What are Mutual Funds ?

A Mutual Fund is a trust that pools together the savings of a number of investors who share a common financial goal. The fund manager invests this pool of money in securities — ranging from shares and debentures to money market instruments or in a mixture of equity and debt, depending upon the objectives of the scheme.

Why choose Mutual Funds ?

Investing in Mutual Funds offers several benefits:

  • Professional expertise: Fund managers are professionals who track the market on an on-going basis. With their mix of professional qualification and market knowledge, they are better placed than the average investor to understand the markets
  • Diversification: Since a Mutual Fund scheme invests in number of stocks and/or debentures, the associated risks are greatly reduced.
  • Relatively less expensive: When compared to direct investments in the capital market, Mutual Funds cost less. This is due to savings in brokerage costs, demat costs, depository costs etc.
  • Liquidity: Investments in Mutual Funds are completely liquid and can be redeemed at their Net Assets Value-related price on any working day.
  • Transparency: You will always have access to up-to-date information on the value of your investment in addition to the complete portfolio of investments, the proportion allocated to different assets and the fund manager’s investment strategy.
  • Flexibility: Through features such as Systematic Investment Plans, Systematic Withdrawal Plans and Dividend Investment Plans, you can systematically invest or withdraw funds according to your needs and convenience.
  • SEBI regulated market: All Mutual Funds are registered with SEBI and function within the provisions and regulations that protect the interests of investors. AMFI is the supervisory body of the Mutual Funds industry.

Types of Funds

There are a wide variety of Mutual Fund schemes that cater to your needs, whatever your age, financial position, risk tolerance and return expectation. Whether as the foundation of your investment program or as a supplement, Mutual Fund schemes can help you meet your financial goals. The different types of Mutual Funds are as follows:

Diversified Equity Mutual Fund Scheme
A mutual fund scheme that achieves the benefits of diversification by investing in the stocks of companies across a large number of sectors. As a result, it minimizes the risk of exposure to a single company or sector.

Sectoral Equity Mutual Fund Scheme
A mutual fund scheme which focuses on investments in the equity of companies across a limited number of sectors — usually one to three.

Index Funds
These funds invest in the stocks of companies, which comprise major indices such as the BSE Sensex or the S&P CNX Nifty in the same weightage as the respective indice.

Equity Linked Tax Saving Schemes (ELSS)
Mutual Fund schemes investing predominantly in equity, and offering tax deduction to investors under section 80 C of the Income Tax Act. Currently rebate u/s 80C can be availed up to a maximum investment of Rs 1,00,000. A lock-in of 3 years is mandatory.

Monthly Income Plan Scheme
A mutual fund scheme which aims at providing regular income (not necessarily monthly, don’t get misled by the name) to the unitholder, usually by way of dividend, with investments predominantly in debt securities (upto 95%) of corporates and the government, to ensure regularity of returns, and having a smaller component of equity investments (5% to 15%)to ensure higher return.

Income schemes
Debt oriented schemes investing in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments.

Floating-Rate Debt Fund
A fund comprising of bonds for which the interest rate is adjusted periodically according to a predetermined formula, usually linked to an index.

Gilt Funds – These funds invest exclusively in government securities.

Balanced Funds
The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. They generally invest 40-60% in equity and debt instruments.

Fund of Funds
A Fund of Funds (FoF) is a mutual fund scheme that invests in other mutual fund schemes. Just as fund invests in stocks or bonds on your behalf, a FoF invests in other mutual fund schemes.

Investment ObjectiveInvestment horizonIdeal Instruments
Short-term Investment1- 6 monthsLiquid/Short-term plans
Capital AppreciationOver 3 yearsDiversified Equity/ Balanced Funds
Regular IncomeFlexibleMonthly Income Plans / Income Funds
Tax Saving3 yrs lock-inEquity-Linked Saving Schemes (ELSS

Points to Remember

  • Do not speculate: Always evaluate risk-taking capacity.
  • Do not chase returns: Because what goes up must come down.
  • Do not put all eggs in one basket: Diversification reduces the risk.
  • Do not stop working on Mutual Funds: Continuous evaluation of funds is a must.
  • Do not time the market: Every time is good for investments.
  • Mutual Funds are subject to market risks and there is no assurance that the fund objective will be achieved.
  • NAVs fluctuate depending on forces affecting the Capital market.
  • Past performance may or may not be sustained in the future