What is Mutual Funds Scheme

What is Mutual Fund

Mutual funds are pooled investments overseen by professional fund managers who make investment decisions on behalf of the investors, focusing on stocks, bonds, and government securities

How does an Mutual Fund work

Mutual funds gather capital from various investors to form a shared investment fund. Investors wishing to participate purchase units at the current Net Asset Value (NAV), which represents the per-unit value of the fund's net assets (total assets minus liabilities). For example, if securities are worth INR 150 lakh and 10 lakh units are issued, the NAV per unit is INR 15. Investors receive units in proportion to their investment and share profits and losses accordingly

Skilled Fund Managers oversee the investment process, they research and select the securities to build a diversified portfolio aligned with the fund's objective.

How do mutual funds work? How do Mutual Funds generate profits?

Mutual fund schemes define their investment objectives and accept funds from investors either for a limited time or continuously and these funds can earn returns in multiple ways :

1. The fund earns income through dividends or interest from the securities it holds in its portfolio.

2. The fund profits by selling securities at a higher price when their value increases.

Hence as value of underlying securities rises, the Net Asset Value (NAV) of the fund increases, and help investors to increase their values

Different categories of mutual funds available in India?

Popular categories of mutual funds include Equity, Debt, Hybrid and Other funds described below:

A. Equity Funds:

Large Cap Funds: These funds invest in the stocks of well-established companies that have stable earnings and significant market capitalization.

Mid Cap Funds: Invest in mid-sized companies with potential for growth.

Small Cap Funds: Invest in stocks of small-sized companies with potential for rapid growth, offering highest returns among equity funds but also has highest risk.

Sector Funds: Focus on specific sectors such as Banking, IT, Pharma, etc., aiming to capitalise on sector-specific growth opportunities.

Multicap Funds: These funds invest in a variety of stocks, including large-cap, mid-cap, and small-cap. They must allocate a minimum of 25% of their investments to each category. At least 75% of a multi -cap fund's assets must be invested in equity and equity-related instruments.

It offer diversification by spreading investments across various market capitalizations.

Flexi Cap Funds: mutual funds that have the flexibility to invest across large-cap, mid-cap, and small-cap stocks without any fixed proportion It allows fund managers to invest across all market capitalizations, depending on market conditions and available opportunities.

It provide flexibility to adjust investments according to market trends

Fund managers have complete freedom to choose stocks from any market capitalization, including large-cap, mid-cap, and small-cap companies.

At least 65% of a flexi-cap fund's assets must be invested in equity and equity-related instruments

Flexi-cap funds can be less volatile than multi-cap funds, especially during market downturns, but they can also be more volatile and may offer higher returns over time.

B. Debt Funds:

Liquid Funds: Invest in very short-term money market instruments, offering high liquidity and stability, period of Investment is 1 day to 3 months

Short Term Funds: Invest in bonds and other debt securities period of Investment is 1 to 3 years.

Medium Term Funds: invest in debt securities with a medium-term investment horizon, typically ranging from 3 to 5 years.

Long Duration Funds: Invest in bonds with longer maturity profiles, aiming for higher returns but carrying higher interest rate risk, period is 7 years or more.

Gilt Funds: Invest in government securities (gilts) issued by the central or state governments, offering low credit risk but subject to interest rate risk.

Ultra Liquid Fund: Invests in high-quality, short-term instruments like Treasury bills, commercial paper, maturity of the portfolio is typically less than 91 days

Corporate Bonds: debt securities issued by companies to raise capital, can range from short-term (less than 5 years) to long-term (more than 10 years),

C. Hybrid Funds:

Balanced Hybrid Funds: Maintain a balance between equity and debt ,as per general proposition followed by Funds are 60% Equity, 40% Debt.

Aggressive Hybrid Funds: Allocate more to equities than debt, , 65% to 80% are invested in Equity and 35% to 20% for Debt.

Conservative Hybrid Funds: Allocate more to debt than equities,Equity15% to 30%, Debt 85% to 70%.

