Frequently Asked Questions

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Mutual Funds are constituted as trust in India. Mutual fund is a financial instrument which pools the savings of a number of investors and may invest them in different financial securities like stocks, bonds, debentures, money market instruments and Government Securities etc. or a combination of these. These securities are professionally managed by a fund manager on behalf of the unit holders and each investor holds a pro-rata share of the portfolio, that is, entitled to profits as well as losses. Each investor in a mutual fund scheme owns units of the fund, which represents a portion of his holdings of that mutual fund scheme. Profits made or income earned through these investments and the capital appreciation realized is shared by the scheme unit holders in proportion to the number of units owned by each one of them.

Thus a mutual fund is the most suitable investment instrument for common savers or investors as it offers an opportunity to invest in a diversified, professionally managed portfolio of securities at a relatively lower cost.

Let us understand this with the help of an example – Suppose, Anupam invests Rs 100,000 in a mutual fund scheme. If the price of a unit of the scheme is Rs 10, then the mutual fund house will allot him 10,000 units. A unit represents percentage ownership of the total pool of money managed in the scheme. Mutual fund units are priced at Rs 10 at the time of launch of the scheme during the new fund offer or NFO and its price fluctuates with change in value of the underlying assets held in the scheme portfolio post closure of equity and bond markets on a daily basis.

Let us assume the total money invested in the mutual fund scheme by all the investors including Anupam is Rs 100 Crores. The mutual fund scheme invests the money to buy stocks and other securities as mandated in the scheme offer document. Then, each unit will represent 0.000001% of all the stocks and securities that the mutual fund scheme has in its portfolio. As Anupam has 10,000 units, then his portion of the mutual fund unit holdings will be 0.01%. As the value of securities held by the scheme in its portfolio increases or decreases, so will the price of the units (NAV). For example - If the total value of holdings increases from Rs 100 Crores to Rs 120 Crores assuming no new units has been issued, the per unit price or NAV will be Rs 12 (0.000001% X 120 Crores). Please note that the percentage ownership of the units of the scheme represented by Anupam and other unit holders will change from time to time as new investors may invest in the scheme and / or existing investors may redeem from it.

How do mutual funds work in India

The Mutual funds are set up as trust and following is the structure of a typical Mutual fund -

Sponsor: Sponsor is the corporate body, which establishes a mutual fund. The sponsor must contribute at least 40% of the net worth of the investment managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (SEBI)Mutual Funds Regulations, 1996.The sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the schemes beyond the initial contribution made by it towards setting up of the mutual fund Trust

Trust: The mutual fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the sponsor. The trust deed is registered under the Indian Registration Act, 1908.

Trustee: Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). The main responsibility of the trustee is to safeguard the interest of the unit holders. Trusttes ensure that the Asset Management Company (AMC) functions always in the interest of the investors of the schemes and in accordance with the various guidelines given by Securities and Exchange Board of India (SEBI), the provisions of the trust deed and the offer documents of the respective schemes. At least 2/3rd of the directors of the Trustee should be independent directors who are not associated with the sponsor in any manner whatsoever.

Asset Management Company (AMC): The trustee, as the investment manager of the mutual fund, appoints the Asset Management Company or the AMC. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual fund. At least 50% of the directors of the AMC should be independent directors who are not associated with the sponsor in any manner whatsoever. The AMC must have a net worth of at least Rs. 50 Crore at all times. The required net worth was earlier Rs 10 Crores but the same was revised to Rs 50 Crores by SEBI in February 2014. All the AMCs were given 3 year time to adhere to this.

Custodian: Custodians are a trust company, bank or similar financial institution who are registered with SEBI and is responsible for holding and safeguarding the securities owned within a mutual fund.

Registrar and Transfer Agent: The AMC appoints the registrar and transfer agent (R&T) to the mutual fund schemes. The R&T agents process the application form, redemption requests and dispatches account statements to the unit holders. The R&T agents also handle communication with investors, do scheme accounting and updates investor records.

Mutual funds in India can be categorized into various types depending on their structures, underlying investments, tax treatment, nature of the scheme management and various invest or goals. Based on these parameters there can be two types of mutual funds:-

  • Open ended Funds: Open ended funds can be bought or sold at any time after the launch of the new fund offer (NFO). Some open ended funds (e.g. Equity Linked Savings Schemes) have a lock-in period of 3 years, after which units of these funds can be redeemed at any point in time.
  • Close ended Fund: Close ended funds can be bought only during the subscription window, i.e. the new fund offer (NFO) Once the subscription window closes, investors cannot invest in the close ended funds. Close ended Funds have fixed investment period or maturity periods during which the investors cannot redeem units. Post maturity the closing unit value is automatically redeemed and transferred to unit holder’s bank account.

    However, some close ended funds can become open ended funds after the maturity date or the AMC might give option to roll over the redemption proceeds to some other fund.

Based on the underlying investments in open and closed ended funds, broadly there are 4 different types of mutual funds in India. But before that, let us see what are Mutual Funds in India

  • Equity mutual Funds: Equity mutual funds seek to invest their corpus in equity and equity related securities. Equity funds can further be categorized into large cap funds, diversified or multi-cap funds and mid and small cap funds. Large cap funds invest most of the investments in large cap companies, midcap funds invest mostly in shares of small cap and midcap companies, while multi-cap funds (also known as flexi-cap or diversified equity funds) have substantial exposures to both large cap and midcap stocks and also across various sectors of the economy.

    The majority of mutual fund schemes (whether large cap, diversified or mid and small cap) invests across many sectors and therefore can be called diversified equity schemes. Some mutual fund schemes, however, may invest in particular sectors (e.g. banking, FMCG, pharma, technology, infrastructure, automobile or entertainment etc.). These funds are called sector funds and therefore, they are not diversified equity funds.

    See how the top performing funds performed historically

  • Debt Funds: Debt funds seek to invest their corpus in money market and / or debt market securities. Money market securities include commercial papers, certificates of deposits (CDs), treasury bills etc. Debt market securities include government bonds, PSU bonds, non-convertible debentures etc.

    Debt funds can be further categorized into sub-categories depending on the basis of the maturities or durations of the underlying securities in the scheme portfolio. Liquid funds invest in money market securities whose residual maturities are usually less than 90 days. Ultra-short term debt funds invest in money market securities whose residual maturities are in the range of 90 days to a year. Short term debt funds invest in debt securities whose maximum duration is 2 – 3 years, while long term debt funds (popularly known as income funds) invest in debt securities with longer durations.

    See how the top performing debt funds performed historically

  • Hybrid mutual funds: Hybrid funds invest in both equities as well as debt instruments. The percentage allocation to equity and debt depends on the asset allocation mandates of the respective schemes. There are two types of hybrid funds – equity oriented hybrid funds (popularly known as balanced funds) and debt oriented hybrid funds (popularly known as MIPs). Balanced Funds have at least 65% exposure to equities and balance to debt securities whereas debt oriented hybrid funds or MIPs have majority exposure to debt.

    See the list of top performing balanced funds from here and top performing hybrid debt funds from here

  • Tax Saving mutual funds: Tax Saver Funds are also known as Equity Linked Savings Schemes (ELSS), or tax saver funds or ELSS funds, are a type of equity funds, which enjoy Section 80C tax saving benefit. Investment of upto Rs 1.5 lakhs in ELSS Funds can be deducted from the investor’s taxable income for income tax computation under Section 80C of The Income Tax Act 1961.

    Did you know which are the top ELSS Funds

We have seen what are different types of mutual funds in India, however, from a tax perspective there are only two types of mutual funds in India – equity funds and non-equity funds. Equity funds have at least 65% exposure to equity or equity related securities, whereas non-equity funds have less than 65% exposure to equity. Equity funds enjoy equity tax benefits; the tax treatment of non-equity funds is different from equity funds.

Finally there are mutual funds schemes in India which aim to provide solutions to specific investor goals like retirement planning, children’s higher education or marriage, asset allocation, dynamic funds etc. Examples of these types of funds are retirement plans, children plans, asset allocation funds, dynamic funds and life stage funds etc.

Mutual funds provide customized solutions to a variety of investment goals and have many benefits. But did you know all the benefits of investing in mutual funds in India?

Many investors look at mutual fund NAV in the same way as they look at share prices and therefore they feel that many schemes which have higher NAVs to be more expensive. Though there are a number of similarities between stocks and mutual funds, investors should clearly understand the difference between the two. Let us understand what are mutual funds in India and how they work.

As we know Mutual funds pool money of different investors and invests them in different financial securities like stocks, bonds etc. Each investor in a mutual fund owns units of the fund, which represents a percentage of the holdings of the mutual fund scheme.

Let us understand with the help of an example. Suppose you invest Rs 100,000 in a mutual fund. If the price of a unit of the fund is Rs 10, then the mutual fund house will allot you 10,000 units. If the total money invested in the fund by all the investors is Rs 100 Crores, then each unit (at Rs 10 NAV) will represent 0.000001% of all the stocks the mutual fund has in its holdings. If you have 10,000 units, then your portion of the mutual fund stock holdings will be 0.01%.

The price of a mutual fund scheme unit, also known as the mutual fund NAV, will depend on the value of the underlying securities of the scheme portfolio. The NAV is calculated by dividing the net assets (value of the securities and cash held by the fund minus the liabilities) of the fund by the total number of units outstanding. Say if the net assets of the scheme is 100 Crores and the total units issued to investors are 70 Lakhs, then the NAV of the scheme will be Rs 142.8571 (1,000,000,000 / 7,000,000 = Rs 142.8571).

What is Mutual Fund NAV

Now let us see some common Mutual Fund NAV myths which can lead you to make wrong investment decisions.

  • Schemes with low NAVs are attractive than schemes with high NAVs: You should understand that mutual fund units, unlike stocks, derive their value from the underlying securities of the scheme. Mutual fund schemes are launched at par value (Rs 10) and the current NAV reflects the growth in the asset value since inception. Older schemes will have higher NAVs and newer schemes will have lower NAVs. This does not mean that, older schemes are expensive and newer schemes cheap. A newer scheme may buy richly valued stocks and still have lower NAV compared to an older scheme which buys undervalued stocks.
  • New Fund Offers are cheap because they are available at Rs 10 NAV: As mentioned earlier, the par value of a mutual fund unit is derived from the value of the underlying securities and the accumulated profits since inception of the scheme. Two different mutual fund schemes may have exactly the same portfolio holding and yet one may be offered at par value (NAV of Rs 10) while the NAV of the other scheme might be more than 100; the difference in price notwithstanding the intrinsic value of both the schemes is exactly the same. The annualized growth in the scheme NAV over a period of time is the relevant measure of a mutual fund scheme performance.
  • Investing in schemes which declares regular or big dividends gives higher returns: As per SEBI regulations, dividends can be paid only from the profits made by the scheme. Dividends are adjusted from the NAV of scheme. For example, if the Net Asset Value of a scheme is Rs 50 and the scheme declares a dividend of Rs 4 per unit, the Net Asset Value (ex-dividend) will fall to Rs 46post declaration of the dividend. Dividends are declared at the discretion of the fund manager.

    See the details of top dividend paying mutual fund schemes

  • Booking profits in schemes which give good returns: Mutual fund schemes and stocks are fundamentally different. In direct equity investing, some investors book profits when share prices go up to a certain level. If you follow the same approach in mutual funds, you may end up redeeming funds that have performed well and retain funds which have performed poorly. As discussed earlier, mutual fund NAV growth of different schemes are not indicative of relative valuations. Therefore, investors should select schemes based on its long term performance track record and retain the funds that have performed well over a sufficiently long period of time and redeem funds that have not met your expectations over a period of time. Mutual Fund NAV has nothing to do with this.

Equity Mutual funds invest primarily in equity shares of listed companies across various sectors and market capitalization segments. Equity mutual funds in India are one of the best long term investment products and ideal for meeting your long term financial goals like, retirement, higher education and marriage of your children or simply for creating wealth.

But before we explore what are the various types of equity mutual funds, let us first read the benefits of investing in equity mutual funds in India.

What are the various types of equity mutual funds in India?

There are various types of equity funds suiting different risk appetite of the investors. Investors must choose equity mutual funds which suits their risk appetite and investment horizon. However, ideally one must have minimum 5 year investment horizon while investing in equity mutual funds in order to get the desired results.

Diversified equity mutual funds

Diversified equity mutual funds invest across various sectors and market capitalizations which ensure that the negative performance of one sector does not affect the entire portfolio and increases the possibility of making a sustainable return in the long run. Diversified equity mutual funds are best suited for achieving medium to long term capital appreciation and are suitable for investors with high risk taking ability with minimum investment horizon of at least 5 years.

You may like to read why diversified equity mutual funds are ideal for retail investors

See the top and consistent performing diversified equity mutual funds

Large cap equity funds

As the name suggests, large cap equity mutual funds invest in well renowned large cap companies which usually have market capitalization of over Rs 20,000 Crores. These companies are well established names with strong market share. For example - Some of the well-known large cap companies are HDFC Bank, Tata Motors, Tata Steel, Nestle, P&G, Infosys, Wipro, Reliance Industries, SBI, ICICI Bank and Maruti Suzuki etc. As you can see, these companies have long term well established track record and therefore can be considered safer investments compared to mid size and smaller size companies. Investors with moderately high risk profile may invest in large cap equity mutual funds with 3-5 years investment horizon in mind.

See the top and consistent performing large cap equity mutual funds in India

Mid and small cap equity funds

Companies which have market capitalization ranging from Rs 5,000 to upto Rs 20,000 Crores are considered to be mid and small cap companies. Mid and small cap equity mutual funds primarily invest in these companies which are from different sectors. As these companies are not well known, therefore, they are perceived to be risky. But a good fund manager has the expertise to identify the stocks of right kind of mid and small company companies which can earn decent return for the investors. Mid and small cap equity mutual funds are best fit for Investors with high risk appetite and the ability to hold on to the investments for minimum of 5 years or even more.

Read which the best mid and small cap funds are for SIP

See the top and consistent performing mid and small cap mutual funds in India

Equity-linked Saving Schemes

Equity-linked Saving Schemes or ELSS Funds are essentially diversified equity funds and among all the tax savings options under Section 80C, the ELSS has the least lock-in period of 3 years. The investors can save taxes under Section 80C of The Income Tax Act 1961 by investing maximum Rs 150,000 in a year. ELSS funds are suitable if investors have minimum 3 years investment horizon and the ability to take moderately high to high risk. ELSS funds can be redeemed after 3 years.

In the last 10 years good performing ELSS funds have given annualized return between 11-14% which is quite higher compared to the traditional tax saving options like PPF, NSC and tax savings FDs.

See the top and consistent performing ELSS Funds in India

Sectoral equity Funds

Sectoral equity funds invest in companies of a single or related sector. Returns of these funds depend on the growth of the sector and how the companies chosen by the fund manager is performing over the period. While sectoral funds are the riskiest among all equity funds, the returns can be more than that of large cap or diversified equity funds if the investor can bear the risk in the long term. Being a very risky fund the investors should have minimum 5-7 years of investment horizon and should not hold more than 10-15% exposure of total portfolio to these funds.

See the performance of top performing banking sector funds

See the performance of top performing pharma sector funds

See the performance of top performing IT sector funds

Index Funds

Index fund invests in the basket of securities that replicates the composition of a market index, like Nifty, Sensex, Bank Nifty, CNX – 100, CNX – Midcap, Nifty - CPSE etc. Unlike other equity funds, the fund manager of an index fund tries to replicate returns of the index it is following and not necessarily aim to beat the benchmark. The primary objective of an index fund manager is to reduce the tracking error while replicating the index return. Being passively managed funds, the expense ratios of an index fund is lower than that of an actively managed equity fund.

