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A mutual fund is a pool of money collected from multiple investors and is managed by a fund manager whose aim is to make gains by investing in securities such as equity and debt. Mutual funds give individual investors access to large, professionally managed portfolios.

In this article we cover the following topics:

  1. What is a mutual fund?
  2. What are the types of mutual funds in India?
  3. Features & Benefits of mutual fund investment
  4. Who should invest in mutual funds?
  5. When should you invest in mutual funds?
  6. How to invest & what are the documents required?
  7. What is the Mutual Fund Structure in India
  8. How did mutual funds evolve in India
  9. What are the top Fund Houses in India?

 

1. Introduction to Mutual Funds

A Mutual Fund is formed when capital collected from different investors is invested in company shares, stocks or bonds. Shared by thousands of investors (including you), a mutual fund is managed collectively to earn the highest possible returns. The person driving this investment vehicle is a professional fund manager.

Investing in mutual funds is the easiest means to earn something on the extra or grow your wealth. Every risk, return, or loss arising from this investment is shared mutually by the investors, and hence the term ‘Mutual Fund’. This is why the fund manager’s expertise (thereby the fund house’s reputation) is an important factor to consider. Financial experts call mutual funds the founding stone of any investment portfolio. All mutual funds are registered with SEBI (Securities Exchange Board of India) and therefore, quite safe.

 

2. Types of Mutual Funds

Mutual funds have branched out to unimaginable numbers ever since they were introduced to India. It was important to categorize them to help investors understand various funds and how they must choose a fund. Based on their investment traits and risks involved, you can broadly categorize mutual funds into three:

a. Equity Funds

Equity funds invest money collected from individual investors into shares of different companies. When the price of the share rises, the investors make a profit and vice versa.

b. Debt Funds

Fixed income government securities like treasury bills and bonds or reputed corporate deposits are debt funds. It is less risky than equities.

c. Balanced or hybrid funds

As the name suggests, balanced funds invest in both equity and fixed income funds to balance the risks and maintain a certain return rate. The fund manager decides the ratio to reap the best of both.

Hence, experts have designed mutual fund types based on the current market risks and past returns. Investors, according to the number of risks he can bear, choose a fund that can meet his/her financial goal(s) the best.

 

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3. Features & Benefits of Mutual Funds

a. Expert Money Management

Individual investors may not have the time or professional expertise to decide which fund to invest in or how to. A mutual fund company employs professional managers to manage the money pooled in their funds. They decide which company share, sectors/stocks or debt papers to invest the money or whether to hold on to the capital. Their decisions will be in the investors’ interest.

b. Lock-in Period

Different mutual funds have different lock-in periods, starting from one month. Some don’t have one at all. For instance, ELSS is a tax-saving mutual fund scheme with the shortest lock-in period of 3 years. The longer the holding period (beyond the mandatory lock-in), the better returns you earn and vice versa. Open-ended mutual funds generally do not have lock-in periods and you can close/withdraw them anytime.

c. Low Cost

Mutual funds are an affordable investment option for people who do not have enough money to make a large initial investment. Fund houses charge a nominal fee, called expense ratio, for their services. The annual expense ratio of a mutual fund usually ranges from 0.5% to 1.5%, and cannot exceed 2.5% as per SEBI regulations. They deduct the expense ratio from the money you invest. Investors bear the transactional expenses proportionately.

d. SIP option

If you do not have enough money to make a lumpsum investment, you can invest in smaller and manageable installments called SIP. Systematic Investment Plans foster financial discipline in investors. As it averages the rupee cost, SIP is an ideal alternative to mid-income and low-income people. You can start with as low as Rs. 2000 to make your initial installment with ClearTax.

e. Flexibility to switch funds

A serious investor (or fund manager) knows when to switch from the current fund to another to keep up with or stay ahead of the market. There are many mutual fund schemes that allow this. The asset manager has to keep a sharp eye on the market to know this. This ensures better returns while not getting burned by market volatility.

f. Investments based on goals & focus-sector

Every investor has a reason for which he/she is saving – a financial goal. It could be a short-term goal such as an international holiday or a long-term goal like fixed income post retirement. Also, different schemes focus on different assets and outcomes with varying risk factors. This allows investors to drive money to various asset classes as per their risk appetites and goals.

g. Diversification

Mutual funds invest across assets, company sizes and shares to spread the risks. When one underperforms, the others’ gains can even out the loss. This is diversification. However, do take care to not invest in too many (more than 5) as it may get difficult to monitor. Also, stocks of these companies always tend to be homogeneous, which beats the purpose.

