One should never invest in Mutual Funds, but should invest through them. To elaborate, we invest in various investment avenues based on our requirements, e.g. for capital growth – we invest in equity shares, for safety of capital and regular income – we buy fixed income products.

The concern for most investors is: how to know which instruments are best for them? One may not have enough abilities, time or interest to conduct the research. To manage investments, one can outsource certain tasks one is unable to do.

Investor will get information from the mutual fund manager in case of any changes to your scheme. Moreover, a regular newsletter developed and refreshed mutual fund documents will be given at least once in 2 years. The appendix document will let you keep a record of any changes made to mutual funds till the updated schemes are sent out.

The “expense ratio” factor indicates the ability of a fund. This is necessary to apply to calculate the ability (or lack of it) among funds.

Mutual Fund investments are subject to market risk, Mutual Funds do not give assured returns to investors. Although SEBI ordinances allot “Mutual Funds” to give assured returns, subject to the fund meeting specified conditions. Most Funds do not give such guarantees. In the state of a guaranteed return scheme, the sponsor or the AMC ensures the least level of return and the variation is large, if the actual returns are smaller than the guaranteed.

There is a beautiful Chinese proverb, “The best time to plant a tree was 20 years ago. The second best time is now.”

There is no reason why one should delay one’s investments, except, of course, when there is no money to invest. There is no minimum age when one can start investing. The moment one starts earning and saving, one can start investing in Mutual Funds. In fact, even kids can open their investment accounts with Mutual Funds out of the money they receive once in a while in form of gifts during their birthdays or festivals. Similarly, there is no upper age. Mutual Funds have many different schemes suitable for different

Most people don’t think about their retirement until they are close to retirement. The entire working life is spent attending to one requirement after another right from owning a vehicle, a home, raising a family, on kids’ education to their weddings. Once these responsibilities have been taken care of, we start looking at how much is left for the retired life that’s around the corner. That’s when people start thinking of investing their life’s savings in something that can give fast returns in a short period before the retired phase begins. This is a wrong way to plan for that phase of life when you need the most comfort, security, good healthcare and sustenance over 15-30yrs without regular income.

Planning for this phase must begin as early as possible. Whatever may your earnings and lifestyle be, you can always save the money you have left after paying for all your expenses and fulfilling your financial commitments you surely have some money left at the end of every month after having paid all bills and other liabilities like car EMI, home loan EMI, investment for children, emergency fund, etc. Even if the amount is small, investing this in the right instrument can help you create wealth over the long term. And what better instrument than Mutual Funds! You can invest in mutual funds every month through SIP with as little as Rs. 500 a month and increase the amount as your income/savings grow. You’ll be pleasantly surprised when you see the power of compounding work its magic and who knows you could end up with the proverbial basket of golden eggs!

We’ve all read about stories of kings and their great desire for a suitable heir in history and story books. Just like kings passed on their kingdom to the rightful heir, it’s advisable to name an heir for each of your assets by way of a legally enforceable will. Most people don’t create a will during their lifetime. This can make it contentious as to who would inherit the assets of a person after his/her death. This is where nomination becomes important.

Mutual Funds invest in marketable securities that trade on various exchanges. Hence the NAV of a mutual fund moves up or down daily depending on how the benchmark index moves. This results in volatility in your mutual fund investments over short-term. If you had to look at the average return from a mutual fund investment over a short period of time, the return could be positive or negative depending on how the benchmark index has performed during the same time period.

When you plot the movement of an index or the NAV of a scheme over a short period, you will see many sharp spikes indicating high volatility. You can not rely on an investment that’s so volatile to meet your financial goals which are in a way fixed in terms of time and value. But if you looked at the performance of the same index or mutual fund NAV over a longer period of 5-10 years, you’ll notice that the spikes in the graph are muted. If you change the time period to 10-15 years, you’ll find the volatility of return is significantly reduced.

Over long-term, market indices move upward and hence the average return is usually positive for this period. However, average return from the same index can either be positive or negative over a short-term.

Just the way we have different categories of mutual fund schemes depending on their riskiness, we also group investors into similar categories based on their risk profile. Investors can be classified into aggressive, moderate and conservative risk profiles based on two factors. The risk profile of an investor is dependent on his/her ability to take risk (risk capacity) and willingness to assume risk (risk aversion). If an investor has both low willingness and ability to take risk, we call him/her conservative investor who should invest in low risk investment products like debt funds, bank FDs.

One of the most important considerations before choosing an investment avenue is the expected “time horizon”, i.e. time in days, months or years that an investor intends to stay invested.

All investments should ideally result from a financial or investment plan. Such plans usually indicate how long it would take for a financial objective to be met.

Let’s consider an investor who just made ₹ 50 lacs in a real estate transaction. He is looking for a safe avenue to invest, before he takes a final decision on what to do with that money. An ideal scheme in this case would be a Liquid Fund, which is designed to provide liquidity with generally a high probability for capital protection. He can redeem whenever he has made up his mind.

Therefore, the decision on how long one needs to stay invested, depends on investment objective. Investors need to periodically review investment status and progress, with their advisors. During such reviews, decisions to redeem, switch, invest or leave alone are usually made.

Investing in Mutual Funds online is no different from that first flight. While you may be initially worried about where your money is going and if it has reached the intended recipient, online mode of investment is as safe as any other mode. Online payment platforms are secured with necessary encryption protocols so that your personal and financial data can’t be tapped during data transmission.

The online process is far more convenient because you can access all your transactions, buy or sell at any time and see how your portfolio is doing. When you invest online, your money is credited directly into the Mutual Fund’s account and it allots your units which you can see by logging into your account. So apart from safety and convenience, online mode offers you transparency too similar to offline mode.. Your money is safe in the system!

Usually, when people select a scheme themselves, they do so based on its performance. They don’t consider that past performances may not be sustained. Evaluation of schemes is a function of various attributes of the schemes, e.g. scheme objective, investment universe, the risks that the fund is taking, etc. This requires the investor to put in time and effort. The investor also needs to have the requisite expertise to be able to understand the features and nuances as well as the ability to analyse and compare from among many options. A distributor of mutual funds or an investment advisor would be qualified and trained for such a job.

Secondly, more important than investing in the best scheme, it’s important to invest in a scheme most appropriate or suitable to the investor’s current situation. Though the investor’s situation is best known to the investor, a good advisor or distributor would be able to ask the right questions and put things in perspective.

Once the portfolio is constructed, regular monitoring of the scheme characteristics and portfolio is required, which is an on-going job. An advisor/distributor helps you review these schemes too.

Open-ended Mutual Funds allow investors to redeem their units after certain period at no cost. If an investor wishes to redeem his/her units before this stipulated period, an exit load is levied. Mutual funds charge exit load if investors sell their investments before having completed a specified time in the fund. This is meant to discourage investors with short-term goals from investing into funds that require long-term holding period. Liquid funds usually don’t have an exit load.

Exit loads are charged as a percentage of the NAV if units are redeemed before a given time as mentioned in the Scheme Information Document. Say, a scheme has 1% exit load if investment is redeemed before one year. If the NAV of the scheme is INR 100 and you redeem your holding before a year, you will receive only INR 99 per unit of your holding as 1% will be deducted by the fund house for premature redemption.

You’ll also incur capital gains tax depending on the kind of investments you’ve made and for how long did you hold the investment i.e Short-term or Long-term capital gains tax. Equity-oriented fun transactions are also subject to STT (Securities Transaction Tax). Every time you buy or sell units from these funds, you pay STT that adds up to the cost of your transaction.

Mutual Funds invest in securities that trade in different markets be it stocks, bonds, gold, or other asset classes. Any tradable security is inherently exposed to market risk i.e the value of a security is subject to fluctuations caused by market movement.  

Changes in interest rate inversely affect the price of bonds and thus NAVs of debt funds. Thus, debt funds face the greatest interest rate risk. They are also exposed to credit risk (risk of the bond issuer defaulting). Some income-oriented debt funds are also exposed to inflation risk i.e the return produced by them may not compensate for the inflation experienced by the investor.  

Equity Funds face market risk as they invest in stocks trading in the market and stock price fluctuations affect the NAV of these funds. 

Some securities are actively traded in the market while others are not. If a mutual fund has invested your money in securities that are not frequently traded, the fund may find it difficult to buy or sell the security at the right time at a suitable price. This is liquidity risk that raises the cost of transactions within a fund’s portfolio, impacting your fund’s NAV. 

Thus, the risk of investing in Mutual Fund depends on the type of assets it invests in. 

People think that Mutual Funds are elite investments made only for the wealthy. The fact is: one does not need large sum to invest in Mutual Funds, you can start with a sum as low as ₹ 500, or 5000 depending on the kind of fund you choose.

Why keep the minimum amounts as low as these?

The economies of scale can be understood easily if we look at travelling by an airplane. The plane would cost a lot of money and, of course, not everybody owns a plane! However, we can afford air travel simply because all the costs are divided among all the passengers using the services at various different points of time.

Similarly, a person may not have enough money to create a diversified portfolio through investment in a very large number of investment avenues, one may not have enough money required to conduct or purchase research on investments. However, the economies of scale allow small investors to get multiple benefits through Mutual Funds.

Mutual Funds are thus ideal vehicles for small investors for saving and investing.

Every one wants good returns without taking any risk. But is it possible to earn such a return without even investing your money? If you’re investing your savings, you should be willing to take the risk for earning a return that’s better than inflation. (To know how inflation impacts your savings, read this article here)  This investment could be for some of your future goals like children’s education, new home or retirement. However, you may be worried that you are risking your hard-earned money by investing in Mutual Funds, when you could have put it in a fixed deposit. And that’s a valid doubt. 

