Mutual Fund Investments

Mutual Fund Investments – A Beginners Guide

by Ramit

Introduction

The Indian economy is booming. It’s the right opportunity to grow your saving too. And this is possible through sound investments.In the financial markets, you will find several attractive investments avenuessuch as stocks, debentures, commodities, government securities, corporate bonds, etc. to grow your funds. But, investing individually in each of them can be a complex exercise. It will also need you to be well-versed with all the asset classes. Why notinstead consider a professionally managed investment vehicle like Mutual Funds thathelps you to easily invest in all of them and grows your money too? Too good to be true?

Well, it is. Read on to explore what is Mutual Fund Investments, their features, how they work, and much more.

What is a Mutual Fund and how does it work?

A Mutual Fund is an investment vehicle that accumulates money from investors like you and invests it in different financial products and securities. The investments of a Mutual Fund lie in capital market securities such as equities, bonds, commodities, debt, etc. All these together make up the portfolio of the Mutual Fund. And the returns of the fund depend on the profit that these underlying assets make. The fund manager is the financial markets expert from the Asset Management Company who manages your money and aims to achieve the fund objective by extracting maximum returns from the investment. 

Mutual Fund companies or fund houses offer several categories of Mutual Funds. Each category has multiple schemes in it. When you invest money in a particular Mutual Fund scheme, you essentially buy units of that scheme and become a unitholder. This investment makes you a partial owner of all the securities that the Mutual Fund has invested in. And the returns that these underlying securities generate are divided proportionately among all the unitholders. Simply put, it is the profit you enjoy (or sometimes the loss you suffer). 

Understanding the Organizational Structure of a Mutual Fund

You must know if your hard-earned money is in safe hands and is managed by a trusted entity. This is why understanding the organizational structure of a Mutual Fund becomes imperative for you. It will give you all the details about who is managing your money and protecting your interests.

In India, we have formalized a 3-tier structure of Mutual Funds by SEBI Mutual Fund Regulations in 1996. As per these SEBI Regulations, the Mutual Fund Company is set up as a Trust.

Tier 1 The Fund Sponsor The Fund sponsors establish the Mutual Fund and serve as promoters of the Mutual Fund Company (the trust). SEBI verifies the credibility of these Fund Sponsors and accordingly agrees to set up the Mutual Fund as a Public Trust (as per Indian Trust Act, 1882). The involvement of SEBI in the inception approval and registration process adds a layer of security to your investment.
Tier 2 The Trustees and the Trust The trustees manage this Public Trust. They act as the supervisors of the Mutual Fund and its assets, monitoring the activities of the Fund Sponsors. These trustees are accountable to you. They ensure your money is not misused by making sure that the SEBI regulations are complied with accurately.
Tier 3 The AMC The AMC is the company that invests your money and manages it. The AMC launches all the Mutual Fund schemes. They also offer you fund-related services. The Fund managers employed at the AMC do this job. They charge a fee for managing your money

Features of a Mutual Fund

Mutual Funds come with a host of features that make them a must-buy. Here are some of their key features,

Professional Management

The funds you invest in a Mutual Fund are managed professionally by a subject matter expert i.e. the fund manager. And the investment decisions of the fund manager are backed by thorough research done by a proficient research team. The end objective of each of the personnel involved in managing your money is to maximize gains.  

Diversified Investment

Diversification in your portfolio immensely benefits in hedging risks and averaging dipping performances. And a Mutual Fund is a classic example of a well-diversified form of investment where the fund’s accumulated corpus is invested in several asset classes.

Convenient

The Mutual Fund investment process is like child’s play. You can do it from your place of comfort quickly and conveniently – all you need is a Demat Account. And if you don’t have one, you should get it immediately. It is a prerequisite for any form of financial market investment including Mutual Fund investments. A full-service registered and well-known broker like ICICI Direct can help you to open your Demat Account. It can also be your guiding light for Mutual Fund investments. Their additional value-based services like investment advisory, research, consultation, etc. prove to be saviors for beginners and seasoned investors. Click here to start your Mutual fund Investment journey with ICICI Direct online right now.

Flexible Investment Terms

A Mutual Fund is a flexible investment tool. You do not need a huge amount of money to start your investments here. You can start investing from as little as Rs 500 monthly here through SIP. If you wish to invest a chunk of money in a lumpsum manner, that is doable too. Similarly, if you want to exit the scheme, you can dissolve your investment and withdraw your corpus easily too. In terms of returns, you can opt for a fund that delivers regular income i.e. dividend, or go for a scheme that offers a capital appreciation. 

Choosing between Active Mutual Funds V/s Passive Mutual Funds

Your investment objective and risk appetite will dictate your choice for an actively managed fund or one that is passively managed. In an Active Mutual Fund, the fund manager has a key role to play. He invests the corpus in stocks and securities with high growth potential and aims to outperform the benchmark index. Since the structuring of the fund and overall management actively involves the fund manager, the cost component here is higher. Actively managed funds come with a fair share of risk as the high fund management costs are clubbed with no performance guarantee.

