Equity funds primarily invest in stocks, and hence go by the name of stock funds as well. They invest the money pooled in from various investors from diverse backgrounds into shares/stocks of different companies. The gains and losses associated with these funds depend solely on how the invested shares perform (price-hikes or price-drops) in the stock market. Also, equity funds have the potential to generate significant returns over a period. Hence, the risk associated with these funds also tends to be comparatively higher.
Debt funds invest money into fixed-income securities such as corporate bonds, government securities, and treasury bills. Debt funds can offer stability and a regular income with relatively minimum risk. These schemes can be split further into categories based on duration, like low-duration funds, liquid funds, overnight funds, credit risk funds, gilt funds, among others.
Balanced funds invest in a mix of equities and fixed-income securities typically in a 40% equity 60% fixed income ratio. The aim of these funds is to generate higher returns but also mitigate risk through fixed-income securities.
An Equity Linked Savings Scheme, popularly known as ELSS, is a type of diversified equity scheme which comes, with a lock-in period of three years, offered by mutual funds in India. They offer tax benefits under the Section 80C of Income Tax Act 1961. ELSS can be invested using both SIP (Systematic Investment Plan) and lump sums investment options. There is a three years lock-in period, and thus has better liquidity compared to other options like NSC and Public Provident Fund. Mutual funds are subjective to fluctuations in the market. There were many instances where the money you invested is the same or even lesser after 3 years in a mutual fund.
These are funds that invest primarily in equity shares. Investments made in these funds qualify for deductions under the Income Tax Act. They are considered high on risk but also offer high returns if the fund performs well.
Pension Funds: Pension funds are mutual funds that are invested in with a really long term goal in mind. They are primarily meant to provide regular returns around the time that the investor is ready to retire. The investments in such a fund may be split between equities and debt markets where equities act as the risky part of the investment providing higher return and debt markets balance the risk and provide lower but steady returns. The returns from these funds can be taken in lump sums, as a pension or a combination of the two.
Hybrid funds invest in both debt and equity instruments so as to balance out debt and equity. The ratio of investment can be fixed or varied, depending on the fund house. The broad types of hybrid funds are balanced or aggressive funds. There are multi asset allocation funds which invest in at least 3 asset classes.
These mutual fund schemes are for specific goals like building funds for children’s education or marriage, or for your own retirement. They come with a lock-in period of at least five years.
Offshore funds invest in overseas and multinational companies. Mostly NRI investors invest in these funds. Like any other mutual funds, offshore funds are also under the purview of the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). Also, the fund houses must comply with guidelines of the home country where the company they have invested is registered.
Challenges of Offshore Funds in India
Overseas authorities mostly accumulate and manage international investment influx into the Indian markets. This is because RBI and SEBI guidelines do not encourage fund managers based in India to manage foreign mutual funds. Consequentially, many offshore funds that target Indian investors earlier employed asset managers, who moved to these offshore sites.
There is a strong case for shifting the activities of the offshore funds to uplift our mutual fund sector at home. Therefore, to counter the challenges mentioned above, experts have suggested two solutions. One, permit fund houses to manage offshore funds from India without levying tax on them as an Indian entity. Two, allow direct investment by overseas investors in foreign mutual funds established in India. RBI approved this in November 2015. Now, international investors can invest in the form of AIFs and Real Estate Investment Trusts (REITs). In the 2016 Finance Bill, the taxation rules were also made more straightforward and transparent.
Advantages of Offshore Funds
- Investors enjoy direct access and exposure to international brands and businesses.
- Offshore mutual funds can give India further sectorial diversification.
- The strengths of the two countries can join forces in terms of industrial innovation and quality. For instance, if Japan is the leader in electrical goods, India has world-class IT services to offer.
- An AMC starts them in overseas jurisdictions with fewer investment rules, and the overall asset management costs would also be less.
- Since offshore funds are generally established in countries that provide tax-efficiency to investors abroad, they get some tax relief.
- As per mutual fund tax rules, foreign funds come under the debt category.
Disadvantages of Offshore Fund
- The rates, market fluctuations, policies, tax laws and other developments in both countries can impact your returns.
- Remember to have a long-term investment horizon to earn inflation-beating returns.
- It would be best if you were vigilant of risks in the home country and offshore location.
- Negative movement of currency value can affect the return on investment.