Table of Contents
What is a mutual fund?
A mutual fund is a pool of investment funds collected from multiple investors. Mutual fund pools money from multiple investors and invests this money in stocks, bonds, money market instruments and other types of securities.
A mutual fund is managed by a professional fund manager. The main aim of the fund manager is to produce capital gains for the fund’s investors. All investors have a share in the gains or losses of the fund.
Mutual funds are an ideal investment vehicle for investors who are not familiar with all the important concepts of investing.
Every fund has well-defined investment objectives. You can choose a fund scheme as per your financial goal and risk profile and start investing to achieve that goal.
Who regulates mutual funds?
All mutual funds are registered with the Securities and Exchange Board of India (SEBI). SEBI formulates policies and regulates mutual funds to protect the interest of the investors.
SEBI notified regulations for these funds in 1993 (fully revised in 1996). And have been amended thereafter from time to time.
Who manages mutual funds?
Asset Management Company (AMC) manages mutual funds. An AMC is a company that takes investment decisions for the fund. It manages the assets of the fund as per the objectives.
The AMC hires a professional fund manager. It is the fund manager who plays a decisive role in the performance of the mutual fund.
The fund manager makes decisions pertaining to the buying and selling of securities for achieving the financial objectives of the scheme.
Benefits of investing in mutual funds
With every passing day, mutual funds are becoming increasingly popular among the investors in India. A large number of people are showing interest in these funds due to the various benefits they come with.
However, a majority of people are still not fully aware of the benefits of investing in mutual funds.
Listed below are the benefits of investing in mutual funds to help you make an informed decision.
1. Professional Management
Investing is not an easy task for many people. But investing in mutual funds is very easy. These funds are managed by professional fund managers. These managers have sufficient expertise in managing funds. The fund manager picks the best companies, analyses them and tracks them to get the best returns.
2. Diversification
The biggest advantage of investing in mutual funds is immediate diversification. They allow you to access a wide and diversified portfolio. Portfolio can include more than one asset class to spread the risks. This way, when a particular asset class doesn’t perform. Then the loss can be compensated with profits made in other asset classes.
3. Small Investment
You don’t have to invest thousands of rupees in these funds in one go. Instead, you can start investing with an amount as little as Rs.500 every month through the SIP. It is Rs.100 via SIP for some schemes. You can also invest with an amount as low as Rs 5,000 only as a lump sum. It is even lower for some schemes.
4. Easy Liquidity
These funds are considered liquid assets. Unless they have a pre-specified lock-in period, you can sell your units at any point. You can sell them on any business day and receive your money within days. This way, you get money from your investments as and when you require.
5. Safety
In India, mutual fund investments are regulated by the SEBI. SEBI formulates policies and supervises these funds to protect the interest of the investors. All these funds are required to follow the processes laid down by SEBI. This ensures that your investments are safe and well-regulated.
6. Low-cost Investment
Low-cost investment is also a feature of these funds. They collect money from multiple investors and invest in assets collectively. This way they save on transaction and other costs. The savings are passed on to investors in the form of a low expense ratio.
7. Variety of Schemes
In India, mutual funds come in different categories and types. They offer you a variety of schemes to suit your investment goals and risk appetite. You can find schemes suitable for anyone.
8. Multiple Modes of Investments
Mutual funds offer a variety of investment and withdrawal options. You can choose multiple modes of investments. The modes such as a one-time investment, SIP, STP, SWP, etc. They also offer two kinds of schemes: Growth and Dividend.
9. Simplicity
Mutual funds are quite easy to buy and easy to understand. All the information and data is easily available. Before investing in a scheme all you need to analyze its performance. The easily accessible information makes the investment in mutual funds much simpler.
10. Transparency
These funds are very transparent. All fund houses are under the purview of statutory government bodies like SEBI and AMFI. They all need to make the necessary disclosures. All of the information about a scheme can easily be found on AMC’s website. A mutual fund’s price or its NAV (Net Asset Value) is updated every day.