Conversely, a Passive Mutual Fund aims to match and not beat the performance of the benchmark indices like Sensex, Nifty, commodity indices, etc. Its portfolio structure is a mere replication of the underlying index. Since the involvement of the Fund manager is minimal in this fund, the cost implications here are relatively low.As Passive Mutual Funds have the same structure as the benchmark indices, these funds are also known as Index Funds. Index Funds can be open-ended as well as close-ended schemes. The close-ended Index Mutual Funds that can be traded like a stock listed on the stock exchanges are called Exchange-Traded Funds (ETFs). Thus, there are two types of Passive Mutual Funds – Index Funds and ETFs.

Remember, not all active funds come with high bills. Some research may help you find well-performing active funds with reasonable costs too. But, if you don’t have the acumen or time to research the well-performing active funds, it is wise to go for passively managed funds. They atleast offer index-level performance at relatively lower costs.You can also consider a good mix of actively managed and passively managed funds in your portfolio to reap the benefits of both products.

Types of Active Mutual Funds

It will not be wrong to say that Mutual Funds come in all shapes and sizes metaphorically. Different objectives, asset categories, and structures lead to the creation of a wide range of Mutual Fund categories and schemes as follows

Mutual Fund Category Fund Name Description
Based on Asset Classes Equity Funds
  • These funds invest majorly in equity and equity-linked instruments. 
  • They possess an inherent medium-high risk quotient. 
  • They aim for capital growth.
  • Ideal for long-term investment objectives.
  • Equity Mutual funds can be further classified based on the sectors that the stocks belong to. For instance, Pharma Funds, Banking Funds, IT Funds, etc.
  • Another way to further categorize Equity Funds is based on the Market Capitalization of the stocks – Large-cap Funds, Mid-cap Funds, Multi-cap funds, Flexi-cap funds, and Small-cap Funds.
Debt Funds
  • These funds invest in fixed-income instruments such as bonds, corporate instruments, government securities, etc.
  • They aim for regular income.
  • Relatively stable. 
  • Money Market Fund is an example of a debt-based fund.
Hybrid Funds
  • Hybrid funds are a blend of Equity and Debt investments
  • Based on their allocation pattern, they are further classified into Conservative Fund, Balanced Fund, Aggressive Fund, Flexi-Cap Fund, Multi-Cap Fund, Arbitrage Funds, and Equity Savings Fund.
Based on Fund Structure Open-ended Funds
  • Easy entry and exit.
  • Possess relatively higher liquidity.
Close-ended Funds
  • You can invest in the fund scheme only when the fund launches.
  • You can exit the scheme only after the fund matures, or you may have to pay high exit charges.
  • Rank lower on liquidity.
Basedon Fund’s Investment Goal Growth Funds
  • The fund objective is capital appreciation.
  • Investments lie in instruments that focus on growth as stocks.
  • Ideal for a long investment horizon.
Income Funds
  • The fund objective is to generate a regular dividend.
  • Investments lie in relatively stable fixed-income instruments like bonds, debt funds, corporate bonds, government securities, etc.
  • Suitable for investors with a low-risk appetite.
Tax-Saving Fund
  • The fund objective is to save taxes through investment.
  • Tax benefits of up to Rs. 1.5 lakhs can be claimed under section 80C if investment in a tax-saving fund.
  • Example – ELSS (Equity Linked Saving Scheme)
Based on Fund Liquidity Ultra-Short Term Fund Investment tenure is up to six months
Short-Term Fund Investment tenure is three months to a one year
Medium-Term Fund Investment tenure is 1-5 years
Long-Term Fund Investment tenure is more than five years

Factors to consider for picking the Best Mutual Fund Investment for yourself

Understand your Investment Objective and Risk Appetite

Are you investing now to buy a house, or maybe a car, or to create a big corpus to pay for your child’s overseas education or their grand marriage? Remember, each fund category and scheme is tailored to meet a unique investment objective. Similarly, each fund is structured to be compatible with a specific risk profile. Hence, you must have complete clarity about your investment goal and your risk tolerance limits. This small exercise will help you to pick the most suitable scheme and category for yourself.

Evaluate the Performance of the Fund

Hunt for a fund that delivers consistent returns. The past reports, fund rating, the overall reputation of the AMC (Asset Management Company), etc. will give you insights into its overall performance. Here, the proficiency of your fund manager is also crucial as your money eventually lies in the hands of the fund manager.Hence, opt for a fund where the fund manager is heavily experienced and has a reputation of accurately achieving the fund objectives.

Evaluate the Costs

Mutual funds have several cost components – Management fee, transaction fee, brokerage fee, etc. Opt for funds where this expense ratio paid to the AMC is on the lower end. The entry and exit charges for your ideal fund should also be minimal or nil.

Conclusion

You will have a successful Mutual Fund investment stint if the products you invest in match your investment profile. Hence, the best way to filter through hundreds of Mutual fund offerings is, to begin with, hard-core research, assess various parameters of different funds, and then select a category or scheme based on your end investment goal. If the selection process of a Mutual Fund still baffles you, discuss your worries with a subject matter expert from your brokerage house to guide you through the troubled waters.

Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, AppasahebMarathe Marg, Prabhadevi, Mumbai – 400 025, India, Tel No : 022 – 6807 7100. I-Sec is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990.I-Sec is a SEBI registered with Investment Advisor(IA) vide SEBI Registration Number INA000000094.AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.Please note, Mutual Fund, Research and Investment Advisory related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.

Related Posts