Mutual Funds Investment- Important Step towards Financial Independence

 Content

1. What is Mutual Fund (MF)?
2. Types of Mutual Fund
3. Mutual Fund Schemes as per SEBI
4. Who should Invest in Mutual Funds?
5. Benefits of Investment in Mutual Funds
6. Risks of Investment in Mutual Funds
7. How to Invest in Mutual Funds?
8. Other Important Questions
9. Special consideration for First Time Investors


*** What is Mutual Funds ***

Mutual Fund is a professionally managed company (Created with an objective of Investment

that pooled investment (collects money) from many investors ,
provide shares / units to its investors and 

Invests the money received from investors in the securities such as stocks, bonds etc. to generate incomes for the investors.

The Investments of the mutual fund are known as Portfolio
The Portfolio of mutual fund is structured and maintained to match the investment objectives of the investors with the objectives of mutual fund

Mutual funds are operated by Fund Managers (Professional experts). 

Fund managers manage the pooled investments by strategically investing in securities to generate the maximum capital gains or income for the fund's investors.

Fund managers have in-depth understanding of markets and excellent record of managing investments.

Investors buy shares or units in mutual funds. Each share or unit represents an investor’s part of ownership in the fund. Investors earn income in the form of dividends, interests and capital gains. 


*** Types of Mutual Funds ***


It is of very important to understand the various types of mutual funds and the benefits they offer. Mutual fund types can be classified based on the following characteristics.

Based on Asset Class
Based on Structure
Based on Investment Goals
Based on Risk
Specialized Mutual Funds


1. Based on Asset Class

Mutual funds may invest in equity and equity-related instruments, debt or a mix of both. Hence mutual funds can be classified into 3 categories such as equity funds, debt funds and hybrid funds.


a. Equity Funds

Equity funds primarily invest in equity shares. They invest the money pooled in from various investors into equity shares/stocks of different companies. The profits and losses from these funds depend solely on the performance of the companies in the stock market. Equity funds have the potential to generate Higher returns over a period among all classes of mutual funds. Hence, these funds are higher risky comparatively

Equity funds invest a minimum of 65% of the total assets in equity and equity-related instruments. It may invest the remaining corpus in debt and money market instruments. 

The returns provided by equity funds depend on the market movements, which are influenced by several political and economic factors. 


b - 1. Debt Funds

Debt funds primarily invest in Debt, Fixed-income securities such as bonds, securities and treasury bills. They invest in various fixed income instruments such as Debentures, Fixed Maturity Plans (FMPs), Gilt Funds, Liquid Funds, Short-Term Plans, Long-Term Bonds and Monthly Income Plans, among others. Since the investments come with a fixed interest rate and maturity date, it can be a great option for passive investors looking for regular income (interest and capital appreciation) with minimal risks. Debt funds invests in the fixed. 

Debt fund invests a minimum of 65% of its portfolio in debt securities. Debt funds are ideal for lower-risky investors as the performance of debt funds is not influenced much by the market fluctuations. Therefore, the returns provided by debt funds are very much predictable.


b - 2. Money Market Funds

Money market Funds primarily invest in Money Market Instruments such as Government Securities, Certificate of Deposits, T-Bills etc. 

Investors invests in the stock market. In the same way, investors also invest in the money market

The government runs money market in association with banks, financial institutions and other corporations by issuing money market securities like bonds, T-bills, dated securities and certificates of deposits, among others. The fund manager invests your money and disburses regular dividends in return. Opting for a short-term plan (not more than 13 months) can lower the risk of investment considerably on such funds. 


c. Hybrid Funds (Balanced Funds)

Hybrid funds invests money in more than one Asset (such as combination of Equity, Debt, Gold etc). Hybrid funds (Balanced Funds) is an optimum mix of bonds and stocks, thereby bridging the gap between equity funds and debt funds. The ratio can either be variable or fixed. In short, it takes the best of two mutual funds by distributing, say, 55% of assets in stocks and the rest in bonds or vice versa. Hybrid funds are suitable for investors looking to take more risks for ‘debt plus returns’ benefit rather than sticking to lower but steady income schemes. There are different types of Hybrid Funds such as aggressive hybrid funds, conservative hybrid funds, Dynamic Asset allocation or Balanced Advantage Fund, Equity Savings Fund, Multi-Asset Allocation Fund and Balanced Hybrid Funds. 

The main objective of hybrid funds is to balance the risk-reward ratio by diversifying the portfolio. The fund manager would modify the asset allocation of the fund depending on the market condition, to benefit the investors and reduce the risk levels. Investing in hybrid funds is advisable for diversified portfolio as you would gain exposure to both equity and debt instruments.