SIP Mutual Fund or Systematic Investment Plan is a periodic investment option wherein the investor can invest in mutual funds in instalments at a regular frequency, like weekly, monthly, fortnightly or half-yearly. There are several advantages of investing through SIPs.

  • SIP mutual fund can be started with as small amount as Rs 500 from your regular savings. You do not need to have a large amount to invest.
  • Through SIP mutual fund you can invest the money which otherwise you would have spent on some discretionary item; therefore, SIPs make your savings more productive.
  • SIP mutual fund makes market timing irrelevant. As no one can predict accurately how markets will behave, by investing a small amount regularly, in both rising and falling markets, you can benefit from Rupee Cost Averaging and get superior returns over a long investment horizon.
  • SIPs can create long term wealth through the power of compounding.
  • SIP Mutual Funds are very flexible as you can choose the investment frequency and the dates when you want each instalment to get debited from your bank account.
  • There are no penalties if you have insufficient balance in your bank account on the ECS date, however, if the ECS fails consecutively for few months, the SIP in mutual fund mightly get cancelled.
  • SIP mutual fund can be stopped at any point of time by writing to the Asset Management Company (AMC) or Registrar and Transfer Agent (RTA).

Do you know What are Mutual Funds In India

What do you need to start an SIP Mutual Fund

  • As per SEBI regulations, you need to be Know Your Client (KYC) compliant to invest in mutual funds. You can fulfil KYC requirements by submitting filled in KYC form with your photograph and self-attested documents like PAN and Aadhar or any other document for verifying the address proof. The KYC form is available for download on AMC websites and R&T agent’s websites.
  • However, in person verification will be required and you will have to carry original identity and address proof documents to the AMC or R&T office. AMFI registered mutual fund distributors are also authorized to conduct in person verification. If you submit your KYC documents through a AMFI registered distributor, he or she can conduct the in-person verification at your place and you are not required to go the AMC or R&T office for in-person verification.
  • However, if you are an existing mutual fund investor, you are likely to be KYC complied, but you should still check if your KYC is verified or not before investing again.
  • You must have a bank account as generally cash investments are not allowed in mutual funds. You have to provide your bank account details (Bank name, Address, Account number, IFSC and MICR code) in your mutual fund application form. A copy of cancelled cheque of your bank account is required as supporting document as mutual fund SIP ECS will be debited from this account and also the redemption proceeds will be credited in this account.
  • Before starting SIP in Mutual Funds, you have to select a good mutual fund scheme in which you want to invest through SIP. You have to choose an option - growth option or dividend option. Within dividend option you have to choose ‘dividend payout’ or‘dividend re-investment’ option.You also have to mention the AMFI Registration Number (ARN) and the EUIN (Employees Unique Identification Number) of your distributor. A good mutual fund advisor will always help you with your investments in mutual funds.
  • For mutual Fund SIPs, in addition to the above formalities, you are also required to submit the Auto Debit ECS Mandate also known as SIP registration form. The ECS mandate authorizes your bank to debit the SIP instalment amount from your bank account on the date chosen by you and remit to your mutual fund account. You can choose multiple dates in a month. Investors should note that your signature in the SIP debt ECS mandate form should tally with that of your signature in the bank’s record.

Starting in SIP in Mutual Fund is quite simple, if you can understand the process. The best part of SIP in mutual fund is that, once you start a SIP, your investments are in an auto pilot mode which helps you in creating wealth in the long term.

You should also know what are the 6 points to remember before you start your mutual fund investments

Gold is one of the most important investment assets in India. Over a long period of time gold is supposed to retain its purchasing power and is, therefore, seen as one of the safest assets in our country.

For Indians, the two most popular forms of gold investments in India are buying gold jewellery or buying gold bars and / or gold coins. While buying gold jewellery is the traditional form of gold purchase, it involves making charges and risk of impurities. Many families start buying gold jewellery for their daughter’s wedding from a young age. However, by the time the girl child will reach marriageable age, fashion trends are likely to change and the parents may have to remake the jewellery for the wedding.

When you remake a piece of jewellery or melt your jewellery to get a new design, the jeweller considers only the weight of gold to value the total price and no consideration is given to the making charge that you paid earlier. Further, most of the jewellers deduct the impurities from the value of gold as it invariably contains impurities. For the new jewellery, the jeweller will price the making charge which is based on the weight of the gold and the cost of gold; he will adjust the value of the old gold minus impurities from the price. So, if you remake gold jewellery, you will have to pay making charges twice and also pay for impurities. Therefore, purely from an investment standpoint, buying gold jewellery is not a prudent investment decision.

Therefore, Gold in the form of bars and coins are more suitable for investment purposes because they do not contain impurities and no making charges are involved. However, buying gold in physical form involves the cost of storage and also risk of theft. In order to avoid the risk of theft, you may prefer to keep the physical gold in bank lockers but for which you have to pay annual locker charges to the bank.

Therefore, to avoid all of the above and yet invest in gold as a financial asset you can buy gold either in the form of Gold ETF or Gold fund of funds. Gold ETF is an exchange-traded fund (ETF) that aims to track the price of gold in the market and has the same value of pure 24 carat physical gold. The units of the Gold ETFs are traded on the stock exchange (NSE and BSE) just like listed shares of any company. However, to buy and sell Gold ETFs on the stock exchange, you need to have demat and trading account with a stock broker and if you do not have a demat and share trading account, then you can invest in Mutual fund Gold fund of funds. Gold fund of funds are mutual fund schemes which invest in Gold ETFs and are just like any other open ended mutual fund scheme.

Since Gold ETFs have the same value as pure physical gold and there is no associated cost such as making charges or impurities, so when you sell the Gold ETF you get the value of pure gold.

The units of gold ETFs gets credited to your demat account and thus there are neither is any storage costs involved nor the risk of theft. Gold ETFs are the cheapest and safest way of investing in gold as an investment option.

See the gold fund returns here

Mutual fund, is a purely market linked instrument, which pools the money of different investors and invests them in different financial securities like stocks, bonds, money market instruments and Government Securities etc. Each investor in a mutual fund owns units of the fund proportionate to his investments, which represents a portion of the total holdings of the mutual fund.

To know more please read What are Mutual Funds in India and What are the benefits of investing in Mutual Fund in India

On the other hand, Unit Linked Insurance Plans (ULIPs) are combined life insurance-cum-investment products. Unlike traditional insurance plans like, endowment policy, money back plans, pension plans and term insurance plans etc., ULIPs are market-linked products and have the potential to deliver higher returns compared to traditional life insurance plans. ULIPs invest in different market linked investments and offer basket of products like, equity funds, balanced funds and debt funds. The policy holder can choose a fund based on his/her risk appetite.

However, ULIPs, unlike traditional life insurance plans, do not offer capital safety as the investments are market linked.

ULIPs deduct expenses on account of fund management charges, mortality charges and policy management charges etc. The charges are deducted from the policy account by redeeming units. ULIPs declare daily NAVs based on the valuation of underlying securities in the portfolio.

Mutual funds, on the other hand, is a purely market linked instrument, which pools the money of different investors and invests them in different financial securities like stocks, bonds, Government Securities etc.

There is an expense ratio which is charged to the investor and its gets adjusted in the NAV. Mutual funds declare daily NAVs after adjusting the expense ratio and therefore, unlike ULIPs, no units are redeemed from the account of the investor.

There are different kind of mutual funds, like open ended funds and close ended funds. Though ELSS is also an open ended fund but it is locked-in for 3 years as it offers tax rebate. Open ended funds can be bought and sold anytime. However, in case of ULIPs, the policy holder has to pay minimum 3 annual premiums and it is locked-in for 5 years during which the policy holder cannot redeem the policy.

One can think of ULIP as a mutual fund with a term life insurance plan attached to it. In terms of gross investment returns ULIPs have performed comparably with mutual funds over a 5 year period.

However, net returns to investors are lower in ULIP because various costs are deducted from ULIP premiums before they are invested in the ULIP fund chosen by the policy holder. A portion of the ULIP premium goes towards buying the life cover or sum assured (it is called mortality charges). Another portion goes towards a variety of fees like, premium allocation fees, policy administration fees, fund management etc. The balance premium is then invested in the ULIP fund.

See the return of top performing mutual funds from here

In our opinion, investors should not mix investments and insurance together. For wealth creation and other investments needs, investor should invest in mutual funds which offer investment solution for 1 day to entire life. One should consider life insurance for pure protection purpose and should not look for return from life insurance plans. For protecting life, term insurance plans are the best option.

Arbitrage funds are low risk mutual fund schemes which aim to exploit pricing mismatches in various segments of equity markets to generate risk free profits for investors. Let us understand arbitrage opportunities with an example.

Suppose the share price of a company is Rs 100 and the futures price (in F&O market) is Rs 110. On the expiry of the futures contract, the spot price (share price in cash market) and futures price will converge. If you buy 1000 shares of the company in the cash market and sell 1000 futures, you will lock in a gross profit of Rs 10,000 irrespective of whether the price rises or falls.

See the return of top performing Arbitrage Funds in India

While historical data shows that, arbitrage opportunities exist in Indian equity markets most of the times, volatility in the equity market increases the pricing mismatches between different market segments and hence arbitrage profits are higher in volatile markets. This is one investment product that helps investors profit from economic uncertainties and volatility in the equity markets.

Investors can park their funds which they plan to use for short term requirements in arbitrage mutual funds, instead of keeping them in savings account or even money market mutual funds like liquid funds or ultra-short term funds. Data shows that, in volatile market conditions, arbitrage funds outperform liquid funds. Arbitrage funds have low risk and are highly liquid, which means that you can redeem your fund at any time to use it for your emergency needs. Please note that, arbitrage funds can charge exit loads for redemptions within a week or a month (read the scheme information document of the fund you are investing in carefully before investing).

The tax advantage of arbitrage mutual funds makes it a winner in volatile markets. For taxation purpose arbitrage mutual funds are treated as equity mutual funds. Short term capital gains (holding period of less than a year) are taxed at 15%, while long term capital gains (holding period of more than a year) are tax free. Dividends declared by arbitrage mutual funds are also tax free. Investors have different strategies to deal with uncertainty, but arbitrage mutual funds can always help with cash flows through higher returns in the times of emergency or sudden need of funds.

Please read – What are mutual fund tax benefits

Gilt mutual funds invest in Government securities or bonds with varying maturities.The term Gilt also refers to the sovereign (Government of India) guarantee for these types of securities. Investors should know that, the Government guarantee is with respect to the credit risk of these securities; Gilt prices are subject to interest rate risk.

Bond prices are inversely related to interest rate movements; if interest rate moves downwards, bond prices increase and vice versa. Interest rate risk is directly related to maturity of debt securities. Longer the maturity, higher the interest rate risk; shorter the maturity, lower the interest rate risk.

Average maturities of underlying securities in long term gilt mutual funds can range between 15 to 30 years; these funds are highly sensitive to interest rate changes. Gilt mutual Funds can give negative short term returns if interest rate movement is unfavourable. However, over a sufficiently long investment horizon, in an environment of declining interest rates, long term gilt mutual funds can give good returns.

Average maturities of underlying securities in short term gilt funds can range between 5 to 7 years; therefore, the interest rate risk is significantly lower than the long term gilt mutual funds. Short term gilt mutual funds are less volatile than long term gilt mutual funds; they outperform long term gilt mutual funds in rising interest rate environment but underperform in declining interest environment.

See the performance of short term Gilt Mutual Funds

Medium term gilt mutual funds invest in government securities which have intermediate maturity profiles; longer than short term gilt mutual funds, but shorter than long term gilt mutual funds. These funds combine the characteristics of both long term gilt mutual funds and short term gilt mutual funds. Medium term gilt mutual funds are less volatile compared to long term gilt mutual funds and at the same time, can give higher returns than short term gilt mutual funds in a favourable interest rate scenario. As such, these mutual funds are suitable for debt mutual fund investors with moderate risk tolerance levels.

See the performance of long term Gilt Mutual Funds

Investors should have a sufficiently long investment horizon and some appetite for volatility in medium term or long term gilt mutual funds.

From a taxation viewpoint, gilt mutual funds are taxed just as debt mutual funds. Capital gains held for a period of less than 3 years are treated as short term capital gain and taxed as per the income tax rate of the investor. Capital gains on investments held for more than 3 years are treated as long term capital gains and taxed at 20% after allowing for indexation benefits. Dividends paid by the gilt mutual funds are though tax free in the hands of the investors, the scheme has to a pay dividend distribution tax (DDT) at the rate of 28.8% for individual investors and Hindu Undivided Families (HUF) and 34.6% in case of corporates.

Read What are Mutual Fund Tax Benefits

Many people use Exchange Traded Funds and index funds synonymously. Purely from the standpoint of investment objectives, index funds and exchange traded funds (ETFs) are very much the same. Exchange Traded Funds (ETFs) like Index Funds invest in a basket of stocks which replicate the index. Like Index Funds, Exchange Traded Funds (ETFs) are passively managed and aim to track the index. While there are similarities between the two types of funds, there are differences between the two which investors should clearly understand.

Read what are Index Funds

Exchange Traded Funds (ETFs) have hybrid characteristics of both stocks and mutual funds. Exchange Traded Funds (ETFs) can be bought and sold only on stock exchanges. Investors should have demat and share trading account to invest in Exchange Traded Funds (ETFs). However, investors do not need a demat account and share trading account to invest in index funds. Net Asset Values (NAV) of Index Funds are priced at the end of the day like any other mutual fund scheme, while ETFs are like stocks where the price changes on a continuous real time basis.

Investors can take advantage of intraday volatility (buying at the low point of the day and selling at high point of the day) in ETFs. Like any other mutual fund scheme, you can invest in index funds through Systematic Investment Plan (SIP) too. However, you cannot invest in ETFs through Systematic Investment Plan. Exchange Traded Funds cost less (as they have lower expense ratio) than Index funds.

Exchange Traded Funds (ETFs) and Index Funds serve the same investment objectives. If you have demat and share trading account, you can invest in Exchange Traded Funds (ETFs) if you prefer lower expense ratios. However, if you do not have a demat and share trading account then you can achieve the same objectives by investing in index funds like any other open ended mutual fund scheme.

Know your client (KYC) verification is a mandatory requirement for mutual fund investments in India. KYC essentially is a record of the investor’s identity and address. If you are new to mutual funds, you must submit self-attested copies of your identity proof (either one of passport, driving license, PAN card, Aadhaar card etc.), address proof (either one of passport, Aadhaar card, property tax bill, electricity bill etc.) and PAN card which is mandatory, along with the duly filled KYC form with your photograph affixed on it. You can submit the form to a mutual fund distributor or to the Asset Management Company (AMC) or Registrar and Transfer Agency (CAMS, Karvy etc.) for in-person verification (IPV) which is mandatory. Whoever is doing your IPV, will verify your KYC from based on the documents submitted by you.

Please note that effective 1st January 2018, AADHAR has become mandatory for mutual fund investments in India. Therefore, submitting AADHAR Card copy with your KYC form is mandatory.

Please read in details how you can do KYC for mutual fund

Once you have submitted the necessary KYC documents to the AMC or RTA you can check your KYC status online on the websites of the KYC Registration Agencies (KRA) like CAMS, Karvy, CDSL, NDML, NSE etc. Please note that, you can check your KYC status on websites of any KRA, irrespective of where you submitted your KYC documents. Below are the steps to be followed for checking KYC status on CDSL website.