Mutual funds are known to be risky. They don’t guarantee returns like fixed deposits. But they are like a game of cricket. When the Indian team gets to the pitch, we don’t even know whether they’ll win the match. There is huge risk of losing but there is an equally big opportunity of winning. Unless the team takes the risk of playing the match, they can’t taste success. Same goes with Mutual Funds. Unless you risk your capital by investing it, you can’t experience the other side of Mutual Funds i.e. the potential to earn higher inflation-adjusted return than most other options like FD, physical gold, real estate etc. 

Several questions rest in a potential investor’s mind regarding the ideal amount to invest. People consider Mutual Funds as just another investment avenue. Is it really the case? Is a Mutual Fund just another investment avenue like a fixed deposit, debenture or shares of companies?

A Mutual Fund is not an investment avenue, but a vehicle to access various investment avenues.

Think of it this way. When you go to a restaurant, you have a choice to order a la carte or buffet/thali or a full meal.

Compare the full thali or the meal with a Mutual Fund, whereas individual items you order are the stocks, bonds, etc. A thali makes the choice easy, saves time and also some money.

The important thing is to start investment early, even if small, and gradually add on to your investments as your earnings increase. This gives you better prospects of better returns in the long run.

A factsheet is the most reliable guide an investor can access to get detailed information on a scheme at one go. Have you seen what a monthly report card of a student looks like? It covers not only the academic performance-related aspects of the child but the child’s behavior, participation in extra-curricular activities, attendance, discipline, and everything about the child that you need to know. The report card also shows the child’s performance in comparison with the class average.  

The same goes with a fund factsheet. It covers important aspects of the fund that every prospective or existing investor must know like investment objective, benchmark, AUM, fund managers, features like options available, minimum investment amount, exit loads applicable, and NAVs of different plans. The factsheet then covers important performance and risk parameters like standard deviation (measure of volatility), beta, Sharpe ratio, expense ratio of different plans, and portfolio turnover for equity funds while duration, average maturity, and portfolio yield are disclosed for debt funds. 

The factsheet also shows portfolio holdings for the previous month across sectors and securities. It showcases the fund’s historic performance in comparison to its benchmark and specifies the risk level of the fund. In short, the factsheet provides you with every critical bit of information that you must know as an investor.

After its launch in 1964, Mutual Funds have grown to manage assets over 17.37 lakh  crores (as on Jan 31, 2017).

This impressive growth is because of a strong Indian economy, better regulation, entry of reputed Indian and Foreign Asset Managers, and increasing acceptance of Mutual Funds as a preferred asset class amongst Indian investors.

It is interesting to note that the average investment in every individual retail investor account is ₹ 68,086, indicating the acceptance of this asset class by the growing Indian middle class.

India today has 42 Asset Management Companies (AMC) that help increase awareness and aid in spreading the message of Mutual Funds and financial planning to an increasingly aspirational country.

Nearly 4000 crores is invested every month by way of Systematic Investment Plans, another indicator of the trust and popularity of Mutual Funds in India.

The Top 15 cities of India have 83% of total Mutual Fund Assets. The industry is making serious efforts to broaden the awareness and acceptance of Mutual Funds in smaller cities and towns of India.

(All data provided by Association of Mutual Funds of India).

Compounded Annual Growth Rate(CAGR) is a widely used return metric because it truly captures the year-on-year return earned by an investment, unlike absolute return that captures the point-to-point return from an investment without considering the time taken to earn it. 

CAGR is preferred because it allows returns to be compared across different asset classes by providing the average annual return earned by an investment based on the initial invested amount, the final value of investment and the time-period lapsed. If an investment of Rs1000 made 5 years ago is worth Rs.1800 today, while the absolute growth rate is 80%, its CAGR is the average return the investment earned every year. The CAGR works out to be 12.5%. If you had to compare this with a bank FD that promised 12.5% per annum, CAGR makes it easier to compare.  

Similarly, if you had to calculate the return earned by your investment after removing inflation, which is an annual figure of say 4%, CAGR makes it simpler to calculate that you really earned 8.5% after removing inflation. CAGR is useful when returns are compared for period greater than one year. The investment may have given more than 12.5% in some years and less than 12.5% in other years but on an average, it grew by 12.5% annually during the 5-year period. 

Every open ended scheme offers liquidity with almost complete freedom, i.e. no restriction on time or amount of redemption. However, a few schemes may specify an Exit Load.

For example, a scheme specifies an exit load of 1%, if redeemed within 1 year. What it means is that, if an investor has invested on April 1, 2016, any redemption done on or before March 31, 2017 would attract a penalty of 1% on the NAV. If an investor redeems on February 1, 2017 with the NAV at ₹ 200, then ₹ 2 would be deducted and only ₹ 198 per unit would be returned to investor.

All information on exit loads are usually mentioned in relevant scheme related documents. For instance, a fund fact sheet or key information memorandum would contain such information.

Many of us dread the thought of managing our own investments. With a professional fund management company, people are put in charge of various functions based on their education, experience and skills.

As an investor, you can either manage your finances yourself, or hire a professional firm. You opt for the latter when:

1. You do not know how to do the job best – many of us hire someone to file our income tax returns, or almost all of us get an architect to do our house.
2. You do not have enough time or inclination. It’s like hiring drivers even though we know how to drive.
3. When you are likely to save money by outsourcing the job instead of doing it yourself. Like going on a journey driving your own vehicle is far costlier than taking a train.
4. You can spend your time for other activities of your choice / liking

Professional fund management is one of the best benefits of Mutual Funds. The infographic on the left highlights all the others. Given these benefits, there is no reason why one should look at any other investment avenue.

To many people, Mutual Funds can seem complicated or intimidating. We are going to try and simplify it for you at its very basic level. Essentially, the money pooled in by a large number of people (or investors) is what makes up a Mutual Fund. This fund is managed by a professional fund manager.

It is a trust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities. Each investor owns units, which represent a portion of the holdings of the fund. The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value or NAV. Simply put, 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

Every individual investor is unique. Not only with regards to investment objectives but even in approach and view of risk. This is what makes Risk Profiling absolutely crucial before investing.

A Risk Profiler is essentially a questionnaire that seeks an investor’s answers to questions about both “ability” and “willingness”.

It is highly recommended that investors contact their Mutual Fund distributor or an investment advisor to complete this task and get to know their Risk Profile.

I n a way, both are supposed to help with your investment decisions, which may include selection of Mutual Fund schemes. However, as the name itself suggests, a Mutual Fund distributor is more likely to be focused on Mutual Fund products, whereas an investment advisor may have a broader basket of products and services.

Does it mean that a Mutual Fund distributor would sell any Mutual Fund scheme to the investors just to earn commission? Well, the regulations are very stringent in this regard. If a Mutual Fund distributor sells a Mutual Fund scheme that is not suitable for the investor that would qualify as “mis-selling”, which is an offence.

A Mutual Fund distributor is required to understand the investor’s situation/risk profile and recommend products suitable for the investor’s needs at the time of recommendation. On the other hand, an investment advisor may look at a broader picture, which may include assessment of the investor’s assets, liabilities, income and expenses and recommend products.

Both are registered entities and hence regulated, too. While investment advisors are registered directly with SEBI, the Mutual Fund distributors are registered with AMFI – the Association of Mutual Funds in India, which is the association of the Mutual Fund industry.

Making a mistake while investing happens across all investments, and Mutual Funds are no different.

Some of the common mistakes while investing in Mutual Funds are:

1. Investing without understanding the product: For example, equity funds are meant for the long term, but investors look for easy returns in the short term.
2. Investing without knowing the risk factors: All Mutual Fund schemes have certain risk factors. Investors need to understand them before making an investment.
3. Not investing the right amount:  Sometimes people invest randomly, often without a goal or plan. In such cases, the amount invested may not yield the desired result.
4. Redeeming too early: Investors sometimes lose patience or do not give the requisite time for an investment to provide the desired rate of return, and hence redeem prematurely.
5. Joining the herd: Very often, investors do not exercise individual judgement and get carried away by the buzz in the ‘market’ or ‘media’, and thus make the wrong choice.
6. Investing without a plan: This is perhaps the biggest mistake. Every single rupee invested needs to have a plan or goal. 

All Mutual Funds in India are regulated by the Securities and Exchange Board of India (SEBI). Mutual Fund regulations clearly define the roles and responsibilities of Asset Management Companies (AMC) and Custodians. It’s vital to remember that every investor has to complete an effective KYC process before investing. Therefore, only bonafide investors with a valid PAN card can invest in Mutual Fund schemes. Such investors also provide bank details so that all redemption proceeds are directly credited to an investors own account.

SEBI also ensures that all AMCs are supervised by a board of trustees, some of whom, have to necessarily be independent individuals. These trustees ensure one more level of safeguards and compliance.

Regulations and safeguards ensure that it can never ever be misappropriated and diverted, and that, no one will run with your money.

We have all heard: “Mutual Fund investments are subject to market risks.” Ever wondered what are these risks?

The image on the left talks about the various types of risks.

Not all risks impact all the fund schemes. The Scheme Information Document (SID) helps understand which risks apply to your selected scheme.

So how does the fund management team manage these risks?

It all depends on what type of investments the Mutual Fund has invested in. Certain securities are more sensitive to certain risks and some are exposed to some other.

Professional help, diversification and SEBI’s regulations help mitigate risks in Mutual Funds.

Finally, and the most important question that many investors have asked: Can a Mutual Fund company run away with my money? This is just not possible given the structure of Mutual

KYC is an acronym for “Know Your Customer” and is a term used for Customer Identification Process as a part of Account Opening process with any financial entity. KYC establishes an investor’s identity & address through relevant supporting documents such as prescribed photo id (e.g., PAN card, Aadhar card) and address proof and In-Person Verification (IPV). KYC compliance is mandatory under the Prevention of Money Laundering Act, 2002 and Rules framed there under, read with the SEBI Master Circular on Anti Money Laundering (AML) Standards/ Combating the Financing of Terrorism (CFT) /Obligations of Securities Market Intermediaries.