D. Other Types

Fund of Funds (FoF): Invest in other mutual fund schemes rather than individual securities, providing diversification across mutual funds.

Tax-saving Funds (ELSS): Offer tax benefits under Section 80C of the Income Tax Act, primarily investing in equities.

Passive Funds: Passive funds are mutual funds that aim to replicate the performance of a specific index, such as the S&P 500 or Nifty 50, rather than trying to outperform it

Benefits of Mutual Fund

For investors, investing in mutual funds is one of most brilliant idea and systematic way to grow wealth

Professional Management : a mutual fund is managed by the professional manager who has the expertise and experience to actively buy, sell and monitor investments.

Low Cost : One significant benefit of mutual funds is their affordability. Thanks to substantial economies of scale, mutual fund schemes typically have a low expense ratio.

Well-Regulated : Mutual funds are overseen by the Securities and Exchange Board of India (SEBI), which regulates them under the SEBI (Mutual Funds) Regulations, 1996.

SEBI (Securities and Exchange Board of India) regulates mutual funds in India. SEBI is responsible for setting the rules, guidelines, and regulations that mutual funds must follow to ensure transparency, protect investors, and maintain market integrity.

AMFI (Association of Mutual Funds in India), on the other hand, is a self-regulatory organisation that promotes the interests of the mutual funds india, ensures ethical standards, and educates investors, but it does not have regulatory authority like SEBI

Liquidity : "You can redeem units of open-ended mutual fund schemes on any business day when the markets are operational." Redemption proceeds are typically credited to your bank account within 1 to 3-4 business days.

Portfolio Diversification: Access to a diversified portfolio across various asset classes.

Tax Benefits: Tax advantages, especially with Equity Linked Savings Schemes (ELSS), where one can get deduction from income under 80C upto Rs 1.5 Lac

How does investments in mutual fund impact our economy? After COVID, there was a rapid increase in mutual fund investments. What is your view on this change?

Investments in mutual funds positively and significantly impact our economy. They provide companies with capital to grow and expand, which can lead to job creation and economic development.

After COVID-19, many people started investing in mutual funds more actively, possibly due to increased savings and a search for better returns.

Strong 132% growth happened in mf investments. Monthly ~23K crore is pumped into mutual fund and this create liquidity and domestic demand for stocks - The dependencies of FIIs have also reduced

This surge in investments helps fuel economic recovery by channelling money into businesses and financial markets, supporting economic growth and stability

Tax Treatment for Mutual Funds

Taxes on mutual funds depend on the type of scheme and holding period:

Equity Funds: Investments held for over 12 months are tax-exempt up to ?1.25 lakh per annum; gains above this are taxed at 12.5% without indexation.

Non-Equity Funds: Investments held for over 3 years are considered long-term and taxed at 20%.

Short-Term Gains: Taxed at the investor’s applicable slab rates.

ELSS: Under the old tax regime, investments qualify for a tax deduction of up to ?1.5 lakh under Section 80C of the Income Tax Act

Securities Transaction Tax (STT)

An STT of 0.001% is imposed by the Ministry of Finance when you choose to buy or sell units of an equity fund or a hybrid equity-oriented fund. However, there is no STT applied to the sale of debt fund units.

What are the returns from Mutual Fund

Returns from mutual funds are influenced by several key factors:

Market Conditions: Performance of the stock or bond markets affects mutual fund returns, with bull markets generally leading to higher returns and bear markets potentially causing losses.

Asset Allocation: How a fund divides its assets among stocks, bonds, and cash affects returns, as different allocations carry varying levels of risk and potential return.

Investment Strategy: The chosen strategy (e.g., growth, value, income) influences returns, each with its own risk-return profile.

Fund Manager Expertise: The manager's skill in selecting investments and managing the portfolio contributes to fund performance.