2. Based on Structure

Based on structural classification, Mutual Funds can be classified in 2 categories such as open-ended funds and close-ended funds, and the differentiation primarily depends on the flexibility to purchase and sell the mutual fund shares / units.


a. Open-Ended Funds

Open-ended funds do not have any particular constraint such as a specific period or the number of units which can be traded. These funds allow investors to invest in the funds at their convenience and exit when required at the current market price of units i.e. NAV (Net Asset Value). This is the only reason why the unit capital continually changes with new entries and exits. An open-ended fund can also decide to stop taking in new investors if they do not want to (or cannot manage significant funds). An open-end fund does not have a fixed maturity period. You may redeem the units at any time. 


b. Closed-Ended Funds

The unit capital to invest is pre-defined in Close-end Funds. The mutual fund cannot sell more than the pre-agreed number of units. You may invest in close-end funds during the New Fund Offer only. Some funds also come with a New Fund Offer (NFO) period; wherein there is a deadline to buy units. NFOs comes with a pre-defined maturity tenure with fund managers open to any fund size. Hence, SEBI has mandated that investors be given the option to either repurchase option or list the funds on stock exchanges to exit the schemes. Closed-end funds have a fixed maturity period. You can redeem your investment on the maturity date. However, closed-end funds are listed on the stock exchange and you may redeem units before the maturity date.


3. Based on Investment Goals

a. Growth Funds

Growth funds primarily invest in shares and growth sectors. Growth Plan is suitable for investors who have a surplus of idle money to be distributed in riskier plans (possibly with high returns).

b. Income Funds

Income funds primarily invest in a mix of bonds, certificate of deposits and securities among others. Skilled fund managers who keep the portfolio in closely with the rate fluctuations without compromising on the portfolio’s creditworthiness. Income funds have historically earned investors better returns than deposits. They are best suited for low-risk investors with a 2-3 years perspective.

c. Liquid Funds

Liquid funds also primarily invest in debt instruments and money market with a tenure of up to 91 days. A special feature that differentiates liquid funds from other debt funds is the way the Net Asset Value is calculated. The NAV of liquid funds is calculated for 365 days (including Sundays) while for others, only business days are considered.

d. Tax-Saving Funds

ELSS or Equity Linked Saving Scheme, are the most popular among all categories of investors. Benefits of wealth maximisation with tax-savings, the lowest lock-in period of only three years. Investing primarily in equity (and related products), Average non-taxed returns in the range 14-16%. These funds are suitable for salaried investors with a long-term investment period.

e. Capital Protection Funds

If protecting the principal is the priority, Capital Protection Funds serves the purpose while earning relatively smaller returns (12% at best). The fund manager invests a portion of the money in bonds or Certificates of Deposits and the rest towards equities. Though the probability of incurring any loss is quite low, it is advised to stay invested for at least three years (closed-ended) to safeguard your money, and also the returns are taxable.

g. Fixed Maturity Funds

Many investors prefer to invest at the Financial Year end (Generally in March) to take the advantage of double indexation, thereby bringing down tax burden. If uncomfortable with the debt market trends and related risks, Fixed Maturity Plans (FMP) – which invest in bonds, securities, money market etc. – present a great opportunity. As a close-ended plan, FMP functions on a fixed maturity period, which could range from one month to five years (like FDs). The fund manager ensures that the money is allocated to an investment with the same tenure, to reap accrual interest at the time of FMP maturity.

h. Pension Funds

Putting away a portion of your income in a chosen pension fund to accrue over a long period to secure you and your family’s financial future after retiring from regular employment can take care of most contingencies (like a medical emergency or children’s wedding). Relying solely on savings to get through your golden years is not recommended as savings (no matter how big) get used up. EPF is an example, but there are many lucrative schemes offered by banks, insurance firms etc.


4. Based on Risk

a. Very Low-Risk Funds

Liquid funds and ultra-short-term funds (one month to one year) are known for its low risk, and understandably their returns are also low (6% maximum). Investors choose this to fulfil their short-term financial goals and to keep their money safe through these funds.

b. Low-Risk Funds

In the event of rupee depreciation or unexpected national crisis, investors are unsure about investing in riskier funds. In such cases, fund managers recommend putting money in either one or a combination of liquid, ultra short-term or arbitrage funds. Returns could be 6-8%, but the investors are free to switch when valuations become more stable.

c. Medium-risk Funds

Here, the risk factor is of medium level as the fund manager invests a portion in debt and the rest in equity funds. The NAV is not that volatile, and the average returns could be 9-12%.

d. High-Risk Funds

Suitable for investors with no risk aversion and aiming for huge returns in the form of interest and dividends, high-risk mutual funds need active fund management. Regular performance reviews are mandatory as they are susceptible to market volatility. You can expect 15% returns, though most high-risk funds generally provide up to 20% returns.


