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Mutual Funds

In the past few years, mutual funds have become increasingly popular among investors. It’s not hard to understand why, considering the many benefits they offer investors. Lay investors find it easy to invest in mutual funds, there are a range of products that cater to different types of investment goals and risk appetites and the number of companies offering mutual funds too has grown. Systematic Investment Plans (SIPs) have been especially popular among investors, since it allows them to invest small sums every month. According to the Association of Mutual Funds in India (AMFI), as of 2018 there were about 2.52 crore SIP accounts through which investors regularly invested in various mutual fund schemes.

Equity funds are especially popular among investors keen to earn some returns from the stock market. This could be a sensible choice since, despite the market risks involved, equity has shown some of the highest returns among various asset classes over a longer time frame. According to AMFI, assets under management of various mutual fund schemes stood at Rs 24.03 trillion in November 2018, from Rs 4.05 trillion in 2004, an almost six-fold increase in a 10-year period!

Purchasing a mutual fund has never been so easy. You can buy them directly from the asset management company’s offices or from an agent. Many web sites, like AngelBEE, offer an online mutual fund purchasing facility. So you can buy into a mutual fund scheme of your choice in a matter of minutes.

Benefits of mutual funds

The enormous popularity of mutual funds in India is because of its many benefits. Here are some of them:

  • Easy to invest: It’s very easy to invest in mutual funds, especially for lay investors. You don’t have to spend hours tracking stocks, poring over balance sheets or worry about getting the timing right. You just have to buy a mutual fund. This can be done easily at a distributor’s office, or online. You can even do it from your mobile phone through Angel Bee’s mutual fund app.

  • You can invest small amounts: Since you are part of a pool of investors buying stocks from an exchange, you only need to pay small amounts to buy shares that might be too expensive otherwise. Most mutual funds have systematic investment plans that allow you to invest small sums each month. If you keep contributing to SIPs, you will have a sizeable corpus in a few years.

  • Professional management: Mutual funds are managed by professional fund managers, who are adept at picking up stocks at the right time and at the right price. They are highly qualified and have lots of experience, so you don’t have to worry about making the right choices. Of course, there’s a price to be paid for active management in the form of higher expense ratios. If you don’t want to pay more costs, you can opt for a passively managed fund like an index fund, which requires far less intervention on the part of fund managers and simply follow the index.

  • Diversification: Another benefit of investing in mutual funds is diversification. You will be able to invest in a basket of shares by putting your money in a mutual fund; if you were to buy shares on your own, you probably would have been able to get one or two for the same amount.

  • Tax benefit: Some mutual funds offer tax benefits. For instance, if you invest in ELSS funds, you will be able to claim a deduction of up to Rs 1.5 lakh from your taxable income.

  • High liquidity: Mutual funds are quite liquid, so you can buy and sell them whenever you choose. Once you made your redemption request, you will get the money in your bank account in three-four working days.

  • Good for the cautious investor: If you are cautious investor, you can invest in debt funds, which are better than other instruments like bank fixed deposits. They are more liquid, and they also have some tax benefit, especially in the form of indexation.

  • Economies of scale: One of the benefits of investing in a mutual fund is that they tend to buy large quantities of shares and hence enjoy lower transaction costs.

Types of mutual funds

Mutual fund investors never had it so good. Mutual funds in India have grown exponentially, as have the number of different mutual fund schemes that cater to diverse investment goals and risk appetites. If you are prepared to take some amount of risk, you can invest, for instance, in a mid-cap fund which have the potential to offer higher returns in the longer term. If you are risk averse, but still want to invest in equity, you can go in for large cap funds, which involve less risk than mid cap funds.

There are options available for those who don’t want to invest in equity at all, like debt funds. Debt funds invest only in fixed income instruments and are ideal for those who don’t want to take risks and enjoy stable returns.

Here are some of the different types of mutual funds in India:

  • Open ended fund: An open ended mutual fund is one which is open to investment and redemption at all times. These generally don’t have fixed assets under management or a tenure. Investors can buy units whenever they choose, and sell them at any time. Most mutual funds are of this type, whether they invest in debt, equity or any other financial instrument.

  • Closed ended fund: A closed ended fund, on the other hand, has a fixed tenure and the mutual fund company raises a fixed amount of money in a new fund offering or NFO. The mutual fund scheme is then listed on the stock exchange and traded like shares. Unlike open ended funds, the price is determined dynamically every second according to demand and supply. There could a divergence between the NAV and price. Sometimes the fund can trade at a discount to NAV; at other times, it may trade at a premium.

