Mutual funds are providing an opportunity to investment in the capital market by small investors who do not have adequate knowledge or experience or time to directly invest in the capital market. The small investors rely on the expertise of financial consultants or agents of the mutual funds.
Choice of schemes under mutual funds
Every major Mutual Fund Organization (MFO) in India has introduced at least a dozen of schemes. These schemes are initiated and offered to the public, targeting different investors group. You have a choice of selecting a suitable scheme.
- Open-ended Mutual Funds: Open ended mutual funds means they do not have a fixed maturity period. The investor can purchase the units at any point of time and can sell back (redeem) the units to Asset Management Company (AMC) at any time.
- Close-end Mutual Funds: In close-end mutual funds the scheme ends after fixed maturity period. Normally the investor is not eligible to sell them back to the Asset Management Company before the maturity period.
- Growth/Equity Scheme: In the equity or Growth schemes of Mutual funds, the money of investors is primarily invested in equities (Shares). Investment in equity schemes is subject to market risk. However, the persons who have risk appetite would invest in equity schemes, in anticipation of good profit in the scheme.
- The debt-schemes: Funds are predominantly invested in Government Securities, bonds, insurance company, Deep Discounted bonds and commercials, Deposits etc. Investments in Debt schemes are low risk, but low yield investments.
- Systematic Investment Plan (SIP): In SIP schemes of Mutual Funds, the investor would invest constantly certain amount at regular intervals either on monthly or on a quarterly basis. Investment in SIP helps the investor to diversify their risk over a period of time.
- Systematic withdrawal Plan (SWP): In SWP the investor withdraws money at regular interval. AS in the SIP, the investor diversifies the risk by withdrawing the money from the scheme at a different interval.
- Systematic Transfer Plan (STP): STP offers the investors to transfer his investments from one scheme to another of Asset Management Company (AMC) of a same mutual fund or other mutual funds to maintain the mix of schemes. STP is also known as Fund of Funds (FoF) scheme.
- Balanced Fund: A scheme that provides both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.
- Money Market or Liquid Fund: A scheme that provides easy liquidity, preservation of capital and modest income. Under the scheme, investment will be entirely in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. The corporate and individuals who would like to park their surplus funds for short period prefer this scheme.
- Gilt Fund: These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.
- Index Fund: In Index Funds Schemes’ NAV rises or falls according to index, as these funds purchase all the stocks in the same proportion as in a particular index like Nifty 50, S&P BSE 50 etc. This means the scheme will perform in tandem with the index it is tracking, except for a small difference known as tracking error. Mutual funds such as the SBI Nifty Index Funds, ICICI Pru Index Funds, Franklin (I) Index Funds, and Reliance Index Funds-Nifty are some of the leading mutual funds dealing in index funds. An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover. This is because index funds passively track the performance of a particular index instead of actively buying and selling stocks like other actively managed funds.
There are many other schemes like ‘Sector specific funds/schemes’ (investment will be purely on specific sectors like Software, FMCG etc.), ‘Tax saving schemes’ (Income Tax benefit for investment in these schemes) and so on. These schemes are tailor-made offers to attracts different kinds of investors into mutual fund investments.
Interpretations of words used in mutual funds:
Net Assets Value (NAV): Mutual Funds /AMC invests the investor’s money held by it on various types of financial instruments (assets) like shares, deposits, bonds, Government securities etc. The Market value of assets (Securities) minus the liabilities if any (excluding investor’s liability), is divided by the number of units available in the scheme gives the Net Asset Value (NAV) of each unit.
Entry Load: The selling and distribution expenses of AMC will be charged to the investors at a certain percentage of Net Asset Value (NAV) generally between 1 to 3%. The above-mentioned charge is called Entry Load. In some schemes, entry load is not charged.
Exit Load: The exit load is the amount charged by the AMC towards investor’s money going out of the scheme. Generally, between 1 t”o 3% of NAV is charged as exit load. In some schemes, exit load is not charged.
Figure out the tax saving instruments which suits you most
Know about PPF account benefits
Investment in Sukanya Samriddhi Scheme
Income-tax rebate on the purchase of NSCs
Details on NPS (new pension scheme)