, TIP achieves lower cost of acquisition as compared to SIP bullet The probability of achieving target value for a portfolio through TIP is much higher than a SIP What are the differences between TIP and SIP? TIP works on the principle of fixed units over a specified period of time. Hence, you decided that you want X units per month. If the market conditions are good, then fewer amounts will be invested. If market conditions are bad, then more amounts will be invested. The advantage is you are sure that after some years, you will have specified units that can be encashed.

SIP works on the principle of fixed amount of investment over a specified period of time. Hence the units you get are not constants and vary based on the NAV of fund. The main disadvantage of SIP is that this gives rise to uncertainty of meeting goals over a long period of time. In SIP, you not sure whether you will get those Units of MF you want as the market condition keep on changing.

Is TIP right for me?
The whole advantage of the plan is that an investor does not have to think about whether it’s the right or wrong time to invest. The investor just has to follow the plan with a secure knowledge that investments will help achieve the target amount over a desired period and rate of return.

Are there any charges for TIP?
Yes, transaction charges as applicable for SIP transactions would be applicable.

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