A Know Your Customer (KYC) is generally divided in 2 parts:

Part I contains the basic and uniform KYC details of the investor as prescribed by the Central KYC registry (Uniform KYC) to be used by all registered financial intermediaries and

Part II additional KYC information as may be sought separately by the financial intermediary such as a Mutual Fund, stock broker, depository participant opening the investor’s account (Additional KYC).

Do you visualize roller-coasters or toy trains first when you think of an amusement park? Probably the former. These rides are usually the biggest attractions in such parks which create a certain perception about amusement parks. ‘Mutual funds’ too carry a similar perception that they invest only in stocks and hence are risky. There are many types of Mutual Funds meant for the varying investment needs of people. Some investors want high returns which only stocks can deliver. Such investors can invest in Equity Mutual Funds which are among the best long-term investment options available for achieving such objectives. But these Mutual Funds have risk of higher volatility   because of their exposure to stocks of various companies.

There are other types of Mutual Funds that do not invest in equity but in bonds issued by banks, companies, government bodies and money market instruments (bank CDs, T-bills, Commercial Papers,) which have lower risk but also offer lower returns compared to equity funds. These funds are better suited as alternatives to traditional options like bank fixed deposits or PPFs.  Hence if you are looking to invest your money that can give you better  returns than a bank or post office FDs and still be more tax efficient,

Risks appear in many forms. For example, if you own a share of a company, there is a Price Risk or a Market Risk or a Company Specific Risk. The share of just that company may dip or even crash due to any of the above reasons or even a combination of these reasons.

However, in a Mutual Fund, a typical portfolio holds many securities, thus offering “diversification”. In fact, diversification is one of the biggest benefits of investing in a Mutual Fund. It ensures that the dip in price of one or even a few securities does not affect portfolio performance alarmingly.

Another important risk to bear in mind is Liquidity Risk. What is liquidity? It is the ease in converting an asset into cash. Suppose an investor has an investment that is locked in for say 10 years, and she requires money in the 3^rd year. This presents a typical liquidity problem. Her priority at this point is access to cash and not returns. Mutual Funds by regulation and structure, offer tremendous liquidity. Portfolios are designed to offer an investor, ease of investing and redemption.

If you are wondering how to invest in a Mutual Fund, remember it is mandatory to have an account with any bank, KYC / CKYC, PAN and Aadhaar cards. This has been made mandatory to ensure Mutual Funds are not used for money laundering purposes by few unscrupulous investors. Some Mutual Funds and banks have a common parent company i.e. they belong to the same corporate conglomerate. However, banks are governed by the RBI and Mutual Fund businesses are regulated by SEBI. While you may come across a Mutual Fund company that carries the same brand name as a well-established bank, remember that they are two different companies which are being run independently. You don’t need to have a savings account with the bank to invest in the funds of its sister concern, i.e. the Mutual Fund company in this case.

Banks also work as distributors of various Mutual Funds and cross-sell these funds to their customers. While they may not sell all the Mutual Funds available in the market, they’ll pitch funds from those Mutual Funds with whom they have a distribution tie-up. You can invest in these Mutual Funds which are not related to the bank selling them, i.e. your bank where you have an account.

I n Mutual Funds, one often hears, ‘more the risk, more the return’. Is there truth in this?

If ‘risk’ is measured as either, probability of loss of capital or as swings and fluctuations in investment value, then asset classes like equity are undoubtedly the riskiest, and money in a savings bank account or in a government bond is of course least risky.

In the Mutual Fund universe, a liquid fund is least risky and an equity fund is most risky.

So, the only reason to invest in equity would be an expectation of higher reward. However, higher returns come to those who invest in equity after careful study and adopting a patient, long term time horizon. In fact, risk in equity can be mitigated by adopting diversification as well having a longer term time horizon.

Every category of mutual fund schemes have different types of risks – credit risk, interest rate risk, liquidity risk, market/price risk, business risk, event risk, regulatory risk, etc. Your investment advisor and fund manager’s expertise, and diversification, can help mitigate them.

Mutual Fund investors with long-term investments through SIPs constantly worry about market falls during this period. SIPs are well-designed to overcome some of the Mutual Fund risks like market timing and volatility.

You can beat market volatility through rupee-cost averaging, by investing regularly in Mutual Funds through SIPs. Here you buy more units when NAV is low and vice versa. The cost per unit is averaged out over the long run if NAVs move both ways. For example, if you invest INR 1,000/- per month, you get 100 units if the NAV is INR 10 and 200 units if NAV drops to INR 5. Over longertime period, the average price per unit will fall if markets move in both directions thus helping to lower volatility of returns as well.

If you invest in lump sum, number of units would remain the same during the entire holding period, but their value would go down with falling NAV during market downturns. If you hold your lumpsum investment in an equity fund for long (say over 7-8years), the occasional blips shouldn’t impact your returns as markets usually move up over the long-term. You might end up with a far higher NAV than what you started with.

Mutual Funds invest in securities and the nature of securities depends on the scheme’s objective.

For instance, an equity or growth fund would invest in company shares. A liquid fund would invest in Certificates of Deposit and Commercial Paper.

All of these securities are however traded in the ‘Market’. Company shares are bought and sold through the stock exchange, which is part of the Capital Market. Similarly, debt instruments like Government Securities, can be traded through a platform at the Stock Exchange or through specialised systems called NDS. These serve as markets to buy and sell securities and the buyers and sellers are diverse. So, the entire process of buying and selling, and price determination is done by the ‘market’.

The price of any security is dependent on ‘market forces’, and the market acts on any news or development, making it difficult to predict the direction of the market, it’s impossible to predict the price of a share or security in the short term. There are too many factors and players that influence its direction.

Thus, every investor should know that there always exists a certain risk to security price from an all-important entity known as the ‘Market’. They should also know that Mutual Funds are designed to reduce this risk as much as possible.

When a Mutual Fund Company shuts down or gets sold off, it is a serious matter to note for any existing investor. However, as Mutual Funds are regulated by SEBI, events of such kind have a prescribed process.

In the case of a Mutual Fund company shutting down, either the trustees of the fund have to approach SEBI for approval to close or SEBI by itself can direct a fund to shut. In such cases, all investors are returned their funds based on the last available net asset value, before winding up.

If a Mutual Fund is acquired by another fund house, then there are usually two options. One, the schemes continue in their original format, albeit with a new fund house overseeing it. Or, the acquired schemes are merged with schemes in the new fund house. SEBI approval is required for all Asset Management Company (AMC) Mergers and Acquisitions, as well as scheme level mergers too.

In all such cases, investors are given an option to exit the schemes with no load being levied. Any action by investor or fund house is ALWAYS done at prevailing Net Asset Value.

Yes, there are several types of Mutual Fund schemes – Equity, Debt, Money Market, Hybrid etc. And there are many Mutual Funds   in India managing several hundreds of schemes amongst them. So it may appear that zeroing on a scheme is actually a very complex and confusing affair.

Choosing the scheme to invest in should be the last thing in an investor’s mind. There are several more important steps before that, which will help remove much confusion later.

An investor should first of all have an investment objective, say retirement planning or renovating one’s house. The investor has to arrive at two figures – how much would this cost and how long it would take, while also knowing how much risk can be taken.

In other words, based on an investor’s goals and objectives and risk profile, a type of fund is recommended, say equity or hybrid or debt, and only then specific schemes are selected, based on track record, , portfolio fit etc.

In essence, if there is clarity of investment purpose in the beginning, there would be a lot less confusion about choice of fund in the end.

Money doesn’t get locked up. It gets invested!

In Mutual Funds, money doesn’t get locked up. It gets invested!

When investing in Mutual Funds, one of the most common questions is, ‘Does my money get locked up?’

It is important to note two facts:

1. In a Mutual Fund scheme, the money is Investedand not Locked, and the money always stays yours. It is simply being managed by a professional fund manager.
2. Your money is always easily accessible. The structure of a Mutual Fund ensures that there is flexibility in accessing it. You may redeem your investment either partially or entirely. You can even pre-specify the redemption dates, by giving standing instructions to the Mutual Fund company to transfer a fixed amount into your bank account on a specified date every month or every quarter, as you choose. You can also choose to transfer your investment from one Mutual Fund scheme to another managed by the same Mutual Fund company. And you always get a comprehensive /easy to understand account statement that neatly documents it.

Go ahead and invest in a Mutual Fund scheme of your choice and enjoy the flexibility, transparency and liquidity. In other words, a superior investing experience, while being in the care of professional managers.

There are so many elements involved in providing an investor various services so that he/she can achieve their financial goals.

All these elements need to be paid their remuneration for the services provided. For this, there is an expense charged to each Mutual Fund scheme, as a percentage of the scheme’s corpus. SEBI regulations impose certain limits beyond which the charges are not allowed, even if the expenses are higher than the expenses charged. As per the said SEBI regulations, as the fund size grows, the maximum expenses that can be charged as percent of the Assets Under Management (AUM) come down.

The offer document indicates the maximum-allowed expense ratio for each scheme you are considering to invest in. The monthly fact sheet and the half-yearly mandatory disclosures allow you to see the actual expenses charged per scheme.

One of the biggest advantages of Mutual Funds is liquidity – the ease of converting an investor’s units into cash.

Mutual Funds, being regulated by Securities and Exchange Board of India (SEBI), have well laid out norms to ensure liquidity. Open end schemes, which comprise of a large majority of schemes, offer liquidity as a major feature. Liquidity is ease of access or conversion of an asset into cash.

Once the redemption is complete, funds are transferred to the designated bank account of the investor, within 3 business days after the redemption was lodged.