  1. Copy and paste the link https://www.karvykra.com/upansearchglobalwithpanexempt.aspx on your web browser.
  2. Enter your Permanent Account Number
  3. Enter the Captcha Code you see on the screen and click submit

The output screen will show when the KRA was submitted, the KYC status (registered, on hold, rejected etc.) and the KYC hold reason (if any).

If you are an existing mutual fund investor but you have not made any mutual fund transaction for a long time, the AMC may reject your transactions, if your KYC is “On Hold” status. Therefore, if you have not made any mutual fund transaction for a long time you should check your KYC status online.

Let us now discuss what different KYC status means.

  • KYC registered means that your identity and address records are registered with the KRA. No further action is required on your part and you can make mutual fund transactions.
  • Under process means that the KYC documents have been received and the verification process is underway. You should check the KYC status again after a few days to see if your KYC is registered.
  • On hold means that the KYC has been hold due to discrepancy in KYC documents. The KRA will mention the document where discrepancy has been found. You will need to submit the correct documents.
  • Not available means the KYC record for the PAN is not available with any KRA
  • KYC registered – Incomplete / Existing / Old KYC Record means that the KYC record is incomplete and needs to be updated for missing information. You have to submit fresh KYC documents to AMC or RTA
  • Under Process - Incomplete / Existing / Old KYC Record means that the KYC is incomplete and updated with missing information. You have to submit fresh KYC documents to AMC or RTA
  • KYC Rejected - Incomplete / Existing / Old KYC Record means that KRA has rejected the KYC record after verification of PAN with other KRAs if such PAN is available with other KRA. You have to submit fresh KYC documents to AMC or RTA

As you can see it is very easy to check your KYC online. However,if for any reason your KYC is not showing as registered or you know the reason for the KYC on hold,you can then submit the necessary pending documents and get your mutual fund KYC registered. Alternatively, you should contact your financial advisor or the AMC or the RTA whom you had submitted your mutual fund KYC application.

Diversified equity mutual funds are mutual fund schemes which invest in equity or equity related securities across different sectors and market capitalization segments. Diversification across sectors reduces the risk of the investment. Individual stocks are exposed to three types of risk – company risk, sector risk and market risk. By investing in a large number of companies, diversified equity mutual funds diversify the company specific risks. By investing across different industry sectors (banks, automobiles, oil and gas, cement, capital goods, pharmaceuticals, fast moving consumer goods, Information Technology, metals, chemicals, telecommunications etc.), diversified equity mutual funds diversify the sector risks.

See how diversified equity mutual funds have performed in the last 5 years

Diversified equity mutual funds also diversify across different market capitalization segments. This can help these mutual funds perform better than large cap equity mutual funds which are focused on particular segments across different market cycles or conditions. The universe of stocks can be broadly divided into three segments based on their market capitalization. Market capitalization of a company (stock) is the share price of the company times the number of its shares outstanding.

Companies whose market capitalizations exceed Rs 10,000 Crores are known as large cap companies. These are well known companies with a fairly long history. These companies command a high percentage of the market share in their respective industry sectors. Given their large size, investors believe that these companies are better placed to survive downturns in the economy compared to smaller companies; as a result these companies are perceived to be less risky and investors are ready to pay a premium for their shares.

Read what are large cap equity mutual funds

Companies whose market capitalizations range between Rs 2,000 Crores to Rs 10,000 are known as midcap companies. These companies have the potential to grow faster than large cap companies and therefore, midcap stocks can give better returns than large stocks in the long term. However, these companies are thought to be more risky than large cap companies. Companies whose market capitalizations are less than Rs 2,000 Crores are known as small cap companies. Small cap stocks can grow faster than midcap stocks but are riskier (more volatile) than midcap stocks.

Read what are mid and small cap equity mutual funds

Small and midcap stocks tend to be under-researched and therefore, their valuations tend to be lower than large cap companies. By buying high potential mid and small stocks and holding them for a long period of time, investors can create a lot of wealth not only through faster earnings growth but also through valuation re-rating (upgrade). However, these stocks tend to suffer more than large cap stocks in bear markets. It takes a lot of expertise in identifying good midcap and small cap stocks.

Large cap stocks tend to outperform small and midcap stocks in bear markets, while small and midcap stocks tend to outperform in bull markets.

Diversified equity mutual funds which invest in large cap, midcap and small cap stocks tend to perform better (on a relative basis) in bull markets and bear markets. Diversified equity mutual funds tend to outperform large cap funds in bull markets, but suffer less than midcap funds in bear markets. As such, diversified equity mutual funds are ideal investment choices for long term investments.

Did you know which are the top performing diversified equity mutual funds

Equity savings funds are hybrid mutual fund schemes suitable for investors with moderate risk appetites. Risk in these funds is lower than aggressive hybrid funds like balanced funds, at the same time these funds enjoy equity taxation like balanced funds. Long term capital gains (holding period of more than 12 months) in equity savings funds are totally tax free; short term capital gains (holding period of less than 12 months) are taxed at 15%. Dividends paid by equity savings funds are tax free.

The overall exposure to equity in equity savings funds ranges from 65% to 90%. Mutual fund schemes which have more than 65% equity allocation enjoy equity taxation; long term capital gains (investing holding period of more than 1 year) and dividends are tax free. However, a portion of the equity exposure is hedged and this reduces the risk of these funds considerably. The active (un-hedged) equity allocation of equity savings funds ranges between 20 to 30% with the objective of capital appreciation.

40 to 70% of the portfolio of equity savings funds is allocated to completely hedged equity positions with the objective generating arbitrage or risk free profits. 10 to 35% of the portfolio is invested in fixed income and money market instruments with the objective of generating income. Therefore, 70 to 80% of the portfolio has low volatility and generates regular income. Over a sufficiently long investment horizon, the active equity allocation can also generate capital appreciation for investors.

Please see the list of top performing equity savings funds here

Investment Strategy and how does it work

  • Arbitrage: Arbitrage by definition is defined as risk free profit, by exploiting pricing mismatches in the market. Capital safety, returns and liquidity are important considerations in arbitrage strategy. In volatile market conditions arbitrage can generate comparable or even higher returns than liquid funds. For the arbitrage portion of the fund portfolio, the managers of equity savings funds take completely hedged positions to minimize any risk for the investor and generate arbitrage returns.
  • Fixed Income and Money Market: In the fixed income / money market portfolio within the overall scheme portfolio of equity savings, the fund managers usually employ accrual strategy to generate income and minimize interest rate risk. Fund managers of equity savings funds usually prefer high quality papers of credit. The fixed income portfolio of equity savings funds therefore, have low interest rate and credit risk, and generate stable returns.
  • Active Equity: Equity savings funds take active (un-hedged) exposure within specified allocation ranges. When fund manager are bullish on equities they increase active (un-hedged) equity exposure to the upper end of the range. The fund manager, however, has the flexibility to reduce the equity allocations and increase exposures to safer options (like arbitrage or fixed income), if volatility increases in the stock market. This investment strategy ensures moderately low volatility for investors.

The main advantage of equity savings funds are low volatility and income. Risk and return are directly related; higher the return, higher is the risk. If you are looking for very high returns then equity savings funds are not for you. However, if your primary investment objectives are, low volatility, high liquidity, inflation beating returns (through limited equity exposure) and tax efficiency, then Equity Savings Fund can be a good investment option for you.

Did you know what are mutual fund tax benefits

Ultra-short term debt mutual funds are money market mutual funds. Money market mutual funds invest in money market instruments like commercial papers, certificates of deposits, treasury bills etc. Money market instruments usually have very short maturity periods (less than a year). The two important characteristics of money market mutual funds are high liquidity and low risk. Ultra-short term debt funds invest in money market instruments whose residual maturities range from 91 days to 365 days. Ultra-short term debt mutual funds are similar to liquid mutual funds in terms of liquidity and risk (safety), but these mutual funds usually give higher returns than liquid mutual funds.

Ultra short term debt funds offer high degree of liquidity and safety for investors. Many ultra short term debt funds have no exit loads, but some schemes may levy exit loads for redemptions made within a specified period (usually a few days) from the investment date. Like liquid mutual funds, these funds have low interest rate risk and hence these funds offer a high degree of safety. It is very rare for ultra short term debt fund’s Net Asset Values (NAVs) to fall on a week on week basis. However, investors should note that ultra-short term debt funds can be slightly more volatile than liquid mutual funds over a period of few days or weeks. Therefore, investors should be prepared to remain invested in these funds for a few months (at least 3 months) to get good stable returns.

What is mutual fund NAV

Ultra-short term debt mutual funds usually give higher returns than liquid mutual funds and so, if you do not need immediate liquidity (say within 3 months or so from the investment date), you should invest in ultra-short term debt funds. Even small differences in returns can result in a significant difference in rupees terms.

For example, if you have a Rs 50 lakhs lying in your savings bank account paying you 4% interest per annum for two months, you could have earned almost Rs 1 lakh more in nine months by parking the money in ultra-short term debt funds, assuming that ultra-short terms debt fund returns are 7% per annum. Sometimes the difference between the liquid fund returns and savings bank interest can be as high as 400 to 500 basis points (4 to 5 percentage points) or even more; the financial impact in such situations is much more.

For the same reason, for slightly longer duration very short term investments, you should select ultra-short term debt mutual funds over liquid funds. If ultra-short term debt funds give 0.5 to 0.75% higher returns than liquid funds, then on an Rs 50 lakh investment, you can earn Rs 25,000 to Rs 75,000 more in a year, by investing in ultra-short term debt funds instead of liquid funds.

What are the tax benefits of mutual funds versus other investment options

If ultra-short term debt funds returns are taxed as non-equity funds. Profits from If ultra-short term debt funds held for a period of less than 3 years are as taxed as per the income tax slab of the investor. Profits from ultra-short term debt funds held for a period of more than 3 years are taxed at 20% after allowing for indexation benefits. Investors can also opt for dividends (daily, monthly etc) in If ultra-short term debt funds. Dividends paid by If ultra-short term debt funds are tax free in the hands of the investors, but the fund house has to pay dividend distribution tax at the rate of 28.8% which is deducted from the dividend paid out to the investors. Unlike savings bank or fixed deposit interest, no tax is deducted at source on ultra-short term debt fund returns for resident Indian investors.

Please check which are the top performing ultra-short term debt funds?

Fixed Maturity Plans (FMPs) are close ended mutual fund fixed income schemes. Investors can subscribe to this scheme only during the new fund offer period (NFO period). The tenure of the scheme is fixed. Investor’s cannot redeem units of Fixed Maturity Plans during the tenure of the scheme. Upon maturity of the scheme, the maturity amount will get credited to your bank account. Post the change in taxation of debt mutual funds announced in 2014 Budget, Fixed Maturity Plans (FMPs) now have a minimum tenure of 3 years to avoid short term capital gains tax. Long term capital gains (investments held for more than 3 years) in debt funds (FMPs are debt funds) are taxed at 20% after allowing for indexation benefits. Indexation benefits reduce the tax obligation of investors and the effective tax rate is much lower.

Fixed Maturity Plans usually invest in a variety of fixed income securities like, commercial papers, certificates of deposits and corporate bonds. The fund managers usually buy and hold the securities in the FMP portfolio till maturity and accrue the interest earned paid by the securities. Since the securities are held to maturity, interest rate risk is very low. The fund manager(s) ensures that the maturities of the securities match the tenure of the scheme. For example, if the tenure of an FMP is 1100 days, then the fund manager will invest in fixed income securities which will mature in 3 years and hold them to maturity. This is done to avoid re-investment risk. The investment strategy of Fixed Maturity Plans makes these mutual fund schemes attractive to investors who are looking for stable returns.

Who should invest in Fixed Maturity Plans (FMP)

  • FMPs are suitable for conservative investors (investors with low risk tolerance, looking for stable returns
  • Investors who have a investment horizon of three years or more and do not need liquidity during the tenure of the investment
  • Unlike Fixed Deposits, mutual funds do not give assured returns. However, past track record suggests that fixed maturity plans usually give better returns than FDs on a pre-tax basis.
  • Investors in the higher tax brackets, who lose a significant portion of their FD interest to taxes. FD interest is taxed as per the income tax slab rate of the investor. As discussed earlier, FMP returns are taxed at 20% after allowing for indexation benefits. This makes FMP returns more attractive than FD interest on a post tax basis.

Read tax benefit of mutual funds versus other investment options

If you understand the risk return characteristics of FMPs, you will realize that FMPs can give better returns than FDs, even after factoring in the risk free nature of FDs. Even though FMPs are subject to market risks, the risk is quite low. If you want to reduce your risk even further, you can select FMPs that invest only in the highest quality (e.g. AAA, AA) debt papers. Information about the investment strategy and the type of securities which the FMP will invest in is provided in the scheme information document of the FMP. Investors should read the scheme information document carefully before investing.

Read what are different types of mutual funds in India

Debt funds are mutual fund schemes which invest in debt and money market securities. There are different types of debt mutual funds which can cater to large spectrum of investment tenures and risk appetites. There are three broad categories of debt mutual funds and within each there can be quite a few sub-categories.

  • Money Market mutual funds
  • Short term debt funds
  • Long term debt funds

Money Market Mutual Funds

Money market mutual funds invest in money market instruments like commercial papers, certificates of deposits, treasury bills etc. Money market instruments usually have very short maturity periods (less than a year). The two important characteristics of money market mutual funds are high liquidity and low risk. There are two types of money market mutual funds – liquid funds and ultra short term debt funds.

Liquid funds invest in money market instruments whose residual maturities are less than 3 months. These funds have no exit loads which imply that they can be redeemed at any time without penalty charges. Redemptions in liquid funds are processed within 24 hours on business days. Some liquid fund schemes also offer instant redemption (within a few minutes) for transactions made through AMC websites or mobile apps. Liquid funds can be used to park funds for a few days to few weeks to few months. They give significantly higher returns than savings bank interest.

Ultra-short term debt mutual funds invest in money market instruments whose residual maturities range from 3 months to a year. Many ultra-short term debt mutual funds have no exit loads, but some schemes levy exit loads for redemptions made within a specified period (usually a few days) from the investment date. Ultra-short term debt mutual funds usually give higher returns than liquid funds and so, if you do not need immediate liquidity (say within 3 months or so from the investment date), you should invest in ultra-short term debt mutual funds.

Short term debt funds

Short term debt mutual funds invest in Government securities and corporate bonds (usually called non-convertible debentures in India). This type of debt mutual fund schemes invests in securities which mature in 2 to 3 years, hence the name short term debt mutual funds. The interest rate sensitivity of these funds is quite limited, due to the short maturity periods. The main investment objective of short term debt mutual funds is income accrual; the fund managers hold the securities in their portfolio to maturity to earn the income (interest) from them. There can be different types of short term debt mutual funds, depending on the kind of securities they invest in.

Short term gilt funds invest Government securities (also known as gilts) maturing in 2 to 3 years. There is no credit risk in Government bonds. Corporate bond funds invest primarily in non convertible debentures issued by private sector and public sector companies. Corporate bonds may have some credit risk, but their yields are higher than gilts of similar maturities. A type of corporate bond funds, known as credit opportunities funds, invests in with slightly lower quality (credit rating) corporate paper. Slightly lower papers give significantly higher yields compared to AAA or AA rated papers. Some short term debt mutual funds can invest in both Government bonds and non convertible debentures.

You can invest in short term debt mutual funds, if you have a 2 to 3 years investment horizon. These mutual fund schemes can give superior returns compared to fixed deposits and small savings schemes. If you are investing in corporate bonds, you should check the credit risk of the underlying corporate bonds at a portfolio level to make sure that you are comfortable with the risk.