  • Equity fund: Some of the most popular mutual funds are those that invest in shares. They are called equity funds and invest in stocks of companies like, say, Infosys, Wipro, Reliance Industries and TCS. An equity fund allows investors to reap the benefits of investing in stocks. While the returns may be good, there are also risks involved in investing in equity funds, since stock prices can be unpredictable.

  • Debt fund: A debt fund invests in various fixed income instruments like government securities, bonds, debentures and commercial paper. These mutual funds are not volatile like equity funds and enable investors to earn steady but low returns. It is worth remembering that debt funds too involve some interest rate risk. It may seem counterintuitive, but NAVs of debt funds will fall when interest rates rise. This is because there is an inverse relation between yields and interest rates.

  • Large cap fund: A large cap mutual fund invests in the shares of big well-established companies with large market capitalisation. This kind of fund offers regular and stable returns and is preferred by conservative investors with low risk appetite. The investments are mostly in companies that constitute the Sensex and the Nifty, like for example Infosys, Tata Consultancy Services, Asian Paints and HDFC Bank. Generally, these funds move in tandem with the Sensex and the Nifty.

  • Mid cap fund: A mid cap fund invests in stocks of companies that are in the growth phase. While shares of these companies may earn higher returns, the risks are correspondingly higher. This kind of mutual fund is for those who are willing to stay invested for a longer term and are prepared to bear a higher level of risk. One thing that that you must remember about mid cap funds is that they tend to be more volatile, and fall more during a bear phase. They also rise faster during a bull phase.

  • Small cap fund: A small cap mutual fund invests in companies that are still in their infancy and are new to the stock market. Again, these are high-risk shares that may yield dividends in the long term. Investors here generally invest in a lot of these companies and hope some of them hit pay dirt in the future.

  • Index fund: This kind of mutual fund invests in the shares of companies that make up an index like the Sensex and the Nifty. These are passive mutual fund schemes and are not actively managed. The returns from these funds will be the same as those of the indices.

  • Sectoral fund: A sectoral fund invests in the stocks of specific sectors, like pharmaceuticals, energy, infrastructure, information technology and fast moving consumer goods (FMCG). You do not get the benefit of diversification by investing in these mutual funds because basically you are putting all your eggs in one basket. This is ideal for investors who have good information on certain sectors and are willing to place their bets on them.

  • Equity-linked saving scheme (ELSS): These mutual funds offer considerable tax benefits, especially to those in the higher tax bracket. If you invest in an ELSS mutual fund scheme, you will be able to claim a tax deduction of Rs 1.5 lakh under s.80C of the Income Tax Act. So your taxable income will be reduced to that extent.

  • Hybrid fund: A hybrid fund is one that invests in two or more financial instruments. Most of these mutual funds invest in mix of debt and equity and are also known as balanced funds. In India, any fund that invests 60 per cent of its funds in equity and the rest in debt is called a balanced fund. Of course, there are several variations to this theme. An aggressive fund may invest as much as 75 per cent in equity, while a conservative one may just put in 25 per cent in equity and the rest in debt.

  • Exchange traded funds (ETF): An ETF mutual fund scheme is a closed-ended fund that is actively traded on the stock exchange. There are several kinds of ETFs – debt, equity, commodities and foreign equity. The price of these funds are determined by demand and supply. These mutual fund schemes have some advantages. For one, pricing is determined in a transparent way every second on the exchange. Two, they are liquid and can be sold and bought at a moment’s notice. Three, since these mutual fund schemes don’t need star fund managers, you don’t have to pay much in terms of expense ratios.

How to choose mutual funds

With so many mutual fund schemes available in the market, how do you find the right one? Here are some pointers on how to find the right mutual fund scheme for you.

  • Risk appetite: You must remember that all mutual funds carry risks in varying degrees; some funds involve more risk than others. If you are a conservative investor looking for stable returns, your best option would be a diversified large-cap fund. On the other hand, if you are willing to take risks and enjoy higher returns, you could go in for mid cap funds. If you don’t want any exposure to equity at all, you can go in for a debt fund, which offers low but steady returns with little risk.

  • Make the right choice: There are many mutual fund schemes in the market, so you must do a careful comparison before investing in any one of them. The best way of doing it is by comparing returns. You should compare returns over several time periods – one, three or five years and find one that performs the best during these periods. There are many web sites and companies offering comparisons of mutual funds. They also offer online mutual fund purchasing facility. The Angel BEE app offers comparisons of mutual funds to help you make the right choice. It has the ARQ hyper-intelligent investment engine for selecting the best mutual fund schemes.

