Mutual funds

Fundraising companies raise money from the public. The funds are then invested in different asset classes according to the offer documents.

The Asset Management Company issues and redeems mutual funds units based on the fund’s Net asset value, which is determined at each trading session. NAV is the sum of all assets and expenses minus the number of units.

Benefits:

Funds professionals:

Investments in mutual funds are managed by highly-skilled professionals who, with the support of investment research teams, analyze and trade companies to reach the scheme's objectives.

Diversification of portfolio:

Mutual funds can invest in many securities. Diversification allows for greater risk management as it can limit exposure to one security.

Low investment costs:

Mutual funds allow you to invest in a diverse portfolio for very little money. This makes it even more attractive.

Nature has high liquidity

Investors can redeem all or part their units in open-ended mutual funds when they need them.

It is well-regulated.

Mutual funds have been well regulated and monitored by SEBI. SEBI has the authority to inspect mutual funds and monitor them.

There are many types of mutual funds:

Based on the maturity period

Schemes that are open-ended:

Open-ended funds are those that can be subscribed to or repurchased on a regular basis throughout the year. These funds don't have a fixed maturity and investors can sell or buy units at Net Asset Value (NAV) prices. Liquidity is the key feature of this scheme.

Close-ended schemes

Close-ended funds have a defined maturity period. The scheme is only open to subscription during the launch period. Investors can invest in the scheme during the initial public issue. After that, they can either buy or sell units on the stock exchanges listed for the scheme.

Depending on your investment goal:

Equity-Oriented Schemes:

These funds are designed to increase capital over the medium- to long-term. These schemes typically invest a large portion of their corpus into equities. These schemes offer a variety of options, including a growth option and a dividend option.

Income/Debt oriented schemes:

These funds are designed to provide steady and regular income to investors. Fixed income securities are usually investments in income funds such as bonds and corporate debentures. These funds are more risky than equity schemes, and capital appreciation is also less.

Balanced funds

These funds are designed to provide regular income and growth. Balanced funds invest in both fixed income and equities according to the percentage indicated in their offer documentation.

Money Market and Liquid Fund:

These funds are also income funds. They aim to provide liquidity, capital preservation and moderate income. These funds only invest in short-term safer instruments like treasury bills and certificates of deposit. They also invest in commercial paper, interbank call money, government securities, and other safe investments. These schemes have lower returns than other funds.

Gilt Fund

These funds only invest in government securities that have no default risk.The NAVs of these schemes can fluctuate because of changes in interest rates or other economic factors.

Index funds

These funds are a replica of an index portfolio, such as the NSE 50 Index (Nifty), or the BSE Sensitive Index (BSE Sensitive).

Sector specific schemes:

Only those industries or sectors are eligible for these funds. The performance of each sector/ industry will determine the returns.

Save tax

These schemes offer tax reductions to investors according to specific provisions of Income Tax Act 1961. The Government offers tax incentives for investments in certain avenues, e.g., the Income Tax Act 1961. Equity Linked Savings Plans (ELSS). The mutual funds offer tax benefits to pension schemes. These mutual funds are growth-oriented and invest predominantly into equities.

Fund of Fund (FoF scheme):

This scheme invests in primarily other mutual fund schemes or mutual funds. Investors can diversify more by investing in one scheme because it spreads risk across a larger universe.

Loading or no-load funds:

No-load funds charge exit fees, while a load fund charges a portion of NAV.

Mutual Funds Investment Plans

Growth Plan

This plan allows investors to reinvest their returns and distribute very little income among unit owners or investors.

Dividend Plan

This plan allows income to be distributed between unit owners or investors from time-to-time.

Dividend Reinvestment Plan

This plan allows investors to increase the number of units they own by reinvesting or declaring dividends from their funds.