Mutual funds are investments that pool your money together with other investors to purchase a collection of stocks, bonds, or other securities that might be difficult to recreate on your own. This is often referred to as a portfolio. The price of the mutual fund, also known as its net asset value (NAV) is determined by the total value of the securities in the portfolio, divided by the number of the fund's outstanding shares. This price fluctuates based on the value of the securities held by the portfolio at the end of each business day. Note that mutual fund investors do not actually own the securities in which the fund invests; they only own shares in the fund itself.
Mutual funds are open to a wide range of investors including Resident Individuals, NRIs, PIOs, HUFs, Companies, Partnership Firms, Trusts, Cooperative Societies, Banking and Non-Banking Financial Institutions, registered FIIs, QFIs etc. This is not an exhaustive list but represents the more commonly known types of investors in mutual funds in India.
These schemes invest directly in stocks and can give superior returns but can be risky in the short-term as their fortunes depend on how the stock market performs. Investors should look for a longer investment horizon of at least 5 years to 10 years to invest in these schemes. There are different types of equity schemes.
These schemes invest in debt securities e.g. company debentures, government bonds and other fixed income assets. Investors should opt for debt schemes to achieve their short-term goals. These schemes are safer than equity schemes and provide modest returns.
These funds invest in a mix of both equity and debt. It offers maximum diversification and moderate returns. The fund manager of fund invests your money in the stock market (equity) and fixed income (debt) in varying proportions based on fund investment objective. If it is equity-oriented fund, exposure to equity will be more and if it is debt-oriented fund, exposure to debt will be higher. In order to retain their equity status for tax purposes, they generally invest at least 65% of their assets in equities and roughly 35% in debt instruments, failing which they will be classified as debt-oriented schemes and be taxed accordingly.
These schemes are devised for particular solutions or goals like retirement and child’s education. These schemes have a mandatory lock-in period of five years.
Mutual funds have become a very popular investment option in India and this trend still continues with new funds and schemes being introduced in the market regularly. Some of the key reasons why people invest in mutual funds are outlined below.
Mutual funds are managed by fund managers of asset management companies. These managers employ their investment expertise to minimise risks and maximise returns to investors. Individuals often find it difficult to decide which assets to invest their savings in due to lack of financial knowledge.
For those who don’t have sizeable amounts to invest in direct equity or other instruments that require a high initial investment, mutual funds make for an affordable investment avenue. Also, transaction costs are spread out over a number of investors thereby lowering individual costs.
All mutual funds feature schemes clearly specifying which assets are targeted for investments, allowing investors to direct savings to different asset classes in an organised and focused manner. It also gives investors access to certain securities otherwise unavailable to them e.g. foreign sectors or foreign securities which cannot be invested in by individuals.
Since funds invest in a number of securities, risk is diversified. The chances of all stocks performing badly at the same time is low. Losses suffered on some stocks are offset by gains made on others. This leads to minimization of risks.
All funds come under the purview of SEBI (Securities Exchange Board of India) which ensures dealings are as per regulations. This provides an element of safety to investments made.
Fund units can be easily bought and sold at prevailing unit prices or NAVs. Unless there’s a lock-in period, it is easy for investors to buy into or out of a fund thereby providing liquidity.
There are various types of funds e.g. equity funds, debt funds, money market funds, hybrid funds, sector funds, regional funds, fund of funds, index funds etc. giving investors a wide range of choice.
A number of funds/schemes have been designed to act as tax-saving instruments e.g. ELSS or equity linked saving schemes. Investments made in these schemes qualify for income tax deductions.
Mutual funds have been known to provide good returns on medium and long-term investments since investors can diversify risk to enhance overall returns.
Better financial understanding can be achieved when measurable financial goals are set, the effects of decisions understood, and results reviewed. Giving you a whole new approach to your budget and improving control over your financial lifestyle.
It can be hard for investors to regularly review their investment portfolios. Mutual funds provide clear statements of all investments which makes it easy for investors to keep a tab on. Hybrid or balanced funds provide investors an avenue to access both equity and debt funds at one go in a proportion of choice.
Systematic Investment Plans let individuals invest small amounts on a regular basis to avail benefits of rupee cost averaging. It’s an alternative to those who cannot invest lump sum amounts thereby appealing to investors across income levels. Mutual funds accept initial investments as low as Rs.500.
Many funds offer investors flexibility by letting investors switch between schemes or between funds to avail better terms and/or better returns.