Mutual Funds

Namaste! Welcome to Coverfox’s dedicated page on Mutual Funds. These investment tools help you grow your wealth depending on financial market conditions so that you and your loved ones remain financially protected. However, there is a lot of confusion regarding the types, features, benefits, and investment amount needed to be input into Mutual Funds for excellent returns.

Are you worried about investing without proper knowledge? Don’t fear, Coverfox is here! Our experts will resolve all your queries to make a quick, hassle-free investment on our platform.

What is a Mutual Fund?

Have you ever invested in a recurring deposit? Well, you should know Mutual funds aren’t much different. A mutual fund is an investment vehicle that allows you to invest in multiple tools - like Equities, Debt, and liquid assets, to name a few.

Okay, so to your next question - Do I manage Mutual funds on my own? No, you don’t. A fund manager manages your investment in these funds. Their job is simple enough - they distribute the money you’ve decided to invest in multiple fund options to give you - the investor - the maximum gain in wealth.

Do professional Mutual Fund managers handle only my investment? No. Funds managers pool money from different investors toward a fund - managed by them. According to the extent of their investment, sharing of the rewards, profits, risks, and losses is also proportional. So, how do you decide to separate your investment amount into different Mutual Fund options? Simple. You choose how much ‘risk’ you want to take with your investment. If you invest in highly volatile market options - you stand to make huge gains or huge losses. It is always advisable to mix risky investments with stable and safe ones.

If you get the basics of Mutual Funds now, you will want to ask who regulates all the Mutual Funds in India. The answer is The Securities Exchange Board of India (SEBI). You have to ensure any fund you pick follows SEBI’s guidelines before investment. Now that you know the basics of a Mutual Fund, let’s get to the big question on your mind: Is a Mutual Fund fit for me? It depends. Mutual funds are ideal for investors who either do not want to invest large sums, or don’t have the inclination nor the time to study the market, but still want their wealth to grow.

Features of Mutual Funds

Mutual Funds have certain unique features that make them the ideal form of investment. Some of the best features of these investment tools are below.

Diversification: Minimize and spread risk across multiple investment options like equity and debt.

Professional Management: Choose your risk profile and leave the investment in the hands of a fund manager, responsible for growing your wealth.

Flexibility: Withdraw, Redeem, and Re-Invest at any point in time!

Liquidity: Exit Mutual Funds immediately, hassle-free to get money back in your hands - unless there’s a lock-in period.
Affordability: Invest sums as low as Rs. 500, through SIPs.

Transparency: All of the information on fees is in the mutual fund prospectus, available on the company's website.

Tax exemption: ELSS, which is a specific class of funds, are exempt from taxation under section 80C of Income Tax Act 1961 for a limit of INR 1.5 lakhs.

Choice of Investment: Depending upon your financial goals, you can choose to invest in the appropriate category of mutual funds available mentioned below:

Liquid Funds
Short Term Funds
ELSS Tax Saving Funds
Long-Term Funds

What are the Benefits of Investing in a Mutual Fund?

In today’s day and age, investment options are necessary to ensure financial security for you and your family. Here are some advantages of Mutual funds.

Easy to Understand: They are an ideal option for investors who may not know much about investing.
Easy to Buy: Thanks to online technology today, buying, managing, and selling funds has become a hassle-free convenient task for investors. Through online mode, you can also manage your investment by getting updates on your fund’s performance daily.

Different Categories: Asset management companies offer various mutual funds to meet investors’ diverse risk appetites.

Low Expense: Mutual funds have money from many investors clubbed together in one fund. This way, the asset management cost gets divided amongst all the investors, and there is no burden felt by the investors for the asset management cost.

Risk diversification: Investing in these funds allows you to choose between risky assets and non-risky ones. Make sure you invest in a balanced portfolio.

