Although mutual fund doesn’t offer guaranteed returns, but they are still better investment options then traditional ones. So, Mutual Fund Sahi Hai for small investors who don’t have much knowledge and expertise to directly invest in shares in Stock market.
This post will cover basic to advance topics related to mutual fund so even a beginner could understand it. After reading this post, you can even prepare for best Mutual fund Exam of India. This post is written only for educational purpose to spread awareness about Mutual funds. We are not providing any investment tips here.
Benefits of Investing In Mutual fund:
- Mutual fund schemes gives higher returns than Fixed Deposit, Gold and Real Estate Investment.
- Mutual Funds are relatively more Liquid than Gold and Fixed Deposit. Here Liquidity means you can buy and sell your asset easily.
- Most Mutual Fund schemes have no lock in period i.e. you can withdraw you invested money anytime.
- If you buy any property you have to pay registration cost but in case of mutual fund there is no registration cost.
- Mutual funds are regulated by SEBI and AMFI. So your money is very safe as SEBI is government body.
- It is very secure compare to gold. as gold is physical asset and it could get steal.
- Mutual funds are best and easiest way to invest in International market.
- Mutual funds are generally liquid.
There Are Various Types Of Mutual Funds Like:
Gilt funds which invests in govt bonds which generally have maturity period of 3-5 years or Junk bonds which are risky but provide higher returns with low maturity period. While floating rate funds are changing by interest rate. Liquid funds are just like saving accounts which generally have maturity period of up to 91 days and liquid funds have no lock-in period.
Hybrid funds invest in both equity and debt , hybrid funds invest majority of their asset in equity funds as they are looking for growth, the reason behind to invest in rest of the asset into debt is to to reduce risk. As there are so many different types of funds, there was a need to characterize them. Mutual fund could be characterize in multiple ways. That’s what we will cover in this post.
There Are Two Types Of Mutual Fund Schemes:
- Open ended schemes
- Close ended schemes
Open ended schemes have no time frame, one can buy units anytime. Here, liquidity is very high. Liquidity in layman’s terms means one can easily and quickly buy and sell these fund’s units. While Close ended schemes have fixed time frame, one can’t buy units after NFO (New fund offer).
Open Ended Schemes Examples:
- HDFC Balanced Advantage fund
- Reliance long term equity funds
- SBI Dynamic bond fund
Close Ended Schemes Examples:
- Axis long term equity fund
- DSP tax saver fund
- HDFC housing opportunities fund
Fixed maturity plan are close ended fund with less risk as they mostly invest in government bonds and top corporate bonds.
Capital protected fund are also close ended which provides guaranteed returns. They invest 90% of their asset in equity and around 10% in government bonds.
Exchange traded funds are hybrid of open ended and close ended mutual funds.
There Are Two Types Of Fund:
- Debt Fund
- Equity Fund
Types Of Debt Funds:
- Gilt funds: Invest in government securities with varying maturity (15 to 30 year). NAV is volatile. After maturity period ends RBI gives money back to investors and then withdraw government securities from them. Returns of these funds are highly sensitive to interest rate movements. If interest rate falls then gilt bonds goes up.
- Income funds: as name suggest it gives periodic returns.
- Credit opportunities fund: invest in low rated corporated bond so not much risky.
- Fixed maturity plans: here maturity period is fixed just, like FD. And this fund also provide tax benefit.
- Liquid fund: this fund have no lock-in period so one can withdraw money anytime. And also have no exit load. They mostly invest in commercial papers and government bonds not in Stock market. Liquid funds are similar to savings account but provide higher returns usually around 7-8%. Here risk is very low as governments bonds are involve. FD and liquid fund’s returns are almost same.
Types Of Equity funds:
- Sector fund: invest only in one particular sector, so most risky.
- Equity diversified funds: Diversified equity fund invest in small cap, mid cap as well as in large cap funds.
- Global fund: international funds. For instance: invest in gold.
- ELSS fund: it has lock-in period of 3 years, and also offers taxation benefit. ELSS fund is good for tax deduction. One can save tax here under section 80 C. It provides 1,50,000 limit of exemption from total taxable income
- For example: If you earn 5 lakh per year from your business and get upto 1,50,000 returns from ELSS then total taxable income= 5 lakh – 1.5 lakh =3,50,000
Balance Funds are funds which invest in both Equity and Debt. Balance funds ensure returns but generally have high expenses. balance funds are relatively less volatile. They also do not provide Tax benefit like ELSS funds.
There Is Another Way To Characterize Mutual Funds:
- Active funds
- Passive funds
Active funds are funds manage by Fund Manager actively while Passive funds are not actively managed by Fund Managers. Fund Manager is a person who invest in Stock market in unit holder’s behalf.
Index funds are example of passive funds where Fund Managers almost copies index like BSE Sensex or Nifty 50 with some tracking error.
BSE sensex is nothing but a group of 30 companies shares with different proportions. While Nifty 50 Index is a group of 50 companies shares with different proportions.
What Is An AMC ?
AMC ( Asset Management Company ) invests client funds into securities. AMC is basically an Mutual Fund company.
AMC is a trust which hire Fund manager who invest in Stock Market on your behalf through mutual fund schemes. AMCs are basically provider of mutual fund schemes.
