Mutual Funds
Lets learn what is mutual funds...
When a individual person invests in a company, he is called as investor. When an AMC (Asset Management Company) invests in a company using funds pooled from various people, it is called Mutual fund.
A Mutual Fund is managed by AMC. In the year 2017, there was an IPO (Initial public offering) called Reliance Nippon Life, they are the AMC of Reliance Mutual Fund. Similarly, every Mutual Fund has an AMC.
Lets view the types of Mutual Funds and ponder on the subject little more.
I will show a pictorial view of the types of Mutual Funds available and explain about it,
Open-ended funds: These funds buy and sell units on a continuous basis and, hence, allow investors to enter and exit as per their convenience. The units can be purchased and sold even after the initial offering (NFO) period (in case of new funds). The units are bought and sold at the Net Asset Value (NAV) declared by the fund.
The number of outstanding units (NAV) goes up or down every time the fund house sells or repurchases the existing units. This is the reason that the unit capital of an open-ended mutual fund keeps varying. The fund expands in size when the fund house sells more units than it repurchases as more money is flowing in.
Closed-ended funds: The unit capital of closed ended funds is fixed and they sell a specific number of units. Unlike in open-ended funds, investors cannot buy the units of a closed-ended fund after its NFO period is over. This means that new investors cannot enter, nor can existing investors exit till the term of the scheme ends. However, to provide a platform for investors to exit before the term, the fund houses list their closed-ended schemes on a stock exchange.
Trading on a stock exchange enables investors to buy and sell units through a broker in the same manner as transacting the shares of a company. The number of outstanding units of a closed-ended fund does not change as a result of trading on the stock exchange. The closed-ended funds are free from the worry of regular and sudden redemption and their fund managers are not worried about the fund size.
The next classification of mutual funds is Equity Funds and Non Equity Funds.
Non Equity Funds: Non-equity mutual fund space consists not just of the debt funds but also all other funds that hold less than 65% of their portfolio in equity, fund of funds, international funds and gold funds. Some of the non equity funds are:
- Debt Funds: These Funds invest predominantly in rated debt / fixed income securities like corporate bonds, debentures, government securities, commercial papers and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seeking regular and steady income. They are less risky when compared with equity funds.
- Liquid Funds: These funds invest in highly liquid money market instruments and provide easy liquidity. The period of investment in these funds could be as short as a day. They are ideal for Corporates, institutional investors and business houses who invest their funds for very short periods.
- Gilt Funds: These funds invest in Central and State Government securities and are best suited for the medium to long-term investors who are averse to risk. Government securities have no default risk.
Equity Funds: When mutual funds invest maximum part of their corpus in the stock market, they are broadly called an equity mutual fund schemes. The structure of the fund may vary for different schemes and also on fund manager’s view on different stocks. The structure depends on the objective of the scheme.
Some of the objectives are Growth and Dividend. Growth usually grows over a period of time and is very good for long term investment. So the NAV of the Growth funds keep on increasing when its performance increases. Dividend funds in the other end gives dividends as returns (monthly, quarterly, half-yearly, yearly) and their NAV goes down everytime they give dividend. The important point to note here is the magic of compounding gets missed in dividend option, whereas the growth story keeps ur money invested and it compounds every year.
Next classification is the types of equity funds. In fact, depending on their investment objectives, you can classify equity mutual funds into a number of types.
Large Cap Equity Funds: Funds which invest a large portion of their corpus in companies with large market capitalization are called large-cap funds. This type of fund is known to offer stability and sustainable returns, over a period of time.
Mid-Cap and Small Cap Equity Funds: Another type of equity mutual fund is called mid-cap funds. Here the fund invests in stocks of mid-size companies, which are still considered developing companies. Likewise equity funds which invest in stocks of small-size companies are called small cap equity funds.
Multi Cap or Diversified Equity Funds: These funds invest in companies across different sectors and market capitalization and hence reduce the amount of risk in the fund. Diversification helps prevent events that could affect a single sector for affecting the fund, and hence reduce risk. They are generally meant for investors who seek exposure across the market and do not want to be restricted to any particular sector.
Thematic (Sectoral) Equity Funds: These funds invest in securities of specific sectors such as IT, FMCG, Banking, Logistics, Power, Infrastructure and pharmaceuticals. It is specified in their respective offer documents. So, the performance of these schemes depends on the performance of the respective sector. These funds may give higher returns, but they also come with increased risks and rewards - highest of all equity mutual funds.
Balanced Funds: These funds invest both in equity shares and debt (fixed income) instruments and strive to provide both growth and regular income. They are ideal for medium- to long-term investors willing to take moderate risks.
Index Funds: These funds invest in the same pattern as popular stock market indices like CNX Nifty Index and S&P BSE Sensex. The value of the index fund varies in proportion to the benchmark index. NAV of such schemes rise and fall in accordance with the rise and fall in the index.
Equity Linked Savings Scheme: Another type of equity mutual fund scheme called equity-linked savings scheme (ELSS) gives you tax savings. But there is a lock in period of three years minimum in ELSS, and they work as a good investment option for those who want to invest in equity MF's as well as get tax savings. This is a popular type of investment as it gives exemption under 80c income tax.
As we see “Mutual fund investments are subject to market risks. Please read the offer document carefully before investing.” Every investment instrument is associated with a risk, avert the risk by investing long term. Being a long term investor, your risk gets neutralized.
Study the Mutual funds available from different AMCs and try to assort it based on your risk appetite.
Start investing in terms of SIP (Systematic Investment Plan), if you are investing in a fund and want to transfer the fund to another fund within the same fund house, one can use STP (Systematic Transfer Plan), if you want withdraw some money as a regular income, one can use SWP (Systematic Withdraw Plan).
Based on my research some of the good funds for long term, with the parameters:
open-ended, Growth Option with max 5-year CAGR (Cumulative Annual Growth Returns)
- Tata Equity P/E Fund - Large Cap - 23.86% CAGR
- Franklin India Smarter Cos Fund - Midcap - 29.82% CAGR
- Canara Rob Emerg Equities Fund - Midcap - 29.71% CAGR
- UTI Mid Cap Fund - Midcap - 27.75% CAGR
- SBI Magnum Midcap Fund - Midcap - 26.26% CAGR
- Franklin India High Growth Cos Fund - Multicap - 21.81% CAGR
- Reliance Tax Saver (ELSS) Fund - ELSS - 21.96% CAGR
- DSPBR Tax Saver Fund - ELSS - 20.37% CAGR
Some other good funds are,
- L&T Emerging Business Fund
- L&T Infrastructure Fund
- Kotak Select Focus Fund
- Reliance Small Cap Fund
- HDFC Small Cap Fund
- SBI Blue Chip Fund
One more thing to keep in mind is Regular Plan and Direct Plan. All the suggested funds will be in both regular and direct plan, the difference between direct plan and regular plan is there is no mediator between the AMC and investor which is called as Direct Plan, if there is a mediator then there will be commission which is called as Expense ratio. Lower the expense ratio, better is your returns. For example, same fund with regular plan have 1% more expense than direct plan. so you will miss this 1% returns in the compounding every year which in the long term gives you lot of money.
Some of the platform which gives direct mutual fund is,
- https://www.mfuindia.com/
- Wealthtrust Mobile App - free for 6 months then shift to MFindia
- Zerodha Coin - 50rs/month if investment is more than 25000rs yearly.
- https://kuvera.in/ - latest mutual fund platform which sells direct plans free of cost indefinitely.
That's all folks. Next post will be on Stock Market. 😎
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