h. Flexibility in terms of tenure

Most mutual funds don’t have time constraints unless specified otherwise. ELSS is the only mutual fund that comes with a minimum lock-in period of 3 years, as it is an 80C tax-saving scheme. This gives investors ample flexibility in terms of their financial goals, whether short-term or long-term. Investing for a certain term also makes it easier to plan when and how to invest and investment horizon.

i. Liquidity

Mutual funds are completely liquid investments. You can redeem your invested money any time you want. There is no need to justify your decision or hunt for a buyer. Simply place a request with your fund house, and get the money credited to your account in 2-3 working days.

j. Spoilt for choice

There are different types of mutual funds based on investment goals, individual risk appetite, sectors and fund size among others. However, it can be a daunting task to do the research and analysis. ClearTax can handpick tailored plans from the best fund companies in the country based on your profile.

k. Painless trading & transaction

Buying, selling and redeeming a fund at the current market price per unit (NAV) is quite simple. All you need to do is put in a request with the fund company and the fund manager will take care of the rest. With its easy liquidity, mutual funds can serve as your emergency funds.

l. Tax-Efficiency

Mutual fund (ELSS) has historically generated superior returns compared to the more traditional 80-C  options like FD, PF etc. Budget 2018 re-introduced tax on long-term capital gains exceeding Rs. 1 lakh. This amendment on LTCG only applies to equity and equity-oriented schemes. However, due to the higher returns, capital gains on ELSS will still be more.

m. Safe & secure in every sense

All mutual fund companies are under the purview of the government body, SEBI (Securities Exchange Board of India) and AMFI (Association of Mutual Funds in India). It is as safe as putting money in a bank and nobody is going to run off with your money as generally perceived.

n. Easy to monitor & make informed decisions

Investors may not have the time or knowledge to analyze the performance of mutual funds in an objective manner. This is why fund houses provide investors with regular statements, making it easy for investors to track their earnings from mutual funds.

o. Independence

Every mutual fund related information can be found online (brochures, videos, articles) for easy scrutiny and circumvention of third-party agents. This steers the investors clear of fraudulent representation. They can even study different schemes and how they work to make a decision independently.

Mutual Fund - SEBI

4. Are Mutual Funds for you?

Basically, mutual funds just make investing easier for you. Each is designed to fulfill different goals. This is particularly useful for people who do not have the time or patience to research and choose wisely.

For instance, if you are risk-averse, debt funds guarantee fixed but lesser returns. Here, the main aim is to protect the capital for a short period. Then again, equity funds are better suited for investment horizons of 5+ years due to market fluctuations. The possibilities of suffering heavy losses from equities will be less. Balanced funds strive to give you the best of both worlds.

5. Best Time to Invest in Mutual Funds

The best time to make mutual fund investment is, of course, when you have money. This is not to imply that these funds are expensive. Rather, last-minute investments (eg – at the end of financial year) often stems from hasty decisions. Rise and fall of the stock market as reported, for instance, can influence one’s decisions. But the truth is, not every mutual fund invests in stocks.

If you notice consistently poor performance, don’t hesitate to sell it. The basic rule of any investment is to start early. The more you delay, the more you will lose out on potential returns. So, the right time to invest is always NOW.

6. How to Invest & Documents Required

Thanks to the digital wave, you can easily access mutual funds nowadays. You may invest in mutual funds using any of the below options.

a. Direct Purchase

Investors can directly contact fund houses to apply for a scheme and save on brokerage. Get the form from the nearest branch of the fund house or download it online. Do take care to go through the fine print and clear all your queries before deciding.

b. Agents

These are sales professionals who reach out to potential customers and inform them on the different fund options. You can choose accordingly based on your income, investment goal and risk profile. The agent can help you with applications, redemption, transactions and cancellation among others. They charge commissions for their services.

c. Online (Distributors/Fund Houses)

Buying/selling a mutual fund unit online is almost the norm today. This not only saves time and effort but also makes it easy to compare funds and make informed decisions. ClearTax is one such portal that handpicks the best mutual funds from country’s top fund houses for you at zero costs. Just enter your details and make the online payment in less than 5 minutes.

7. Mutual Fund Structure in India

Contrary to general perception, SEBI & AMFI strictly monitor the mutual fund industry to ensure transparency and protect the investor’s assets. SEBI mandates any fund to be set up as a trust (as per the Indian Trust Act, 1882) – an external fund house should manage this trust.