5. Specialized Mutual Funds

a. Sector Funds

Sector funds invest only in one specific sector. As these funds invest only in specific sectors with only a few stocks, the risk is comparatively highSector funds such as IT and pharma also deliver high returns in recent past. Investors are advised to keep track of the various sector-related trends. 

b. Funds of Funds

A diversified mutual fund investment portfolio offers a slew of benefits, and ‘Funds of Funds’ also known as multi-manager mutual funds are made to exploit this to the tilt – by putting their money in diverse fund categories. In short, buying one fund that invests in many funds rather than investing in several achieves diversification while keeping the cost down at the same time.

c. Emerging market Funds

To invest in developing markets is considered a risky bet, and it has undergone negative returns too. India, in itself, is a dynamic and emerging market where investors earn high returns from the domestic stock market. Like all markets, they are also prone to market fluctuations. Also, from a longer-term perspective, emerging economies are expected to contribute to the majority of global growth in the following decades.

d. International/ Foreign Funds

Investors looking for investment in Foreign countries, Foreign mutual funds can invest in these funds. An investor can employ a hybrid approach (say, 60% in domestic equities and the rest in overseas funds) or a feeder approach (getting local funds to place them in foreign stocks) or a theme-based allocation (e.g., gold mining).

e. Global Funds

Aside from the same lexical meaning, global funds are quite different from International Funds. While a global fund chiefly invests in markets worldwide, it also includes investment in your home country. The International Funds concentrate solely on foreign markets. Diverse and universal in approach, global funds can be quite risky to owing to different policies, market and currency variations, though it does work as a break against inflation and long-term returns have been historically high.

f. Real Estate Funds

Despite the real estate boom in India, many investors are still hesitant to invest in such projects due to its multiple risks. Real estate fund can be a perfect alternative as the investor will be an indirect participant by putting their money in established real estate companies/trusts rather than projects. A long-term investment negates risks and legal hassles when it comes to purchasing a property as well as provide liquidity to some extent.

g. Commodity-focused Stock Funds

These funds are ideal for investors with sufficient risk-appetite and looking to diversify their portfolio. Commodity-focused stock funds give a chance to dabble in multiple and diverse trades. Returns, however, may not be periodic and are either based on the performance of the stock company or the commodity itself. Gold is the only commodity in which mutual funds can invest directly in India. The rest purchase fund units or shares from commodity businesses.

h. Market Neutral Funds

For investors seeking protection from un-favorable market tendencies while sustaining good returns, market-neutral funds meet the purpose (like a hedge fund). With better risk-adaptability, these funds give high returns where even small investors can outstrip the market without stretching the portfolio limits.

i. Inverse/Leveraged Funds

While a regular index fund moves in tandem with the benchmark index, the returns of an inverse index fund shift in the opposite direction. It is nothing but selling your shares when the stock goes down, only to repurchase them at an even lesser cost (to hold until the price goes up again).

j. Asset Allocation Funds

Combining debt, equity and even gold in an optimum ratio, this is a greatly flexible fund. Based on a pre-set formula or fund manager’s inferences based on the current market trends, asset allocation funds can regulate the equity-debt distribution. It is almost like hybrid funds but requires great expertise in choosing and allocation of the bonds and stocks from the fund manager.

k. Exchange-traded Funds

It belongs to the index funds family and is bought and sold on exchanges. Exchange-traded Funds have unlocked a new world of investment prospects, enabling investors to gain extensive exposure to stock markets abroad as well as specialized sectors. An ETF is like a mutual fund that can be traded in real-time at a price that may rise or fall many times in a day.


*** Mutual Funds schemes - (SEBI) ***

SEBI had announced the re-categorisation of mutual fund schemes on October 6, 2017. It was done to bring uniformity as mutual funds had launched several mutual fund schemes. Investors should invest money in mutual fund schemes that match their investment objectives and risk tolerance. 


Equity Funds:
SEBI has categorised equity funds into 11 categories

Large Cap Fund: It invests at least 80% of the total assets in equity and equity-related instruments of large-cap companies.

Large & Mid Cap FundIt invests 35% of the total assets in equity and equity-related instruments of large-cap companies. It also invests 35% of total assets in equity and equity-related instruments of mid-cap firms.

Mid Cap FundIt invests at least 65% of the total assets in equity and equity-related instruments of mid-cap companies.

Small Cap FundIt invests at least 65% of the total assets in equity and equity-related instruments of small-cap companies.

Multi Cap FundIt invests a minimum of 65% of the total assets in equity and equity-related instruments across all market capitalizations. 

Dividend Yield FundIt invests mainly in dividend-yielding stocks and has a minimum of 65% of the total assets in equity.

Value FundIt follows a value investment strategy and has at least 65% of the total assets in equity.

Contra FundIt follows a contrarian investment strategy and has at least 65% of total assets in equity and equity-related instruments.

Focused FundIt focuses on a maximum of 30 stocks. It has at least 65% of total assets in equity and equity-related instruments.

Sectoral / Thematic FundIt invests a minimum of 80% of total assets in equity and equity-related instruments of a particular sector (such as Banking, IT) or a particular theme. Thematic funds invest in equities of companies that operate with a similar theme like travel.