However two issues need to be kept in mind. One, there may be an exit load period in certain schemes. In such cases, redemptions before a certain specified period, say 3 months, may attract a nominal load like 0.5% of Asset Value. Fund Managers impose such loads to deter short term investors. Secondly, AMCs may indicate what the minimum amount for redemption is. Investors are advised to read all scheme related documents carefully before investing. 

An investment in an open end scheme can be redeemed at any time. Unless it is an investment in an Equity Linked Savings Scheme (ELSS), wherein there is a lock-in of 3 years from date of investment, there are no restrictions on investment redemption.

Investors need to keep in mind any applicable exit load on their investment. Exit loads are charges deducted at the time of redemption, only if applicable. AMCs usually impose an exit load to deter short term or speculative investors from entering a scheme.

Closed end schemes do not offer this, as all units are automatically redeemed on the date of maturity. However, units of closed end schemes are listed at a recognised stock exchange, and investors can sell their units to others only through the exchange.

Mutual funds are one of the most liquid investment avenues in India, and are an ideal asset class for every financial plan.

On a long-distance road journey, sometimes a toll is charged when you enter the road or the bridge, and sometimes when you exit. In many cases, the toll bridge company is allowed to charge the toll only for a certain number of years to recover the building costs. After that period is over, the company is not allowed to charge the passengers any toll.

Investment in Mutual Funds also may be subject to some loads, but they’re different from the example of the tolls you just read. Until 2009, there used to be a charge levied at the time of entry into a Mutual Fund, but that doesn’t exist anymore. Some schemes levy a charge on exiting the scheme, under certain conditions, which is called “exit load”.

In most cases, even when an exit load is charged, it applies to exit within a certain period. If you stay invested longer than this period, no exit load would be applicable. In other words, most often, the exit load serves the purpose of discouraging an early exit from a scheme. Even on an “exit load”, SEBI, the mutual fund regulatory authority, has set a limit on the maximum exit load that can be charged.

One of the biggest advantages in a Mutual Fund scheme is Liquidity, i.e. ease of converting investment into cash.

Equity Linked Savings Schemes (ELSS), which offer tax benefits under Sec 80C, are required by regulation to ‘lock-in’ units for a period of 3 years, after which, they are free to be redeemed.

There is another category of schemes popularly called as “Fixed Maturity Plans” (FMP’s) where investors need to stay invested for a stipulated period which is pre-defined in the offer document of the scheme. These schemes have an investment duration of anywhere between three months to a few years.

A few open end schemes may however, specify an exit load period. For instance, a scheme may specify that units redeemed with 6 months would attract an exit load of 0.50% at applicable NAV.

One should bear in mind that while there be may some rules and regulations on minimum time horizon, it is best to take the advice of an investment advisor to know the appropriate or ideal time horizons for every type of schemes. 

The performance of a particular scheme of a Mutual Fund is denoted by Net Asset Value (NAV). In simple words, NAV is the market value of the securities held by the scheme. Mutual Funds invest the money collected from investors in securities markets. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date.

The video on the left explains how NAV is calculated.

The NAVs of all Mutual Fund schemes are declared at the end of the trading day after markets are closed, in accordance with SEBI Mutual Fund Regulations. 

An open end fund permits redemptions on all business days. If a redemption request is handed over at an Investor Service Centre on a non-business day, or after a specified cut-off time, say 3:00 p.m., then it is processed on the next business day. Redemptions are processed at that particular day’s Net Asset Value (NAV). All redemption proceeds are credited to the investor’s bank account within a specified time, usually within 10 business days.

Redemptions may be done by handing over a signed redemption request clearly mentioning the scheme’s folio number. Redemptions may also be made on approved on-line platforms, where investors have the necessary security codes.

Investments made in Equity Linked Savings Schemes (ELSS), however have a lock-in of 3 years, after which they can be redeemed on any business day.

Redemptions may be restricted only in extraordinary circumstances. Under approval from the board of trustees, the AMC may impose restrictions when there is a liquidity issue, capital market closure, operational crisis or when directed by SEBI. It is important to note that these occurrences are extremely rare.

Invest for long term – an advice routinely given by many Mutual Fund distributors and investment advisors. This is especially true in case of certain Mutual Funds – such as equity and balanced funds.

Let us understand why the professionals give such advice. What really happens in the long term? Is there a benefit of staying invested for long term?

Consider your Mutual Fund investment as a good quality batsman. Every good quality batsman has a certain style of batting. However, each good quality batsman would be able to accumulate lots of runs, if he continues to play for years.

We are talking about the record of a “good quality” batsman. Every good batsman would go through some good and poor performances. On average the record would be impressive.

Similarly, a good Mutual Fund would also go through some ups and downs – often due to factors beyond the control of the fund manager. An investor would benefit if one stays invested through these funds for long periods of time.

So, as long as you can afford, stay invested for long periods of time – especially in equity and balanced funds.

Majority of Mutual Fund schemes are open end schemes, which allow an investor to redeem the entire invested amount without any time restrictions.

Only under few instances  schemes impose a restriction on redemption, under extraordinary circumstances, as decided by the Board of Trustees.

All Equity Linked Savings Schemes (ELSS), that offer tax benefits under Sec 80C, are required to ‘lock-in’ investments for a period of 3 years. However, any dividend declared by these schemes during this period is available as a pay out without restrictions. No other category of schemes can impose such a lock-in. Some may impose an exit-load for premature redemptions, to prevent short term investments from entering a scheme. AMCs may specify minimum amounts that may be submitted. All such information is contained in scheme related documents which is important for an investor to read before investing.

Closed end schemes have a fixed tenure and the AMC does not fund or permit any redemption until termination/conclusion date. However, all closed end funds have their units listed in the stock exchange and an investor seeking liquidity needs to sell units to another buyer at a market determined rate.

Imagine asking: At what speed do vehicles run?

Can you generalize the answer for the whole category? Different vehicles run at different speeds – even within one category, e.g. cars, while a car made for city roads may run at a certain maximum speed, the one made for racing can run much faster.

There is not one product called Mutual Fund, there are many types of different Mutual Funds. The investment returns from the different categories could vary and then there are certain fund categories that exhibit higher level of uncertainty in performance.

If the fund invests in a market where prices fluctuate a lot, the Net Asset Value (NAV) of the fund is likely to witness huge fluctuations (e.g. growth funds investing in equity market); however, if it invests in a market where prices do not fluctuate much, the Net Asset Value (NAV) of the fund would be quite stable (e.g. liquid funds investing in money market). In other terms, a liquid fund would exhibit far lower uncertainty in comparison to an equity fund.

An investor would be advised to focus on the characteristic nature of the fund and match the same with one’s own requirements.

An investor has no restriction on redeeming money from an open ended scheme. While there may be an exit load in certain cases, which impacts final amount realised, all open end schemes offer liquidity as a great benefit.

The decision to redeem is totally at investor’s discretion. There are no restrictions on the number of redemptions, or on the amount to be redeemed. There have to be sufficient units in the account to fund redemptions. Scheme documents usually indicate minimum amount that can be redeemed.

Units under lien to a bank or institution cannot be redeemed, unless the lien is removed. Redemptions may be restricted only under extraordinary circumstances, as decided by the Board of Trustees.

Closed end schemes may be redeemed from the AMC only on maturity. However, they do provide a route to liquidity – any time before maturity – by selling units in a recognised exchange.

Redemptions can be made at;

• Investor Service Centres (ISCs)
• AMC offices
• Official Points of Acceptance of Transaction (OPAT)

Through an authorised on-line platform

Investments in Mutual Funds require the appropriate time horizon. Having the right time horizon, not only provides a better chance of getting expected, investment returns, but also lowers the risk in the investment.

Now what is this “risk” we are talking about? In simple terms, it is volatility of investment performance, as well as chances of eroding investment capital. By staying invested over the long term, some years of low/negative returns and some years of impressive returns will make the average returns quite reasonable. Therefore, the investor can ‘average out every year’s widely fluctuating returns’ to get a more stable long term return.

The recommended time horizon, differs for every asset class as well as Mutual Fund category. Please consult an investment advisor and read scheme related documents before making an investment decision.

Like other asset classes, Mutual Funds returns are calculated by computing appreciation in the value of your investment over a period as compared to the initial investment made. Net Asset Value of Mutual Fund indicates its price and is used in calculating returns from your Mutual Fund investments. Return over a period is calculated as the difference in sale date NAV and purchase date NAV upon  purchase date NAV and converted to percentage by multiplying the result by 100 . Any net dividend* or other income distribution by the fund during the holding period is also added to the capital appreciation while computing total returns.

Capital appreciation in Mutual Funds is reflected by increase in NAV over time. This happens because NAV of a fund is derived from stock prices of companies included in the portfolio of the fund, and the prices fluctuate every day. Change in NAV of a fund over time contributes to the capital appreciation or loss in your holding. View the return performance of your investments in the account statement provided to you by the fund house. This statement captures both your transactions and the return on your investments.

Note: *NAV of a Fund falls to the extent of dividend payout and statutory levy, if any.

“Why should one invest in Mutual Funds? We keep hearing about poor performance of many Mutual Funds. And Mutual Funds offer no guarantees. Given these limitations, is there any reason why someone should consider investing in Mutual Funds at all? Do they perform at all?”

Well, often there are versions of this question, asked by existing as well as potential Mutual Fund investors.

Whereas the question might be similar in many cases, the origin of the question, the reason why such a question arose could be very different across different individuals.

In one of the cases, the investor thought that the scheme he had invested in was not delivering investment returns as much as what he had expected. However, when probed, it was found that the investor was comparing two completely different schemes. This is like comparing apples with oranges – not the right approach.

