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A mutual fund is not an alternative investment option to stocks and bonds, rather it pools the money of several investors and invests this in stocks, bonds, money market instruments and other types of securities.
Each investor owns shares, which represent a portion of the holdings of the fund. Thus, a mutual fund is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
We offer a careful selection of mutual funds, based on in-depth analyses that best represent the most appropriate routes-to-market for specific strategic or tactical objectives. Our analyses include firm and fund-specific factors, including consistency and risk management. We also ensure rigorous periodic monitoring to revalidate our conviction in the constituents of our selection.
Mutual Fund Basics
UnderstandingMutualFunds
A mutual fund is a pool of money from numerous investors who wish to save or invest money just like you. The money collected is invested either in stocks, bonds and other securities, or in a combination of the three based on the investment objective of a particular scheme.
The fund adds value to the investment in two ways: income earned and any capital appreciation through sale. As an investor, you are issued units in proportion to the money you have invested.
Advantages of Mutual funds are:
1) Increase in diversification.
2) Liquidity on a daily basis.
3) Professional investment management.
4) Capacity to participate in investments that may be available only for larger investors.
5) Convenience as well as service.
6) Government oversight.
7) Easier comparison
There are different types of Mutual funds as well. Here are some of them.
Advantages of Mutual funds are:
1) Increase in diversification.
2) Liquidity on a daily basis.
3) Professional investment management.
4) Capacity to participate in investments that may be available only for larger investors.
5) Convenience as well as service.
6) Government oversight.
7) Easier comparison
There are different types of Mutual funds as well. Here are some of them.
Types of Mutual Funds
Mutual Fund schemes can be classified into different categories and subcategories based on the type of securities they invest in or their maturity periods.
Classification based on maturity period:
Open Ended
An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.
Closed Ended
A close-ended fund or scheme has a defined maturity period e.g. 1-3 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges.
Classification based on type of securities invested in
Equity Oriented Schemes
Equity oriented schemes are those schemes which predominantly invest in equity and equity related instruments. The objective of such schemes is to provide capital appreciation over the medium to long term.
These types of schemes are generally meant for investors with a long-term outlook and with a higher risk appetite.
Debt Oriented schemes
The main objective of debt-oriented schemes is to provide regular and steady income to investors. These schemes mainly invest in fixed income securities such as Bonds, Money Market Instruments, Corporate Debentures, Government Securities (Gilts) etc. Debt-oriented schemes are suitable for investors whose main objective is safety of capital along with modest growth. These funds are not affected because of fluctuations in equity markets. However, the NAV of such funds is affected because of change in the interest rate in the country.
Hybrid Schemes
Hybrid schemes provide the best of both worlds i.e. equity and debt. The aim of the hybrid funds is to provide both capital appreciation and stability of income in the long run. The proportion of investment made into equities and fixed income securities is pre-defined and mentioned in the offer document of the scheme. This type of scheme is an effective asset allocation tool. These schemes are suitable for investors looking for moderate growth. NAVs of such funds are generally less volatile in nature compared to pure equity funds.
Money Market/ Liquid Funds
These are predominantly debt-oriented schemes, whose main objective is preservation of capital, easy liquidity and moderate income. To achieve this objective, liquid funds invest predominantly in safer short-term instruments like Commercial Papers, Certificate of Deposits, Treasury Bills, G-Secs etc.
These schemes are used mainly by institutions and individuals to park their surplus funds for short periods of time. These funds are more or less insulated from changes in the interest rate in the economy and capture the current yields prevailing in the market.
Other Funds/Schemes
Gold Funds
The objective of these funds is to track the performance of Gold. The units represent the value of gold or gold related instruments held in the scheme. Gold Funds which are generally in the form of an Exchange Traded Fund (ETF) are listed on the stock exchange and offers investors an opportunity to participate in the bullion market without having to take physical delivery of Gold. Like any other mutual fund scheme, investors can buy, sell, hold, and conduct SIP/STP/SWP in these funds.
Index Funds
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc. These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.
Sector specific funds/schemes
These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert.
Tax Saving Schemes
These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.
Fund of Funds (FoF) scheme
A scheme that invests primarily in other schemes of the same mutual fund or other mutual funds is known as a FoF scheme. An FoF scheme enables the investors to achieve greater diversification through one scheme. It spreads risks across a greater universe.