A mutual fund is a type of investment vehicle that pools money from a large number of investors to invest in a diversified portfolio of securities such as stocks, bonds, or other assets. Each investor owns a portion of the fund, which is represented by shares, and receives a proportional share of the fund’s gains or losses.
A mutual fund is managed by a professional fund manager, who is responsible for making investment decisions based on the fund’s investment objectives and strategy. The manager uses the pooled money to buy a variety of securities, which can range from stocks and bonds to other types of assets, depending on the fund’s investment mandate.
Mutual funds offer several advantages to investors. They provide access to professional management and a diversified portfolio of securities, which can help to reduce risk and increase returns. They also offer liquidity, which means that investors can buy and sell shares of the fund on any business day, usually at the net asset value (NAV) of the fund.
Types of Mutual Funds:
Equity funds invest primarily in stocks, which can be either domestic or international. These funds can be further classified based on their investment objective, such as growth, value, or income.
Fixed Income Funds:
Fixed income funds invest primarily in bonds and other debt securities, which can include government bonds, corporate bonds, and municipal bonds. These funds can be further classified based on the maturity of the bonds, such as short-term, intermediate-term, or long-term.
Balanced funds invest in a mix of stocks and bonds, with the allocation determined by the fund’s investment objective and strategy. These funds can be further classified based on their asset allocation, such as aggressive, moderate, or conservative.
Index funds seek to replicate the performance of a specific market index, such as the S&P 500 or the Nasdaq. These funds invest in the same securities as the index they are tracking and offer low fees and broad diversification.
Specialty funds invest in specific industries or sectors, such as healthcare, technology, or real estate. These funds can be further classified based on their investment objective, such as growth, value, or income.
Advantages of Mutual Funds:
Mutual funds provide investors with access to a diversified portfolio of securities, which can help to reduce risk and increase returns.
Mutual funds are managed by professional fund managers, who have the expertise and experience to make informed investment decisions based on the fund’s investment objectives and strategy.
Mutual funds are highly liquid, which means that investors can buy and sell shares of the fund on any business day, usually at the net asset value (NAV) of the fund.
Mutual funds are easy to buy and sell, and offer a range of investment options to suit different investor needs and goals.
Mutual funds are affordable, as investors can invest in a diversified portfolio of securities with a relatively small investment.
Disadvantages of Mutual Funds
Fees and Expenses
Mutual funds charge fees and expenses, which can reduce the net returns to investors. These fees can include management fees, operating expenses, and sales charges.
Lack of Control
Investors in mutual funds have limited control over the securities held in the fund, as the investment decisions are made by the fund manager.
The performance of a mutual fund can vary based on a variety of factors, including the fund manager’s investment decisions, market conditions, and the performance of the underlying securities.
Mutual fund investments can have tax implications, as investors may be required to pay taxes on capital gains.
Tax Saving Funds
Tax-saving funds, also known as Equity Linked Saving Schemes (ELSS), are mutual funds that offer tax benefits to investors under Section 80C of the Income Tax Act. ELSS funds invest primarily in equities and have a lock-in period of three years, which means that investors cannot redeem their investments before the end of the lock-in period. ELSS funds offer investors the opportunity to save tax while also earning potentially higher returns compared to traditional tax-saving investments such as fixed deposits or Public Provident Fund (PPF).
The tax benefit available to investors under Section 80C is up to INR 1.5 lakhs per year. The amount invested in ELSS funds can be claimed as a deduction from taxable income, which can help to reduce the investor’s tax liability. Additionally, the returns earned on ELSS funds are tax-free up to INR 1 lakh per year, which makes them a highly tax-efficient investment option.
Offshore Funds in India:
Offshore funds, also known as international funds or global funds, are mutual funds that invest primarily in securities listed in international markets outside India. These funds provide investors with exposure to global markets and the opportunity to diversify their portfolio across countries and regions. Offshore funds can invest in a variety of assets, including equities, bonds, commodities, and currencies.