Types of Mutual Funds in India

Based on Asset

Mutual funds can be broadly categorized into 8 classifications based on their asset class – equity funds, debt funds, money market funds, balanced funds, fund of funds, sector funds, index funds and ELSS tax-saving funds. Let’s discuss the categories based on their asset class:

Equity Funds: This type of mutual fund invests primarily in stocks. It could be passively or actively managed. Equity funds are also referred to as stock funds. They are the riskiest class of funds, and thus have the potential to generate higher returns compared with debt and hybrid funds.
Debt Funds: Investments are made in debt instruments such as corporate bonds, debentures, government securities, etc. Debt funds are comparatively less risky than equity funds and, hence, the returns are not as high. They serve as an effective investment option for investors looking for a steady source of income.
Money Market Instrument: They are funds that invest in highly liquid money market financial instruments such as commercial papers, treasury bills, certificate of deposits, etc. They are best-suited for individuals seeking short-term to short-term investment horizons. Not just that, these also enable high liquidity.
Balanced or Hybrid Funds: These are best-suited for investors seeking to invest for the medium and long-term and have a moderate risk appetite. As evident from the name, these funds invest in a combination of risky investments such as equity funds, and non-risky instruments like safe debt funds. This helps to balance out the portfolio and protect it from capital market risks. The objective of this fund is to ensure growth, while at the same time, offer a secure and regular source of income.
Fund of Funds: Just like balanced funds, fund of funds focusses on diversification to ensure capital growth while averting market risks. However, the Management Expense Ratio or MER of these funds is generally priced higher than the other fund categories.
Sector Funds: These funds invest in company equity shares of a specific industry or sector. They attract more risks than diversified funds, and therefore, generate higher returns. It is recommended that investors keep a close track of the fund performance of the chosen sector or industry and have an exit strategy in place.
Index Funds: As suggested by the name, this fund category invests in the same way as an individual does in a leading stock market index. Here, the fund value is linked to the benchmark index. As a result, the Net asset Value or NAV fluctuates along with movements of the index.
ELSS Tax-Saving Funds: These offer tax exemptions under Section 80C of the Income Tax Act, 1961. ELSS serves the dual purpose of investments and savings. It enables investors to invest in equity funds over the long-term as opposed to short term growth that are accompanied by capital market risks. These funds can generate decent returns, while equity investments can ensure healthier returns during stable capital market conditions. In the rising economy like India, a good equity-linked ELSS fund portfolio is an effective investment instrument for a rising economy like India, reaping high dividends for investors.

Based on Investment

Based on investment objectives, mutual funds can be categorized into growth funds, income funds and liquid funds.

Growth Funds: For investors looking for capital appreciation in the medium to long term period, growth funds (also referred to as equity funds) are an ideal option. These involve a high level of risk as the money is parked in equity shares of companies across all sizes - large, medium and small, including start-ups. The primary objective of investing in growth funds is to achieve growth, as apparent from the name. Since they are a high-risk investment, they generate healthy returns and are best suited for investors with a high-risk appetite. However, the returns are not paid as dividends to investors, but re-invested in varied companies across market caps for further growth.

Income Funds: Individuals who want an investment instrument that generates a reliable and steady source of income must consider investing in income funds. These funds park money in government securities, corporate bonds, fixed deposits of companies, debentures, etc., which are less risky when compared with equity funds. Such funds are exposed to the risks of market fluctuations, and inflationary influences, both of which determine the prices of shares and bonds. Returns might not be as high as that of equity funds, but they serve as an effective investment option for investors planning a stable income as their post-retirement plan or individuals planning to supplement their income.

Liquid Funds: They are ideal for investors who want high liquidity on their investments. These are short-term investments, starting from as short as one day and reaching maturity in a maximum of 6 to 9 months. This fund category invests in government securities, treasury bills and call money, which are less risky. This is because such funds invest solely in investment tools with high credit ratings. Secondly, the NAV of liquid funds do not fluctuate as much as other funds because they are held until they reach maturity and not hardly traded in the mutual investment market.