In another case, the investor had invested in a scheme, where the overall market was going through turmoil. When someone is stuck in a traffic jam, however great a driver or however great a car, there is no way to speed up. Exactly the same thing happens when the overall market is not good. In such a case, as in case of a traffic jam, one has to wait till things clear out.

In most situations, the Mutual Funds are perceived to be not performing well when the way of looking could be incorrect.

Some people like to play safe and opt for familiar options. Suppose you are in a new restaurant. The menu has exotic dishes, but you still order something familiar just to be sure you don’t regret it later. You may choose a regular ‘Paneer Kathi Roll’ over a ‘Couscous Paneer Salad’ to be safe. But you managed to get an idea about the new restaurant while enjoying its services, ambience and food.
 
Investing in Mutual Funds is like ordering the right dish on the menu at a restaurant. If you prefer to stay away from the stock market, you can still choose to invest in debt funds for your financial goals. Mutual Funds are broadly categorized into equity, debt and hybrid, Solution Oriented Schemes and Other Schemes based on where they invest.

If you don’t want to invest in stocks via equity mutual funds, you can still experience the benefits of investing in mutual funds through debt funds that invest in bonds issued by banks, corporates, govt. bodies including RBI and money market instruments like commercial papers, bank CDs, T-bills etc. A debt fund helps you grow your money better because of tax efficient returns than your traditional choices of bank FDs, PPFs and post office saving schemes. 

Recurring Deposits (RDs) and Fixed Deposits (FDs) are some of the most popular savings instruments in our country. They are safe and offer a guaranteed rate of return.  

That really depends on what an investor expects from the future. If the investor wants her capital to be safe and earn some reasonable fixed rate of return, irrespective of inflation and taxes, then these may be good enough. However, if the investor wants to earn a positive return even after factoring inflation and taxes, then these may not be good enough.

If an investor has a large enough corpus to start with and is really not worried about enhancing purchasing power, then RDs and FDs are safe and useful savings and income generating options. If an investor is more concerned about safety of principal and receipt of timely and predictable income, a FD may be ideal.

Business and commerce allows us to create wealth by investing our money with those who are on the path to creating wealth. We can be investors in businesses of entrepreneurs, by investing in stocks of various companies. As the entrepreneurs and the managers run their businesses efficiently and profitably, the shareholders get the benefits. In this regard, Mutual Fund are a great way to build wealth.

But how do we know which stocks to buy, and when?

That is where taking professional help counts. They also take the advantage of a large corpus to explore more opportunities simultaneously. Like a balanced diet – we all need proteins, vitamins, carbohydrates, etc. Eating only one type results in some nutrient deficiency. Similarly, in a diversified equity fund you’re exposed to different segments of the economy, and also protected from the potential downside.

Invest in a professionally managed, diversified equity fund and stay invested for long period to create wealth for yourself and your next generation.

Simply put, inflation is the rise in prices over time, relative to the money available. In relatable terms, a certain amount of money buys you much less today, than it did years ago.

Let’s use an example to understand this better. Say you buy a grilled sandwich today for INR 100. The yearly inflation is 10%. Next year, the same sandwich will cost you INR 110. If your income also doesn’t increase at least as per the inflation rate, you’re unable to buy the sandwich or other such products, right?

Inflation also tells investors how much of a return (%) their investments need to make for them to maintain their current/present standard of living. For example, if investment in ‘X’ returned 4% and inflation was 5%, then the real return on investment would be -1% (5%-4%).

Mutual Funds give you investment options which have the potential to give inflation beating returns! You can aim to protect your purchasing power over the long run by investing in the right type of Mutual Funds.

Narendra aims to accumulate enough to make the down payment for his dream house. He started an SIP in some Mutual Fund schemes. Though he was falling a tad short, he was comfortable with what he had accrued.

He got a pleasant surprise when his company announced a big cash reward for some star employees, and he was one of them.

While the house purchase would take some time, he wasn’t sure how long. The payment may also be scheduled over a period.

What could he do with the money?

His advisor suggested Liquid Mutual Funds as they’re ideally suitable when money is required in a short period, and still the time period is uncertain. It also gives the flexibility to take out even part of the money or whole of it whenever required.

So there are ample Mutual Fund schemes for both long term, and short term goals.

From where do you get the vegetables for dinner? Do you grow them in your backyard, or purchase it from the nearest mandi/supermarket depending on what you need? Growing your own veggies is a great way of eating healthy food, but effort is spent on seed selection, manuring, watering, pest control, etc. The latter option allows you to choose from a wide variety without the hard work.

Similarly, you can create wealth by investing directly in shares of good companies or invest in them through Mutual Funds. Wealth can be created when we buy company stocks which use our money to grow their business, creating value for us.

Direct investment in shares carries a relatively higher risk element. You need to pick stocks by researching the company and sector. It’s a humongous task to choose few companies from thousands of them listed on the stock exchange. Once done, you need to keep a track of every stock’s performance.

In Mutual Funds, the stock picking is done by expert fund managers. You need to keep track of the performance of the fund and not individual stocks within the fund. They also allow investment flexibility unlike stocks, with growth/dividend options, top-ups, systematic withdrawals/transfer, etc. besides helping to ride over volatility by investing smaller amounts regularly through SIPs.

A plan for every goal!

Yes, Mutual Funds are ideal to help you plan your life goals!

•   Mr. Rajput eventually wants to move away from the city, into a farmhouse on a hill station when he plans to retire after 15-20 years.
•   Mrs. Patel didn’t receive any retirement benefits. Although she has savings, she now needs a regular income from her investments to meet her regular expenses.
•   Mrs. Sharma has surplus money generated from her business and lets it lie idle in her bank account. She is required to pay her suppliers and staff only after a few days.

The above could be real life situations. Is there any option available for these investors?

YES!  Mutual Funds!

Mutual Funds offer different kinds of schemes for different kinds of investment objectives. For e.g.

–   Long term goals like building a corpus for retirement – You could consider equity and balanced funds

–   Looking to generate income with relatively low risk – You could consider a bond fund

–   Park your surplus money till you decide where to invest it next – You could consider a liquid fund

Mutual Funds offer different kinds of investment options for planning one’s investments, especially when one is clear about their goals.

Pension plans provide a guaranteed source of income in the form of annuity during retirement. However, they don’t provide immediate liquidity for emergencies and offer limited choice in terms of diversification and investment styles. The premium paid towards a pension plan is tax deductible.

Mutual Funds investments are not tax deductible unless you have invested in an ELSS fund but they offer you much more variety and flexibility in designing a retirement plan as per your need. If you are young, you can start SIPs in equity funds suiting your risk preference and continue the SIPs close to your retirement. You would have built a good corpus by then which can be transferred to short-term debt funds through STP(Systematic Transfer Plan) 2-3 yrs prior to retirement to reduce your risk.

If you didn’t plan well in advance for your retirement through SIP but are now thinking of it just before retirement, you can invest your lumpsum savings and opt for SWP to withdraw a specified amount every month post retirement. 

Pension plans have a conservative allocation and offer stable return while you need to choose a fund with suitable allocation in case of mutual funds. Since annuity income is taxed as per your income slab while you pay only capital gains tax on mutual fund withdrawals, Mutual Funds can be more tax-efficient.

With so many Mutual Funds schemes in the market, often one may wonder which scheme may be the best. But, understanding the meaning of “best” is more important.

Often, people tend to select the “best” performers of a recent past period – schemes that have delivered highest returns in the recent past.

If you watch a movie filmed in the USA in December, you would notice people wearing warm overalls. Someone may really like it and want to have those. However, can you imagine someone wearing woollen clothes around the streets in Mumbai or Chennai?

The same logic applies to Mutual Funds too. There is no such thing as the “best” Mutual Fund – it is always about what is appropriate in a given situation and is in line with your investment objective.

For long term goals there are different funds compared to short term needs. There are aggressive funds vastly different from moderate funds or even conservative funds. There are different funds for income generation as compared to wealth accumulation or for liquidity.

So don’t search for the best – search for the most appropriate.

To begin with, it is important to select the right scheme for your investment need. Look at it this way.

How do you decide what mode of transport you should take when you travel? Whether you want to walk it up, take an auto rickshaw, a train or a flight, it all depends on your destination, on your budget and travel time available.

Planning for your financial goals is also uses the same kind of principles.

Different modes of transport for different travel needs – different schemes (or combination of schemes) for different needs.

One may consider liquid funds for very short term needs; income funds for medium term needs and equity funds (or a combination of different funds) for long term needs. Different investors may invest in different schemes of the same asset category depending on the risk that they are willing to take.

Remember, there are solutions available among Mutual Funds for each investor need. It is important to understand one’s own unique need to find which solution is appropriate.

A ULIP is Unit-Linked Insurance Plan. It is a life insurance policy with an investment component that is invested in various financial markets. The returns generated by the investment component determine the value of the policy. However, the sum assured on the death of the policy holder may not be a function of the market – the minimum sum assured may remain unaffected. In other words, a ULIP is a hybrid product, combining investment and insurance.

The investment component of ULIP is similar to a Mutual Fund.

1. Both are managed investments.
2. For both, a team of professionals manages the investments and the funds are invested in line with a stated objective.
3. There would be units allotted to the investor on purchase and there would be NAV per unit declared periodically.

Since ULIP is an insurance policy, failure to pay regular premium would result in termination of the risk cover.

In Mutual Funds, all the expenses are charged before calculation of the NAV, whereas in case of ULIP, some expenses are charged like mutual funds, whereas some others are charged by cancelling a small number of units from the investors’ accounts.

Within one ULIP product, there could be more than one fund options and the investor is free to switch between these funds. However, some schemes put a restriction on the number of free switches in a year. In case of mutual fund, switches from one fund to another are allowed any number of times, but depending on the scheme from which one is exiting, there may or may not be exit loads.

The best part about Mutual Funds is that no matter what your financial goal is, you can find an appropriate scheme for it.