11. Beat Inflation
Mutual funds are an ideal investment option for long-term inflation-adjusted returns. Most of them invest in the equity market. Therefore, you get a chance to benefit from the growing Indian economy by investing in mutual funds. Investing in mutual funds for a long period of time is one of the best ways to stay ahead of inflation.
12. Tax Benefits
There are tax saving mutual funds. They are called ELSS funds. You can invest up to Rs.1.5 lakh in ELSS that are exempt u/s 80C of the Income Tax Act. Long-Term Capital Gains (LTCG) on equity funds of up to Rs 1 lakh are tax-free. However, you have to pay 10% tax on LTCG above Rs 1 lakh without the benefit of indexation.
So, the above mentioned are some of the benefits of investing in mutual funds. You should keep these benefits in mind while investing in mutual funds.
However, you should also keep in mind that mutual funds are subject to market risks.
Therefore, choose funds that suit your requirement and risk appetite or consult a financial advisor before investing.
Disadvantages of investing in mutual funds
There are certain disadvantages associated with mutual funds like the risk of over-diversification and transaction charges.
Listed below are some disadvantages of investing in mutual funds to help you make an informed decision.
1. No Guaranteed Returns
Mutual funds do not offer guaranteed returns. The funds are exposed to equity markets-related risks. The returns on a mutual fund would depend on the market conditions. The professional money management of a fund also does not protect you from getting bad returns. Therefore, if you want guaranteed returns, you should not invest your money in mutual funds.
2. No Insurance
Mutual funds do not have insurance against the possible loss on your initial investment. Although, they are regulated and supervised by SEBI and AMFI. However, there is no insurance against losses in mutual funds.
3. Dilution
Diversification is one of the main advantages of these funds. While diversification reduces your risk of loss, it also dilutes any major gains. These funds are diversifying investments. Hence, you should not invest in too many funds in the name of diversification.
4. No Control
The manager of the fund decides what to invest and when to invest. All the decisions about which securities to buy and sell are taken by your fund manager. This means you do not have any control over your investment. And, you have to trust someone else for your money when you invest in mutual funds.
5. Costs
Most funds charge operating fees and expenses involved in the professional management of the fund. Some funds also charge an entry load. This is also borne by the investor. Furthermore, these funds also charge an exit load when you exit from your fund.
As mentioned above, the benefits of investing in mutual funds can override its disadvantages without any doubt if you make informed decisions.
Types of Mutual Fund Schemes
SEBI has classified mutual fund schemes under five broad groups:
1. Equity schemes
2. Debt schemes
3. Hybrid schemes
4. Solution-oriented schemes
5. Other schemes
Categories of Mutual Fund Schemes
The mutual fund scheme categories under each of the groups are given below.
Equity Schemes
Equity mutual fund schemes further classified into 10 categories:
1. Multi-Cap Fund
2. Large Cap Fund
3. Large & Mid Cap Fund
4. Mid Cap Fund
5. Small-Cap Fund
6. Dividend Yield Fund
7. Value Fund/ Contra Fund
8. Focused Fund
9. Sectoral/ Thematic
10. ELSS
Definitions – Large Cap, Mid Cap, and Small Cap
Large Cap: 1st – 100th company in terms of full market capitalization.
Mid Cap: 101st – 250th company in terms of full market capitalization.
Small-Cap: 251st company onwards in terms of full market capitalization.