ELSSIt invests a minimum of 80% of total assets in equity and equity-related instruments (In accordance with Equity Linked Saving Scheme, 2005 notified by the Ministry of Finance). 

ELSS is the only mutual funds covered under Section 80C of the Income Tax Act, 1961 for providing Tax-savings.


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Additional Information

A Large Cap is defined as the Top 100 companies based on market capitalisation

A Mid Cap is defined as companies Top 101st to 250th companies based on market capitalisation

A Small Cap is 251st Company onwards based on market capitalisation

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Debt Funds
SEBI has categorised debt funds into 16 categories

Overnight Fund: It invests in overnight securities with maturity of one day.

Liquid Fund: It invests in debt and money market securities with a maturity of up to 91 days. Liquid funds are the best option to invest your surplus funds, and they offer higher returns than a regular savings bank account.

Ultra Short Duration Fund: It invests in debt and money market instruments where the Macaulay duration of the portfolio is between three months to six months.

Low Duration Fund: It invests in debt and money market instruments where the Macaulay duration of the portfolio is between six months to twelve months.

Money Market Fund: It invests in money market instruments with a maturity of up to one year.

Short Duration FundIt invests in debt and money market instruments where the Macaulay duration of the portfolio is between one year to three years.

Medium Duration Fund: It invests in debt and money market instruments where the Macaulay duration of the portfolio is between three years to four years.

Medium to Long Duration Fund: It invests in debt and money market instruments where the Macaulay duration of the portfolio is between four years to seven years.

Long Duration Fund: It invests in debt and money market instruments where the Macaulay duration of the portfolio is above seven years.

Dynamic FundIt invests across duration. Dynamic Bond Funds are those debt funds whose portfolio is modified depending on the fluctuations in the interest rates.

Corporate Bond Fund: It invests at least 80% of the total assets in corporate bonds of the highest rating.

Credit Risk Fund: t invests at least 65% of total assets in corporate bonds (Investment in below rated highest instruments). These funds are the riskiest class of debt funds.

Banking and PSU Fund: It invests a minimum of 80% of total assets in debt instruments of banks, PSUs and Public Financial Institutions.

Gilt FundIt invests a minimum of 80% of total assets in G-secs across maturity.

Gilt Fund with 10-year constant duration: It invests a minimum of 80% of total assets in G-Secs where the Macaulay duration of the portfolio is ten years.

Floater Fund: It invests a minimum of 65% of total assets in floating rate instruments.


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Additional Information

The Macaulay duration is the weighted average term to maturity of the cash flows from a bond. The weight of each cash flow is determined by dividing the present value of the cash flow by the price. 

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Hybrid Funds
SEBI has categorised hybrid funds into 7 categories

Conservative Hybrid Fund: It invests between 10% and 25% of the total assets in equity and equity-related instruments. It invests between 75% to 90% of the total assets in debt instruments.

Balanced Hybrid Fund: It invests between 40% and 60% of the total assets in equity and equity-related instruments. It invests between 40% to 60% of the total assets in debt instruments. No arbitrage is allowed in this scheme.

Aggressive Hybrid FundIt invests between 65% and 80% of the total assets in equity and equity-related instruments. It invests between 20% to 35% of the total assets in debt instruments.

Dynamic Asset Allocation or Balanced AdvantageIt invests in equity or debt that is managed dynamically.

Multi-Asset AllocationIt invests in a minimum of three asset classes with an allocation of at least 10% each in all three asset classes.

Arbitrage Fund: It invests a minimum of 65% of total assets in equity and equity-related instruments. The scheme follows an arbitrage strategy. 

Arbitrage funds aim at maximizing the returns by purchasing securities in one market at lower prices and selling them in another market at a premium. However, if the arbitrage opportunities are not available, then the fund managers prefers to invest in debt securities or cash equivalent

Equity Savings: It invests a minimum of 65% of total assets in equity and equity-related instruments. It invests a minimum of 10% of total assets in debt instruments. 


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Additional Information

Solution-oriented schemes:

Retirement FundYou may fund these schemes having a lock-in of at least five years or till the retirement age, whichever is earlier.

Children’s FundThe scheme would have a lock-in of at least five years or till the child attains majority age whichever comes earlier.


Other Schemes:

Index Funds/ETFsIt invests a minimum of 95% of total assets in securities of a particular index.

FoFs (Fund of Funds): It invests a minimum of 95% of total assets in the underlying fund.

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***Who should Invest in Mutual Funds*** 


Everyone who has a particular financial goal, be it short-term or long-term, should invest in mutual funds. Investing in mutual funds is an excellent way to accomplish your goals faster. 

Investors need to assess their 
Risk Profile, 
Investment time period, and 
Goals 
before starting investment in mutual fund. 


*** Benefits of Investment in Mutual Funds*** 

Investment in mutual funds provides several advantages such as flexibility, diversification, and expert management of money, which makes mutual funds an ideal investment option for investors.