Fixed Maturity Funds: These typically invest in fixed income instruments like money market instruments, non-convertible debentures, bonds and certificates of deposits that lock in the current yields. Fixed maturity funds are close-ended funds, and have a consistent interest rate and predetermined maturity tenure. The tenure of these funds varies from a minimum of 30 days to a maximum of 5 or more years. The most common tenures range from 30 days to 180 days, and 370 days and 395 days. This investment aims at generating a reliable source of income for a fixed time period by protecting investments from capital market fluctuations, making it a low risk investment.

Pension Funds: Pension fund investments are categorized into two phases – the accumulation stage and the vesting stage. In the accumulation stage, a regular amount is paid by investors till their retirement age. This is followed by the vesting stage in which the investors reap the benefits of disciplined payments made over the years till their death or a pre-determined period.

Based on Structure

The mutual funds based on the structure have been detailed below:

Open-Ended funds: These can be purchased and redeemed at any time, as per the investor’s preference and investment objectives. The benefit of parking money in such funds is that their units can be encashed by the investor, as per his/her convenience, according to the prevailing Net Asset Value on the day of the encashment. There are no restrictions on the number of units that can be issued by these funds. Therefore, investors can opt for unlimited shares in the form of stocks and bonds. It is a cost-effective investment tool that offers growth as well as a reliable source of income. As investors can start small, these funds have a high accessibility among a wider population of investors.
Close-Ended Funds: These funds have a certain maturity period that generally varies between 5 years and 7 years. The subscription for this fund is open only during the stipulated period at the time of launch of the scheme, that is, the initial offer period. Following this, the units of such funds are locked for purchase and can be redeemed only after a specific pre-defined maturity period. These funds are usually listed on the stock exchange to introduce liquidity to such fund investments.
Interval Funds:Interval fund shares usually do not trade on the secondary market, though many of these funds are consistently offered on sale at the existing NAV of the day of purchase. These funds can also be repurchased at fixed intervals of three, six or twelve months, as mentioned in the fund documents and annual report. The repurchase cost is again determined by the existing NAV on the day of purchase. The fees charged on interval funds are generally higher than other fund categories and, hence, they generate comparatively higher returns.

Based on Specialty

Emerging Market Funds: These funds are typical to emerging countries like India and invest specifically in emergent markets.
International Funds: These funds invest in organizations that are based outside of the investor’s country. International funds differ from global funds, which can invest in companies from any country in the world.
Global Funds: Global funds can invest in organizations across the globe, as opposed to international funds that invest in any funds from any country other than the one where the investor is a resident of.
Real Estate Funds: As evident from the name, real estate funds invest only in companies that specialize in the real estate sector.
Commodity Focused Stock Funds: Especially designed for portfolio diversification, these funds invest in traditional bonds or stocks, or a fund that invests in bonds and/or stocks.
Market Neutral Funds: The market neutral funds invest in long and short stocks in various proportions, aiming at healthy returns across various market cycles.
Inverse/leveraged Funds: This is a type of Exchange Traded Fund that is specifically designed to perform exactly the opposite of its benchmark or index. They perform especially well declining market conditions and are a suitable investment option in bear markets.

Top Performing Mutual Funds in India

Mirae Asset Hybrid Equity Fund	L&T Emerging Businesses Fund
Axis Bluechip Fund	HDFC Small Cap Fund
ICICI Prudential Bluechip Fund	ICICI Prudential Equity & Debt Fund
L&T Midcap Fund	Motilal Oswal Multicap 35 Fund
HDFC Mid-Cap Opportunities Fund	Kotak Standard Multicap Fund

Source: The Economic Times

Mutual Fund Investment Objective

Income Funds: If you’re looking for the reliability of investments based on returns, nothing will beat income funds. These funds invest in government securities, Corporate Bond Funds, fixed deposits of companies, debentures, etc., which has some element of risk.