Top 3 mutual funds in india (As on 30th Jul’24) :

Schemes	Return(1Year)	Return(3Year)	Return(5Year)
Nippon India Small Cap Fund - Direct Plan - Growth	59.9	34.3	36.7
Edelweiss Mid Cap Direct Plan-Growth	54.7	26.3	28.7
HDFC Small Cap Fund Direct- Growth	49.4	26.9	32.5

Risk factors

1) There are multiple risks associated with scheme which are captured in Scheme Information Document (SID) in detail for each scheme.

2) Risk in Mutual funds are divided into Systematic and Unsystematic Risks

3) Systematic/Market Risk : This refers to the inherent risk that affects the entire market or a broad segment of it. This risk stems from external factors beyond any single company's control and cannot be mitigated through diversification alone

Market Risk: Potential for investments to decrease in value due to broader economic changes affecting the entire market.

Inflation Risk: Risk that investment returns may not keep pace with inflation, reducing purchasing power.

Interest rate risk: The value of underlying securities can fluctuate based on interest rates. For example, if interest rates increase, the value of a bond decreases.

Credit risk: This risk is linked to bonds that fail to make their payments. Credit rating agencies rate bonds based on their risk level.

4) Unsystematic/Specific Risks : risk associated with a particular company or industry. It arises from factors that are unique to a specific company or industry and can be mitigated through diversification

Business Risk: Risk linked to company-specific factors, like management decisions or competitive shifts.

Management Risk: Risk associated with the mutual fund manager's decisions potentially leading to lower returns.

Other risks include: Liquidity risk, Stock or sector concentration, and Financing risk.

5) Investors can try to minimize risk by diversifying across sectors and asset types.

Mutual Fund Recommendation

Best mutual funds in india

Category:

Large Cap Funds

Scheme	AUM(cr)	Expense Ratio(%)	Return (1 Year)	Return (3 Year)	Beta	Fund Manager
ICICI Prudential Bluechip Fund	59,364	0.9	41.2	23.0	0.88	Anish Tawakley , Vaibhav Dusad , Sharmila Dmello
HDFC Top 100 Fund - Growth	35,453	1.04	37.0	22.6	1.04	Rahul Baijal
Nippon India Large Cap Fund	29.533	0.75	42.0	26.6	0.99	Kinjal Desai, Ashutosh Bhargava, Sailesh Raj Bhav

Category:

Mid Cap Funds

Scheme	AUM(cr)	Expense Ratio(%)	Return (1 Year)	Return (3 Year)	Beta	Fund Manager
HDFC Mid-Cap Opportunities Fund - Direct Plan - Growth	70,569.7	0.76	54.62	30.8	0.9	Dhruv Muchhal , Chirag Setalvad
Kotak Emerging Equity Fund - Direct Plan - Growth	49,023.2	0.38	56.6	26.93	0.81	Arjun Khanna , Atul Bhole
Motilal Oswal Midcap Fund - Direct Plan - Growth	12,627.6	0.65	69.35	40.36	0.83	Niket Shah , Sunil Sawant

Small Caps

Scheme	AUM(cr)	Expense Ratio(%)	Return (1 Year)	Return (3 Year)	Beta	Fund Manager
Nippon India Small Cap Fund - Direct Plan - Growth	51,566.1	0.68	64.33	42.3	0.86	Samir Rachh
Axis Small Cap Fund - Direct Plan - Growth	20504.37	0.55	42.24	22.39	0.67	Tejas Sheth , Mayank Hyanki , Krishnaa N
Tata Small Cap Fund - Direct Plan - Growth	7867.7	0.34	48.97	29.87	0.75	Chandraprakash Padiyar , Jeetendra Khatri

Flexi Cap

Scheme	AUM(cr)	Expense Ratio(%)	Return (1 Year)	Return (3 Year)	Beta	Fund Manager
Parag Parikh Flexi Cap Fund - Direct Plan - Growth	66383.8	0.62	40.08	20.89	0.73	Mansi Kariya , Rajeev Thakkar , Raunak Onkar , Rukun Tarachandani , Raj Mehta
HDFC Flexi Cap Fund - Direct Plan - Growth	54692.1	0.79	46.2	28.33	0.88	Dhruv Muchhal , Roshi Jain
Franklin India Flexi Cap Fund - Direct - Growth	15468.09	0.96	47.66	24.45	0.94	Rajasa Kakulavarapu , Sandeep Manam , R. Janakiraman