Investment Handled by Experts ( Fund Managers )

Fund managers manage the investments pooled by the asset management companies (AMCs) or fund houses. These are finance professionals who have an excellent track record of managing investment portfolios. Furthermore, fund managers are backed by a team of analysts and experts who pick the best-performing stocks and assets that have the potential to provide excellent returns for investors in the long run.

No Lock-in Period

Most mutual funds come with no lock-in period. In investments, the lock-in period is a period over which the investments once made cannot be withdrawn. Some investments allow premature withdrawals within the lock-in period in exchange for a penalty. Most mutual funds are open-ended, and they come with varying exit loads on redemption. Only ELSS mutual funds come with a lock-in period.

Low Cost

Investing in mutual funds comes at a low cost, and thereby making it suitable for small investors. Mutual fund houses or asset management companies (AMCs) levy a small amount referred to as the expense ratio on investors to manage their investments. It generally ranges between 0.5% to 1.5% of the total amount invested. The Securities and Exchange Board of India (SEB) has mandated the expense ratio to be under 2.5%.

SIP ( Systematic Investment Plan )

The most significant advantage of investing in mutual funds is that you can invest a small amount regularly via a SIP (systematic investment plan). The frequency of your SIP can be monthly, quarterly, or bi-annually, as per your comfort. Also, you can decide the ticket size of your SIP. However, it cannot be less than the minimum investible amount. You can initiate or terminate a SIP as and when you need. Investing via SIPs alleviates the need to arrange for a lump sum to get started with your mutual fund investment. You can stagger your investments over time with an SIP, and this gives you the benefit of rupee cost averaging in the long run.

Switch Fund Option

If you would like to move your investments to a different fund of the same fund house, then you have an option to switch your investments to that fund from your existing fund. A good investor knows when to enter and exit a particular fund. In case you see another fund having the potential to outperform the market or your investment objective changes and is in line with that of the new fund, then you can initiate the switch option.

Goal-Based Funds

Individuals invest their hard-earned money with the view of meeting specific financial goals. Mutual funds provide fund plans that help investors meet all their financial goals, be it short-term or long-term. There are mutual fund schemes that suit every individual’s risk profile, investment horizon, and style of investments. Therefore, you have to assess your profile and risk-taking abilities carefully so that you can pick the most suitable fund plan.

Diversification

Unlike stocks, mutual funds invest across asset classes and shares of several companies, thereby providing you with the benefit of diversification. Also, this reduces the concentration risk to a great extent. If one asset class fails to perform up to the expectations, then the other asset classes would make up for the losses. Therefore, investors need not worry about market volatility as the diversified portfolio would provide some stability.

Flexibility

Mutual funds are buzzing these days because they provide the much-needed flexibility to the investors, which most investment options lack in. The combination of investing via an SIP and no lock-in period has made mutual funds an even more lucrative investment option. This means that people may consider investing in mutual funds to accumulate an emergency fund. Also, you can enter and exit a mutual fund plan at any time, which may not be the case with most other investment options. It is for this reason that millennials are preferring mutual funds over any other investment vehicle.

Liquidity

Since most mutual funds come with no lock-in period, it provides investors with a high degree of liquidity. This makes it easier for the investor to fall back on their mutual fund investment at times of financial crisis. The redemption request can be placed in just a few clicks, and the requests are processed quickly, unlike other investment options. On placing the redemption request, the fund house or the asset management company would credit your money to your bank account in just business 3-7 days.

Seamless Process

Investing in mutual funds is a relatively simple process. Buying and selling of the fund units are all made at the prevailing net asset value (NAV) of the mutual fund plan. As the fund manager and his or her team of experts and analysts are tasked with choosing shares and assets, investors only need to invest, and the rest would be taken care of by the fund manager.

Regulated

All mutual fund houses and mutual fund plans are always under the purview of the Securities and Exchange Board of India (SEBI) and Reserve Bank of India(RBI). Apart from that, the Association of Mutual Funds in India (AMFI), a self-regulatory body formed by all fund houses in the country, also governs fund plans. Therefore, investors need not worry about the safety of their mutual fund investments as they are safe.

Ease of Tracking

One of the most significant advantages of investing in mutual funds is that tracking investments is easy and straightforward. Fund houses understand that it is hard for investors to take some time out of their busy schedules to track their finances, and hence, they provide regular statements of their investments. This makes it a lot easier for them to track their investments and make decisions accordingly. If you invest in mutual funds via a third party, then you can also track your investments on their portal.

Tax-Saving

ELSS or Equity-Linked Savings Scheme is an equity-oriented mutual fund which provides tax savings as per Section 80C of the Income Tax Act, 1961. ELSS is the most popular tax-saving investment option. It comes with a lock-in period of just three years, the shortest of all tax-saving investments. Investing in ELSS provides you with the dual benefit of tax deductions and wealth accumulation over time

Rupee Cost Averaging

On investing in mutual funds via an SIP, you get the benefit of rupee cost averaging over time. When the markets fall, you buy more units while you purchase fewer units when the markets are booming. Therefore, over time, your cost of purchase of fund units is averaged out. This is called the rupee cost averaging. Investing in mutual funds via an SIP is beneficial during both market ups and downs, and there is no need to time the markets. This benefit is not available when you invest in mutual funds via a lump sum.