Long term debt funds

Long term debt mutual funds invest in securities with long maturity profiles. Since yield curve is generally upward sloping bonds with longer maturities give higher yields than bonds with shorter maturities. But longer maturity bonds are subject to interest rate risk. Interest rate risk can work both ways. If interest rate goes up, the price of long maturity bonds and the NAVs of long term debt mutual funds fall. If interest rate falls, the price of long maturity bond and the NAVs of long term debt mutual funds rises. You should have a long investment horizon of three years or more for long term debt mutual funds, because over a long investment horizon, there are periods of both rising and falling rates and their opposing effects cancel out each other.

There can be different types of long term debt mutual funds depending on the nature of underlying securities and investment strategies. Long term Gilt mutual funds invest in long maturity Government bonds. These funds are highly sensitive to interest rate changes. Income funds can invest in both Government bonds and NCDs. Long term debt mutual funds aim to benefit primarily from duration calls (profiting from interest rate changes) and also income accrual. Strategic bond funds employ a flexible strategy depending on the interest rate environments.

Long term debt mutual funds are good investment options for investors who are ready to remain invested for three years or more. They can give both income and capital appreciation to investors. Investors can also benefit from the long term capital gains tax advantage of debt mutual funds, if they remain invested for more than three years. Long term capital gains in debt mutual funds are taxed at 20% after allowing for indexation benefits. The tax advantage of debt mutual funds make them attractive investment options compared to traditional fixed income schemes.

Top performing equity mutual fund schemes in India keep changing over time, since mutual funds are subject to market risks and historical performance of a scheme may not be sustained in the future. Further, different mutual fund schemes have different risk return characteristics.

For example, one cannot compare the performance of large cap equity mutual funds and midcap equity mutual funds. Similarly, one cannot compare the performance of diversified equity mutual funds and balanced mutual funds. Once an investor has identified a particular category of mutual funds for investment, based on his or her investment objectives, investment tenure and risk capacity, he or she needs to look at a number of factors when identifying the best mutual funds in that category.

Did you know what are equity mutual funds in India and their various types

The investor needs to look at mutual fund returns across various time scales by going to our MF research section http://meetplutus.com/mutual-funds-research/top-performing-mutual-funds. You should first select the relevant category and then look at the top performing mutual funds across several time periods, by selecting different periods like 1 year, 2 years, 3 years, 5 years etc. from the drop down menu.

For example, the best performing diversified equity funds in the last 5 years are Franklin India High Growth Companies Fund, Aditya Birla Sun Life Advantage Fund, Invesco India Contra Fund etc.

The best performing small and midcap funds in the last 5 years are SBI Small and Midcap Fund, Reliance Small Cap Fund, DSP BlackRock Microcap Fund etc.

The best performing Balanced Funds in the last 3 years are Principal Balanced Fund, Reliance Regular Savings Fund – Balanced Option, L&T India Prudence Fund etc.

For equity funds or equity oriented hybrid funds (balanced funds) one should always select a sufficiently long time-scale e.g. 3 to 5 years to evaluate performance, because short term performance may be biased by market conditions relative to investment strategy and may be not reflective of long term performance. However, one should also not look at performance over a very long period because fundamental attributes of a fund like fund manager, investment strategy, market cap strategy etc. may change. Apart from ranking within a particular category, you should also see how a mutual fund performed versus the benchmark.

Systematic Transfer Plan (STP) is a smart mutual fund investment mode by which an investor is able to transfer a fixed or variable amount from one mutual fund scheme to another within the same asset management company (AMC).

Mutual Fund Systematic Transfer Plan (STP) is mainly used by investors to transfer from debt mutual funds to equity mutual funds. If you are investing for the long term and at the same time, are concerned about short term market volatility or high valuations in the market, you can invest your capital in a low risk debt mutual fund (e.g. liquid, ultra-short term debt fund) and use Systematic Transfer Plan (STP) to redeem fixed amounts from your debt / money market mutual fund and transfer the proceeds in a defined frequency, daily, weekly, fortnightly or monthly, to equity mutual funds on a regular basis over several months or year/s. Mutual Fund STP ensures rupee cost averaging of purchase price for the destination scheme along with liquid fund/ ultra-short term fund returns on the money parked in the debt. Liquid scheme.

On the other hand, if you are nearing your financial goals, want to benefit from rising market and at the same time, are nervous about a market correction is imminent, you can withdraw fixed amounts from your equity fund and transfer to your income fund using an Systematic Transfer Plan.

Types of Systematic Transfer Plan

There are basically three types of Systematic Transfer Plan (STPs):-

  • Fixed Systematic Transfer Plan – Here you can transfer a fixed amount at regular intervals from one scheme to another within the same AMC
    You can try this STP Calculator and see how it works
  • Capital Appreciation Systematic Transfer Plan - Here you can transfer the profit of a scheme at certain intervals and transfer it to another scheme of the same AMC
    You can try this Profit Transfer STP calculator and see how it works
  • Dividend Transfer Plan - Here you can opt to transfer your dividends declared in a scheme to some other scheme in the same AMC

How does Systematic Transfer Plan works in Mutual Fund?

For long term investors equity is the best investment asset class. While volatility is an intrinsic aspect of equity asset class, it can be very stressful for new investors and even experienced investors. Mutual Fund Systematic Transfer Plan (STP) is your defence mechanism against adverse impact of market volatility because you can harness the benefit of rupee cost averaging.

Let us understand with the help of an example.

Suppose you want to invest Rs 1 lakh in an equity fund but are worried that the market levels in the next one year. You can invest the money in a liquid fund and use STP to transfer equal amounts to the equity fund of the same AMC every week, fortnight or month. Let us assume that the liquid fund gives an annualized return of 7%. The table shows how the Mutual Fund STP will work over the next 12 months (NAVs are purely illustrative).

You can see that the equity mutual fund Net Asset Value increased from Rs 100 to Rs 110 over the course of the year, but it was volatile on a month on month basis. If you had invested your money in the equity fund in lump sum, you would have purchased 1,000 units and the value of your investment at the end of the year would have Rs 110,000. However, using Mutual Fund Systematic Transfer Plan you were able to purchase additional 40 units (total 1,040) and the value of your equity investment was Rs 114,414; so you made an additional Rs 4,414 through systematic transfer plan.

This is not all. You also had a balance of Rs 3,355 in your liquid fund. Your total investment value at the end of the year was Rs 117,769. Therefore, you were able to make an additional profit of Rs 7,769 through rupee cost averaging of the units and also through making your money productive by investing in the liquid fund during the tenure of the Systematic Transfer Plan.

Predicting short term market movements is extremely difficult, and this is where Systematic Transfer Plan is very useful in helping you to optimize the return on your investment. If you are rebalancing your portfolio to shift your asset allocation as per your financial objectives and risk tolerance levels, you should evaluate if you want to use Systematic Transfer Plan to effectively manage the shift in your asset allocation.

SIP or Systematic Investment Plans is now one of the most popular ways of investing in mutual funds in India. However, most new investors are wary of mutual fund SIPs and a lot of seasoned investors too struggle to get their strategy right in terms of finding the best mutual funds for SIP. Therefore, before jumping on to choose the best mutual fund SIP for your investments, let’s first see what SIP or systematic investment plan really means for an investor.

What is SIP or systematic investment plan

A SIP or Systematic Investment Plan helps investors invest a fixed amount at regular intervals (weekly, monthly, quarterly or even daily) in mutual fund schemes, which in turn invest in the equity or debt markets depending upon the scheme category and mandate. Mutual fund SIPs being a flexible way of investing help one build long term wealth and instils the habit of savings even in the most undisciplined investors.

The major benefit of investing through SIPs is the power of compounding, rupee cost averaging and compounding benefits over and above the core benefit of savings small amounts in a disciplined manner.

Please check or detailed blog on the topic – Mutual Fund SIPs and its benefits

How to choose the best mutual funds for SIP

Choosing the best mutual funds for yourSIP is very critical for your investment needs and therefore, you need to know the following 6 things –

  1. What is your investment objective: Before finding best mutual funds for SIP, it is important to know what you are investing for. You need to ask yourself questions like 1) are you investing for the short term or the long term 2) what is your risk profile? Your investment horizon and risk profile as knowing these will help you in determining which type of fund will suit you.
    For example - if you are investing for short term and okay with moderate and consistent returns debt funds might be suitable for you. However, if you are investing for the long term horizon, equity mutual fund schemes can be suitable for you as it has the potential of generating the highest return comparable to other fund categories as well as asset classes.

  2. What are the mutual fund types: As mutual funds are of various types, it is important to know which type is suitable for your risk appetite thus it can become your best mutual fund for SIP. Let’s take a quick look at the various types of mutual funds:
    Read a detailed blog on the above topic – What are different types of mutual funds in India
    Equity Mutual Funds – Equity mutual funds are the most preferred choice for doing long term SIPs. The equity mutual funds are further categorised into various types like, large cap funds, diversified equity funds, mid & small cap funds, Index Funds and sectoral and thematic funds. Equity mutual funds can become your best mutual funds for SIPs if your risk profile is moderately high to high.
    Debt Funds – debt mutual funds can be further classified based on the investment tenure and your investment needs. For example – long term debt funds, short term funds, ultra short term funds and liquid funds. Depending upon how long you want to continue your SIP, you should choose an appropriate debt fund. These funds can be suitable for investors with conservative to moderate risk taking ability.
    Balanced Funds – These are also called hybrid mutual funds as it invests in both, equity and debt instruments. While the equity portion provides the return kicker the debt portion provides stability to the portfolio. Balanced funds can be the best mutual funds for SIP if your risk profile is moderately high.
    ELSS or tax saving mutual Funds – SIP in ELSS funds can be started if you want to save taxes under Section 80C. ELSS Funds are essentially diversified equity funds and can be your best mutual funds for SIPif your risk profile is moderately high to high and the need is to save taxes along with regular investments.
    If you plan to start a SIP in ELSS mutual funds do read this blog – three best mutual fund ELSS tax savers to invest in this season

  3. Mutual fund performance & returns: A comparison of historical performance of the scheme you have chosen as best mutual funds for your SIPnot only tells you how strong or weak the fund was but you must also check whether the chosen scheme has a consistent track record of beating the category average returns and benchmark returns and how the scheme fared compared to its peers in the group.

  4. Fund House (AMC): The fund management practice and the investment process followed by an AMC and the fund manager/sare very important aspects of fund management in the interest of the unit holders. Before investing, you should know more about the AMC, the fund manager’s track record of managing the various schemes along with the scheme that you intend to start your SIP in. You should read the scheme information document (SID) and key information memorandum (KIM) to know about fund house’s investment approach, the scheme investment objective etc.
    You may also like to read – How Asset management companies (AMCs) work in India

  5. Entry and exit load of the chosen scheme: Around 4 year back, The Securities and Exchange Board of India (SEBI) stopped fund houses from levying any entry loads on any mutual fund schemes. Now, the only charge you might pay is the exit load if you redeem your SIP units before the exit load period. The information about exit load is available on the application form and on the Key information memorandum or KIM.

  6. Expense ratio of the scheme: you might have chosen the best mutual funds for SIP but have you checked the expense ratio of the scheme? What is expense ratio? Expense ratio comprises of management fee, brokerage charges and administrative costs etc. and charged to the scheme annually. Mutual fund schemes with higher assets under management (AUM) usually have lower expense ratios as you can see in the following example in case of equity funds –
    On the first Rs. 100 Crores of the daily net assets – 2.50% p.a.
    On the next Rs. 300 Crores of the daily net assets – 2.25% p.a.
    On the next Rs. 300 Crores of the daily net assets – 2.00% p.a.
    On the balance of the daily net assets – 1.75% p.a.

Therefore, if your selected scheme has a higher AUM it will charge you lesser expenses and thus increase the returns.

Therefore, before starting a mutual fund SIP and finding the best mutual funds for your SIP, you should know the above 6 things so that the selection of your best mutual fund for SIP should also be fitting to your risk profile, investment objectives and thus make your SIP investment journey more meaningful and result oriented.

If you have chosen the best mutual funds for SIP, it is time you know how to start a SIP in mutual fund

Mutual Funds are traditionally classified on the basis of the asset class they invest in. The ones which invest only in stocks are called equity funds and the ones that invest in bond or other debt instruments are called fixed income or debt funds. The funds which own both stocks and bonds are called Equity Hybrid Funds.

Equity Hybrid Funds were earlier known as balanced fund. You can read what are balanced funds

As Equity Hybrid Funds are exposed to both equity and debt, it helps those investors who want an all-encompassing fund for their investment purposes. These Funds tend to have 65-75% exposure to equities and the rest 25-35% to debt instruments. While the equity component makes the fund capable of beating inflation and gives good returns over a long investment time horizon, the debt portion of the portfolio provides stability and gives consistent returns.

Another important advantage of Equity Hybrid Funds is that the dividend paid by them is tax free in the hands of the investor. Equity Hybrid Funds are taxed as equity funds and the long term capital gains (LTCG) is tax free upto Rs 1 Lakh in a year. Long term capital gains beyond Rs 1 Lakh are taxed at 10% only.

In case of Mutual Funds, dividends are paid out of distributable surplus / or the profit made by the fund. This is why the dividends in mutual funds are neither fixed nor assured.

In such a scenario it would mean that the investors cannot get a regular return from their investments. Then, what is the way to get a regular return from your investments? There is a simple and smart solution to this which helps mutual fund investors who have regular cash flow requirement. It is called Systematic Withdrawal Plan or SWP. Let us find out how this works -

In a SWP, one can withdraw a fixed amount of money regularly from their investment in Mutual Fund scheme/s. The frequency and amount for this is decided upon by the investor and it can be monthly, quarterly or annually. It generates fixed cash flow for the investors by redeeming a certain number of units that matches the redemption value at the current NAV. Thus, the unit balance of the investment reduces and the rest of the units continue to accrue returns over a long tenure.

Let us now see a live example –

Investor 'A' invested Rs 10 Lakhs in SBI Equity Hybrid Fund 10 years back. He started withdrawing Rs 7,500 per month (annual 9%) through SWP after one year from the date of investment just to avoid short term capital gains tax as well as the exit load.

In the last 9 years, Investor 'A' has withdrawn Rs 8.10 Lakhs in total but still the fund value has grown to over Rs 30 Lakhs. Effectively, the fund has grown 3 times despite regular monthly SWP withdrawal.

Please see the result of the above SWP example -

The investor can get benefits of both capital appreciation as well as regular income if the withdrawal rate per annum is lesser than the long term annualized return of the fund. Investors must note that results of SWP are best reflected over a long time period, as you can see in the above example.

Let us now discuss why Equity Hybrid Funds are best suited for SWPs -

When the market is bearish, MF investments decline in value due to a fall in the Net Asset Value (NAV). This affects SWP too as with lesser NAV value, more number of units would have to be redeemed from the scheme for meeting investor’s cash flow requirement. If the fund is volatile, then in a bearish market, it can lead to substantial unit depletion. But, in case of Equity Hybrid Funds, downside risks are limited by asset allocation. It is obvious that in a bear market the NAV of Equity Hybrid Funds may decline too but what we need to understand here is that the drop will not be as sharp as in the case of equity mutual funds as a good percentage of the portfolio is invested in debt instruments. The investment, thus, will recover in its value faster when bull market commences again.

In this article or while showing the SWP example, we have not taken into account the impact of exit load and tax while explaining the concept of SWP but the investors must take into account these factors. Ideally SWP Withdrawals should begin after exit load and short term capital gains tax period (which is now currently one year). Also, during the initial years, the annual SWP withdrawal percentage should not be more than 9-10%, if you are investing in an Equity Hybrid Fund to start SWP.

