Financial Planning Consultant
Financial Planning Consultant
MUTUAL FUND
ABOUT MUTUAL FUND

A mutual fund is a pool of money collected from investors, which is invested by an Asset management company to achieve some common objective of the investors. The picture below would help you to understand it better.

Investors get the net returns after deducting the related expenses. However the investors would have to bear an equal share of the losses as well. Mutual Funds schemes are managed by respective Asset Management Companies sponsored by financial institutions, banks, private companies or international firms.


  • Benefits of Investing In Mutual Funds

    Mutual Funds offer several benefits to an investor such as potential return, liquidity, transparency, income growth, good post tax return and reasonable safety. There are number of options available for an investor offered by a mutual fund. Mutual funds can reduce the anxiety of investing.

    Most investors constantly live with a certain amount of anxiety and fear about their investments. This is usually because they feel they lack one or more of the following essentials:

      Market Knowledge
      Investing Experience
      Self-discipline
      A proven game plan
      Time

    As a result, they often invest on impulse or emotion. The advantages offered by mutual funds can go a long way toward relieving the burdens associated with investing.

    Mutual fund shares can be purchased in such small amounts that it makes it easy to get started

    Mutual fund accounts can also be added to whenever you want in small amounts. Since a Mutual Fund scheme invests in number of stocks and/or debentures, the associated risks are greatly reduced.

    Investments in Mutual Funds are completely liquid and can be redeemed at their Net Assets Value-related price on any working day.

    Access to up-to-date information on the value of investment in addition to the complete portfolio of investments, the proportion allocated to different assets and the fund managing investment strategy makes it easier to manage.

  • Mutual Funds and its Types

    There are different types of mutual fund made to suit the different needs and demands in the Market. They depend on factors like financial position, risk tolerance and return expectations etc

      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.
      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.
  • How to Invest in Mutual Funds
      Identify your Investment needs
      Choose the right Mutual Fund
      Select the ideal mix of Schemes
      Invest regularly
      Start early
      The final step
    Mutual Fund Type Objective Risk Investment Portfolio Who should invest Investment horizon
    Money Market

    Liquidity + Moderate Income + Reservation of Capital

    		 Negligible

    Treasury Bills, Certificate of Deposits, Commercial Papers, Call Money

    Those who park their funds in current accounts or short-term bank deposits

    		 

    Short-term Funds (Floating - short-term)

    Liquidity + Moderate Income

    Little Interest Rate

    Call Money, Commercial Papers, Treasury Bills, CDs, Short-term Government securities.

    Those with surplus
    short-term funds

    		  
    Bond Funds
    (Floating - Long-term)

    Regular Income

    Credit Risk & Interest Rate Risk

    Predominantly Debentures, Government securities, Corporate Bonds

    Salaried & conservative investors

    		  

    Gilt Funds

    Security & Income

    Interest Rate Risk

    Government securities

    Salaried & conservative investors

    		  

    Equity Funds

    Long-term Capital Appreciation

    High Risk

    		 Stocks

    Aggressive investors with long term out look.

    		  

    Index Funds

    To generate returns that are commensurate with returns of respective indices

    NAV varies with index performance

    Portfolio indices like BSE, NIFTY etc

    Aggressive investors.

    		  

    Balanced Funds

    Growth & Regular Income

    Capital Market Risk and Interest Rate Risk

    Balanced ratio of equity and debt funds to ensure igher returns at lower risk

    Moderate & Aggressive

    		  

    Selecting a scheme that matches your investment objectives is important
      For Capital Appreciation go for equity sectoral funds, equity diversified funds or balanced funds.
      For Regular Income and Stability you should opt for income funds/MIPs
      For Short-Term Parking of Funds go for liquid funds, floating rate funds, short-term funds. For Growth and Tax Savings go for Equity-Linked Savings Schemes.
    Investment Objective Investment horizon Ideal Instruments
    Short-term Investment

    1- 6 months

    		Liquid/Short-term plans

    Capital Appreciation

    Over 3 years

    Diversified Equity/ Balanced Funds

    Regular Income

    Flexible

    Monthly Income Plans / Income Funds
    Tax Saving Tax Saving Equity-Linked Saving Schemes (ELSS)

    Before investing in a Mutual Fund an investor must identify his needs and preferences. While selecting a Mutual Fund's schemes he should consider the effect of inflation rate, diversification of investment, the time period of investment and the risk factors. There are various types of risk factors like:

      Market Risk
      Credit Risk
      Interest Rate Risk
      Inflation Risk
      Political Environment
    There are four parameters considered to measure the performance of a mutual fund.
      Risk-adjusted returns of the scheme's NAV
      Diversification of Portfolio
      Liquidity
      Asset Size.
Palani. G
Financial Planning Consultant
Mobile: 97909 21951, 86800 00446
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