What are Mutual Funds?
Mutual funds are nothing but units of investment, like of shares or debentures, issued by a Mutual fund company. They are professionally managed collective investment vehicle which pools investments to purchase securities. An investor can purchase units of Mutual fund instead of directly investing in stock market and get proportional return in the form of dividend.
What are the constituents of units of mutual fund?
Stocks, Bonds, Debentures and other type of investments.
Can I buy or sell them anytime?
Yes, the type of mutual fund talked about is open-end mutual fund. Open-end mutual funds can be purchased or sold anytime directly from/to the mutual fund company.
Talking about the other type of mutual fund which is closed-end mutual fund, they cannot be sold and purchased directly from the mutual fund company instead they can be transacted with other investors in the open market.
At what price will the close-end or open-end units be sold?
1. For open-end – At Net Asset Value (NAV) which is changed daily. Have a look at the NAVs of different mutual funds http://www.amfiindia.com/net-asset-value/nav-history
2. For closed-end – Like in share market, may be at premium or at discount.
There are 1000’s of types of mutual funds out there. How can I choose the right one among them?
There are 5 broad categories of mutual funds and an investor can choose the one which may fit her needs:
1. Money Market Mutual Funds – They are consisted of short term debt instruments like treasury bills. They have less return but secured. If you can’t take risk then it is better to park your money in money market funds.
There are 2 types of money funds: Institutional – Made for Govt., Corporations etc. and Retail – Made for Individuals.
Some of the top rated ones are:
• HSBC Cash Fund -Inst Plus (G)
• IDFC Cash Fund - Regular (G)
• Morgan Stanley Liquid - RP (G)
• SBI Premier Liquid Fund - RP (G)
2. Bond/Income Funds – These are for investors who need steady income. They are also called fixed income securities. These funds are invested in high yield or junk bonds (high risk of default but high return), govt. bonds or corporate bonds. Return is generally more than money funds but risk is more.
Some of the top rated ones are:
• HSBC Flexi Debt Fund - IP (G) – Long term
• IDFC Dynamic Bond -Reg Plan (G) – Long term
• SBI Dynamic Bond Fund (G) – Long term
• Birla SL Short Term Fund (G) – Short term
• Morgan Stanley STBF - RP (G) – Short term
• Reliance Money Mgr - IP (G) – Ultra short term
• Religare Invesco Credit Opp (G) – Ultra short term
3. Equity Funds – These funds consist of stocks of the companies. They may focus on specific industry or sector. It can further be classified into capitalization based or investment style based.
• Capitalization indicates the size based on the value of the company’s stock and the types are:
a) Small cap (value less than Rs. 100 Crores)
b) Mid cap (value between Rs. 100 and 1000 Crores)
c) Large cap (value above Rs. 1000 Crores)
• Stock funds are classified into:
a) Growth funds – Investment in stock of fast-growing companies.
b) Value funds – Investment in cheap funds.
c) Blend funds – Unbiased towards growth or value based funds.
• Some of the top rated ones are:
a) BNP Paribas Equity Fund (G) – Large-cap
b) Canara Robeco Large Cap+ (G) – Large-cap
c) Birla Sun Life MNC Fund (G) - Small and mid-cap
d) Mirae Emerging Bluechip Fund (G) – Small and mid-cap
4. Hybrid funds – These funds consist of stocks, bonds and other securities. Balanced funds, MIP (monthly income plan) Aggressive and MIP conservative are types of hybrid funds.
Some of the top rated ones are:
• ICICI Pru Eqty-Volatility Adv. (G) – Balanced
• DSP BlackRock MIP Fund (G) – MIP aggressive
• Birla SL MIP II-Savings 5 (G) – MIP conservative
5. Index funds – Funds with an objective of generating returns that can commensurate with the performance of a benchmark index like CNX Nifty Index and S&P BSE Sensex.
Kotak Nifty ETF is an example of such fund.
How to read mutual fund online?
• Fund here is BNP Paribas Equity Fund (G) belonging to the equity large cap category.
• CRISIL ranking is 1. CRISIL mutual fund ranking is the relative ranking of mutual fund schemes within a peer group.
• Assets are worth 127.22 Crores while NAV is 42.2 which is assets in the portfolio less liabilities.
• Returns are stated as average 1.6% in the previous 1 month, 8.7% in previous 3 months and so on. Here, consistency should be seen. A fund with more fluctuations depicts that there are instable returns and therefore carries more risk.
• Fund returns are compared with the return of other funds from the same category by taking average.
• Choosing a fund by looking at previous few months may not be the best option. As you can see that in previous 1 month return was low as compared to other funds, and same is for 3 month’s return. But if you see return in previous 6 months it is more than the standard and in previous 1 year it is nearly 3.9 times the standard return.
Source – CNX NIFTY.
• Here you can see the investment objective and scheme details.
• Performance of the fund manager is a critical factor that should be assessed before investing.
• Sometimes there are conditions on the load of the funds like as stated above, 1% exit load will only be levied if the unit will be redeemed or switched out within 1 year from the date of allotment.
• Here you can see where the funds are invested (Top holdings) and in which sector the funds are invested (sector allocation).
• You can also see the proportion (asset allocation %) in which the funds are invested in equity, debt and other funds.
Will there be any tax on dividend and sale of units?
Dividend – No tax in the hands of the unit holder but the tax is deduced from the dividend itself by the mutual fund company. Dividend Distribution Tax (DDT) will be deducted @25% + 5% surcharge + 3% cess = 27.0375%.
Sale of units – Tax treatment will be different for equity oriented mutual funds and other funds.
• For equity oriented mutual funds (funds which have 65% or more equity) – 15% for short term gain (less than 1 year) and 0% for long term gain (more than 1 year)
• For other mutual funds (non-equity oriented funds) – Short term gains at normal slab rate and long term gain 10% without indexation and 20% with indexation.
Note: Indexation means adjustment in value to take into account factors like inflation.
What will be the commission paid while buying and selling units?
In mutual funds, we call commission as load. Very nominal load fees like 1% or 2% need to be paid. While purchasing, entry load is charged and while selling, exit load is charged. There are some mutual funds with even zero entry or exit load.
Why should I invest in Mutual funds?
• Tax relief – Dividend received from units of MF is exempt u/s 10(35) of Income tax Act, 1961.
• No professional skills – You need not to worry because there are experts who are trading on your behalf. You need no professional skills.
• Risk impact – Failing of one or more securities may not have any huge impact on the earnings.
• Diversification – You don’t have to buy securities in bundles. Indirectly you are investing in a number of companies without any limit.
• Less investment – You need not to have a huge amount of money to trade. Like in Rs. 10,000 you can get a good deal.
• High liquidity – If you need money urgently, you can get it within 1 day of sale.
• Nominal load – You need not to pay heavy brokerage like while dealing directly in securities through broker. MF companies charge a nominal fee as they have their own contract with brokers.
• Efficient – Sometimes more efficient than to invest in ETFs or closed-end fund.
• Tax deduction – You can get a deduction u/s 80C of IT tax, 1961 up to Rs. 100,000.
• Future diversification – You can diversify your portfolio later including more types of mutual fund into the same.
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