  • Check the costs: Investing in a mutual funds involves some costs. For instance, there’s the expense ratio, which is what a mutual fund company charges you to manage your investments. Expense ratio is the amount that is used for management, marketing and administrative expenses. A 1% ratio means that 1% of the fund’s total assets will be used for expenses. A high expense ratio will reduce your returns, so you have to make sure that you choose a fund that has the lowest figures.

  • Time frame: Time frame is important while you’re making your investment calculations. Stock markets move up and down in the short term, but the longer-term trend in equity funds has generally been upward. So you have to be invested for the long term to reap the real benefits. Generally a time frame of 10-15 years is ideal, but even five years should get you reasonably good returns. Younger people should put more of their money in equity funds. If you want to invest for the short term, a debt fund could be more suitable since returns are predictable.

  • Fund manager: A fund manager is critical in determining the kind of returns you make from mutual funds. A good fund manager can make above market returns and help you get the biggest bang for your buck. So if you can, check out the fund manager’s record. If the funds that he has been managing have been showing consistently high returns, he could be the one who should be managing your portfolio.

  • Portfolio turnover: Another factor you must consider while selecting a mutual fund is the turnover ratio. A mutual fund with a high turnover ratio is undesirable because every time it buys and sells shares, it has to pay Securities Transactions Tax and brokerage. Additional costs will reduce the amount of returns you will be able to make. According to SEBI guidelines, AMCs have to disclose their portfolio turnover twice a year.

  • Don’t invest in too many funds: Diversification is a good thing, but you shouldn’t go overboard and buy into dozens of mutual funds. Chose a select few that are the best in their category; it’s easier to keep track of how they’re doing.

How to invest in a mutual fund

  • Get your KYC done: If you’re a first-time investor, you need to do your KYC (know your customer) done. This is mandatory for all investments. It takes a few days to verify, so you may want to get it done well in advance. You have to fill a form that is available at AngelBEE’s offices.

    After you’ve filled the form, you have to give it to us along with proof of identity and proof of address. You’ll need copies of documents like PAN card, Aadhaar card or passport. This KYC is a one-time requirement and once done, you can use it for investments in another mutual fund, stock broker or bank.

    AngelBEE mutual fund investment app allows you to upload documents and photographs online. This makes the process of online mutual fund purchase much simpler.

  • How to purchase: If you don’t know much about mutual funds, AngelBEE could help you find the one that suits your needs the best. Besides, we will have a wider range of offerings than an AMC, which will have only products of its own.

  • Choosing the right scheme: You have to find the right scheme depending on your investment goals and risk appetite. If you want higher returns, a mid cap mutual fund could be right for you, but they’re also volatile and involve higher risk. If you don’t want to take much risk, you can opt for a debt fund, which offers steady returns.

  • Compare returns: Once you’ve narrowed down on the type of mutual fund you want to invest in, you can do a comparison of the returns that schemes of different companies have made. Many web site offers such online mutual fund comparisons, so make use of them. You can compare returns over several periods. The AngelBEE mutual fund investment app helps you pick out the best schemes under various categories like equity, debt, balanced and ELSS mutual fund schemes, using ARQ its hyper-intelligent investment engine.

Systematic Investment Plan

Systematic Investment Plan or SIP has been very popular with investors in recent years. Here are some of the reasons why SIPs have been so much in demand:

  • Convenience: SIPs are convenient because it allows you to invest small sums in mutual funds every month, depending on how much you are able to save. You don’t have to wait until you’ve accumulated a lump sum. You can invest as little as Rs 500 a month and maximise returns from every investible rupee you have.

  • Rupee cost averaging: Most investors find it difficult to time the market. The temptation is to buy more mutual funds in a bullish market when prices are already low and sell when share prices are falling. SIPs allow you to benefit from rupee cost averaging. That is, by investing at regular intervals, you get more mutual funds units when stock prices are falling and less when they are on the uptick. Therefore you can enjoy stable returns over a period of time.

  • Easy to invest: It’s very easy to invest in SIPs. Once you decide on the amount you can give a mandate to your bank to transfer the amount every month automatically to your AMC.

  • Discipline: SIPs introduce some amount of discipline in your investing. Most people fail to muster up the discipline and save up the money for mutual fund investments. Putting aside sums every month involves less pain and easier to maintain over the long run.

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