Mutual Funds

There are many types of funds with a wide range of risk levels, profit potential, and type of fund management. Funds that invest in equity have the potential to provide higher returns but with a higher risk. At the other extreme, there are funds that invest in short-term bonds having a potential to give relatively lower returns than equity funds but at a much lower risk. There are plenty of intermediate funds as well, which offer varying degrees of risk and returns. For example, hybrid funds, as the name indicates, are a mix of equity and bonds. They combine some of the characteristics of both.
Then there are gold funds, which are a way of investing in gold without having to buy physical gold. They allot mutual fund units which hold physical gold as the underlying security. These funds give almost the same returns as physical gold would have fetched.

Investors, however, need to keep an eye on the track-record of individual funds, their fund managers and the fund companies, to make the right decision.
There are also funds that invest outside India. 1n 2014 the government permitted Indian investors to invest in foreign stocks up to the value of $125,000. Howeve4 it isn’t easy for investors to directly trade in stocks abroad. This problem is solved by domestic funds that are run by Indian fund companies which invest in foreign stocks.
Moreove4 there is also a wide diversity in the quarterly of funds. This means that not all funds are able to deliver what they promise and investors also have to keep an eye on the track record of individual funds, their fund managers and companies.

Instant and easy diversification:
One of the basics of safe investing is to spread your money across different investments. Mutual funds are an easy way to do this. Mutual funds help to spread the money across a large number of investments – not just across different companies but also across different sectors and sizes of companies, thus providing safety.
Professional research and investment management: Investing is a lot of work. There are hundreds of companies to track and their prospects could change without warning. While you could do it all yourself, you may not have the time or the resources to spare. Mutual funds employ professional, whole-time investment managers and research staff. Their cost and effort gets shared among all the investors in a fund thus providing economies of scale.
Variety:
There are mutual funds available for every kind of risk level and suitable for every kind of time horizon. No matter what kind of investment you want, there is likely to be a variety of fund that suits you.
Convenience:
You can easily invest as well as withdraw from mutual funds. Investments can be made by filling up a simple form or even online with direct debit from your bank account. Similarly, redemption proceeds can be credited directly into your bank account within a few business days. If you go directly to buy shares to have a diversified set, you will need a lot of money to do so. However, through a mutual fund, you can invest in a diversified set of stocks for as little as a few thousand rupees. And what’s more, you can invest (or redeem) in small batches as well. Same is the case with international stocks which would be very expensive and complex to purchase at an individual level.
Tax efficiency:
When you buy or sell any investment, you have to pay tax on the profit you make (capital gains tax). However, this does not happen when that buying and selling is being done on your behalf by a mutual fund. To maximize profits, the fund manager could keep buying and selling stocks as needed without paying any capital gains tax (4) . As per current tax laws, you have to pay capital gains tax if applicable, only in case you redeem your investments from the fund.
Transparent, well-regulated industry:
Mutual funds are obligated by law to release comprehensive data about their operations and investments. All funds release NAVs (Net Asset Value) daily and their complete portfolio every month. SEBI regulates the fund industry very closely and is constantly refining the applicable rules to protect investors better.
Providing access to inaccessible assets:
There are many investments you can make more easily through a mutual fund. Here are some examples.
      Government securities: It’s difficult for individuals to buy government securities, but they can buy funds that invest in them.
      International stocks; For most of us, it would be prohibitively complex to open brokerage accounts and buy shares in different countries. However you can do so easily by investing in an international fund.

Open Vs closed
Apart from the different types of investments they make, mutual funds differ in another fundamental way. They can be closed-end and open-ended. Closed-ended funds have a defined period over which they exist after which they are wound up. Investors are allowed to invest only at the beginning, when the fund is launched. Investors can withdraw their money from the fund only at the time when the fund is finally closed (maturity date). It must be noted that closed-end funds are listed like shares in the stock markets but the trading volumes for these funds is very low causing illiquidity in most cases.
In contrast, open-ended schemes are perpetual. Investors can come in and invest at any point of time. They can also redeem their money from the fund at any time as the scheme never closes.
While closed-ended schemes were dominant when the Indian fund industry was young, the convenience and safety of open-ended funds have gradually meant that now open-ended funds are dominant. It must be noted that even closed-ended funds are listed Iike shares in the stock market, and, in theory investors can get their money back by selling to another investor.