So if you have a long term financial goal like planning for your retirement or your child’s future education than equity funds could be a choice to consider

If your endeavour is to potentially generate regular income, a fixed income fund could be considered.

You may have suddenly received a windfall of money and are yet to decide where you wish to invest, you can consider a liquid fund. A liquid fund is a good substitute to consider for a savings account or even a current account to park your working capital.

Mutual funds also offer investment options for saving tax. Equity Linked saving Schemes (ELSS) are specifically designed to do the same

Mutual Funds are a one-stop shop for practically all investment needs.

ELSS Fund – Tax Saving Mutual Fund

An ELSS is an Equity Linked Savings Scheme, that allows an individual or HUF a deduction from total income of up to Rs. 1.5 lacs under Sec 80C of Income Tax Act 1961.

Thus if an investor was to invest Rs. 50,000 in an ELSS, then this amount would be deducted from the total taxable income, thus reducing her tax burden.

These schemes have a lock-in period of three years from date of units allotment. After the lock-in period is over, the units are free to be redeemed or switched. ELSS offer both growth and dividend options. Investors can also invest through Systematic Investment Plans (SIP), and investments up to ₹ 1.5 lakhs, made in a financial year are eligible for tax deduction

SIP in Mutual Fund is like running a marathon. Marathon runners practice throughout the year but keep stepping-up their targets every year starting from dream run, moving to half marathon and finally a full marathon. The same goes with SIPs.

Systematic Investment Plans (SIPs) are a disciplined way of investing in Mutual Funds that offer you twin benefits of managing market fluctuations through rupee cost averaging and power of compounding over long-term. SIPs have become a popular way of investing in Mutual Funds as they allow small and regular investments over many years. Does this mean you’ll be stuck forever with the initial SIP amount you started with? The answer is NO.

Suppose you started with INR 3000 p.m. in Equity Mutual Fund and continued investing for two years. If you want to commit more money towards this SIP, go for SIP top-up that lets you automatically increase the SIP amount by a pre-defined percentage (say 50%) or amount (say INR 1500) at regular intervals/every year. While you can’t increase your SIP amounts automatically every month, you can increase it at specific intervals like quarterly or annually through top-ups. You can also make additional purchases in your SIP account folio whenever you want to invest more money.  

An ETF is an Exchange Traded Fund, which unlike regular Mutual Funds trades like a common stock on a stock exchange.

The units of an ETF are usually bought and sold through a registered broker of a recognised stock exchange. The units of an ETF are listed in stock exchanges and the NAV varies as per market movements. Since units of an ETF are listed in the stock exchange only, they are not bought and sold like any normal open end equity fund. An investor can buy as many units as she wishes without any restriction through the exchange.

In the simple terms, ETFs are funds that track indexes such as CNX Nifty or BSE Sensex, etc. When you buy shares/units of an ETF, you are buying shares/units of a portfolio that tracks the yield and return of its native index. The main difference between ETFs and other types of index funds is that ETFs don’t try to outperform their corresponding index, but simply replicate the performance of the Index. They don’t try to beat the market, they try to be the market.

ETFs typically have higher daily liquidity and lower fees than Mutual Fund schemes, making them an attractive alternative for individual investors.

Mutual Fund investments are subject to capital gains tax. It’s paid on the profit we make while redeeming / selling our Mutual Fund holdings (units). The gain is the difference in Net Asset Value (NAV) of scheme on the date of sale and date of purchase (Selling Price-Purchase Price). Capital gains tax is further classified depending on period of holding. For equity funds (funds with equity exposure > =65%), holding period of one year or more is considered long-term and subjected to Long-Term Capital Gains (LTCG) tax.

LTCG tax of 10% is applicable on equity funds if the cumulative capital gain in a financial year exceeds INR 1 lakh. While doing financial planning remember your gains remain tax-free up to INR 1 lakh. It’s applicable for all investments made after 31^st Jan 2018. Profits on holdings of less than a year are subject to 15% Short-Term Capital Gains (STCG) tax in equity funds.

Long-term is defined as holding period of 3 years or more in case of non-equity funds (debt funds) and 20% LTCG tax is applicable on such holdings with indexation i.e. purchase price is adjusted upwards for inflation, while computing capital gains. Profits on holdings of less than 3 years are subject to STCG tax, which is the highest income tax slab individuals fall into.

Retired people usually have their savings and investments locked up in bank FDs, PPFs, gold, real estate, insurance, pension plans etc. Most of these options are difficult to convert to cash immediately. This may lead to undue stress in case of medical or other emergencies. Mutual Funds provide the much-needed liquidity to retirees as they are easy to withdraw and offer better post-tax returns.

Most retired people fear the volatility or fluctuation in returns of Mutual Funds and stay away from them. They should put some part of their retirement corpus in Debt Mutual Funds and go for a Systematic Withdraw Plan (SWP). This will help them earn a regular monthly income from such investments. Debt funds are relatively safer than equity funds as they invest in bonds issued by banks, companies, government bodies and money market instruments (bank CDs, T-bills, Commercial Papers).

SWP in debt funds provides tax efficient returns as compared to bank FDs. Income from FDs/pension plans are taxed at higher effective rates compared to withdrawals under SWP. You can easily stop a SWP or change the withdrawal amount anytime depending on your need unlike in a pension plan. Thus, retirees should include Mutual Funds in their financial plans.

There are several ways to start investing in a Mutual Fund scheme.

One can invest in Mutual Funds by submitting a duly completed application form along with a cheque or bank draft at the branch office or designated Investor Service Centres (ISC) of Mutual Funds or Registrar & Transfer Agents of the respective the Mutual Funds.

One may also choose to invest online through the websites of the respective Mutual Funds.

Further, one may invest with the help of / through a financial intermediary i.e., a Mutual Fund Distributor registered with AMFI OR choose to invest directly i.e., without involving or routing the investment through any distributor.

A Mutual Fund Distributor may be an individual or a non-individual entity, such as bank, brokering house or on-line distribution channel provider.

One can choose to invest online, as platforms these days have all necessary safeguards to ensure secure investing. It is really more a matter of comfort and convenience.

While most Indian Mutual Funds invest only in India, there are quite a few schemes that invest in overseas securities.

All Mutual Fund schemes need to get Securities and Exchange Board of India (SEBI) approval before offering units to investors in India. SEBI gives an approval after scrutinising the Scheme Information Document (SID), which clearly spells out the scheme’s investment objectives, type of securities to be invested in, countries & regions, and risks unique to each security.

There are in fact two ways for a scheme to get such exposure to foreign securities. Schemes may either buy such securities listed or traded in overseas exchanges, or they may invest in other overseas Mutual Fund schemes that have such securities in their portfolio after obtaining separate SEBI approval for investment in foreign securities. Either way, the scheme has foreign flavour in the portfolio.

Even after investment in overseas securities, Indian Mutual Funds have to provide daily Net Asset Values, ensure portfolio disclosure, provide liquidity, etc. In short they have to comply with all SEBI regulations. Such schemes should have a dedicated  separate fund manager for the investments in foreign securities component only

Imagine a 50-overs cricket match in which #6 batsman walks in to bat only in the 5^th over. His job is to first ensure he does not lose the wicket, and then focus on scoring runs.

While saving is a must for investing, it is important to save one’s wicket in order to be able to score later. One can save the wicket by playing defensive cricket and avoiding all sorts of shots. But that would result in a very low score. He would need to hit some boundaries by taking certain risks like lofted shots or drives between fielders or cuts and nudges.

Similarly, in order to accumulate large sums to meet one’s financial goals, in order to beat inflation, one must take certain investment risks. Investing is all about taking calculated risks and managing the same, not avoiding the risks altogether.

At the same time, in the cricket analogy, in order to stay at the crease as well as score runs, one must take calculated risks and not play rash shots. Taking unnecessary risks is a bad strategy.

So while saving is necessary, investing is very important to achieve long term goals.

Once you invest in a Mutual Fund scheme, you will get an account statement with details like the date of the transaction, the amount invested, and the price at which the units are bought and the number of units allotted to you.

You can do multiple transactions in the same account, wherein the statement will keep getting updated. A typical account statement will list out the last few (10 in most cases) transactions – whether purchase or redemption; dividends, if any; or even non-commercial transactions. The account statement would also give you a count of your latest unit balance, the NAV of a recent date and the current value of your investments.

If you lose one statement, you can always get another one without hassles. Loss of account statement would not prevent you from future transactions, including taking your money out of the account.

The popular investment concept for creating wealth is ‘Start Early. Invest Regularly. Stay invested for Long Term’. Even if the investment is as low as ₹ 500, it is important as it marks the beginning of a journey.

There are several ways to increase investments amounts as you go. In a mutual fund scheme, you can always make additional purchases in the same fund/account. In many fund houses, this can be for amounts as low as ₹ 100 or money can be transferred or switched in from other schemes. You can start a Systematic Investment Plan (SIP), which enables a regular investment into a scheme, much like a bank recurring deposit. Also, many AMCs allow their investors to increase their SIP contribution gradually every year, so as to account for an annual salary or income rise.

Mutual Funds, with their flexibility and convenience are the ideal investment vehicles in today’s busy world.

Yes, Non Resident Indians (NRI) and Persons of Indian Origin (PIO) can invest in Indian Mutual Funds on a full repatriation as well as non-repatriation basis.

However, NRIs would have to comply with all regulatory requirements such as completion of KYC before investing. It should however be noted that a few countries such as US and Canada have restricted investments by NRIs in Mutual Funds without relevant disclosures. NRIs from these countries, thus need to check once with their advisor on feasibility of investing in Indian funds before actually investing.

NRIs are provided most of the benefits and conveniences of resident Indian investors while investing. They can invest through SIPs, they can switch as per their convenience, they can opt for growth or dividend options and can repatriate the redemption proceeds whenever they want to.

