What should Mutual Fund Investment?

A mutual fund is a pool of money collected from investors and is invested according to stated investment objectives

Mutual Funds represent the hands-off approach to entering the equity market.

Increased complexity of Financial Markets

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Mutual Funds

Mutual Funds are among the hottest favorites with all types of investors. Investing in mutual funds ranks among one of the preferred ways of creating wealth over the long term. In fact, mutual funds represent the hands-off approach to entering the equity market. There are a wide variety of mutual funds that are viable investment avenues to meet a wide variety of financial goals. This section explains the various aspects of Mutual Funds.




What is A Mutual Fund

A mutual fund is a pool of money collected from investors and is invested according to stated investment objectives.

How do Mutual Funds Work

Structure of Mutual Funds

Concept of Mutual Funds

Pros and Cons of Mutual Funds

Advantages of Mutual Funds

  • Portfolio diversification
  • Professional management
  • Reduction in risk
  • Reduction in transaction cost
  • Liquidity
  • Convenience and flexibility

Disadvantages of Mutual Funds

  • Scheme performance depends on fund Manager capability/share market
  • Volatility

Mutual Fund Classification

Mutual Fund - Based on Investment

Debt Funds

Predominantly invest in the debt markets

  • Diversified debt fund

Debts Fund Include

  • Income funds or Diversified debt funds
  • Gilt funds
  • Liquid and money market funds
  • Serial plans or fixed term plans


As the debt fund invest in debt securities and government bonds. The risk is low and so is the return.

Equity Funds

Equity Funds pre-dominantly invest in equity markets

  • Diversified portfolio of equity shares — Large cap
  • Select set based on some criterion

Equity Funds Include

  • Diversified equity funds
  • ELSS as a special case
  • Primary market funds
  • Mid cap funds
  • Small stock funds
  • Index funds
  • Sectoral funds


The risk associated with the equity funds are high as they Invest in equity market, they also have a high growth potential while also having a high risk

Balanced Funds

Balanced Funds, Investment is in more than one asset class

  • Debt and equity in comparable proportions
  • Pre-dominantly debt with some exposure to equity
  • Pre-dominantly equity with some exposure to debt

Balanced Funds Include

  • Education Plans
  • Children's Plans
  • Pension Plan
  • Monthly Income Plans (MIPs)


As the exposure of balanced is both on equity and debt the returns will be based on the level of exposure to the particular market.

Mutual Fund - Based on Schemes

Open and Close Ended Funds

Open Ended Funds

  • Initial issue for a limited period
  • Continuous sale and repurchase
  • Size of the fund changes as investors enter and exit
  • NAV-based pricing

Closed Enede Funds

  • Sale of units by fund only during IPO
  • Listing on exchange and liquidity for investors
  • Size of fund is kept constant
  • Price in the market is usually at a discount

What is Net Asset Value - NAV?

Net Asset Value (NAV) denotes the performance of a particular scheme of a mutual fund

For Example:-

If the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20.

Why Mutual Funds?

  • Falling Interest Rates
  • Unattractiveness of traditional investment avenues
  • Lack of attractive long term Investment Avenues
  • Increased complexity of Financial Markets
  • Information overdose
  • Need to diversify across several Asset Classes
  • Need for Tax efficiency in investment options

Why Equity Funds?

  • To beat Inflation
  • In the long term equity outperforms other investments
  • Chance of buying high value stocks with small investment
  • Well researched stock investments
  • Professionally managed
  • To share the benefits of economic growth

What is Systematic Investment Plan?

What is Systemtatic Investment Plan

  • Invest regularly a fixed amount at a specified frequency say, monthly or quarterly.
  • SIP is a simple method of investing used across the world as a means to creating wealth
In Short Called as SIP

Benefits

  • Smaller amounts — affordable.
  • Regular Investing — becomes a habit.
  • Diversify investments over various time periods.
  • Power of Compounding
  • Rupee Cost Averaging
  • Avoids sudden over exposure in bullish times.

Equity Linked Savings Scheme - ELSS

  • As the name suggests they invest in mainly in equities only, except for a small portion of investment in liquid money market
  • They are also called as Tax Saving Schemes
  • They have a lock-in period of three years
  • Amount invested in ELSS is exempted under Section 80C-Subject to a maximum of 1 Lakh during a financial year.
  • If opted for Dividend reinvestment plan, the reinvested amount will also be subject to three in lock in period
As per the SEBI mandate, a minimum of 90% of investments by ELSS
should be in equities at all times

Taxation

  • Dividend from MF is Tax free in the hands of investor
  • Amount of investment in ELSS is exempted under 80C-Maximum of 1 Lacs
  • Short Term and Long Term Capital gains are subject to Securities Transaction Tax and it is Tax free in the hands of investors

Forms

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Structure

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FAQ's

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