As per SEBI rules, all mutual funds must offer liquidity. However, liquidity depends on whether a fund is open-ended or closed-ended.
Open-ended funds are perpetual funds that are always available for investment or redemption with the AMC. In case of open-ended funds, the AMC will redeem the money at the prevailing NAV at a short notice, within a few business days.
Closed-ended funds are launched for a fixed period (generally less than one year and upto 5 years) and you can invest in them only at the time of the initial offer. For closed-ended funds, the AMCs get the fund listed on a stock exchange so that you can sell your units like a stock through a stock broker. However, this is not a great option because the trading volumes on the stock-exchange are very low and may lead to illiquidity in most cases. Further, the sale is not at NAV but at market price which may even be below the NAV. In practice, you should consider closed-ended funds only if you agree to the lock-in period. Tax-saving Equity Linked Saving Schemes (ELSS) too have a three-year lock-in. These funds save you tax under Section 80C of the Income Tax Act, 1961. You cannot redeem for three years if you propose to claim tax benefits.

There is no credit rating for mutual funds. Fixed-income funds may publicize a rating given to the fund by a rating agency but this has no legal sanctity and is little more than a marketing device.
However if you need a simple-to-understand rating system that tells you how good or bad a fund is, then Value Research’s fund rating system has been doing that job for knowledgeable investors since 1992.
Value Research follows a range of parameters that evaluate the long-term returns that a fund has generated and the risk it has taken in doing so. The funds are then graded along five levels, ranging from one star to five stars. This is a relative rating that is given in comparison to other funds of the same type.

Load is a sma1l percentage of your funds that can be deducted by the AMC at the time of redemption. Load percentages can range from 0 to 3-4 per cent. The actual percentage (and whether it will be charged at all) depends on the type of fund and the period of investments. Typically, there could be a load of 1 per cent if you redeem your units within a year of investment and there is no load after that. Earlier there could also be an entry load that was charged at the time of investment but in August 2009, this was abolished by the Sebi.

Investment preferences and scenarios
There is no one-size-fits-all solution when it comes to investing. Your ideal solution will depend on many factors Iike your age, profession, background, risk profile, aspirations, etc. Depending on your goals and profile, you can have a number of options. Here we present to you a couple of investment scenarios and we will also see what the ideal asset allocations are for those scenarios.
Investing for Growth
Investing for growth inevitably means investing in equity or equity-based investments. On an average, equity tends to grow at least at the same real rate at which the economy is growing. Equity could mean buying shares but for beginners it generally means investing in equity based mutual funds. If you want real growth which can beat inflation over the long term, then equity is the only option which is promising. In equity portfolios, it is extremely important to avoid lump-sum investments in equity funds. All investments should be done gradually through a systematic investment plan (SIP), which is explained later. Even if you have a lump sum to invest in this portfolio, you should place it in a short-term debt fund and transfer it to the equity funds through a systematic transfer plan (explained later). This can be done conveniently because this portfolio itself has a short-term debt fund in it.
Investing for Income
Investments made for income Investments made for income- and those in fixed income funds – need a very different approach from equity. Among mutual funds, those that invest in stocks are less suitable as a source of income compared to those that invest in fixed income assets. Fixed income assets mean bonds and deposits, issued either by companies or by banks.
Such funds, which we call ‘fixed income funds’ or ‘debt funds’ are suitable for generating regular income because they have a lower risk and higher predictability of returns compared to those that invest in stocks. Since they are safe and Predictable, they are apt to invest for a short term, even if you want to accumulate the returns instead of withdrawing them as regular income. Although debt funds are quite similar to each other, they come in several subtypes with subtle differences that make them suitable for different purposes.
Investing for Retirement
The absence of a good retirement benefit system in India means that you have to Plan your investments carefully. We should start investing for retirement as soon as we start earning. To some extent, this happens automatically with benefit systems like the employees’ provident fund.
However discretionary savings should also be started as early as possible. The conventional opinion is that because one should not take risks with one’s retirement savings, one should not invest them in equity. This view is not only wrong but is actually dangerous.