Thus NRIs and PIOs can invest and enjoy the full benefit of investing in a wide variety of Indian Mutual Fund schemes.

Systematic Investment Plan (SIP) is an investment route offered by Mutual Funds wherein one can invest a fixed amount in a Mutual Fund scheme at regular intervals– say once a month or once a quarter, instead of making a lump-sum investment. The installment amount could be as little as INR 500 a month and is similar to a recurring deposit. It’s convenient as you can give your bank standing instructions to debit the amount every month.

SIP has been gaining popularity among Indian MF investors, as it helps in investing in a disciplined manner without worrying about market volatility and timing the market. Systematic Investment Plans offered by Mutual Funds are easily the best way to enter the world of investments for the long term. It is very important to invest for the long-term, which means that you should start investing early, in order to maximize the end returns. So your mantra should be – Start Early, Invest Regularly to get the best out of your investments.

Collective and pooled investments have existed in various traditional formats across the world for some time. Mutual Fund as we know it came into existence in 1924, with creation of Massachusetts Investors Trust.

The Mutual Fund industry growth was accompanied by three broad trends:

1. Impressive growth in assets under management – More investors embrace Mutual Funds.
2. Stricter regulation – Ensures investor protection and proper supervision of fund management industry.
3. Introduction of more innovative products – Which suits the needs of different customers; from long term retirement planning to short term cash management.

Mutual Funds have been in existence in India, since Unit Trust of India (UTI) established in 1963. UTI was set up by Government of India and Reserve Bank of India. Unit Scheme 64, launched in 1964 was the first Mutual Fund scheme .

In 1987, other public sector banks and institutions were permitted to launch Mutual Funds. In 1993, following a wave of liberalization, the private sector and foreign sponsors were allowed to launch Mutual Funds.

This ensured that the Mutual Fund Industry rapidly acquired size, expertise and reach. As on Dec 31, 2016, Mutual Funds in India managed assets exceeding 16.93 lac crores.

Invest in SIP or a one-time investment (lumpsum)? Choosing one depends on your familiarity with Mutual Funds, the fund you want to invest in and your goal. If you want to invest regularly to accumulate sufficient capital for a goal, invest in a suitable equity scheme through SIP. Like, if you want to save from your monthly income and put it in an option where you can grow your money significantly so that in the long run it’ll be sufficient to fund your child’s higher education, SIP is the answer. Seek help from a fund adviser if needed.

If you have surplus cash now, like – bonus, proceeds from property sale or retirement corpus, but unsure how to use it, go for lumpsum investment in a debt or liquid fund. SIPs are advisable for investing in equity-oriented schemes while lumpsums are better suited for debt funds. If you are new to investing in Mutual Funds, SIPs are meant for you. SIPs need sufficiently long-time horizons to prove beneficial. You may invest in lumpsum if the market has been following an upward trend and you think it’ll continue for long. SIPs are best suited for a widely fluctuating market phase.

Before you make any Mutual Fund investment, you need to complete a KYC process. This is done through submission of certain documents as proof of identity and proof of address. The process of starting or stopping an SIP is extremely convenient and easy. How to start an SIP is explained in the graphics on the left.

What happens when you skip an installment or two?

SIP is just a convenient mode of investing and not a contractual obligation, there is no penalty even if you miss an installment or two. At most, the Mutual Fund Company would stop the SIP, which means further installments would not get debited from your bank account. At the same time, you can always start another SIP, even in the same folio, even after the earlier SIP was stopped. Please keep in mind, this would be treated as a fresh SIP and hence there could be some time taken to set up the SIP all over again.

Consult with a financial advisor today and start enjoying the benefits of Mutual Funds!

The Global Assets Under Management (AUM) of Open-end Mutual Fund schemes exceeded US$ 37.1 trillion, across 100,494 schemes as on Dec 31, 2015.

While developed markets have the maximum AUM, developing or emerging markets are beginning to break out. The US had over $17.7 trillion in AUM, while Europe had $12.7 trillion. Asia Pacific countries had $4.7 trillion, of which Australia, China and Japan accounted for $1.52 Trillion, $1.26 Trillion and $1.33 Trillion respectively. Brazil, had over $743 Billion in Mutual Fund Assets. India had Assets of $168 Billion, thus showing the low penetration of Mutual Funds in India, while highlighting the tremendous unrealised potential in India.

The data suggests that Mutual Funds are very popular in developed nations and are rapidly creating acceptance in fast growing emerging markets. Aiding the growth is increase in GDP as well as establishment of effective regulatory structures to manage the growth.

(All data and figures: International Investment Funds Association from Investment Company Institute Year Book 2016)

To many, the power of compounding seems like a difficult topic. But it is not so. We’ll help you understand this in a simple manner.

Let us assume that someone invested ₹. 10,000 @ 8% p.a. The interest for the year would be ₹.800. However, when the interest is reinvested in the same investment, the earning next year would accrue on original investment of Rs. 10,000 as well as on the additional investment of ₹.800. This means, the earning for the second year would be ₹. 864. As the years pass, the interest for the year keeps increasing since there is additional investment each year.

How much money would be accumulated after a certain time period if the returns are reinvested? Let us see.

Investment:₹.. 1, 00,000
Rate of return: 8% p.a.

 The above table shows some interesting pattern. As the investment is held for longer periods, the earning keeps growing faster. While the earning in the first 5 years was ₹.. 0.47 lacs, the same for the next 5-year period was ₹.. 0.69 lacs (₹.. 2.16 lacs – ₹.. 1.47 lacs). The earning in the 21^st year – a single year – was ₹.. 0.37 lacs.

“As the time goes, the earnings do not multiply, but grow exponentially.”

Essentially, compounding is the process of earning income on your principal investment plus the income earned – the income also starts to earn as the same is reinvested.

Long Term and Short Term Investment Plans for Your choice

Are Mutual Funds ideal for short term or long term Investment?

“Mutual Funds could be a good saving tool for short term.”

“You must be patient with your Mutual Fund investments. It takes time to deliver results.”

People regularly come across both the above statements, which are clearly contradictory.

So what period are Mutual Funds suitable for? Short term or long term?

Well, that depends on what one’s investment goals are, and most goals are driven by time. There are schemes suitable for short periods, there are several schemes suitable for longer horizon, and then, there are schemes for any period in-between.

Consult your Mutual Fund distributor or your investment advisor, discuss your financial goals, and then decide where you want to invest. For example;

1. Equity-oriented Mutual Funds– Look for longer periods, typically 5 years and above.
2. Fixed Income oriented Mutual Funds–
   1. Liquid Funds – For very short term – Less than 1 year
   2. Short Term Bond Funds – For the medium term – 1 to 3 years.
   3. Long Term Bond Funds – For the long term – 3 years or more

As you explore our website, you will know more about the various kinds of Mutual Funds too. So, trust the expertise of your advisor, know your goals, and invest!

A Gold ETF is an exchange-traded fund (ETF) that aims to track the domestic physical gold price. They are passive investment instruments that are based on gold prices and invest in gold bullion. In India, Gold is usually held in ornament form, which has a certain making and wastage component (usually more than 10% of bill value). This is eliminated when investing in a Gold Fund.

Buying gold ETFs means you are purchasing gold in an electronic form. You can buy and sell gold ETFs just as you would trade in stocks. When you actually redeem Gold ETF, you don’t get physical gold but receive the cash equivalent. Trading of gold ETFs takes place through a dematerialized account (Demat) and a broker, which makes it an extremely convenient way of electronically investing in gold.

Because of its direct gold pricing, there is complete transparency on the holdings of a Gold ETF. Further due to its unique structure and creation mechanism, the ETFs have much lower expenses as compared to physical gold investments.

Investing in Mutual Fund through SIP offers a lot of flexibility. Investors can control the amount they want to invest, tenure for which they want to invest, frequency with which they want to invest (weekly, monthly, quarterly, etc.). 

But once you start a SIP, are you bound by the initial choices made until the end of your SIP tenure? 

The answer is NO. For instance, if you start a monthly SIP investment of INR 5,000 in a fund for a 7-year period, you have the flexibility to increase or decrease its tenure at will, reduce or increase your SIP instalment depending on your financial well-being. SIPs are one of the best long-term investment options you can fall back on. These flexible features make them hassle-free and highly liquid as compared to other investment options.

In fact, to reduce the hassle of renewing and extending SIPs periodically, you may even choose to opt for perpetual SIPs and continue in an uninterrupted manner till you achieve your financial goals. In times of need, you have the flexibility to pause your SIP. If you wish to stop or pause your SIP before completing the tenure, send an application form at least 30 days before the next SIP due date to be safe.

Various types of Mutual Fund schemes exist to cater to different needs of different people. Largely there are three types mutual funds.

1.     Equity or Growth Funds

• These invest predominantly in equities i.e. shares of companies
• The primary objective is wealth creation or capital appreciation.
• They have the potential to generate higher return and are best for long term investments.
• Examples would be
  • “Large Cap” funds which invest predominantly in companies that run large established business
  • “Mid Cap funds” which invest in mid-sized companies. funds which invest in mid-sized companies.
  • “Small Cap” funds that invest in small sized companies
  • “Multi Cap” funds that invest in a mix of large, mid and small sized companies.
  • “Sector” funds that invest in companies that are related to one type of business. For e.g. Technology funds that invest only in technology companies
  • “Thematic” funds that invest in a common theme. For e.g. Infrastructure funds that invest in companies that will benefit from the growth in the infrastructure segment
  • Tax-Saving Funds

2.     Income or Bond or Fixed Income Funds

• These invest in Fixed Income Securities, like Government Securities or Bonds, Commercial Papers and Debentures, Bank Certificates of Deposits and Money Market instruments like Treasury Bills, Commercial Paper, etc.
• These are relatively safer investments and are suitable for Income Generation.
• Examples would be Liquid Funds, Short Term, Floating Rate, Corporate Debt, Dynamic Bond, Gilt Funds, etc.