Debt Schemes
Debt mutual fund schemes are classified into 16 categories:
1. Overnight Fund
2. Liquid Fund
3. Ultra Short Duration Fund
4. Low Duration Fund
5. Money Market Fund
6. Short Duration Fund
7. Medium Duration Fund
8. Medium to Long Duration Fund
9. Long Duration Fund
10. Dynamic Bond
11. Corporate Bond Fund
12. Credit Risk Fund
13. Banking and PSU Fund
14. Gilt Fund
15. Gilt Fund with 10-year constant duration
16. Floater Fund
Hybrid Schemes
Hybrid mutual fund schemes are classified into 6 categories:
1. Conservative Hybrid Fund
2. Balanced Hybrid Fund/ Aggressive Hybrid Fund
3. Dynamic Asset Allocation or Balanced Advantage
4. Multi-Asset Allocation
5. Arbitrage Fund
6. Equity Savings
Solution-Oriented Schemes
Solution-oriented mutual fund schemes are classified into 2 categories:
1. Retirement Fund
2. Children’s Fund
Other Schemes
Other mutual fund schemes are classified into 2 categories:
1. Index Funds/ ETFs
2. FoFs (Overseas/ Domestic)
Mutual Fund Companies in India
1. Aditya Birla Sun Life Mutual Fund
3. Baroda Pioneer Mutual Fund
4. BNP Paribas Mutual Fund
5. BOI AXA Mutual Fund
6. Canara Robeco
7. DHFL Pramerica Mutual Fund
8. DSP Black Rock Mutual Fund
9. Edelweiss Mutual Fund
10. Essel Mutual Fund
11. Franklin Templeton Mutual Fund
12. HDFC Mutual Fund
13. HSBC Mutual Fund
14. ICICI Prudential Mutual Fund
15. IDBI Mutual Fund
16. IDFC Mutual Fund
17. IIFL Mutual Fund
18. India Bulls Mutual Fund
19. INVESCO Mutual Fund
20. JM Financial Mutual Fund
21. Kotak Mutual Fund
22. L&T Mutual Fund
23. LIC Mutual Fund
24. Mahindra Mutual Fund
26. Motilal Oswal Mutual Fund
28. PPFAS Mutual Fund
29. Principal Mutual Fund
30. Quantum Mutual Fund
31. SBI Mutual Fund
32. Shriram Mutual Fund
33. Sundaram Mutual Fund
34. Tata Mutual Fund
35. Taurus Mutual Fund
36. Union Mutual Fund
37. UTI Mutual Fund
Who should invest in mutual funds?
Mutual funds are a convenient and ideal investment for all types of investors. In India, mutual funds come in different categories and types. They offer a variety of schemes.
They have something to offer each type of investor as per their objectives. Thus these funds are suitable for both individual retail investors and institutional investors.
Which is the right time to invest in mutual funds?
There is no right time or a bad time to start investing. Therefore, go ahead and start investing at the earliest. You can delay your investment if you want to give up some extra gains.
You should not worry about getting everything right. Therefore, you can invest as and when you wish. However, it is always better to invest at a lower NAV (Net Asset Value).
It is always the right time to start investing in mutual funds, as long as your investment horizon is long.
Which is the best mode to invest in mutual funds?
You can invest in mutual funds either by investing a lump sum amount or via a SIP route.
There is no harm in investing a lump sum amount if you have a lump sum amount in hand. When you invest a lump sum amount. The compounding could work better over the long term.
The lump sum mode of investment gives higher returns during upward trends of market. Whereas, the SIP mode of investment generally gives better returns during downward trends of market.
If you are new or a small investor then SIP is the best way to invest. In a SIP model, you get more units at lower NAV when the market is low. And lesser units at higher NAV when the market is high.
This way, you would reduce your average cost per unit over a period by investing via the SIP route. Hence, there would be fewer chances of loss.
Are returns from mutual funds guaranteed?
Mutual funds do not guarantee you any fixed returns. They are linked to equity markets-related risks. So, the returns on a fund would depend on market performance.
The prices of equity funds decline if the market is in a downward trend. However, if the market is on a bull run, the prices of equity funds will increase. This means these funds do not guarantee your investment protection.
Therefore, you should do your research before investing in mutual funds. This will help you meet your financial objectives.
Hope now you know what is mutual fund? Different types of mutual funds, Disadvantages and benefits of investing in mutual funds.
Note: This post was originally published in May 31, 2018. Now it has been updated for accuracy and comprehensiveness.
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