It follows a 4-tier structure as listed below.

a. Sponsor

The sponsor could be an individual acting alone or with another corporate body that starts a mutual fund. A minimum of 40% of the Asset Management Company should come from the sponsor.

b. Asset Management Company (AMC)

An AMC or a fund house is run by a fund manager (and his team), who decides where to invest the money amassed from investors. They put money in securities (equity, debt etc.) in accordance with market trends and review the fund performances.

c. Board of Trustees

Board of Trustees are people with no association with the sponsor and they also hold the property of the mutual fund in the trust. This ensures objectivity and transparency in the interest of unit-holders.

d. Custodian

Law mandates every mutual fund to be placed with a SEBI-registered custodian. In most cases, it will be a bank.

8. How Mutual Funds Evolved in India

In India, the mutual fund industry is over 55 years old. Mutual funds were not preferred investment vehicles initially. More and more investors are now moving towards them, thanks to regulations set by Government bodies like AMFI and SEBI. The main aim of the government was to provide a platform for small and mid-cap investors to make market investors.

The mutual fund assets in the country have grown from Rs. 600 crores in the initial stage (1964) to an all-time high of Rs. 18.3 lakh crore in FY17. Ever since, the industry has had a fascinating journey of growth and popularity, summed up in 6 distinct stages.

Stage I – How UTI Evolved (1964-87)

The Government of India and RBI formed the Unit Trust of India (UTI) in 1963 – this was the beginning of mutual fund sector in the country. As the only entity providing mutual funds at the time, UTI enjoyed a monopoly and incepted its first scheme, the Unit Scheme. The 70-s and 80-s saw a huge growth of UTI with diverse schemes – Unit Linked Insurance Plan (ULIP), India Fund etc. – attracting investors from all backdrops.

Stage II – Public-sector Funds Enters (1987-93)

The State Bank of India launched SBI Mutual Fund in 1987, the first of its kind outside UTI. Then followed a slew of other public-sector funds like Canbank Mutual Fund, Bank of India Mutual Fund, GIC Fund, Indian Bank Mutual Fund, LIC Mutual Fund and PNB Mutual Fund.

Stage III – Privatization Happened (1993-96)

When the government allowed privatization of mutual funds in 1993, Kothari Pioneer was the first company to acquire permission for the same. This was followed by several others including foreign fund management companies – leading to higher competition, a wider choice for investors and integration of user-friendly technologies in the field. The year 1995 also saw the launch of Association of Mutual Funds in India (AMFI).

Stage IV – SEBI Stepped In (1996-99)

SEBI was set up in 1996 to regularize mutual fund operations in the country, setting a uniform precedent to all fund houses. Exemption of mutual fund dividends from taxation by the 1999 Union Budget was another milestone. It was also when SEBI and AMFI incepted Investor Awareness Programme aimed to educate the masses about MF investments.

Stage V – Uniform Across Industry (1999-2004)

This phase was marked with the repeal of the UTI Act and UTI Mutual Fund now operates under SEBI just as any other mutual fund. This uniformity in terms of structure, guidelines, and functions made it easier for fund houses as well as distributors.

Stage VI – Continues To Evolve (2004-present)

The mutual fund sector went through a slew of acquisitions and consolidations (example, Allianz Mutual Fund acquired by Birla Sun Life). New players (both domestic and international) enter the arena as we speak, and mutual fund has become one of the best financial instruments to build wealth.

9. Largest Fund Houses in India

Aditya Birla SunlifeAxisBaroda PioneerBirla SunlifeBNP Paribas
BOI AxaCanara RobecoDHFL PramericaDSP BlackrockEdelweiss
EsselFranklin TempletonHDFCHSBCICICI Prudential
IDBIIDFCIIFLIndiabullsInvesco
JM FinancialKotak MahindraL & TLICMahindra
Mirae AssetMotilal OswalPPFASPrincipalQuantum
RelianceSaharaSBIShriramTata
TaurusUnionUTI

In a nutshell, if you haven’t started investing in mutual funds, you should do so right away. You can invest in mutual funds easily and quickly through ClearTax.

 

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If you had invested Rs 10,000
every month for last 25 years
in equity funds, you could make

₹ 3.3 Crores
at 15%* annual returns

Invested
Rs 30 Lakhs

Received
Rs 3.3 Crores

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