We explained in this article how SWP option from Equity Hybrid Funds can be a good, simple and hassle free option for investors to gain regular monthly income. You can contact us to plan your regular cash flow requirement using the systematic withdrawal plan route.

Mutual fund is a financial instrument which pools the savings of a number of investors and may invest them in different financial securities like stocks, bonds, debentures, money market instruments and Government Securities etc. or a combination of all of these. These securities are managed by a professional fund manager on behalf of the unit holders and each investor in the scheme holds a pro-rata share of the portfolio, that is, entitled to profits as well as losses.

Read what are mutual funds in India?

There are many benefits of investing in mutual funds but let us discuss some compelling ones.

1. Mutual Funds help in diversification of risk

Mutual funds help investors diversify their risks by investing in a portfolio of stocks across different sectors, bonds, money market instruments and Government Securities etc. depending upon the objective of the scheme. A diversified portfolio reduces risks associated with individual stocks or specific sectors. If an invest or wants to create a diversified stocks portfolio by directly investing in stocks through stock exchange, he or she would require a large amount of investment.

On the other hand, the same investor can buy units of a diversified equity mutual fund scheme with an amount as small as Rs 5,000/- only. In fact he can even invest with an even lower amount of Rs 500, in case of ELSS Funds.Mutual funds are managed by qualified and professional fund managers who are backed by a team of result analyst skilled to pick the right stocks and other instruments. Therefore, the mutual fund managers are able to generate best risk adjusted returns for the investors.

2. Mutual Funds are low cost investments

Since mutual funds buy and sell shares and securities in large volumes, transaction costs on a per unit basis is much lower than that of buying or selling stocks directly by an individual investor from the stock market.

3. Mutual Funds are tax efficient

The other benefit of investing in mutual funds is that they are more tax efficient than most other investment products. Long term capital gains (holding period of more than 1 year) for equity mutual funds are totally tax free. Further, dividends of equity funds are also tax free. Short term (holding period of less than 1 year) capital gains in case of equity funds are only 15% on the profits made.

For debt funds, long term capital gains (holding period of more than 3 years) is taxed at 20% after applying the indexation benefit. Once indexation is factored in, the long term capital gains tax on debt funds is reduced considerably, especially for investors in the higher tax bracket. You can compare how debt funds are better than traditional investments. Short term capital gains (holding period of less than 3 years) in case of debt funds is taxed according to the tax slab of the investor.

If you invest in ELSS Funds, you can avail a tax benefit of upto Rs 150,000 in a financial year, under Section 80C of the Income Tax Act 1961. See the top performing ELSS Funds here

4. High Liquidity

Open ended mutual funds are more liquid than many other investment products like shares, debentures, fixed deposits, post office schemes and PPF and variety of traditional deposit products. Investors in open ended mutual fund schemes can redeem their units fully or partially at any point in time and get the redemption amount credited in their bank account generally on T+3 basis (Here, T means the transaction day + 3 means, 3 transaction days). In case of liquid funds it is on T+1 day basis. Some mutual fund liquid schemes have even started crediting redemption amounts instantly if you are making the redemption request online or through their mobile apps.

5. Wide range of schemes to choose from

Mutual funds offer investors a variety of schemes to suit their respective risk profiles and investment objectives. Apart from equity mutual funds, there are many other fund categories like, income funds, short term debt funds, balanced funds,arbitrage funds, monthly income plans (MIPs), child plans, retirement plans and liquid funds to suit different investment requirements of an investor.

In fact mutual funds have investment option from 1 day to your entire life time period.

See the various categories of funds and their performance from here

6. Mutual Funds are easy to invest

If you have a bank account, a colour photograph, address proof (either driving license, Aadhar Card, Voter ID Card) and a PAN card, you are ready to invest in a mutual fund. All you have to do is to contact a mutual fund advisor in your city or the mutual fund company (AMC) in whose scheme you want to invest and fill up the mutual fund KYC form. Once the KYC formalities are done, you need to fill in and sign the application form of the scheme you want to invest in and provide a cheque drawn in favour of the scheme name.

Mutual funds also offer investors flexibility in terms of modes of investment and withdrawal. You can opt for different investment modes like lump sum (one time), systematic investment plans (SIP), systematic transfer plans or STP (it helps transfer a fixed amount on a fixed frequency or the appreciation from one scheme to the other schemes within the same AMC), switching from one scheme to another or Systematic Withdrawal Plans (SWP) wherein one can withdraw a fixed amount at a fixed interval from his investments.

As we can see there are many benefits of investing in Mutual funds. Mutual Funds offer diversified investments, provides better tax efficient returns, saves taxes, easy to invest and historically has given the best returns compared to other investment asset classes and therefore it should be the integral part of your overall investment portfolio.

NAV of Mutual Fund or the Net Asset Value is the unit price of a mutual fund scheme. Mutual funds are bought or sold on the basis of NAV. Unlike share prices which changes constantly during the trading hours, the NAV of mutual fund is determined on a daily basis, computed at the end of the market closure based on closing price of all the securities that the mutual fund scheme owns after making appropriate adjustments.

Read what are mutual funds in India?

Investors should note that, the expenses of a mutual fund scheme like fund management, administration, distribution etc. are charged proportionately against the assets of the scheme and are adjusted in the NAV of the mutual fund scheme. The NAV of mutual fund that you see in the public domain is post adjustment of these expenses.

To see the latest NAV of Mutual Fund schemes you can visit this website http://www.amfiindia.com/net-asset-value

Mutual fund scheme units are priced at par value or face value which is usually at Rs 10, at the time of the New Funds Offer (NFO). The scheme NAV goes up or down depending on the closing market value of the respective securities held in the portfolio. Schemes which are older are likely to have higher NAVs compared to the schemes that are new because the NAVs of older schemes have had more time to grow.

Now that we know what is the meaning of NAV in Mutual Fund, let us also know few common misconceptions about NAVs in mutual fund. Read more about common misconceptions about Mutual Fund NAVs

  • Low NAVs are not necessarily cheap and high NAVs are not necessarily expensive. The NAV is derived from the value of the underlying securities of the scheme and the accumulated profit made by the scheme since inception. The NAV of a scheme by itself should not be a consideration in investment decisions.
  • Some investors think that NFOs are cheap because they are issued at par value (Rs 10). As mentioned earlier, the par value of a mutual fund unit is derived from the value of the underlying securities and the accumulated profits since inception. Two different mutual fund schemes may have exactly the same portfolio of securities and yet one may be offered at par value (NAV of Rs 10)through a new fund offer (NFO) while the NAV of the other scheme might be more than 200 or so; the difference in price notwithstanding the intrinsic value of the both the schemes is exactly the same.
  • Schemes which pay high dividends do not necessarily give higher returns. Investors should know that, as per SEBI regulations, dividends can be paid only from the profits made by schemes or from the scheme reserves. Dividends are adjusted from the NAV of the mutual fund scheme.

    For example, if the NAV of a scheme is Rs 50 and the scheme declares a dividend of Rs 5, the Net Asset Value (ex-dividend) will fall to Rs 45 just after the dividend is declared. There is no advantage in investing in schemes which pay dividends unless you are looking for regular return from your mutual fund investments. Therefore, if you are interested in total returns the growth option is better as you benefit from power of compounding.

    See the list of top performing mutual funds in India

NAVof a mutual fund should not be the criteria of selecting a mutual fund scheme. The track record of the scheme and the ability of its fund manager in terms of delivering superior risk adjusted returns can only determine whether the scheme will give good returns in the future or not.

Now that you know what is NAV in mutual fund, you must also know what are the benefits of investing in Mutual Funds in India

Asset Management Companies (AMCs) are SEBI registered entities which manages the assets of mutual funds. In order to understand the working of an Asset ManagementCompany (AMC) in India, let us first understand what are mutual funds in India

What is a mutual fund?

As we have seen that Mutual fund is a financial instrument which pools money of different investors and invests them in different financial securities like stocks, bonds, money market instruments and Government Securities etc. based on the scheme mandate and objective. Each investor in a mutual fund scheme owns units of the fund, which represents a portion of the holdings of the mutual fund scheme.

Let us now understand how asset management companies (AMC) raises money from the investors for a mutual fund scheme.

The initial process of raising money is known as New Fund Offer (NFO). New fund offers are open for a particular period (normally 15 days). To raise money from prospective investors in the scheme through the NFO, the AMC has to seek permission of the market regulator SEBI by submitting the desired documents which includes the Scheme Information Document (SID) and Key Information Memorandum (KIM).

A scheme can be close ended or open ended. Investors can invest in close ended schemes only during the NFO period. Investments and redemptions are not allowed once the subscription window is closed for closed ended funds. On maturity of the scheme, the units of the close ended funds are automatically redeemed and the fund value is paid to the investor.

In an open ended scheme, post the NFO period, the old and new investors are allowed to invest and redeem/ switch on an on-going basis.The AUM of open ended schemes changes on a continuous basis due to the on-going fresh investments as well as redemptions.

Once the scheme is approved by SEBI, the AMC informs the general public about the NFO through Scheme information document (SID) which carries details like, investment objectives, nature of securities (stocks, bonds etc.), scheme tax ability, minimum investment amounts, exit load and other information which is mandatory for the investors to know.

The money raised from investors is deployed by Asset Management Company (AMC) in different financial securities like stocks, bonds, Government Securities and money market instruments etc according to the investment objective of the scheme. For example, if the investment objective of the fund is capital growth, the fund will invest in shares of different companies. If the investment objective of the fund is income generation, then the fund may invest in fixed income securities like bonds, non convertible debentures, money market instruments etc.

The AMC appoints a fund manager to manage each scheme on an ongoing basis, to ensure that the investment objectives of the schemes are met. The fund managers are assisted by a team of research analysts to support the fund managers. The assets under management (AUM) of open ended schemes change on a continuous basis due to fresh investments and redemptions

Sponsor of a mutual fund

The Mutual Funds are set up in India as a Trust. The sponsor of a mutual fund is the promoter of the mutual fund. The sponsor makes an application for registration of the mutual fund with SEBI and provides the capital which is now minimum Rs 50 Crores for setting up the mutual fund. SEBI requires a sponsor to have at least 5 years track record in financial services business (e.g. banks, financial institutions etc). After SEBI’s approval the sponsor appoints a board of trustees to ensure full compliance of the mutual fund with SEBI’s requirements.

Role of the trustee

The Board of Trustees does not manage the assets of mutual funds directly rather it appoints the AMC who manages the assets of a mutual fund.The role and responsibility of the trustee is to ensure protection of interest of the investor. The trustees appoint a custodian for safe-keeping of scheme assets. The trustees monitor any new scheme introduced by the AMC and on an on-going basis closely monitors the AMC to ensure full compliance.

Role of custodian: Custodians are banks or similar financial institution who are registered with SEBI and is responsible for holding and safeguarding the securities owned by a mutual fund.

Role of Registrar and Transfer Agent: The AMC appoints the registrar and transfer agent (R&T) to the mutual fund schemes. The R&T agents process the application form post validation of mutual fund KYC norms, redemption requests and other financial and non-financial transactions and dispatches account statements known as SOA (Statement of Accounts) to the unit holders. The R&T agents also handle communication with investors and also do fund accounting and updates investor records.

Some of the Top Asset Management Companies in India are –

ICICI Prudential Asset Management Company Limited

Aditya Birla Sun Life Asset Management Company Limited

HDFC Asset Management Company Limited

SBI Funds Management Private Limited

DSP BlackRock Investment Managers Private Limited

Reliance Nippon Life Asset Management Limited

Sundaram Asset Management Company Limited

Franklin Templeton Asset Management (India) Private Limited

UTI Asset Management Company Limited

Kotak Mahindra Management Company Limited

As you may know there is an old saying that there are only two certainties in life - death and taxes; death is unavoidable, but taxes can be reduced significantly under certain circumstances, provided you understand the tax laws well and make the right investment moves. Unfortunately, many of us do not understand the tax consequences of our investments and the result is that we either end up paying more taxes than expected or we do not disclose the correct taxable income while filing the Income Tax Returns (ITR). Paying more taxes also means that our post tax returns are less.

Mutual fund tax benefit makes it one of the most tax friendly investment options for investors in India. Mutual Funds enjoy tax benefits compared to most of the popular traditional investment options e.g. bank fixed deposits, PPF, Post Office small savings schemes etc. These traditional investment options are taxed as per the income tax slab rate of the investor.

However, different types of mutual funds are taxed differently, depending on the nature of income and type of the scheme.

Capital gains on Mutual Funds

Capital gain is the profit made by sale of mutual fund units; profit is the difference in the selling price and buying price of mutual fund units. From a taxation point, there are two types of capital gains.

  • Short term capital gain: The definition of short term capital gains is different for equity funds and non-equity funds. A fund in which invests at least 65% of it's assets to equities or equity related securities is classified as an equity fund. Funds, where equity allocation is less than 65% of the total assets, are classified as non-equity funds from a tax perspective. If the equity funds are sold within 12 months from the date of investment, then the profits arising from these sales are treated as short term capital gains. For non-equity funds, short term capital gain period is defined as, within 36 months from the date of investment.

    For equity mutual funds, short term capital gains (if the units are sold before one year from date of investment) are taxed at the rate of 15% plus 3% cess.

  • Long term capital gain: If the units are sold after a period defined under tax laws, then it leads to long term capital gains. For equity funds long term capital gain period is defined as, more than 12 months from the date of investment. There is no long term capital gains tax in equity funds; in other words, there is no tax on the profit from sale of equity fund if units were held for a period of more than one year.

    For non-equity funds long term capital gain period is defined as, more than 36 months from the date of investment. Non-equity funds are taxed as per the income tax slab rate of the investor. Long term capital gains in debt funds (if units are sold after 36 months from the date of investment) are taxed at 20%, after indexation benefits. To calculate capital gains with indexation, you should index your purchasing cost by multiplying the purchasing cost with the ratio of the cost of inflation index of the year of sale and cost of inflation index of the year of purchase, and then subtract the indexed purchasing cost from sales value. So for long term debt investors (investment tenure of more than 36 months), debt mutual funds give more tax benefits for investors in the 20% or higher tax brackets compared to traditional investment schemes which is taxed as per the income tax slab rate of the investor.

    You can check how debt mutual funds are better alternative to fixed deposits

Dividends on Mutual Funds

Dividends are another mutual fund tax benefits for which investors invest in mutual funds. Dividends are profit made by a mutual fund scheme and distributed to the investors. While dividends of mutual funds are tax free in the hands of the investors, for equity funds the dividend distribution tax is zero even for the fund house. Hence, over short investment tenures (less than 12 months), dividend or dividend re-investment options can offer more tax benefits than growth options (where short term capital gains tax apply) for equity or equity oriented funds.

For non-equity funds, like debt funds, money market mutual funds, hybrid debt oriented funds, gold funds etc., while dividends are tax free in the hands of investors the AMC has to pay dividend distribution tax (DDT) before distributing dividends to investors. The dividend distribution tax (DDT) on dividends declared by debt mutual fund schemes is 25% plus 12% surcharge plus 3% cess, total 28.84%. For fixed income investors in the highest tax bracket (30%), dividends, even after paying the dividends distribution tax is more tax efficient, compared to interest incomes from traditional fixed income schemes, which are taxed as per the income tax slab rates of investors.

Conclusion

Mutual funds tax benefits make mutual funds among the most tax efficient investment options for investors. Investors should educate themselves about the tax benefits of mutual funds vis- a-vis other investment options, so that they can make the best investment decisions by investing in the mutual funds and avail tax benefits.