Growth Funds: Are you looking to make a tidy sum in the short-term? Invest in Growth funds. However, you should know they’re risky, investing in the shares of Large, Medium, Small Scale, and Start-up companies.
Aggressive Growth Funds: These funds only invest in stocks of companies whose growth is estimated to be much higher than the average company on the stock market.

Money Market Funds: Mutual funds that invest in highly liquid money market financial instruments like treasury bills, commercial papers, certificates of deposits, etc. are referred to as money market funds.

Balanced Funds: Also known as hybrid funds, balanced funds are best suited for medium and long-term investors with medium risk appetite.

Mutual Fund Fees & Structure

There are certain charges that investors will have to incur when investing in mutual funds. Asset management companies charge investors for professional fund management as well as regular operational expenses. Returns are taxable by the government. The investor also has to pay for transaction charges plus the cost incurred towards maintaining the fund. Some riskier funds can involve higher management fees levied on them.

How to Invest in Mutual Funds?

If you’ve got here, then it’s safe to say you’re interested in investing in Mutual Funds.

Did you know? Financial institutions offer investors the convenience and flexibility of investing in mutual funds online and offline. Yes! Now, sit at the comfort of your house and spend away! However, before you begin that journey, here are some factors for you to consider:

Analyze your investment objective

Assess your risk appetite

Research about the Mutual Fund Investment House

Get assisted by Mutual Fund Agents.

Direct online purchase - Over Websites, Mobile Apps

How do Mutual Funds Work?

Mutual fund companies purchase plenty of stocks or bonds, according to the recommendations of the professional advisor. A third-party firm or individual, known as a fund manager, manages the funds portfolio of investors. Fund managers may either belong to third-party firms or be the owners of funds. The board of directors of a mutual fund company hires a fund manager who has the necessary skills and industry knowledge to assign and manage the investments, aiming at optimum growth and returns for the investors of their funds. There are also other expert professionals, each of them specialized with a distinct skill set to manage various aspects of fund investments like tracking fund performances and identifying the right time for selling the assets for greater returns.Some fund managers are the owners of these funds, while some others are not.Fund managers collect the investment amount from investors and invest the same on their behalf in various funds, as per their individual financial objectives and risk appetites, to build a robust portfolio.

Direct Vs. Regular Mutual Funds

Mutual funds divide themselves into two categories – Direct and Regular Fund, usually managed by the same Fund Manager. However, there are specific differences between them. Let’s discuss these differences below:

Direct mutual funds: These funds do not involve charges as commission to the agent/broker, payable by fund investors. Also, these funds offer higher NAVs.

Regular mutual funds: These funds involve commissions payable to the broker/agent over the fund investment amount. It implies that these charges cut into the returns of the investor, thus, offering lower NAVs.

Investment Strategies in Mutual Funds

Option for SIP: Systematic Investment Plan (SIP), offered for every investment, enables investors to invest in their chosen fund easily through monthly installments, easing the financial burden of investors.

Diversification of investment: Switching to other funds is necessary when a fund is on its downward peak. This diversification enables the investor to avoid losses from the fund’s negative performance in his/her portfolio earlier. Investing in a healthy combination of risky funds like equity and less risky options like balanced funds balances out the portfolio, avoids risks, and helps capital growth.

Asset Class Investing: Investing in mutual funds based on its eight asset classes - equity funds, debt funds, money market funds, balanced funds, fund of funds, sector funds, index funds, and ELSS tax-saving funds.

Periodic Overview: Mutual funds are always vulnerable to market risks, which can be predictable and unexpected. While unforeseen risks cannot be averted, the foreseeable market risks can be avoided by keeping a close track of the performances of the funds in the portfolio and then sell or switch between funds.

Direct Plans: These funds are directly purchased by the fund house that owns it, generally through its official website or mobile app. Hence, they do not involve any additional charges and expenses like brokerage fees.