ELSS

Scheme	AUM(cr)	Expense Ratio(%)	Return (1 Year)	Return (3 Year)	Beta	Fund Manager
SBI Long Term Equity Fund - Direct Plan - Growth	25738.08	0.94	59.18	29.4	0.92	Dinesh Balachandran
DSP ELSS Tax Saver Fund - Direct Plan - Growth	16283.7	0.75	49.93	22.9	0.95	Charanjit Singh , Rohit Singhania
Kotak ELSS Tax Saver Fund - Direct Plan - Growth	5768.5	0.58	44.06	23.59	0.96	Harsha Upadhyaya

HYBRID FUND

Scheme	AUM(cr)	Expense Ratio(%)	Return (1 Year)	Return (3 Year)	Beta	Fund Manager
ICICI Prudential Equity & Debt Fund - Direct Plan - Growth	35122.02	1.02	40.16	25.66	1.01	Sri Sharma , Sharmila Dmello , Sankaran Naren , Manish Banthia
HDFC Childrens Gift Fund - Direct Plan	9018.6	0.92	29.94	19.09	1.66	Chirag Setalvad, Rakesh Vyas
UTI Aggressive Hybrid Fund - Direct Plan - Growth	5511.9	1.27	34.12	19.15	1.4	V Srivatsa , Sunil Patil

Index funds india

Scheme	AUM(cr)	Expense Ratio(%)	Return (1 Year)	Return (3 Year)	Beta	Fund Manager
HDFC Index Fund Nifty 50 Plan Direct -Growth	?18,127	0.2%	34.14%	14.7%	0.9	Nirman Morakhia , Arun Agarwal
UTI Nifty 50 Index Fund Direct-Growth	?19,848	0.1	34.43%	14.7%	0.9	Sharwan Kumar Goyal , Ayush Jain
ICICI Prudential Nifty Next 50 Index Fund	? 6863	0.3	70.87%	21.8%	0.8	Ajaykumar Solanki , Priya Sridhar , Nishit Patel

FAQ

What factors should I consider before investing in a mutual fund?

Evaluate Fund Performance

Size and Age of Fund : If the size of fund is reasonably big can be relied on better than other funds.

Credibility of fund Manager: Skill, experience, track record of past performance of fund managers are critical evaluation factors

Historical Returns: Review the fund's past performance over various periods (1 year, 3 years, 5 years, etc.).

Consider these factors before investing in good mutual funds in india

How do I choose the right mutual fund scheme for my investment goals?

Investment Goals

Purpose: retirement planning, education funding, or wealth creation, determines the selection of the fund. Equity funds can be chosen for long term, Liquid Funds are preferred for very short-term money needs

Time Horizon: Consider the time period you intend to hold the scheme (short-term, medium-term, long-term). Different funds are suitable for each duration.

Risk Tolerance

Risk Appetite: Assess willingness and ability to handle fluctuations in investment value.

What is the minimum amount required to invest in a mutual fund?

Range from ?1000 to ?5,000 for a lump sum investment, Systematic Investment Plans (SIP) amounts are generally more affordable, starting as low as ?100 to ?500 per month

How can I invest in mutual funds in India?

Open an Investment Account:

Online Investment Platforms: Use platforms like ORCA which offers state-of-art trading platform for mutual funds

Direct Investment in Fund House : By creating a login and direct investments in fund house’s website or app

Complete KYC (Know Your Customer) Process:

Mandatory to complete KYC before investing.

Complete the Application Process:

Fill out the application form with personal and bank details. Choose the mutual fund scheme and investment mode (lump sum or SIP).

For lump sum investments, transfer the investment amount via net banking, cheque, or demand draft.