No Need to Time Markets

When you are investing in mutual funds via an SIP, there is no need to time markets. This is because the rupee cost averaging phenomenon ensures that your cost of purchase of fund units is on the lower side. However, you have to continue investing via an SIP for a long period. Therefore, you can invest in mutual funds whenever you feel like. There is no ‘right time’ as such to investing in mutual funds. The best time is now!

Convenience

Investing in Mutual Funds is a paperless and straightforward process. Investors can monitor the market and make investments as per their requirements. Moreover, switching between mutual fund schemes and portfolio rebalancing helps to keep returns in line with expectations.

Low initial investment

You can build a diversified mutual fund portfolio by investing as low as Rs 500 a month through SIP in mutual fund schemes of your choice. You also have the option to invest either as a lump sum or a systematic investment plan (SIP). However, when compared to lump sum investments, SIP is capable of lowering the overall cost of investment while unleashing the power of compounding benefit.

Professional fund management

Your mutual fund investments are managed by a professional fund manager who is backed by a team of researchers. The fund manager formulates the investment strategy for your asset allocation. The team of researchers picks suitable securities as per the fund’s investment objectives.


***Risks of Investment in Mutual Funds***


Risk is inherent in all investments. 

There is barely any investment that is completely risk-free.


Although mutual funds are considered to be a relatively safe investment tool, their performance also depends on the stock market


Like any investment, investing in mutual funds involves a certain amount of risk.  

The risk involved in mutual funds depends on a lot of factors like the 

government's economic policy, 
existing economic conditions in the country, 
the gap between demand and supply, etc. 

affect the value of these instruments. 

To maximise your return on investment, you must select your mutual fund wisely. 


What are the Risks?? 

All risks in mutual funds can be classified into two categories - systematic and unsystematic risks.


Systematic Risks:

Risks that cannot be avoided as they are not under control are known as Systematic Risk. For example, any regulation that affects many assets falls under the category of systematic risks.


Unsystematic Risks:

Specific risks, that affect a small class or a group of mutual funds. For example, any fraud Investigation or Criminal inquiry on a company can decrease the value of the shares of that company.

Debt Mutual Fund Risk

Interest Rate Risk – When the interest rate rises, the price of bonds goes down which means you can lose investment value. So you have to invest as per the interest rate movement or better will match investment horizon with deft fund average maturities.

Interest rates and the price of a debt instrument are inversely related. When interest rates go up, bonds are perceived to be less lucrative investment options and thus their prices go down. Similarly, when interest rates decrease, bond prices experience a hike. The degree of interest rate sensitivity varies from one type of debt fund to another and is indicated by a debt fund’s modified duration. As a general rule, debt funds which invest in instruments of shorter duration are less prone to interest rate risk as compared to funds invested in longer maturity instruments. Interest rates in a market reflect the availability of credit, and the economic state of the country influences it. This usually affects the fixed-income mutual funds and investments such as debt funds. As interest rates go up, investment in bonds seems less profitable than other investment options, and their prices go down. The reverse is also true.

While it is usually, debt funds, that may be impacted negatively with the increase in interest rate; it may also lead to a decline in the value of equity-oriented funds in the short-run.

Keep a longer time-frame while investing in mutual funds to ensure the negative impacts of an increase in interest rates are balanced out.


Credit Rate Risk – Bond MFs are dependent on debt instruments. They are rated on the basis of parameters such as safety, quality, returns, and liquidity. If the quality of debt instruments which are part of the MF scheme is bad, you can lose your money. If the bond issuer does not make the stipulated payments, the MF scheme loses value. Credit Risk is the risk associated with a bond defaulting on the grounds of non-payment by the lender. Thus, this impacts all mutual funds that may have exposure to bonds. Credible agencies give ratings to bonds based on the risk associated with a bond. 

Generally, the PSU bonds or AAA bonds are the safest and possess the least credit risk.

Look at the credit rating of a debt fund before investing. Moreover, diversify your portfolio to safeguard the interest.

Debt funds invest in a wide array of debt and money market instruments such as government securities, corporate bonds, certificates of deposit (CDs), commercial papers, etc. The credit worthiness of these investments vary depending on the issuer and are determined by the credit ratings (such as AAA, AA+, AA, AA-, etc.) provided to them by credit rating agencies such as CRISIL, ICRA, Fitch, and Brickworks. 

Credit worthiness refers to the repayment ability of the issuer of the instrument. A higher rated debt or money market instrument features a higher level of credit worthiness than a low rated instrument.