3.     Hybrid Funds

• These invest in both Equities and Fixed Income, thus offering the best of both, Growth Potential as well as Income Generation.
• Examples would be Aggressive Balanced Funds, Conservative Balanced Funds, Pension Plans, Child Plans and Monthly Income Plans, etc.

On watching the video on the left, you will notice that in all the situations, the money is lying idle for a short period of time. In certain cases, the exact time when the money needs to be taken out may not be known. What does the investor do? Where should the money be parked?

One must consider a few things here:

1. The money is parked for a short period of time
2. One would prefer that there is no drop in investment value
3. Even low returns should be fine, if it means the money is safe
4. The period may not be fixed or even known

Given the above four conditions, putting money in a fixed deposit may serve the purpose, but only to a limited extent. One of the big benefits of a fixed deposit is the safety. At the same time, one of the limitations is often ignored – the money can be parked for a fixed period only – there is no flexibility regarding the period of parking.

That is where liquid mutual funds could be considered. As is conveyed in the video too, they offer safety, reasonably good returns (in comparison to savings accounts or even very short term fixed deposits) and full flexibility of redemption any time.

Some people invest in Mutual Funds for a regular income, and they usually look at options of getting a dividend. Thus many schemes, especially debt oriented schemes, have monthly or quarterly dividend options. It is important to note that dividends are distributed from the profits or gains made by the scheme and are in no way guaranteed every month. Though the fund house endeavors to give consistent dividends, the distributable surplus is determined by market movements and fund performance.

There is another method to get a monthly income: using the Systematic Withdrawal Plan (SWP). Here, you need to invest in the growth plan of a scheme and specify a certain fixed amount required as a monthly payout. Then on a designated date, units amounting to that fixed amount would be redeemed. For example, an investor could invest Rs. 10 lacs and request that Rs. 10,000 be paid on the 1^st of every month. Then, units worth Rs. 10,000 would be redeemed on the 1^st of every month.

It is important to note that the tax treatment for both, dividend and SWPs, vary, and investors need to plan accordingly.

*Monthly Income is not assured and should not be construed as guarantee of future returns.

Debt funds are for investors who seek safety of capital or regular income from investment and/or want to park money for short periods.

But debt funds are of various types. 

Like in banks, you can open a savings account, where you can put and remove money whenever you want.  However, it doesn’t make sense to keep money idle, if you are not likely to use it for some time. You may, in such a case, open a fixed deposit – where the money is locked for a certain period allowing you to earn a higher rate of interest. You may also opt for a recurring deposit, wherein you keep investing a fixed amount every month for a pre-defined period of time. All these products help you with different requirements.

Similarly, among Mutual Funds too there are variants available in the debt fund category to fulfill various needs of investors, like – Liquid Funds, Income Funds, Government Securities and Fixed Maturity Plans.

An investor would be advised to select schemes based on one’s unique requirements.

There are different equity funds catering to various needs of investors. The broad objective of all is to generate appreciation over long periods.

To understand it better let us look at the contingent we send to the Olympic Games. There is a large group of players, and then there are teams for various sports. One of the major events at the Olympic Games is the “track and field” event. We send a group for these events, as well. Within that, there are some races – right from a 100-meter sprint to long distance races, including marathon. Though, the whole contingent has gone to compete in the Olympic Games, there would be different players with different strengths.

It is the same with Mutual Funds. If all the Mutual Fund schemes are equivalent to the entire Olympic contingent, equity funds may be similar to a group within, which participates in, various track and field events. As we saw, there are various sub-categories even within track and field, similarly, there are different schemes within equity funds.

Mutual Fund schemes investing in a single asset category are like specialist bowlers or batsmen. Whereas certain other schemes, known as hybrid funds, invest in more than one asset categories, e.g. some invest in equity and debt both. Some may also invest in gold apart from equity and debt.

In cricket, we see batting all-rounders as well as bowling all-rounders depending on the skill they are better at. Similarly, there are Mutual Fund schemes that invest heavily in one asset category as compared to another.

The oldest category, the balanced fund category, invests in equity and debt. The allocation to equity is normally higher (over 65%) and the rest is in debt.

The other popular category known as MIP or the monthly income plan endeavours to provide monthly (or regular) income to investors. However, there is no guarantee of regular income. These schemes invest predominantly in debt securities so that regular income can be generated. A small portion is invested in equity to enhance returns over the years. 

Another variation of the hybrid scheme invests in equity, debt and gold, to take advantage of three different asset classes in one portfolio.

An investor has an option of buying different equity or debt or gold fund schemes to create a hybrid portfolio or alternately buy a hybrid fund.

All Mutual Fund Schemes offer two plans- Direct and Regular. In a Direct Plan, an investor has to invest directly with the AMC, with no distributor to facilitate the transaction. In a Regular Plan, the investor invests through an intermediary such as distributor, broker or banker who is paid a distribution fee by the AMC, which is charged to the plan.

Therefore, the direct plan has a lower expense ratio as there is no distribution fee involved, while the regular plan has a slightly higher expense ratio to account for the commission paid to a distributor to facilitate the transaction.

Managing a MF scheme entails costs and expenses, like fund management expenses, sales and distribution expenses, custodian and registrar fees etc. All such expenses are covered by the expense ratio of the fund. Such expenses are within the limits prescribed by the regulator – SEBI.

Thus if an investor chooses to invest directly through the Direct Plan, she may get marginally higher return on account of savings in expenses, but she would not be able to avail of distribution and related services of an intermediary.

An Equity Fund is a Mutual Fund Scheme that invests predominantly in shares/stocks of companies. They are also known as Growth Funds.

Equity Funds are either Active or Passive.  In an Active Fund, a fund manager scans the market, conducts research on companies, examines performance and looks for the best stocks to invest. In a Passive Fund, the fund manager builds a portfolio that mirrors a popular market index, say Sensex or Nifty Fifty.

Furthermore, Equity Funds can also be divided as per Market Capitalisation, i.e. how much the capital market values an entire company’s equity. There can be Large Cap, Mid Cap, Small or Micro Cap Funds.

Also there can be a further classification as Diversified or Sectoral / Thematic. In the former, the scheme invests in stocks across the entire market spectrum, while in the latter it is restricted to only a particular sector or theme, say, Infotech or Infrastructure.

Thus, an equity fund essentially invests in company shares, and aims to provide the benefit of professional management and diversification to ordinary investors.

The minimum tenure for investment in Mutual Funds is a day and the maximum tenure is ‘perpetual’.

It may be easy to understand the minimum period of a day, i.e. getting units allotted at a particular NAV and then redeemed at the next day’s NAV. However, what is the ‘perpetual’ nature of the maximum tenure? There are open end schemes in India with daily NAV, in existence for more than 20 years. And there are investors too who have stayed invested for that tenure! As long as the schemes continue in operation and offer a NAV based sale and purchase price, investors can choose to continue to stay invested. An open end fund may continue in existence until the fund house decides to terminate it, after obtaining due approval of the trustees.

A debt fund is a Mutual Fund scheme that invests in fixed income instruments, such as Corporate and Government Bonds, corporate debt securities, and money market instruments etc. that offer capital appreciation. Debt funds are also referred to as Fixed Income Funds or Bond Funds.

A few major advantages of investing in debt funds are low cost structure, relatively stable returns, relatively high liquidity and reasonable safety.

Debt funds are ideal for investors who aim for regular income, but are risk-averse. Debt funds are less volatile and, hence, are less risky than equity funds. If you have been saving in traditional fixed income products like Bank Deposits, and looking for steady returns with low volatility, debt Mutual Funds could be a better option, as they help you achieve your financial goals in a more tax efficient manner and therefore earn better returns.

In terms of operation, debt funds are not entirely different from other Mutual Fund schemes. However, in terms of safety of capital, they score higher than equity Mutual Funds.

Our choice of meals when we dine depend largely on the time at hand, the occasion and of course, our mood. If we’re in a hurry, say during an office lunch or eating before boarding a bus/train, we may opt for a combo meal. Or if we know a combo meal is famous, we may not bother to go through the menu. A leisurely meal would mean ordering individual items from the menu, as many as we’d like.

Similarly, an investor in a Mutual Fund can select and invest individually in various schemes, e.g. equity fund , debt fund , gold fund , liquid fund , etc. At the same time, there are schemes like a combo meal – known as hybrid schemes. These hybrid schemes, earlier known as Balanced Funds, invest in two or more asset categories so that the investor can avail the benefit of both. There are various types of hybrid funds in the Indian Mutual Fund industry. There are schemes that invest in two assets, viz., equity and debt, or debt and gold. There are also schemes that invest in equity, debt and gold. However, most of the popular hybrid schemes invest in equity and debt assets.

Different types of hybrid funds follow different asset allocation strategies. Remember to have your objectives clear before you invest.

Equity Mutual Funds buy stocks while Debt funds buy debt fund securities like bonds for their portfolio. Securities like bonds aare issued by corporates such as power utilities, banks, housing finance and the Government. They issue bonds with fixed interest rate to raise money from the public (investors) instead of taking a loan for new projects. Bonds are a promise to pay periodic fixed interest to investors who buy them.

When investors buy bonds with a maturity of a few years, they are lending their money to the issuer (say ABC Power Ltd.) for those many years. ABC promises to pay periodic interest to its investors during this time in return for the money they have invested in its bonds (=money lent to ABC). ABC is the borrower like a customer taking a home loan. The investor (your Mutual Fund investing your money) is the lender to ABC just like the bank is a lender to the home loan customer.

Debt fund invests your money in a basket of bonds and other debt fund securities.