Examples of AMCs in India:
- L & T Mutual Fund
- HDFC Mutual Fund
- Sundaram Mutual Fund
- Tata Mutual Fund
As we all know, RBI regulate banks while SEBI regulates Capital market.
As per SEBI, Every AMC can charges fees to their unit holders. This is known as Expense ratio, It is nothing but an fees to manage the fund.
Passive funds have low expense ratio then Active funds as they are not actively managed.
There Are Two Types Of Load In Mutual Fund:
- Exit load
- Entry load
Exit load is nothing but penalty of leaving any fund before it’s maturity period.
Entry load was charge while entering the fund. SEBI has now ban the entry load.
There Are Three Option One Have To Invest In Mutual Fund:
- SIP (Systematic Investment Plan)
- SWP (Systematic Withdrawal Plan)
- STP (Systematic Transfer Plan)
In SIP, fixed amount debited from investors bank account periodically to buy units as per the NAV. SIP is good for small investors and one can stop SIP anytime. It saves investor from volatile market.
SIP is good for only those who get monthly income. But If you have lumpsum amount than go for SWP . SWP is good for those who wants regular income.
- Value investing
- Growth investing
Value investing’s main objective is to find undervalued shares to gain higher returns in future.
Growth investing’s main objective is to invest in companies which are expected to have high growth opportunity.
There Are Two Types Of Investing Approach:
- Top down approach
- Bottom up approach.
In Top down approach one need to first analyze economy then industry and lastly company in which one wants to invest.
While in Bottom up approach investors first analyze company then industry and last but not least Economy.
Mutual Fund Can Be Hold In Two Format:
- Electronic Format
- Physical Format
Demat account can hold shares and bonds in electronic format. ISA provide both physical and demat options. While dealing with Liquid fund for daily transactions physical format holdings of Mutual fund needed.
So far, I think you get your answer that Mutual Fund Sahi Hai. But there are some risk in Mutual Fund schemes which know one seems to be acknowledge. Now question arises about how to measure risk in Mutual Fund schemes, that’s what we will discuss right now.
Mutual Fund Risk Indicators :
- Beta: Beta is measure of risk in a fund based on data collected from past returns. It’s not good for predicting long term risk.
- Standard Deviation: Standard deviation is another measure of risk. It is basically an measure to determine the extent of volatility in Mutual Fund.
- Variance: Variance is also a measure of risk in a fund. It is basically a measure to determine how closely similar does benchmark index and investment’s performance are.
Risk Adjusted Returns:
It is a way to examine the performance of any investment by adjusting for it’s risk.
These ratios are rarely used and mostly important to get mathematical insights of your investment.
So don’t worry if you don’t understand these ratios. We will discuss four types of risk adjusted returns one by one. The four types of risk adjusted returns are: Sharpe ratio, Treynor ratio, Alpha, Information ratio and last but not least Sortino ratio.
1] Sharpe Ratio:
Sharpe ratio have notion that Volatility is not good metric as risk equals volatility. Because of this, Sharpe ratio provide less return as it doesn’t recommend to invest in high volatile assets which generally provide more return then less volatile assets.
2] Treynor Ratio:
Treynor ratio in one way is opposite of Sharpe ratio which usually consider volatility ideal for investment. Treynor ratio is basically the measurement of the returns generated
in excess of that which could possibly earned on an investment with no diversifiable risk like Fixed deposits or bonds. Treynor didn’t consider unsystematic risk while Sharpe ratio also consider unsystematic as well as Systematic risk.
Systematic risk and total risk of some portfolio could be different but Treynor consider both as similar.
Treynor is only good for evaluating the Sub-portfolio of a fully diversified broader portfolio.
3] Jenson’s Alpha: As per this, if assets is more risky then it should have high expected returns than less risky assets. The statement seems no–brainer.
As we all know, more the risk you took more the returns one could expect.
4] Information ratio:
Information ratio is basically a measure of risk-adjusted returns of an portfolio like a Mutual Fund. It was traditionally used to check the Fund Manager’s investing skills.
It basically measure the active returns of Fund manager’s portfolio divided by the amount of risk the Fund Manager took as relative to benchmark returns.
If Ratios value is higher than it suggest that investor took more risk to achieve the investment returns. It’s good way to check whether Fund manager beats benchmark returns or not
5] Sortino Ratio:
Sortino Ratio is a ratio of average excess returns to the downside risk.
So, if downside risk is high Sortino ratio will decrease as they are inversely proportional. As per formula, Increase in Sortino ratio will result in higher mutual fund return. While calculating an investor has to set their Target returns (T) as per their needs. This helps to maintain the returns above the fixed target.
Are Mutual Funds App Safe?
Let say app is closed then you can go to fund house and tell them your details like pan card. They will provide you all the details about your investment and later go to your AMC, they will track your mutual fund and you can withdraw your money from there.
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We hope you enjoy reading this detailed guide.
Now it’s time to check your knowledge about mutual fund through this below quiz.
Out Of 10 Indians 7 Fails To Solve This Mutual Fund Quiz. Are You One Of Them?
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Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. Past performance of securities/instruments is not indicative of their future performance. This post is only for Educational purpose.