Balanced Mutual Funds Risks

Higher exposure to Equity – Some fund managers in hope of higher returns, increase exposure to equity and sometimes to volatile equity. This can backfire and the scheme can lose value.

Debt Holdings – If the fund has long duration bonds and the interest rates rise, the portfolio can lose value.


Money Market Mutual Funds (Liquid Funds) Risks

These funds come under the low-risks category of mutual funds but are not risk-free. 

Inflation Risk – If inflation is higher than money market returns, your investment loses value. Bonds and money market instruments are mostly fixed rate investments as they feature a fixed coupon rate. Hence, an increase in inflation tends to erode coupon rate based earnings that the debt fund is liable to receive. As a result, increase in inflation makes bonds trade lower on bond markets which adversely impact the potential returns that a debt fund investor is to receive. On the other hand, lower inflation levels tend to push bond prices and debt fund investment values to higher levels. Inflation Risk is the risk associated with the reduction in purchasing power of the investor due to rising prices of commodities. As an investor, you would want the return on the investment to be more than the prevailing inflation rate. For example, if the money invested in mutual funds gets you a 7% return, and the inflation rises by 4% within the same period, your net purchasing power increases by 3% only.

While selecting mutual funds, make sure the schemes you choose have the potential to give you inflation-beating returns. Generally, equity-oriented mutual funds are considered to have a high-return potential that can beat inflation. However, they also carry a certain amount of risk with them.


Opportunity Loss – You will probably get higher returns if you invest in the right equity funds or even other debt funds instead of money market funds. This results in opportunity lost.


Equity Mutual Funds Risks:

Volatility Risk: An equity fund invests primarily in the equity shares of companies listed on stock exchanges. Thus, the value of an equity fund is directly related to the performance of companies, in stocks of which it has invested. The performance of a company is affected by prevailing macroeconomic conditions. Macroeconomic changes include changes with respect to government, SEBI and  RBI policies, consumer preferences, economic cycle, etc. These factors directly impact the price of the stocks of a company either favorably or unfavorably causing either an upward or downward movement in its value of the share. 

This movement is in turn reflected in the value of an equity fund. As a general rule, large cap companies are less prone to such volatility as compared to mid cap and small cap companies. Similarly, a diversified equity fund is relatively less prone to getting affected by such volatilities as compared to thematic or sectoral equity funds.

Equity funds are considered high risks mutual funds in India due to market volatility.

If the market is volatile, there can be fluctuations in the NAV value. If the underlying stocks lose a lot of value, then the NAV will decrease.


Performance Risk – Return on Investment in equity funds is low when the market is not doing well unless the fund manager manages the portfolio very well.


Concentration Risk – If a large proportion of the portfolio is in one stock or one sector, there is a risks of higher losses in case that stock/sector underperforms. Sector/thematic funds can face this risks. The concentration risk arises when you focus all your investment on a particular mutual fund or sector. If the sector defaults due to government policy or bankruptcy, your entire investment is impacted negatively.


Management Risk: Management of a company refers to the team which is responsible for leading the company in the right direction. Changes in the management team and their actions such as pledging shares, decrease/increase in promoter stake, etc. can affect the price of shares for a company. While policies like good corporate governance and high transparency have a positive impact on a company’s share price, mismanagement, conflicts in the team etc. downgrade the price of a company’s shares.   


Liquidity Risk: When it comes to equity investments, investing for the long term has the greatest chance of ensuring profitability of investment. Thus, it is often difficult for equity mutual funds to buy or sell equity investments quickly in order to make a profit or minimise a loss. This may lead to a situation where the scheme does not have sufficient liquidity to meet redemption obligations placed by investors. 

Such a liquidity crunch is most commonly observed during situations when a large number of redemption requests are made by investors as a result of a sustained bear run in equity markets. In order to reduce this risk, many equity funds also invest a small portion of their capital in debt and money market instruments to ensure higher levels of liquidity for the scheme. Liquidity risk is the risks associated with lowering liquidity in the market. This could happen due to many reasons, such as interest rates increase, changes in currency value, etc. In financial sectors, liquidity refers to the ability to sell the asset quickly to arrange funds. 

For instance, investment instruments with lock-in periods like fixed deposits or ELSS-based mutual funds pose liquidity risk. Similarly, it may be challenging to sell Exchange Traded Funds (ETFs) during a liquidity crisis without suffering losses. While it affects these funds directly, it impacts all types of mutual funds negatively as the fund manager finds it hard to sell the equities in the stock exchange without suffering some losses. 

Ensuring that you can remain invested for long can help you overcome this risk. Moreover, do consider including a few short-term and medium-term debt funds in your portfolio to avoid the temporary problem of liquidity.