Mutual Funds Drawback & Their Solutions

Just like any other investment tool, Mutual Funds are subject to their limitations. Some of them may seem more severe than others. It is essential to maintain the perspective of your investment goals. Here are a few disadvantages of Mutual Funds.

Lack of reliable returns

Non-withdrawable cash

Additional fees

Hidden terms and conditions

Investing in the wrong mix of diversified funds

Smart Tips to Keep in Mind during Mutual Fund Investments

Invest in diversified mutual funds
Consider the possibility of inflationary effects
Time it right
Consider your risk appetite
Consider your age

Terms Related to Mutual Funds

AMC: An Asset Management Company is a firm that pools investments from individual and institutional investors. The objective of AMCs is to build a robust portfolio that generates optimal returns for the investor.

NAV: Net Asset Value is the value per share of a fund or an Exchange Traded Fund (ETF) on a specific day and time.
Entry Load: The entry load is the additional charge paid by investors over and above the investment amount during the time of availing a fund.

Exit Load: Exit load is payable by an investor at the time of redemption of a fund or withdrawing from a fund scheme.
Portfolio: Collection of financial instruments or assets like stocks, shares, bonds, government securities, money market instruments, etc. through which the fund house generates profit for its investors.

Corpus: Corpus refers to the total value invested towards a particular scheme by all investors.

Diversified equity fund: Diversified equity funds park money in the shares and stocks of companies, irrespective of their size and sector.

Debt fund: These include investments made in debt instruments such as corporate bonds, debentures, government securities, etc.

New Fund Offer (NFO): A New Fund Offer (NFO) refers to the unique benefits offered by an investment company on the first subscription of its new fund. A new fund is a fund that enables the company to raise capital for buying securities.
SIP investment: SIP is a Systematic Investment Plan that enables the investor to invest the money in installments for a defined period in MFs. SIP takes the burden out of the investor to make lump sum money available in one shot.

Asset Class: An asset class is a group of stocks, shares, and securities that are similar in their salient features and benefits, act similarly in the capital marketplace, regulated by the same laws.

Dividend mutual funds: These funds mainly invest in businesses that pay dividends.

ETF: ETF or Exchange Traded Fund is a security that monitors bonds, groups of assets, indexes, or commodities.

Money market funds: They invest in highly liquid money market financial instruments such as treasury bills, commercial papers, certificates of deposits, etc.

Redeem: Mutual funds can be redeemed by investors on any business day, either online or offline.

Floating rate debt: A floating rate debt is a type of debt like a bond whose coupon rate fluctuates with capital market conditions.

Lock-in period: A lock-in period refers to the minimum period for the fund to reach its maturity.

Lump-sum investment: A lump sum investment refers to a large one-time corpus that an investor wants to invest as opposed to spending the same amount in multiple installments at regular intervals over a pre-decided period. This lump sum amount may be the amount received after retirement or the profits of an investment or gift, etc.

Case Study on Mutual Fund Investment and Performance

Let’s take the case of HDFC Balanced Fund, renamed as HDFC Hybrid Equity Fund.

Launched in August 2000 with the objective of generating capital appreciation by investments in equity, debt and money market instruments at a ratio of 60:40 for equity and debt.
HDFC Balanced Fund has been merged with HDFC Premier Multi-Cap Fund and renamed HDFC Hybrid Equity Fund since June 01, 2018.
It is an open-ended balanced scheme, growth and dividend option, with no lock-in period applicable.
Minimum application amount is Rs.5,000 for new investors and Rs.1,000 for existing investors. This is not applicable for SIP plans.
An Exit Load of 1% is applicable if units are redeemed or switched-out within 18 months from the date of allotment.
The risk involved for equity and equity-related instruments is medium to high, while for debt securities, it is accompanied by low to medium.
Investments in equity focus on long term investments, based on economic trends and investor sentiments. The decision to sell a holding is taken when the value of equity has reached its optimum level or there are other investment options that offer better return or the market in has undergone a fundamental change.
Investments in money market instruments include treasury bills, commercial papers and bills, certificate of deposit, etc.
Invests in medium and large-sized companies that are expected to achieve above average growth than the existing industry standard, commands a clear competitive advantage, and is superior financially.