Offshore funds in India are regulated by the Securities and Exchange Board of India (SEBI) and are subject to the same regulations and guidelines as domestic mutual funds. However, investing in offshore funds involves additional risks, such as currency fluctuations, geopolitical risks, and regulatory risks.
Investing in offshore funds in India requires investors to comply with the regulations set by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA). Indian residents are allowed to invest in offshore funds up to a certain limit, which is currently set at USD 250,000 per financial year per person. The investment can be made through a designated bank in India and requires the submission of relevant documents and declarations to the bank and other regulatory authorities.
Regulation of Mutual Fund
Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI), which is the primary regulatory body for the securities market in India. SEBI was established in 1988 as a non-statutory regulatory body and was later given statutory powers through the SEBI Act, 1992.
The main objective of SEBI is to protect the interests of investors in securities and to promote the development of the securities market in India. SEBI regulates mutual funds in India through the SEBI (Mutual Funds) Regulations, 1996, which provide a comprehensive framework for the regulation and functioning of mutual funds in India.
Some of the key regulatory aspects of mutual funds in India are:
- Registration: All mutual funds in India must be registered with SEBI before they can launch any schemes or collect money from investors. SEBI assesses the suitability of the sponsor and the asset management company (AMC) based on their financial and technical capabilities and their track record in the securities market.
- Investment Restrictions: SEBI imposes certain investment restrictions on mutual funds to ensure that they invest in a prudent and diversified manner. For example, mutual funds cannot invest more than 10% of their corpus in a single company, and they must invest at least 65% of their corpus in equity and debt securities.
- Disclosure Requirements: Mutual funds in India are required to disclose information about their schemes, including their investment objectives, investment strategies, and risks associated with investing in the schemes. They are also required to disclose their portfolio holdings and performance on a regular basis to ensure transparency and accountability.
- Investor Protection: SEBI has introduced several measures to protect the interests of investors in mutual funds. For example, mutual funds are required to have an independent trustee who represents the interests of the investors. SEBI has also mandated that mutual funds provide a standard riskometer for each scheme to help investors understand the risk associated with investing in the scheme.
- Continuous Monitoring: SEBI continuously monitors the functioning of mutual funds in India to ensure that they comply with the regulations and follow best practices. SEBI has the power to take corrective action if it finds any violation of the regulations or any other irregularities in the functioning of the mutual funds.
Money market mutual funds
Money market mutual funds (MMMFs) are a type of mutual fund that invests in short-term, low-risk debt securities such as treasury bills, commercial paper, certificates of deposit, and other money market instruments. In India, MMMFs are regulated by the Securities and Exchange Board of India (SEBI).
MMMFs are a popular investment choice for investors who want to earn a higher rate of return than a savings account or fixed deposit, while still maintaining a low level of risk. The returns on MMMFs are generally higher than those on bank deposits, as they invest in a variety of money market instruments that provide higher yields.
There are various types of MMMFs available in India, including liquid funds, ultra-short-term funds, and low-duration funds. Liquid funds are the most popular type of MMMFs, as they offer high liquidity and a low level of risk.
To invest in MMMFs, investors can approach a mutual fund distributor or invest directly through the fund house. They can invest a minimum amount of Rs. 1,000 and there is no maximum limit. The investment can be made through lump sum or systematic investment plan (SIP).
The regulation of MMMFs in India is strict, with SEBI mandating that they can only invest in money market instruments with a maturity of up to 91 days. The fund managers of MMMFs are required to maintain high levels of liquidity to ensure that investors can easily redeem their units.
Assets under Management
Assets under management (AUM) is a term used to describe the total market value of the assets that are managed by a financial institution or an investment company. In India, the AUM of the mutual fund industry has been steadily increasing over the past few years.
As of March 2021, the total AUM of the Indian mutual fund industry was Rs. 31.43 lakh crore ($422 billion), according to data from the Association of Mutual Funds in India (AMFI). This represents a growth of around 29% from the previous year.
The growth in AUM has been driven by a number of factors, including increasing investor awareness, a favorable regulatory environment, and the availability of a wide range of investment products. The Indian government’s push towards financial inclusion has also played a role in increasing the number of retail investors in the country.