For SIPs, set up an auto-debit mandate from your bank account

What are the costs associated with investing in mutual funds?

Expense Ratio : An annual fee assessed to cover the operating expenses of the fund.

For example, a 1% expense ratio means 1% of the fund's assets are used annually for expenses. In India, expense ratios are flexible but must adhere to SEBI's prescribed limits.

SEBI regulations prohibit entry loads, so investors pay distributor fees from the fund's expense ratio. The total cost to investors stays within SEBI's limits

Exit Load (Back-End Load) A fee charged when investors redeem units of a mutual fund within a specified period. Generally, it ranges from 0.5% to 2%.

Transaction CostsPlatform Fees: Fees charged by online investment platforms for facilitating transactions.

What is the difference between growth and dividend options in mutual funds?

Growth Option In the growth option, any profits earned by the mutual fund are reinvested into the scheme, Investors benefit from compounded growth as their investment grows over time.

Dividend Option Dividends are typically distributed monthly, quarterly, semi-annually, or annually, depending on the fund’s policy.

What is an SIP (Systematic Investment Plan)? How does it work?

A Systematic Investment Plan (SIP) is a structured method for investing in mutual funds, enabling investors to contribute a consistent amount on a regular basis.

How SIP Works Investors commit to investing a fixed amount (as low as ?500) regularly into a mutual fund scheme. Contributions are automated through standing instructions with the investor’s bank account

What is an SWP (Systematic Withdrawal Plan) and STP(Systematic Transfer Plan)? How does it work?

SWP allows investors to periodically withdraw a predetermined amount or units from their mutual fund investments.SWP centres on maintaining a steady stream of withdrawals to meet financial needs

How SWP Works: Regular Withdrawals: Investors specify intervals monthly amounts/units to withdraw, aligning with financial needs like retirement income.

STP(Systematic Transfer Plan)

An STP allows investors to systematically move a predetermined sum or a specified number of units from one mutual fund to another within the same fund family. Investors usually use STPs to gradually shift funds from a debt mutual fund to an equity mutual fund. Objective: To mitigate market volatility by spreading out investments over time, aiming to optimise returns and reduce risk .

What is the role of a mutual fund distributor or advisor?

Mutual Fund Distributor

- A mutual fund distributor acts as a middleman, assisting investor, good mutual funds to invest in india,ensuring compliance with regulatory requirements.

- Earns compensation through commissions or fees for their assistance.

Investment Advisor

An investment adviser provides counsel to clients on investing in securities such as stocks, bonds, mutual funds. Some advisers also oversee portfolios of securities.

How can I track the performance of my mutual fund investments?

Monitoring your mutual fund portfolio is essential for managing your investments effectively.

Online Portfolio Trackers: They provide insights into fund performance trends and may suggest alternative funds if needed.

AMC Websites: While AMCs provide portfolio information, using their websites can be time-consuming for multiple fund investments by different fund houses

Can I switch between mutual fund schemes? Is there any cost involved?

Process: Investors can transfer investments from one mutual fund scheme to another within the same fund house, This can be executed online via the fund house's website or offline through a switch request form.

Cost: Additional switches may incur a small fee, varying by fund house and specific mutual fund scheme, amount varies but can range from ?50 to ?100 per switch.

How often should I review my mutual fund portfolio?

Annual Evaluation: Conduct a thorough yearly assessment. Analyse how your funds have performed, reassess how your investments are distributed across different assets, and determine if any changes needed in your portfolio.

What should I do if I need to redeem my mutual fund units?

Step (1)

Online Redemption Request ,Access your mutual fund account by logging into the online platform provided by your mutual fund company, broker, or financial intermediary

Step (2)Redemption Form: Obtain a redemption form from the mutual fund company's website, or request it from your financial advisor. Fill it out accurately.

Step (3)Submission: Submit the application form, along with the necessary KYC documents, to the nearest branch of the fund house.