FAQ on Mutual Funds

What are the risks involved?

MFs are dependent on the market returns and thus possess the risks of volatile market conditions.

How is an MF set-up?

Mutual fund is set up in the form which includes trustees, sponsor, custodian and asset management company (AMC).

How to choose the right MF?

Open Ended

Debt/Income: If your objective is to get a stable income from your MF investment, then debt/income funds are an ideal choice for you.
Money market/liquid: If you want to invest your money for a shorter duration, then money market/liquid funds are the ones for you.
Equity/growth: If your financial goal is to make good returns over a long-term period and a good appetite for risk taking, then equity/growth funds are the best choices for you.
Balanced: If you want a balance of equity and debt-related investment in your portfolio, then you should go for balanced funds, which give you moderate capital growth and decent returns on your investment.

Close Ended

Capital Protection: As the name suggested, the objective of these funds is to safeguard the investor's capital during the downtime of the market.
Fixed Maturity Plans: Fixed maturity funds plan are closed-ended debt funds having fixed maturity period. These are like conventional bank FDs. The fixed maturity plans are not open for subscription on a continuous basis like open-ended funds plans.

What are the drawbacks?

Cost, Taxes, and Fees

A mutual fund has a cost associated with the returns it produces. There are prices charged not only for the price of the fund but also for additional fees depending on the commission charges. A fee also goes towards the fund management charges.

Mutual funds returns get taxed by the government. The investor also has to pay for transaction charges plus the cost incurred towards maintaining the fund. Some riskier mutual funds can have more management fee levied on them.

Unpredictability

Mutual funds returns can be quoted hypothetically but it is impossible to give a written guarantee on the returns as they are linked to the performance of an industry. Some mutual funds carry a high amount of risk, some others carry a moderate amount of risk. It all depends on how well the mutual fund portfolio is diversified.

Who can invest in MFs?

Indian residents
Non-resident Indians (NRI)
People of Indian Origin
Parents/Guardians on behalf of minors
Indian Public Sector Undertakings
Indian Private Sector Undertakings
Cooperative Societies
Charitable or Religious Trusts
Trustee, AMC or Sponsor of their associates
Endowment or Registered Societies
Scientific and/or industrial research organizations
Wakf Boards
Hindu Undivided Family
Sole Proprietorship Firms
Partnership Firms
Other associations, institutions, bodies, etc., authorized to invest in mutual funds

What is the process to make an investment?

Agents: You can buy mutual funds through an agent/broker. The agent/broker will get his commission from the fund house on your purchase. They will also receive a percentage of your portfolio value which is created by them as commission.
Direct: Mutual fund companies offer mutual funds online for purchase and you can directly purchase them from their websites. Why to Apply for Mutual Funds Online?
Convenience: Online platform gives you ease of investing the mutual funds at the convenience of your home at any time.
Easy Comparison: You can compare features of different mutual funds online and review the fund performance and its current value.
Affordable: As you buy the mutual funds directly, agent commission is saved. This makes it cheaper to buy mutual funds online.
Independence: Online platform gives you the independence to login to the portal and review your mutual funds anytime. You can also redeem or buy new mutual funds at your convenience.

Know more about How to Invest in Mutual Funds

Will there be TDS when I redeem my MFs?

Yes, there is a TDS applicable for resident Indians when selling/redeeming units, be it of debt mutual funds, Equity mutual funds, tax saving mutual funds or ELSS mutual funds. A Long Term Capital Gains (LTCG) Tax at the rate of 10% is applicable on capital gains from equity mutual fund redemptions.

Are MFs a safe investment option?