*** How to Invest in Mutual Funds ***


You can invest in mutual funds in a paperless and hassle-free manner with us. Follow these simple steps to start your investment journey:

Step1: Log on to                 

                                     http://mf.investdirectcap.in/register\4tPA@I_9Ccb_3ZyoDHUZSQ== 


Step 2:  Enter all the requested details

Step 3:  Get your e-KYC done

Step 4:  Select the mutual fund from the list 

Step 5:  Select the mutual fund scheme based on                                                                    your investment objectives and risk tolerance

Step 6:  Invest in the mutual fund


How to invest 1 crore in mutual funds?

Unless Market is fallen to record level, it is always advisable to invest in mutual funds through SIP instead of investing large amount through a one-time investment. It is a method of investing small amounts regularly in a mutual fund scheme of your choice.


*** Other Important Questions ***


How to choose a suitable mutual fund?

A right Mutual Fund plan cannot be chosen only by considering the past performance of the fund and fund manager. To choose the right mutual fund, you should check whether the fund’s investment objectives are matching with your goals.


How can you redeem your mutual fund units?

You can redeem MF units anytime. You need to inform your fund house or the agent. Your money will be deposited to your bank account within 3- 7 working days, post-redemption.


What is CRISIL MF ranking?

CRISIL is an Indian analytical company, which provides rankings, research, and advisory services. MF rankings given by CRISIL depend on global parameters. The rankings are very crucial for investors when they are deciding on a particular mutual fund scheme.


Is SIP better than a lump sum?

It depends on the individuals and the market scenario. If you are risk-averse, then investing in via SIP is advisable. If the markets have fallen record levels, then a lump sum is advisable. You need to assess your risk profile and requirements.


Do mutual funds invest only in stocks?

It depends on type of Mutual Fund. There are some Mutual Funds - debt funds that don’t invest in stocks at all. Only equity funds invest in stocks, while debt funds and liquid funds hardly invest in stocks.


What is an exit load?

It is the penalty charged by the fund house if you are not able to stay invested over a particular time frame. There is No Exit load in open-ended Mutual Funds. Investors should read the fund offer carefully before investing.


What is an expense ratio?

The expense ratio is the fee charged by the fund houses to manage the investments of the investors. It is always less than 2.5% of the amount invested by the investors.


Are mutual funds safe?

Yes, mutual fund investments are absolutely safe as all fund plans and fund houses are governed by the Laws, rules and regulations made by the Securities and Exchange Board of India (SEBI), the Association of Mutual Funds in India (AMFI) and the Reserve Bank of India (RBI).


Who can invest in mutual funds?

All individuals who have completed their KYC process are eligible to invest in mutual funds.


What are the advantages and Disadvantages of investment in mutual funds?


Advantages

Diversification: A fund diversifies by holding many securities. Diversification reduce the risk.
Ability to participate in investments that may be available only to larger investors. 
Government oversight: Mutual funds are regulated by a governmental body
Transparency and ease of comparison: All mutual funds are required to report the same information to investors, which makes them easier to compare to each other.
Professional investment management: Mutual funds hire portfolio managers to supervise the fund's investments.


Disadvantages

Mutual funds have disadvantages as well, which include:

High Fees
Less control over the timing of recognition of gains
Less predictable income
No opportunity to customize.


*** Special Consideration for First time Investors in Mutual Funds ***


 Fixing Investment Goal 

Fixing your financial goals, budget, and time period is very important before making investments. It will help you to decide how much you can set aside towards investing and you must also invest based on your risk profile. Investment always works best when done with a purpose.

 Selecting the right mutual fund scheme 

With a 100s of mutual fund schemes in each category, you need to analyse and compare them to pick the right investment. A balanced or debt fund is advisable for first-time investors as it comes with minimum risks with fixed returns.

 Selecting the right mutual fund 

Investors should also consider factors such as fund manager’s credentials, expense ratio, portfolio components, and assets under management.

 Diversify your portfolio 

Consider investing in more than one mutual fund to diversify your portfolio and earn risk-adjusted returns. A portfolio of funds will help you diversify across asset classes and investment styles. It will also reduces risks – when one mutual fund underperforms, as the other funds makes up for the loss maintaining the value of your portfolio. 

 Go for SIPs instead of lump-sum investments 

Investing via systematic investment plans (SIP) is advisable for those investing in equity instruments for the first time. SIP allows you to spread your investments over time and invest across market levels. The benefit of rupee cost averaging that comes with SIPs also helps you average out the cost of your investment and earn higher returns over the long-term.

 KYC documents updating 

Know Your Customer (KYC) process completion is must for investment in mutual funds. KYC is a government regulation for most financial transactions in India to identify the source of funds and prevent money laundering. To become KYC-compliant, you need a Aadhar Card, PAN card and valid address proof.

 Application for Net Banking 

To invest in mutual funds, you must activate internet banking on your bank account. Mutual funds also allow investments to be made through debit cards and cheques, but doing it via net banking is a more straightforward, fast and secure process to make investments.

 Seeking advice from a financial advisor 

Investors can take the services or advice of a mutual fund expert or distributor for 
Selecting Right Mutual fund, 
Monitoring Performance of the funds 



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