Step (4)Processing Time: Mutual funds usually process redemption requests within 3-7 business days. The redemption proceeds are typically deposited into your registered bank account during this time.

Where can I find additional information and resources about mutual fund investments in India?

To find additional information and resources about mutual fund investments in India, consider the following sources:

1. Websites of Mutual Fund Companies

2. SEBI (Securities and Exchange Board of India)

3. AMFI (Association of Mutual Funds in India): website offers resources on mutual fund basics, investor education, and industry news.

What is meant by direct plan and regular plan ?

Investors can purchase mutual funds via a financial intermediary by opting for a Regular Plan.

Invest directly with the fund house in a Direct Plan by not involving financial intermediary or distributor.

Direct plans have lower expense ratios because they don't involve distributor fees, resulting in a higher NAV compared to Regular Plans.

Both plans have the same portfolio and fund manager but differ in expense ratios due to distribution costs.

What is growth scheme and ICDW scheme ?

Growth

Profits are reinvested in the scheme, which can lead to higher returns over time due to compounding. The NAV of the growth option reflects the reinvested profits, and investors are taxed on the gains when they redeem their units.

IDCW

A portion of the profits are distributed to investors as regular income payments. This can reduce risk during market volatility and provide higher liquidity, as investors can access their money at any time.

However, IDCW can lead to lower returns than growth, and investors are taxed on the reinvested income as it's added to the scheme

What is a folio number and What is an Account Statement?

A Folio Number is your unique account number in a mutual fund house, recording all your unit holdings. Most mutual funds use a Master Folio for consolidated and easier management

The Consolidated Account Statement (CAS) provides details on your mutual fund holdings, including scheme name, investment amount, purchase price, units allotted, bank details, contact information, and nominee details.

It is issued monthly, with individual statements available upon request

When does the investor get an account statement after investing in a mutual fund?

- Mutual funds must issue account statements within five working days after the initial subscription close

- For close-ended schemes, investors receive a demat account statement as they are traded on stock exchanges.

- AMCs must confirm the number of units allotted via email and/or SMS within five working days of subscription closure or request receipt.

Can I add an additional name as joint holder in an existing Folio? Can an investor appoint a nominee for his investment in units of a mutual fund?

All mutual funds have provided a facility to the clients to hold units in demat mode from the demat account of the sole holder to the desired demat account held in multiple names through an off-market transaction.

. Every mutual fund scheme is assigned a unique ISIN, as required by SEBI, to simplify the dematerialization of units.

Yes, all mutual funds offer a nomination option for individual investors.

In case of joint holding in mutual fund - whether any holder of mutual fund need to be holder of bank account

The first holder in the mutual fund folio must be one of the joint account holders in the registered bank account, although they do not need to be the primary holder of that account.

AMCs and RTAs are required to verify mutual fund investors' bank accounts, typically using a "penny drop" method through IMPS. Currently, IMPS validation is only possible for the first holder in the account. For other holders, investors need to provide additional proof, such as a cancelled cheque, bank passbook, or bank statement, to verify the account.

How much time does it take to get my money back i.e., repurchase proceeds?

Redemption or repurchase proceeds must be sent to unitholders within three business days.

For schemes with at least 80% of assets in overseas investments, the period is extended to five working days. If there is a delay beyond these periods, the AMC must pay interest at 15% for the additional delay.

If mutual fund scheme is wound up, what happens to investors’ money?

In the event of a scheme's winding up, mutual funds will refund unitholders, whose names are listed in the Unit Holders’ Register, the value of their outstanding units at the current NAV, after accounting for all expenses. Unitholders are also entitled to receive a report regarding the winding up from the mutual fund, containing all essential information.

I wish to gift my units in mutual funds to my children. Can I do this by executing a Gift Deed for this purpose?

Mutual Fund units cannot be transferred through a Gift Deed.

The person desirous of gifting the units may either bequeath the units to the person whom she/he wishes to gift through a Will or transfer the units through Demat mode (not physical mode) via an off-market transaction in the transferee’s De-mat account.