Mutual fund investments are not devoid of risks arising from capital market fluctuations. The returns may vary from your initial estimates due to market volatility. However, you can be assured that your investments are in safe hands, irrespective of the fund house that you have invested in. This is because all mutual fund investments in India are under the strict regulation and supervision of government entities like the Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI). What’s more, there are mutual fund options that not only aim for generating returns, but are also tax-efficient. Hence, they serve the dual purpose of an investment-cum-savings tool.

How much should I invest?

There is no maximum limit for the amount you would like to invest towards mutual funds. Its flexibility is further emphasised with the fact that mutual fund investments through SIP or ELSS can be started with an amount as meagre as Rs. 500. You can decide on the amount you would like to invest in mutual funds as per your financial ability and investment objectives.

Are all MFs tax exempt?

The only mutual fund that offers tax benefits is Equity Linked Savings Scheme or ELSS. It offers tax exemptions of up to Rs. 1.5 lakh annually under Section 80C of the Income Tax Act, 1961.

Can you lose your money in a mutual fund?

Mutual fund investments are vulnerable to volatile capital market conditions. However, not all mutual funds are exposed to the same risks. Short-term mutual funds generate comparatively higher returns while being exposed to high risks. On the other hand, medium to long term investments like debt mutual funds remain invested for a longer time and may not offer as much returns as equity funds, but they are susceptible to lower market risks. Expertise in mutual fund investments enable investors to switch between funds before inflation sets in. However, unpredictable inflationary effects lead to losses.

Do mutual funds pay dividends?

Yes, mutual fund investments paying dividends has become an emerging trend in the last couple of years. Fund houses pay dividend payoutsat regular intervalsto create a positive impression about their mutual fund. Further, Indian investors often equate mutual fund dividends with company dividends and interpret them as net gain. Besides, distributing dividends ina rising economy like India minimizes the risk of equity mutual fund schemes.

How do I choose a mutual fund?

Not all mutual funds are suitable for every investor. It depends on factors like existing fund performance and other parameters that are unique to every individual such as investment objective, risk appetite, etc.

How is expense ratio calculated?

The Total Expense Ratio or TER is calculated by dividing the totalexpense incurred for a mutual fund in a certain year by the total assets of the mutual fund averaged throughout that year. It is denoted in the form of a percentage.

How is the expense ratio charged?

The Total Expense Ratio (TER) is the evaluation of the total cost of a mutual fund incurred by the investor. The final charges may involve various fees for purchase, repurchase, auditing, redemption, etc.

Is demat account required for SIP?

No, you do not require to open a demat account for any mutual fund investment, including SIP. You only need to fill up and submit the KYC or Know Your Customer Form for investing in mutual funds. Demat accounts are compulsory for trading in the stock market.

What are the risks of MF investments?

One of the primary risks that mutual fund investments are exposed to are the fluctuations and volatility of capital market conditions. While certain inflationary situations can be foreseenand funds can be switched to safeguard the portfolio against risks, inflation sometimes can be unpredictable too.Another risk to mutual fund investment is investing in the wrong mix of diversified mutual funds. Investing in mutual funds of the same asset class, sector and company cap does not help in achieving the diversity that a portfolio requires to avert avoidable capital market risks. Lack of clarity in mutual fund policy document can be another risk, misleading investors regarding their salient features and benefits.

What are 80C, 80CCC and 80CCD?

The provisions laid down in Sections 80C, 80CCC and 80CCD of the Income Tax Act, 1961 are:

Section 80C – Under this section of the Income Tax Act, 1961, an investor can enjoy tax deductions of up to Rs. 1.5 lakh annually from his/her annual income on specific investments like mutual funds, PPF, LIC, etc.

Section 80CCC–This section of the Income Tax Act, 1961 focuses on tax deductions on premium paid towards certain annuity plans as referred to in Section 10(23AAB). Pension received from annuity or the amount received after surrendering the annuity plan, along with the interest or accrued bonus, is taxable on the year of receipt.