To know more, you may like to read - The tax benefit of mutual funds versus other investment options

Know your client or KYC is in an important process to detect and prevent money. KYC information is required by All Asset Management Companies (AMCs) to verify and maintain records of identities and addresses investors (clients) in accordance with the Prevention of Money Laundering Act, 2002. Hence, KYC for mutual fund is a mandatory requirement for making investments in mutual funds schemes in India.

Even though some investors might think that, KYC (Know your customer) is a complicated and cumbersome procedure; in reality, it is not. KYC is a simple process and can be completed very easily. Let us now understand how easily you can get your KYC for mutual fund done in few steps.

  1. To download the Mutual Fund KYC Form you can visit any Mutual Fund Company (Known as Asset Management Company) in whose scheme you plan to invest and download the KYC form from the website. Alternatively, you can also visit the websites of the registrar and transfer agencies (e.g. CAMS, Sundaram BNP Paribas, Franklin Templeton and Karvy) and download the KYC form.Your mutual Fund Advisor can also provide you the Mutual Fund KYC form and assist you in doing KYC.
  2. The Mutual Fund KYC form is very easy to understand. Fill out the form as instructed. Affix your colour photograph on the application form in the space mentioned and sign across (partially on the form and rest on the photo).

    You also need to provide self-attested copies of the following documents:-

    1. Identity proof (Either one from PAN card, passport, driving license, voter ID card, Aadhaar card or any other Government ID Card etc.)
    2. Address proof (Either one from Passport, driving license, voter ID card, Aadhaar card, electricity bill, property tax bill etc.)
    3. PAN card
    4. Linking of Aadhar to your mutual funds is now mandatory, therefore, while making KYC you can provide this detail too.
  3. You can submit the duly filled in KYC form (along with photograph pasted on it) and the self-attested documents mentioned above to your mutual fund advisor or to the asset management company (AMC) or the registrar and transfer agents (R&TAgents) as per your convenience to make KYC for mutual fund. You should carry the identity and address proof originals with you when you go to submit the KYC documents for in-person verification. However, please note that yourAMFI registered mutual fund advisor is also authorized to conduct in-person verification. So if you are getting your KYC done through a financial advisor, you need not need to visit the AMC or R&TAgents office for in-person verification.
  4. You can track your KYC for mutual fund status by going to https://www.cvlkra.com/kycpaninquiry.aspx. Enter your Permanent Account Number (PAN) and you will know if your KYC is verified or not.

Once your KYC is verified you can start investing in mutual funds. New mutual fund investors (people who have never invested in mutual funds before) will have to fulfil the KYC requirements before investing in mutual funds. Existing mutual fund investors are likely to have fulfilled the KYC requirements. However, if you have not made any mutual fund transaction for a long time, you should also check your KYC status by going to CDSL Ventures Limited website https://www.cvlkra.com/kycpaninquiry.aspx and check your KYC by entering your PAN. If yourKYC is not verified, then you should submit fresh KYC form along with necessary documents. The KYC process is quite simple and easy to fulfil.

Still, if you have any doubts, you should contact us and we will help you do your KYC for Mutual Fund http://meetplutus.com/contactus

To invest in mutual funds in India, the individual investor has to be Mutual Fund KYC compliant. Mutual Fund KYC is a simple process for which you need to fill up a KYC form giving your personal, communication and professional details. You also have to affix your colour photograph and sign across. The KYC form should be supported with your self-attested ID and address proof.

To know more, read here about how you can do Mutual Fund KYC

To invest in mutual funds in India, there are mainly 5 ways by which you can invest in any mutual fund scheme of any AMC -

Through your Financial Advisor

This is the most popular and traditional way of investing in mutual funds in India. AMFI (Association of Mutual Funds in India), an industry association of all the SEBI approved AMCs, provides licenses (which are called ARN No.) to Mutual Fund Distributors so that they can advise and help investors on their mutual fund investments.

A good financial advisor is expected to provide end to end to services, including collecting KYC (Know your Customer) documents, do in-person verification (IPV) of the client, filling up the application form, collect the investment cheque and submit them for processing with the respective AMCs (Asset Management Companies).

Most financial advisors do not charge any fee from the investors as they are compensated by way of commission from the AMCs with which they are registered.

Investor should invest through a mutual fund distributor or through his financial advisor. Before investing through a mutual fund advisor, however, you should check if he / she has a valid AMFI license.

You can check the validity of AMFI License of your Mutual Fund advisor from here https://www.amfiindia.com/locate-your-nearest-mutual-fund-distributor-details

Invest directly with the Mutual Fund companies (AMCs)

You can visit the office of the mutual fund company (AMC) in whose scheme you want to invest and invest directly. If you are investing for the first time, the AMC will do the needful in terms of making you KYC compliant which also includes in-person verification (IPV).

Most of the AMCs in India now provide transactions through their mobile App too. You can download the App on your mobile and transact in mutual fund of the respective AMCs.

Post your investment, the AMC will send you the account statement by email and through post.

Invest through Mutual Fund R&T agent’s websites or Mobile App

CAMS or Karvy are the two registrars (R&T agent) who process almost 95% of the mutual fund industry transactions and do record keeping and accounting on behalf of the mutual fund companies (AMCs). You may visit the office of R&T agents and submit the mutual fund application forms there, just like investing directly with mutual fund companies.

While submitting the application you can mention your Mutual Fund Distributor’s ARN number on the application form or otherwise you can invest in direct plans of mutual funds.

These R&T agents have also launched Mobile Apps, which you can download on your mobile and transact.

Invest through online portals

There are several online mutual fund portals (started by various mutual fund advisors) including us http://meetplutus.com through which you can invest in mutual funds.

To invest through the online portals your KYC has to be registered as the online platform will first verify your KYC before you proceed for transactions. Some of the portals can also help you with getting your KYC registered. One of the advantages of investing through an online portal is that you can view your entire portfolio (investment in mutual funds of different AMCs) in one place. These online portals are registered mutual fund distributors and empanelled with AMFI www.amfiindia.com.

A good online portal helps you plan your investments by providing automated tools on their website. For example – you can check a tool on our website which helps you plan your financial goal - Plan your financial goal

You can plan your financial goal on our website and start investing online after signing up on our website http://meetplutus.com/signup

Invest through your demat account

If you have a share trading account with any broker who provides online trading and demat services, you can buy mutual funds and keep them in your demat account just like shares. Likewise, when you want to redeem your funds, you have to contact your share broker and sell the funds from your demat account.

Balanced Mutual Funds are equity oriented hybrid mutual fund schemes. Hybrid mutual funds invest in multiple asset classes like equities and fixed income instruments. Balanced mutual Funds have at least 65% asset allocation in equity or equity related securities and the remaining portion in fixed income instruments. Balanced mutual funds have a moderate risk profile compared to stocks or equity mutual funds due to the holding of fixed income (or debt) instruments which as an asset class is subject to less price volatility compared to equities.

Since equities comprise more than 65% of the asset allocation of balanced mutual funds, these funds can generate good returns in the long term. The debt allocation of balanced funds takes care to moderate the downside risks when the markets are volatile. Balanced fund managers maintain equity allocation above 65% and debt allocation to 35%, but they can change asset allocation based on their outlook for relative valuations of these two asset classes. If fund manager thinks that equity valuations are on higher side, they can reduce exposure to equities and increase allocation to debt. Likewise, if fund manager thinks that, equities are cheap then they can increase allocation to equities and reduce debt exposure correspondingly.

These active asset allocations help balanced funds generate superior risk adjusted returns, with lower volatility. Please check which are the top performing balanced funds

Balanced funds are good long term investment options for investors with moderately high risk profiles. These funds are also good investment options for new investors as well as those who are retired and looking for stable and regular return from their investments.

If your investment objective is capital appreciation over long term, then you can choose Growth Option in Balanced Funds. However, investors looking for regular income can opt for Dividend payout option. Investors should note that, dividends are paid out of the profits made by the fund and it is at the sole discretion of the fund manager. Therefore, the dividends, both in terms of the pay-out rate and the frequency of payment are not assured by any mutual fund scheme.

Please check the details of top dividend paying balanced mutual funds

Balanced funds enjoy a major tax advantage compared to many other investment products. Though Balanced Funds may have up to 35% allocation in debt instruments, they are taxed as equity funds. Long term capital gains (units held for a period of more than 1 year) are tax free. Dividends paid by balanced mutual funds are also tax free.

Read what are mutual fund tax benefits

By investing in Equity Linked Savings Schemes, also known as ELSS Funds, investors can get tax deduction of up to Rs 150,000 from their taxable income under Section 80C of Income Tax Act 1961. ELSS or tax saver mutual funds are equity mutual fund schemes which invest in a diversified portfolio of stocks with the objective of generating capital appreciation over a sufficiently long investment horizon. Though ELSS investments are subject to market risks, they are among the best tax saving investments under Section 80C because historical data shows that equity has been the best performing asset class in the long term.

Please see performance of top 10 ELSS funds

Equity Linked Savings Schemes or ELSS funds have a lock-in period of only 3 years; investors cannot redeem ELSS mutual funds units till 3 years from the date of investment. Investors can invest in ELSS mutual funds in lump sum or through Systematic Investment Plans (SIP). By investing in ELSS through SIP, investors should note that, each SIP instalment is locked in for three years.

Please see the SIP returns of ELSS funds from here

Equity Linked Savings Schemes or ELSS mutual fund Investors can choose between Growth and Dividend payout options based on the investment objective of the respective investors. In Growth Option, the profits generated by the scheme remain invested in the scheme and compounds over the investment period to give higher returns to investors.

In Dividend Option, the profits made by the ELSS scheme may be distributed to the investors in the form of dividends. However, the dividends may or may not be declared and is totally the discretion of the fund manager of the scheme. Unlike other mutual fund schemes, dividend re-investment option is not available in ELSS mutual funds.

By saving the maximum amount (Rs 150,000) in Equity Linked Savings Schemes or ELSS funds under Section 80C of The Income Tax Act 1961, investors can save up to Rs 46,350 (applicable to investors in 30% tax bracket) in taxes every tax year. Investors should also note that the overall limit of Rs 150,000 under Section 80C also includes investments in bank tax savings fixed deposits, PPF, NSC and premium paid for life insurance etc. and is not exclusive to ELSS mutual funds.

Please read – All you wanted to about Income Tax slabs 2017-18

Apart from tax savings, ELSS mutual fund investments are suitable for a variety of long term financial goals like retirement planning, children’s education and their marriage and wealth creation etc.

Read why mutual funds ELSS Scheme is one of the best retirement planning investments for you

Equity Linked Savings Schemes or ELSS mutual funds are open ended schemes but they have a lock-in period of 3 years due to the tax rebate benefit. However, compared to other Section 80C investment options, mutual fund ELSS schemes offers the maximum liquidity to investors as most other Section 80C investment options have a minimum lock-in period of at least 5 years or more (in case of PPF It is 15 years).

Equity Linked Savings Schemes or ELSS is also the most tax friendly investment option among the eligible Section 80C investment options. This is because ELSS Mutual Funds comes under E-E-T (Exempt-exempt-Exempt) category. This means, there is no taxation during the time of investment, there is no tax on the interim profits like dividends or partial withdrawal after 3 years and again no tax on the final redemption amount as that is tax free under long term capital gains taxation benefit applicable to equity mutual funds/ equities.

Would you like to know what are mutual fund tax benefits

Index fund is an instrument which invests in the basket of securities that, replicates the composition of a market index, like Nifty, Sensex, Bank Nifty, CNX 100, CNX Midcap, Gold ETF, Nifty CPSE etc. Like any other equity mutual fund scheme, index funds are also managed by Asset Management Companies (AMCs). However, unlike different equity fund categories, fund manager of an index fund do not aim to beat the benchmark index. The primary objective of an index fund manager is to reduce the tracking error with respect to the index against which it is benchmarked.

Index funds give investors the opportunity to invest in an index fund without having to worry about trading margins and marked to market losses. You can hold your index fund as you would hold any other mutual fund scheme for as long as you want to benefit from the long term capital appreciation.

Even though different equity mutual fund schemes aim to diversify unsystematic risks (or security specific risk), and they do diversify, to a large extent depending upon the category of the scheme or theme/ sector of the mutual fund scheme, there is likely to be still some residual unsystematic risk in these equity mutual funds.

The equity fund manager can be overweight or underweight on certain sectors or stocks relative to the index, in their attempt to beat the index or category returns. Since equity mutual fund portfolios do not exactly reflect the benchmark portfolio composition, there is likely to be some unsystematic risk (company and sector risks) in addition to systematic risk (market risk). Index funds, on the other hand, are only subject to market risk, since they reflect the market portfolio.

You may know the names of few Index funds which are given below. Please check these links and know more about these ETF Funds -

Kotak Nifty ETF

Kotak Sensex ETF

Reliance ETF NIFTY 100

Reliance ETF NIFTY BeEs

ICICI Prudential NIFTY Next 50 Index Fund

Since index funds are passively managed, the expense ratios of index funds are much lower than actively managed equity mutual fund schemes. Investors who are looking for market returns at a low cost over a long investment horizon should invest in Index Funds.However, you should note that, since index funds are passively managed they may underperform versus top performing actively managed equity funds in the long term.

Read What are Equity Mutual Funds in India and their various types

If you are planning to invest in mutual funds but hesitate to do the paper work and not willing to visit the mutual fund office (AMC), then you can easily start investing online in mutual funds as technology enabled by Asset Management Companies and mutual fund advisors have made investing in mutual funds easier, faster and simpler.

However, before you want to start the online investment, you have to fulfil Mutual Fund KYC (Know your customer) formalities, if you are not KYC compliant already. KYC is a mandatory requirement for investing in Mutual Funds.

How to make an online KYC

Keep scan copies of an ID proof (preferably AADHAR as it is going the be mandatory from 1st Jan 2018), PAN Card and address proof. You can complete this requirement electronically through eKYC module available with mutual fund registrars and few AMCs.

What is Aadhar based eKYC – If you have AADHAR number, it would simplify the above procedure. The moment you enter your AADHAR card number, an OTP is sent to your registered mobile number with AADHAR. You have to authenticate the details with the OTP (One-Time Password) sent by UIDAI. Once it is authenticated, it will pre-populate the form with all your personal details available in the UIDAI database. Completing the eKYC procedure through AADHAR will not require any IPV (in person verification).

Upload the mandatory documents – In the next step, you will asked to upload scanned copy of your PAN (Permanent Account Number) card and AADHAR Card.

IPV verification through video Call – This is the last step (if you are not making anAadhar based eKYC) in making the eKYC. To complete the IPV (In-Person Verification) requirement, the fund house or the registrar will ask seek a suitable time slot from you when you can confirm your physical existence through a webcam. You need to keep your original PAN card and address proof ready with you as you will be asked to show them during the video call.

Please note that eKYC is a centralised and one time procedure and therefore you need not repeat the process separately with each AMC you wish to invest or with the R&T agent.

Start the online registration process for investment – Once your eKYC is made or you are already Mutual Fund KYC compliant, visit the AMC website whose fund you want to buy or visit our website http://meetplutus.com and click on the SIGN UP link http://meetplutus.com/signup on the home page. We will ask your name, mobile number and email ID which we will verify through a link sent to your email ID.

Post the verification, you have to follow few steps to enter your address, nominee details,bank details and answer few FATCA questions. In one of the steps we will ask you to upload your cancelled cheque and your signature (you can sign with black ink on a white paper).