Equity funds have been the main driver of growth in AUM in recent years, accounting for around 44% of the total AUM in March 2021. Debt funds and hybrid funds accounted for around 27% and 18% of the total AUM, respectively.
In terms of fund houses, the top five asset management companies in India in terms of AUM as of March 2021 were HDFC Mutual Fund, ICICI Prudential Mutual Fund, SBI Mutual Fund, Aditya Birla Sun Life Mutual Fund, and Nippon India Mutual Fund.
Net Asset Value
Net Asset Value (NAV) is a term used in the context of mutual funds and represents the per-unit value of the fund. It is the market value of all the securities held by a mutual fund, minus any liabilities, divided by the total number of units issued.
In other words, NAV is the price at which an investor can buy or sell a mutual fund unit. It is calculated by adding up the current market value of all the assets held by the fund, subtracting any expenses or liabilities, and then dividing that amount by the total number of outstanding units.
NAV is calculated at the end of each trading day and reflects the fund’s performance on that day. It is an important measure of a mutual fund’s performance, as it reflects the value of the investments made by the fund, and is used to calculate returns for investors.
Investors use NAV to determine the value of their investment in a mutual fund. For example, if an investor owns 100 units of a mutual fund with an NAV of Rs. 50, the value of their investment would be Rs. 5,000. If the NAV goes up to Rs. 55, the value of their investment would increase to Rs. 5,500.
NAV is also important for buying and selling mutual fund units. When an investor buys mutual fund units, they pay the NAV plus any applicable fees or charges. When they sell units, they receive the NAV minus any fees or charges. The NAV can be found on the mutual fund company’s website, in the financial press, or through a financial advisor.
It is important to note that the NAV does not reflect the total return on a mutual fund investment. It only represents the value of the assets held by the fund at a given time. To calculate the total return on a mutual fund investment, investors need to consider factors such as dividends, capital gains, and fees.
Exchange Traded Funds
Exchange Traded Funds (ETFs) are a type of investment fund that are traded on stock exchanges, much like individual stocks. ETFs are designed to track the performance of a specific market index, such as the Nifty 50 or the BSE Sensex, or a basket of securities, such as a particular sector or asset class.
ETFs are similar to mutual funds in that they offer investors access to a diversified portfolio of assets, but they differ in that they trade on stock exchanges throughout the day, like a stock, and can be bought and sold at any time during trading hours. This means that ETFs provide investors with the flexibility to enter and exit the market quickly and at a lower cost than traditional mutual funds.
ETFs in India are regulated by the Securities and Exchange Board of India (SEBI) and can be issued by mutual funds or other financial institutions. They are typically listed on a stock exchange and can be bought and sold through a broker or online trading platform.
ETFs offer several advantages to investors in India:
- Diversification: ETFs offer investors exposure to a diversified portfolio of assets, reducing the risk of losses due to the performance of a single security.
- Lower costs: ETFs have lower expense ratios than traditional mutual funds, as they are passively managed and require less oversight.
- Flexibility: ETFs can be bought and sold throughout the day, giving investors greater flexibility in managing their investments.
- Transparency: ETFs publish their holdings daily, allowing investors to know exactly what assets they are invested in.
- Tax efficiency: ETFs are more tax-efficient than mutual funds, as they typically generate fewer capital gains.
Drawbacks to investing in ETFs:
- Liquidity: While ETFs are generally more liquid than traditional mutual funds, some ETFs may have lower trading volumes, which can make it difficult to buy and sell at the desired price.
- Tracking error: Since ETFs are designed to track the performance of a particular index or basket of securities, there may be some tracking error, or difference between the ETF’s performance and the index it is tracking.
- Limited control: ETF investors do not have control over the underlying assets held by the ETF, which may not align with their personal investment goals or values.
Real Estate Investment Trust
Real Estate Investment Trusts (REITs) are a type of investment fund that invests in income-generating real estate properties, such as commercial buildings, shopping malls, and residential properties. REITs are designed to provide regular income to investors through rental income and capital appreciation.