Section 80CCD – This section of the Income Tax Act, 1961 pertains to tax deductions eligible by individuals contributing towards pension accounts. The maximum deduction that can be availed is 10% of annual income for taxpayers who are salaried professionals and 20% of annual income for taxpayers who are self-employed, or Rs. 1.5 lakh, whichever is lesser. This section is further classified into two categories:

Section CCD(1B)–Under this section, additional deductions of up to Rs. 50,000 can be claimed by taxpayers on deposits made towards savings schemes like NPS (National Pension Scheme) account and Atal Pension Yojana.
Section 80CCD (2)–This section includes provision for additional deductions for employers contribution towards pension accounts of their employees and accounts for 10% of the employee’s salary. There is no maximum limit applicable on this deduction.

What is a good expense ratio?

The expense ratio of mutual fund varies from time to time, based on the performance of your fund in a year. It is the percentage of the number of assets that a fund house takes back in lieu of the services offered by it. Hence, the lower the percentage, the better it is for an investor.

What is a good ROI?

A good marketing ROI is considered to be 5:1. A ratio beyond 5:1 is considered to be a strong ratio for businesses, while a 10:1 ratio is exceptional. Achieving a ratio higher than 10:1 ratio is way beyond expectations though it can become a reality.

What is a good turnover rate?

Turnover rate for a mutual fund portfolio is measured on a scale between 0% and 100%. 0% turnover rate implies the holdings of the mutual funds have remained unchanged in the previous year. On the other hand, a rate of 100% indicates that the fund has a completely new portfolio that is different from what it was a year back. This is because all the funds in the previous portfolio have been sold and new investments have been made in its place. Certain very aggressive funds can have turnover rates even beyond 100%.

What is difference between MF and SIP?

A mutual is not a category of securities but rather a scheme that enables the purchase of securities. On the other hand, SIP or Systematic Investment Plan is a mode of mutual fund investments that enables investors to make premium payments in easy instalments as opposed to lump sum payments.

What is the 10-year average return that I can expect on the S&P 500?

The 10-year average return on the S&P 500 index return is generally 0.66%, more than returns on mutual funds over the same period of time.

What is the average rate of return?

The average 10-year return on mutual funds is about 0.66% lesser than the S&P 500 index return over the same tenure. For instance, if a mutual fund offers a return of 4.23%, the S&P 500 will generate an average return of 4.895%.

What is the average rate of return on a retirement account?

There are different types of retirement schemes that you can opt for and each of them has their own interest rates that vary from time to time. For instance, the interest rate for Senior Citizen Savings scheme is 8.7%, as per the Oct-Dec 2018 quarter, whereas it was 8.3%, according to the previous quarter of July-Sept 2018.

What is the total expense ratio?

The Total Expense Ratio (TER) is the percentage of the total expenditure made towards a mutual fund in a specific year to the total mutual fund assets averaged throughout that year.

When can I expect to receive the proceeds of the repurchase of my investment?

Regulated by government agencies like SEBI, it is mandatory for the MF to dispatch the dividend warrants to the investors within 30 days of the declaration of the dividend. Redemption or repurchase proceeds have to be dispatched within 10 working days from the date of redemption or repurchase request issued by the investor. If the fund house fails to dispatch these proceeds within the stipulated deadlines, they are liable to pay interest at the current rate of 15%, as per SEBI regulations.

What are some of the leading MF investments in India?

Here are some of the best performing fund houses:

Aditya Birla Sun Life Small & Midcap Fund
HDFC Monthly Income Plan – MTP
ICICI Prudential Focused Bluechip Equity Fund
Kotak Corporate Bond Fund
Canara Robeco Gilt PGS
DSP BlackRock Balanced Fund

What is the ideal scheme for a 19 year old investor?

It is always wise to start investing at an early age so as to gain good returns later. As a 19 year old investor who wants to inculcate the habit of saving with merely Rs. 1000-2000 per month, multi cap funds are a good idea. These funds offer the liberty to switch market caps depending on the situation of the market.

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