Post fulfilment of all the above steps you will be redirected to a page from where you can select the AMC in whose scheme you want to invest, then select the fund category and the scheme name and amount. Once these are selected, you will be redirected to the net-banking page of your bank from where you can pay online using your net-banking account.

You can invest in any mutual fund scheme from any place and at anytime without any hassle. Whether you are a new or experienced investor, online mutual fund investment is ideal for you. We at http://meetplutus.com have made it simpler as you can complete your transactions as and when you want in just few steps and minutes!

Large cap mutual funds are equity mutual funds which invest in shares of large cap companies across different sectors. Large cap mutual funds invest across companies in different sectors with a view to diversify company specific risk and sector risks. Large companies are perceived to be less risky than midcap and small cap companies. Therefore, large cap mutual funds are suitable for investors who do not have high appetite for volatility.

Companies which have a market capitalization exceeding Rs 10,000 Crores are known as large cap companies. These are well known companies with a fairly long history. These companies command a high percentage of the market share in their respective industry sectors. The largest of large cap companies are known as bluechip companies (stocks). They are called bluechip companies, because they enjoy the public’s confidence due to their strong long term track record. In India, the companies which form part of the BSE - Sensex are usually considered to be the bluechip companies.

Given their large size, investors believe that these companies are better placed to survive downturns in the economy compared to smaller companies; as a result these companies are perceived to be less risky and investors are ready to pay a premium for their shares. Since large cap companies are often richly valued upside potential in terms of valuations can often be limited compared to midcap companies. However, large cap stocks or mutual funds can give more stable returns compared to midcap stocks or funds.

Large cap mutual funds usually invest in companies which are included in the Nifty 50, BSE – 100 or BSE - 200. Some large cap mutual funds have concentrated portfolios, i.e. they invest in a limited number of stocks (usually 25 to 30 stocks). These mutual funds are called focused funds, e.g. Axis Focus 25 Fund, DSP Black Rock Focus 25 Fund, ICICI Prudential Focused Bluechip Equity fund etc. The company concentration risk of focused large cap funds are higher than that of more diversified large cap funds, but these funds can give excellent returns. However, investors who are not comfortable with incremental risks (related to company concentration), they should invest in more diversified large cap equity mutual funds.

Top performing large cap mutual funds have excellent track record of beating their benchmark indices like Nifty, BSE-100 or BSE-200. Investors need to have a sufficiently long investment horizon, at least three years or longer, when they are investing in large cap mutual funds. These funds tend to suffer in stock market corrections which are largely driven by Foreign Institutional Investor outflows from the Indian stock market, since Foreign Institutional Investors invest primarily in large cap stocks. But given the fundamental strength and growth potential of the Indian economy, foreign institutional investors consider Indian large cap stocks among the most attractive in the emerging market basket. Corrections in large cap mutual funds are usually temporary and over a sufficiently long investment horizon these funds can give good returns to investors.

Large cap mutual funds are suitable for new investors or investors who do not have a high appetite for volatility or investors want more stability in their portfolio. Investors can invest in large cap mutual funds either in lump sum or through systematic investment plan (SIP). Systematic Investment Plans are more suitable for salaried investors because they can invest in a disciplined way from their regular monthly savings instead of waiting to accumulate a lump sum amount.

Read What is Mutual Fund SIP and its benefits

Through Systematic Investment Plans, investors can also take advantage of stock market volatility through rupee cost averaging. Rupee cost averaging along with the power of compounding can give excellent returns to investors in the long term. However, in addition to systematic investment plans, if investors have lump sum funds available, they can tactically take advantage of market corrections to increase the asset allocation of equity in their overall investment portfolio by investing in large cap mutual funds.

Did you know which are the top performing large cap mutual funds in India

Mid and small cap mutual funds are equity mutual fund schemes which invest primarily in stocks belonging to the midcap and small cap market segments. Stocks with market capitalizations ranging from Rs 2,000 to Rs 10,000 Crores are classified as midcap stocks, while stocks whose market capitalizations are below Rs 2,000 Crores are classified as small cap stocks. The universe of mid and small cap stocks is very large, but expert fund managers can find excellent investment opportunities in the mid and small market capitalization segments.

Mid and small cap equity mutual funds are usually perceived to be more risky than large cap equity mutual funds. Given their smaller size, small and mid cap companies tend to suffer more in economic downturns because they lack the economic resources which large cap companies have during demand slump in the economy. In past bear markets, especially during the financial crisis of 2008, investors dumped small and midcap stocks at the slightest signs of trouble (bad news) and the price damage can be severe in these stocks when panic sets in;in some stocks, it can take a long time for the price damage to be reversed.

You may like to read what are large cap equity mutual funds

Mid and small cap stocks in India usually have a relatively small base of free floating shares, i.e. shares not held by the promoters, related parties or the management. The smaller base can cause liquidity problems, especially in very volatile market situations. Sometimes in bad bear markets, when panic strikes, investors rush to redeem their small and midcap equity mutual fund investments. When redemption pressures are extreme, mutual fund managers may not find enough buyers for these stocks in the market and therefore may not be able to sell at times.

However, in India, mid and small cap mutual funds have historically given the highest returns among all equity mutual fund categories. This is because these companies have the potential to grow faster (in terms of revenues and earnings per share) in percentage terms than large cap companies because of their smaller base. Small and midcap companies are also considered to be more nimble, with the ability to react faster to new market opportunities compared to their large cap counterparts.

It has also been observed in more recent times, especially during the bear market of 2015 / early 2016, that small and midcap stocks are less affected by deterioration in global risk sentiments compared to large cap stocks. Foreign Institutional Investors account for a large percentage of volumes traded in Indian stock markets. Foreign Institutional Investors invest mostly in large cap stocks and their activity mostly impacts large cap stocks. As long as sentiments of domestic investors (institutional and retail) remain positive, midcap stocks and mutual funds tend to remain unaffected by global factors.

Small and midcap stocks tend to be under-researched and therefore, their valuations tend to be lower than large cap companies. However, investors can create a lot of wealth in these stocks over long investment tenures through both rapid earnings growth and also valuation re-rating (upgrade) over a period of time. Growing midcap companies at some stage may become large cap companies and may be valued as such; since midcap companies usually trade at a discount (in terms of valuations) to large cap companies, the valuation upside and capital appreciation potential in these stocks can be quite substantial.

When investing in small and midcap stocks, it is essential for investors to invest in high quality stocks, i.e. stocks which have business model strength, growth potential, ability to generate good free cash-flows and return on capital employed. As discussed earlier, the universe of small and midcap stocks is vast and less is known about these companies compared to large cap companies. Therefore, the task of selecting high quality midcap stocks, which are potential multi-baggers, can be quite difficult. However, top fund managers have the expertise and experience in identifying such stocks. Top performing mid and small cap equity mutual funds have given more than 25% returns in the last 5 years.

Systematic Investment Plans are the best investment modes for mid and small cap equity mutual funds for salaried investors because they can invest in a disciplined way from their regular monthly savings instead of waiting to accumulate a lump sum amount. Through Systematic Investment Plans, investors can also take advantage of stock market volatility through rupee cost averaging.

What is Mutual fund SIP and its benefits

Since midcap equity mutual funds tend to be more volatile than large cap equity mutual funds rupee cost averaging along with the power of compounding can give excellent returns to investors in the long term. However, in addition to systematic investment plans, if investors have lump sum funds available, they can tactically take advantage of market corrections, which can at times be quite sharp for small and midcap funds,to increase the asset allocation of equity in their overall investment portfolio by investing in small and midcap equity mutual funds.

See the SIP Returns of Top performing mid and small cap funds

Liquid funds are low risk mutual funds which are suitable for parking funds for very short durations ranging from a few days to a few months. We usually park funds, which may be required to be drawn at very short notice from our savings bank accounts. But the interest rates paid by savings bank accounts are very low and therefore, our funds are almost unproductive when they are lying in our savings bank account.

Normally, we do not look for returns when we keep money in savings bank account because liquidity is the most important consideration for us in such situations. However, by investing in liquid funds, not only you get almost as much liquidity as in your savings bank account, you can also get good returns on your investment in liquid funds. Even a relatively small percentage difference in returns (interest) between liquid funds returns and savings bank interest can have a substantial impact in rupee terms.

For example, if you have a Rs 50 lakhs lying in your savings bank account paying you 4% interest per annum for two months, you could have earned almost Rs 17,000 more in two months by parking the money in liquid funds, assuming liquid fund returns at 6% per annum. Sometimes the difference between the liquid fund returns and savings bank interest can be as high as 400 basis points or even more; the financial impact in such situations is much more.

Why is liquid mutual funds a must have in your portfolio

Liquid fund invest primarily in money market instruments like treasury bills, certificate of deposits, commercial papers, treasury bills etc,that have a residual maturity of less than or equal to 91 days, with the objective of providing investors an opportunity to earn more returns on very short term deposits (compared to savings bank or current bank accounts), without compromising on the liquidity of the investment. Liquid funds offer a high degree of safety; it is very rare for liquid fund NAVs to fall in value and the risk of capital loss in liquid funds is minimal.

Did you know what is NAV of Mutual Fund

Liquid mutual funds also offer high liquidity. Withdrawals from liquid funds are processed within 24 hours on business days. Some liquid fund schemes offer instant redemption, for transactions made through the AMC website or mobile application and the redemption amount gets credited to your bank account within a few minutes of the online or mobile transaction. There is no exit load for liquid; this means that, you can redeem your investment, partially or fully at any point of time, depending on your needs without any penalty unlike fixed deposits. Further, unlike savings bank or fixed deposit interest, no tax is deducted at source on liquid fund returns for resident Indian investors.

Liquid mutual fund returns are taxed as non-equity funds. Profits from liquid funds held for a period of less than 3 years are as taxed as per the income tax slab of the investor. Profits from liquid funds held for a period of more than 3 years are taxed at 20% after allowing for indexation benefits. Investors can also opt for dividends (daily, monthly etc.) in liquid funds. Dividends paid by liquid mutual funds are tax free in the hands of the investors, but the fund house has to pay dividend distribution tax (DDT) at the rate of 28.84% which is deducted from the dividend paid out to the investors.

Read the tax benefit of mutual funds versus other investment options

Liquid mutual funds can help investors make their idle money work instead of keeping them in savings bank accounts. Liquid funds are ideal for parking funds for a period of few days, few weeks or few months. Liquid mutual fund is the best investment choice for money that investors may need to use at a very short notice and not commit to longer term investments like fixed deposits, post office small savings schemes, bonds and stocks.

Visit our mutual fund research section to see which are the top liquid mutual funds

Most equity mutual fund schemes (including Equity Linked Savings Schemes) invest in a diversified portfolio of equity and equity related securities. By diversified portfolio, we mean that the portfolio comprises of stocks from multiple sectors and multiple stocks within a particular sector. Diversification reduces company and sector risks. As such diversified funds are suitable for investors who do not have sufficient knowledge of equity market risks. However, for more informed investors, who have some knowledge of equity markets, sectoral funds can be attractive investment options.

Unlike diversified equity mutual funds, sectoral mutual funds invest in particular sector. Within a particular sector, they invest in multiple companies as per the investment strategy of the fund manager. Therefore, while the company concentration risk is diversified, sectoral funds are subject to sector risk along with market risk. There are several sectoral fund categories. Some sectoral funds invest only in bank stocks. Some sectoral funds invest in Pharmaceutical stocks. Some sectoral funds invest only in technology stocks. Some sectoral funds invest in Fast Moving Consumer Goods (FMCG) stocks. Some sectoral funds invest in Infrastructure stocks. See the performance of various sectors here –

Performance of FMCG Sector Funds

Performance of Banking Sector Funds

Performance of Pharma Sector Funds

Performance of Infrastructure Sector Funds

Performance of Technology Sector Funds

Different sectors outperform each other at different parts of the economic cycle of a country. For example, cyclical sectors (like bank, infrastructure etc) outperform defensive sectors (like Pharmaceuticals, FMCG etc) when economic (GDP) growth outlook is optimistic or in bull markets. On the other hand, defensive sectors outperform cyclical sectors when economic growth outlook is pessimistic or in bear markets.

Infrastructure sector stocks tend to perform very well in the early stages of market recovery from a bear market. Bank stocks perform well after interest rates have peaked and a declining interest rate regime is expected. Defensive sectors like Pharmaceuticals and FMCG tend to perform well in all market cycles, though they tend to underperform cyclical sectors in bull markets. Outlook of export oriented sectors like pharmaceuticals, technology etc are greatly influenced by global macro-economic outlook and foreign exchange rates. If global macro-economic outlook is favourable, export oriented sectors perform well and vice versa.

Unlike diversified equity mutual funds, where market timing is irrelevant if the investor has a long investment horizon, investing in sectoral funds may require the investor to time his or her entry or exit in the fund because in the long run, some sectors will outperform the broader market, while some sectors will underperform. You may have to contend with returns lower than your expectations, if you unfortunately invest in an underperforming sector. On the other hand, by investing in the right sectoral fund at the right time, you can have terrific returns, much higher than what you may have expected.

Investing in sectoral funds is more difficult than investing in diversified equity mutual funds, because you have to identify both the right sector and then the right scheme within that sector. Sectoral mutual fund investments require some market knowledge, especially understanding of sector risks, which average retail investors do not possess. Experienced financial advisors can help investors identify the right sectoral funds to meet their investment objectives.

Sectoral mutual funds should not form your core investment portfolio. However, smart investors allocate a small portion of their portfolio to sectoral funds and rotate sectors from time to time, to enhance their overall portfolio returns.

You may also like to read what are different types of mutual funds in India

As per conventional investment planning in our country the investments of senior citizens of retirees comprised wholly of only fixed income or debt. Since investments are the only source of income for retirees, risk was the most important factor in investment planning. As such, fixed income or debt, which is the lowest risk asset class, was thought to be the only suitable investment for retirees. However, increased longevity with advancements in healthcare, is forcing many retirees to look beyond fixed income investments, because in an inflationary environment fixed income returns may not be sufficient to meet the income needs of retired investors for a very long period of time. Asset allocation rules suggest that, even retired investors need some exposure to equities to beat inflation and sustain their lifestyle for a long period of time.

Read what are different types of mutual funds in India

Mutual fund monthly income plans are hybrid debt oriented mutual fund schemes where the debt allocation ranges from 75% to 95% and the equity allocation ranges from 5% to 25%. The primary objective of monthly income plan(MIP) is to provide regular income to investors and also some capital appreciation over a sufficiently long investment. The capital appreciation can help investors beat inflation in the long term. The debt component of Monthly Income Plans lowers the volatility, provides stability and generates income for investors. The equity portion of the portfolio provides a kicker to returns over a sufficiently long investment horizon and can help investors beat inflation.

Historical data shows that, mutual fund monthly income plans can give significantly superior returns compared to traditional fixed income investments like bank Fixed Deposits and post office small savings schemes (like Monthly Income Scheme, Senior Citizens Savings Schemes). Top performing mutual fund monthly income plans like Reliance Monthly Income Plan, Aditya Birla Sun Life MIP II – Savings 5 Plan, HDFC MF Monthly Income Plan – Long Term Plan, Aditya Birla Sun Life MIP II – Wealth 25 Plan etc, have given around 10% or more compounded annual returns over the last 10 years.

See the performance of top mutual fund monthly income plans

Though mutual fund Monthly Income Plans are subject to market risk, the high debt component reduces the risk of capital loss considerably. The volatilities of Monthly Income Plans are considerably lower than equity or balanced funds. Post 2008, investors of top performing Monthly Income Plans never made material annual losses.