REITs in India are regulated by the Securities and Exchange Board of India (SEBI) and were first introduced in 2014. Indian REITs must have at least 80% of their assets invested in completed and income-generating properties, with the remaining 20% allowed to be invested in under-construction properties and other real estate assets.
Investors in REITs can purchase shares of the trust on a stock exchange and receive dividends in proportion to their share ownership. REITs are required to distribute at least 90% of their income as dividends to investors, making them an attractive investment option for those seeking regular income.
Advantages of investing in REITs in India:
- Diversification: REITs provide investors with exposure to a diversified portfolio of real estate assets, reducing the risk of losses due to the performance of a single property.
- High liquidity: REITs are traded on stock exchanges, providing investors with the ability to buy and sell shares easily and at a low cost.
- Regular income: REITs distribute a significant portion of their income as dividends, providing investors with a regular source of income.
- Professional management: REITs are managed by professional managers who have expertise in managing real estate properties, reducing the need for individual investors to manage properties themselves.
- Potential for capital appreciation: REITs can generate capital appreciation if the value of their underlying properties increases over time.
Drawbacks to investing in REITs:
- Dependence on real estate market: REITs are dependent on the performance of the real estate market, which can be volatile and subject to fluctuations.
- Interest rate sensitivity: REITs are sensitive to changes in interest rates, which can affect their borrowing costs and the value of their properties.
- Limited control: REIT investors do not have direct control over the properties held by the trust, which may not align with their personal investment goals or values.
- Regulatory risks: REITs in India are subject to regulatory oversight, which can limit their investment options and increase their operating costs.
Value investing is a type of investment strategy where investors look for stocks that are undervalued by the market. The underlying philosophy of value investing is that the market often overreacts to short-term events, causing stock prices to fluctuate and creating opportunities for long-term investors to buy stocks at a discount to their intrinsic value.
Value investors typically look for companies with strong fundamentals, such as solid earnings, a healthy balance sheet, and a competitive advantage in their industry. They use a variety of financial metrics, such as price-to-earnings ratio (P/E), price-to-book ratio (P/B), and dividend yield, to identify undervalued stocks. Value investors may also look at a company’s historical performance, management team, and overall industry trends to assess its potential for future growth.
The key principle of value investing is to buy stocks at a price that is lower than their intrinsic value, which is the estimated value of the company based on its fundamentals and future earnings potential. Value investors believe that if they can identify undervalued stocks, the market will eventually recognize the company’s true value and the stock price will rise accordingly.
One of the most famous proponents of value investing was Warren Buffett, who used the strategy to build his successful investment firm, Berkshire Hathaway. Buffett famously said, “Price is what you pay, value is what you get.”
Value investing is often contrasted with growth investing, which focuses on investing in companies with high growth potential, often at the expense of short-term profitability. Value investors tend to have a longer-term investment horizon and are willing to be patient as they wait for the market to recognize the true value of the company.
Advantages of value investin:
- Lower risk: Value stocks tend to be more stable and less volatile than growth stocks, providing investors with a lower risk investment option.
- Potential for higher returns: If the market eventually recognizes the true value of a company, value investors can potentially benefit from a significant increase in the stock price.
- Emphasis on fundamentals: Value investing focuses on a company’s fundamentals, such as earnings and cash flow, which can provide a more stable and reliable investment opportunity.
- Historical performance: Many studies have shown that value stocks have historically outperformed growth stocks over the long term.
Drawbacks to Value investing:
- Longer investment horizon: Value investing typically requires a longer-term investment horizon, which may not be suitable for all investors.
- Limited growth potential: Value stocks may not have the same high-growth potential as growth stocks, which could limit their long-term potential.
- Difficulty in identifying undervalued stocks: Identifying undervalued stocks requires significant research and analysis, which can be time-consuming and difficult.
- Lack of diversification: Focusing on value stocks may lead to a lack of diversification in a portfolio, which could increase risk.