Mutual fund monthly income plans are also much more tax efficient than traditional fixed income investments like bank Fixed Deposits (FD), Post Office Monthly Savings Schemes (MIS), Senior Citizens Savings Schemes (SCSS), company Fixed Deposits (FD), life insurance pension annuity plans etc. Interest paid by FDs, MIS, SCSS, annuities etc are taxable as per the income tax slab rate of the investor. Profits or returns from mutual fund monthly income plans are also taxable as per the income slab rate of the investor for investments held for less than 3 years. However, for investments held for more than 3 years, the profits from mutual fund monthly income plans are taxed at 20% after allowing for indexation benefits. Indexation benefits reduce the tax obligation of investors and the effective tax rate is much lower.

Read tax benefits of mutual funds versus other investment options

Monthly income plan is not just suitable for retirees. It is suitable for any investor with moderately conservative to conservative risk appetites. Over a long investment horizon the risk return trade-offs in the mutual fund monthly income plans is quite favourable. Top performing monthly income plans have excellent monthly dividend pay-out track records. Investors can also get regular monthly cash-flows from mutual fund monthly income plans through Systematic Withdrawal Plans (SWP). Monthly income plan is a great investment option for investors looking for both income and capital appreciation.

Read why mutual fund monthly income plans are good options for conservative investors

SIPs are the most preferred method of investing in mutual funds in India. But before we tell you how to start a SIP online, did you know what are Mutual Fund SIPs and its benefits

An online mutual fund SIP can be started by visiting the AMC website or the website of your financial advisor provided he or she has provided this facility on their website. Irrespective of from where you want to register a mutual fund SIP online, the technology has enabled investors to make investments in mutual funds easier, faster, simpler and truly paperless.

However, before you want to start the online SIP investment, you have to make sure that you fulfil Mutual Fund KYC (Know your customer) formalities, if you are not KYC compliant already.

How to make an online KYC

Keep scan copy of your Aadhar Card as ID proof, PAN Card and address proof. You can complete this requirement electronically through eKYC module available with mutual fund registrars (RTAs) like CAMS, Karvy and Sundaram BNP Paribas.

As you have AADHAR number, it would simplify the above procedure. The moment you enter your AADHAR card number, an OTP is sent to your registered mobile number with UIDAI. You have to authenticate the details with the OTP (One-Time Password) sent by UIDAI. Once it is authenticated, it will pre-populate the form with all your personal details available in the UIDAI database. Completing the eKYC procedure through AADHAR will not require any IPV (in person verification).

As a next step, you will be asked to upload scanned copy of your PAN (Permanent Account Number) card and AADHAR Card scan copies.

Please note that eKYC is a centralised and one time procedure and therefore you need not repeat the process separately with each AMC you wish to invest or with the R&T agent.

Start the online registration process for your SIP investment – Once your eKYC is made or you are already Mutual Fund KYC compliant, visit the AMC website whose fund you want to buy or visit our website http://meetplutus.com and click on http://meetplutus.com/signup. We will ask your name, mobile number and email ID which we will verify through a weblink and OTP sent to the email you have provided while registering with us.

Post this verification, you need to follow the steps like, filing up the personal details, communication address, nominee details,bank details and answer few FATCA questions. In one of the steps we will ask you to upload your cancelled cheque and your signature. You can sign with black ink on a white paper and upload the image or alternatively you can sign on the screen using your mouse).

In the next step you will be redirected to a page from where you can select the AMC in whose scheme you want to invest, select the fund category and the scheme name and the monthly SIP amount. Other than this you will have to provide start and end date of your Mutual Fund SIP investment. Once these are selected, you will be redirected to the net-banking page of your bank from where you can pay online using your net-banking account.

(Please note that a gap of 30 days is required to start the SIP ECS mandate (it enables auto debit of future instalments from your bank account)

For those investors who are mutual fund KYC compliant,can visit the AMC website and start the paperless SIP investing in few steps.

You can invest in any mutual fund scheme from any place and at any-time without any hassle. However, more than starting a SIP online, it is important to select the right mutual fund schemes suiting your risk profile. We at http://meetplutus.com have made it simpler as you can now select the best funds in few steps by using our robo advisory tools http://meetplutus.com/mutual-funds-research/sip-robo-advisor. Once you have selected the right funds this tool helps you in setting up your mutual fund SIP online and helps you track your SIP investments from our mutual fund portfolio tracker.

Tax payers can claim deductions of up to Rs 1.5 lakhs every year from their gross taxable income by investing in various schemes allowed in Section 80C of Income Tax Act 1961. Tax savings investment options like Public Provident Funds (PPF), National Savings Certificates (NSC), tax saver term deposits (offered by both banks and post offices), Senior Citizen Savings Schemes (SCSS) etc. are risk free investments. Tax Savings Mutual Funds or Mutual Fund Equity Linked Savings Schemes (ELSS)are however, subject to market risks.

Also read – what is Equity Linked Saving Scheme (ELSS) of Mutual Funds

While the risk free tax saving investments provide safety of capital, the returns generated by them on a post tax basis may not be adequate to meet various long term financial goals. Though tax saving mutual funds is subject to market risks, they are one of the best tax saving investment options for investors with a long investment horizon. Tax Savings Mutual Funds or ELSS funds are diversified equity mutual fund schemes, which invest in a diversified portfolio of stocks across different sectors for generating capital appreciation over a sufficiently long investment horizon.

Historical data shows that, equity is the best performing asset class over a long investment period as it has outperformed asset classes like gold and fixed income investments. In the last 20 years, the BSE Sensex has given 11.8% annualized returns, while gold has given 9.2% and fixed deposits have given only 7.2% annualized returns respectively.

Good performing Tax Savings Mutual Funds have consistently beaten the market benchmark indices and given superior returns. The wealth creation potential of Tax Savings Mutual Funds or Equity Linked Savings Schemes is substantial. If you invest Rs 1 lakh every year in a Tax Savings Mutual Fund for the purpose of tax saving, over a 10 year period, assuming 15% annualized returns, you can accumulate a corpus of more than Rs 20 lakhs, in addition to saving up to Rs 3 lakhs in taxes (assuming tax slab to be 20%) over the 10 year tenure.

Over a 15 year period you can accumulate a corpus of nearly Rs 48 lakhs by investing Rs 1 lakh in ELSS every year for tax saving (assuming a 15% annualized rate of return), in addition to saving up to Rs 4.5 lakhs in taxes over the 15 year tenure. Over a 20 year period you can accumulate a corpus of over Rs 1 Crores by investing Rs 1 lakh in Tax Savings Mutual Funds every year (assuming a 15% annualized rate of return), in addition to saving up to Rs 4.5 lakhs in taxes over the 15 year tenure (Tax slab assumptions at 20%)

See the top performing tax saver mutual funds in India

Investors often ignore the impact of taxes on wealth creation. For example, a fixed deposit scheme may give investors 9% interest per annum, but if the interest income is fully taxable, then the effective return for the investor is only around 6.3% (for investors in the highest tax bracket). Interest paid by most risk-free tax saving schemes eligible under Section 80C are taxed as per the income tax rate of the investor. On a post tax basis, the inflation adjusted return of risk free investments is often very low, close to zero.

Tax Savings Mutual Funds or ELSS Schemes, on the other hand, are among the most tax efficient investments. Profits (long term capital gains) made are tax free along with the dividends paid by Tax Savings Mutual Funds are also tax free. The tax efficiency of these funds makes it as one of the best investment options for wealth creation while saving taxes too.

Read what are mutual fund tax benefits

Making tax savings investments often means locking up your capital for a long period of time. Lack of liquidity in investments can reduce the flexibility of your financial plan. Tax Savings Mutual Fund offers higher liquidity compared to all Section 80C investment options. PPF have tenures of 15 years with limited liquidity in the interim. Traditional life insurance policies also have long maturity tenures from 5 years to as long 30-35 years and surrender charges may apply if you want to surrender the policy before maturity. Unit linked life insurance policies (ULIPs) usually have lock-in period of 5 years; if you stop paying premiums before the 5 year period, surrender charges will apply and you will lose your insurance cover. NSC and tax saver FDs (banks or post office) also have 5 year tenures. Therefore, the Tax Savings Mutual Fund is the most liquid tax saving investments as they have a lock-in period of just 3 years and this makes them the most flexible tax saving investment schemes which also offers the potential of highest return in the long run.

Mutual funds are wonderful investment options that address a wide variety of financial needs and goals. You can invest the idle cash in your savings bank account in liquid mutual funds and earn a higher return than your savings bank account while at the same time have the flexibility of liquidating it at any time to meet your needs. You can invest in mutual funds to earn short term higher yields than fixed deposits.

Mutual funds can help you plan for your longer time investment goals as well, like purchasing a house, your children’s education, their marriage, your retirement or simply for wealth creation purposes. Even after your retirement, mutual funds can help you meet your post retirement regular income needs and beat inflation.

You must read what are different types of mutual funds in India

Mutual funds also cater to a wide spectrum of risk appetites. Risk and return are directly related. Therefore, if your investment objective is capital appreciation then your risk appetite should be high. Usually, if you have a long investment horizon then you can afford to take risks. However, risk appetite also is related to your investment temperament. We are all humans and each of us is different from one another. Some investors may want capital appreciation and have a long investment horizon but may not have appetite for lot of volatility. Fortunately, mutual funds offer solutions for such investors too. Sometimes an investor may have different risk tolerance towards two different investment goals, even though both goals are similar in nature from an investment objective and horizon perspective.

Did you know the benefits of investing in equity mutual funds

For example, an investor can have a fairly high risk appetite for his retirement planning investment, but a lower risk tolerance for his child’s higher education investment. The investment choices for these two investment goals, though of similar nature, should be different.

For each financial goal, investors should define the following:-

  • What is their investment objective? Is it capital appreciation or income generation
  • What is the time horizon of your goal, short term, medium term or long term, in number of years
  • What is their risk taking appetite? i.e. how much risk you can take with your investments
  • What are the liquidity needs over the investment period

The table below shows, the various investment options that mutual funds can provide depending on the investment horizon and risk tolerance levels of the respective investors.

However, the investors should note that the table above is only a broad guideline; there can be several nuances of risk return characteristics of different types of mutual funds and there will be overlapping areas. There are also liquidity and tax considerations which you must consider before starting to invest in different mutual funds.

Investors should also note that, their investment timeline (horizon) and risk appetite are also related – longer the investment horizon, higher should be the risk appetite. Investors who have multiple financial goals which need to be met at different point of time, therefore, should not invest only in schemes of a particular risk profile. Each investment should be based on a specific goal and risk considerations thereof.

While selecting different funds for different investment objectives, particularly long term goals, equity mutual funds can be a very good option. However, you should first know what are equity mutual funds and their various types

As mutual funds invest in stock, some investors feel that they may be better off investing directly in stocks through a stock broker instead of investing in mutual funds. Some investors cite fund expense ratios, lack of control over the investments and commission to mutual fund distributor as key reasons why investing directly in stocks may score over mutual funds.

However, according to us, mutual fund is a better if not the best investment option for retail investors in India, since the benefits of investing in mutual funds far outweigh the costs and other considerations.

Let us see what are the key benefits of investing in mutual funds versus directly in shares? But before that let us know what are mutual funds in India?

What are mutual funds in India?

In short, mutual fund is an investment instrument which pools the money of different people and invests them in different financial securities like stocks, bonds, gold etc. Each investor in a mutual fund scheme owns units of the scheme, which represents his or her portion of the holdings in the said scheme. The securities selected for investing are in line with the investment objective of the scheme. Mutual funds are managed by asset management companies (AMCs) which appoints fund managers to manage the different mutual fund schemes and ensures that the scheme investment objectives are met.

For fund management and other services provided by the AMC, it charges a fee, known as expense ratio to the investors. These expenses are charged against proportionately against the assets of the fund and are adjusted in the price of the unit. Therefore, the NAVs that you see for a mutual fund scheme is post adjustment of the expense ratio.

Would you like to know how asset management companies work in India

Let us now discuss the major advantages of investing in mutual funds versus directly in stocks.

  1. Diversification of risk: The biggest advantage of investing in mutual funds versus stocks is the risk diversification. Mostly investing in stock is subject to three types of risk – company risk, sector risk and market risk. While the company and sector risk are known as unsystematic risk, the market risk is known as systematic risk. What is the essential difference between unsystematic and systematic risk?
    The stock price of a company may fall if the company’s financial performance is poor, even if the market rises. On the other hand, even if the company performs well, the stock price may still fall, if the market falls.Mutual funds help investors diversify unsystematic risks by investing in a diversified portfolio of stocks of different sectors. Hence mutual fund investing risk is much lower than the risk of investing in individual stocks.
    Read what are diversified equity mutual funds

  2. Smaller capital requirement: Investors require a large capital to build a portfolio of stocks. But, on the other hand, as mutual funds work on the basis of pooling of money from different investors, investors can have the beneficial ownership of a diversified portfolio of stocks through mutual funds with a much smaller investment. Investors can buy units of a diversified equity mutual fund scheme with an investment of as low as Rs 500 – Rs 1,000/- only (it is Rs 500 minimum if you are investing in an ELSS mutual fund scheme)

  3. Investment expertise of the fund managers: Choosing the right stock or investing in the market requires a lot of expertise along with experience. Many retail investors lose a lot of money in share trading because they do not have the adequate expertise. Mutual funds, on the other hand, are managed by professional fund managers who have sufficient expertise and experience in picking the right stocks to get the best risk adjusted returns.

  4. Lowe transaction costs: Since mutual funds buy and sell securities in large volumes transaction costs on a per unit basis is much lower than what retail investors may incur if they directly buy or sell shares through their stock broker.

  5. Range of products: Mutual funds offer a variety of products suiting the risk profiles and investment objectives of investors. In fact mutual funds have products which to meet investment needs of one day to life time. Apart from equity mutual funds which are very popular with investors, there are also balanced funds which help moderate risk takers and retired people to earn a regular income, monthly income plans if you have monthly income needs,income funds and liquid funds to suit different investment requirements of short term and medium term.
    Know more about different types of mutual funds in India

  6. Many modes of investments: Mutual funds also offer investors many ways of investing and managing their investments. One can opt for different investment modes like lump sum,systematic investment plans (SIPs), systematic transfer plans (STP) and systematic withdrawal plans (SWP), switching facility from one scheme to another and profit booking facility by way of switch and redemption etc. You can even invest in dividend payment option of a mutual fund scheme if you want income from your investment. No other investment products, other than mutual funds offer such wide array of investment modes.
    Read what is SIP and its benefits and what is STP

  7. Disciplined investing: Share prices are highly volatile and thus induce the investors to buy or sell in short time periods due to fear or greed. Frequent stock trading often leads to making losses in the market. Mutual funds encourage investors to invest over a long time horizon, with an investment objective or goal in mind.ThroughSIPs or systematic investment plans,mutual funds encourage investors to invest in a disciplined manner to meet their long term financial objectives like retirement, children education and marriage.
    On the other hand, most of the investors fail to build a substantial investment corpus because they are not able to invest in a disciplined way through stock trading. Usually stock traders very often get enthusiastic in bull markets, but get nervous during bear markets.
    Therefore, by investing through SIPs in a disciplined, though mechanical way, investors can build sustainable investments which are critical to achieving their financial objectives.

We have discussed how the benefits of investing in mutual funds score over investing directly in shares. Even though investing directly in shares may give you a sense of greater control, the benefits of investing in mutual funds outweigh that of investing directly in shares for the various reasons we mentioned above.For retail investors, therefore, investing in mutual fund definitely makes a better sense over investing in stocks.

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