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Mutual Funds: Dummies’ Guide to Mutual Funds in India

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Are you planning to diversify your portfolio by investing in Mutual Funds? Is the ocean of choices weighing heavy on your mind and stopping you from investing in Mutual Funds?

When it comes to mutual funds, we Indians are spoiled with choices. Thus, selecting the right one according to your needs is always a daunting task, until you follow the key points. If you focus on these key factors to select and decide about your fund choice, you can expedite your investment decisions.

In case of mutual funds, you can always rely on your professional financial advisor, but a little knowledge wouldn’t hurt.

What are Mutual Funds?

A mutual fund is a type of financial tool where an Asset Management Company (AMC) collects money from a bunch of people and invests it in securities like bonds, stocks, and other securities. Each shareholder for a fund proportionately participates in the profits and losses of the fund.

Mutual funds provide individual investors access to efficiently managed and diversified portfolios. Whenever you buy a mutual fund, you are allotted units. The Number of units represents your portion of holdings. You can purchase or redeem these units on that day’s Net Asset Value (NAV) for the fund. NAV, for a particular fund, fluctuates every working day, depending on the market movement.

The Securities and Exchange Board of India (SEBI) governs all activities related to the Indian security and commodity market. This includes India-based mutual funds as well. To safeguard investor’s interests, SEBI has come up with a set of rules and regulations for AMCs to comply with. If you think AMCs can loot your hard-earned money, you can’t be more wrong.

Development of Mutual Funds in India

Unit Trust of India (UTI) is the first Indian company to deal with MF. It was set up back in 1963 as a joint venture between GOI and RBI.

UTI’s monopoly in the MF business ended in 1987 when SBI became the first Public Sector Bank to set up a mutual fund arm. During this period, SEBI was also established, which later became an autonomous body in 1992.

It wasn’t until 1993, private sector companies entered the market. Kothari Pioneer (now Franklin Temptation) became the first private sector MF operator in July 1993. Other private sector players quickly followed suit. Presently 49 registered AMCs are operating in India.

How Do Mutual Funds Work?

As you’ve already learned, mutual fund service providers pool money from multiple sources and invest the whole corpus in shares, government bonds, short-term money market instruments, and other securities.

When an AMC launches a new fund, it’s known as New Fund Offering (NFO). With the help of advertising, the AMC will spread the news to potential investors. Interested investors have to subscribe to the NFO by submitting application money. This acts as the initial capital to buy securities.

If the investments generate profit, it will take the NAV upwards, thus investors earning returns on investment. The NAV will go down if the investments made by a fund perform poorly. Apart from a few close-ended funds, investors always have the choice to pull out his investment at any point of time by redeeming the units.

What is AMC? & Other Stakeholders in MFs

An Asset Management Company (AMC) is a firm pooling investment from individual and institutional investors. The company then invests the pooled corpus in capital assets in order to generate a return on investment.

Every AMC employs professional fund managers backed by large research teams. Their job is to identify investment options with a good return prospective.

Securities & Exchange Board of India (SEBI)

SEBI is the apex regulator of any security transactions in India. SEBI provides the compliance framework for the operation of mutual funds in India and keeps an eye on their activities. As an apex regulator SEBI is responsible for investor safety from fraudulent practices in the market.

Sponsor, Trustees & Asset Management Company (AMC)

Sponsor is the promotor of any mutual fund house and provides the liquidity and capital to start the fund. Sponsor appoints Trustees and empowers them to appoint AMC as per the established (and approved) charter. AMC is responsible for the hiring and commencing the operations of the mutual fund. From designing the individual schemes, hiring fund managers and other parties for the operations fall under AMCs responsibilities.

Registrar & Transfer Agents & Custodian

Registrar and transfer agents are responsible for registering and maintaining customer activities in the fund. In other words, if you want to invest in a mutual fund, you submit your application to one of the two R&T agents – Karvy or CAMS in India.

Custodians on the other hand keep the assets of the funds safe from any unauthorized activity. So, whatever stocks, bonds or units the AMC purchases on your behalf stays with the custodian and not with the AMC.

Fund Managers

Fund managers are the guide for any scheme. One AMC could have multiple fund managers and one fund manager can manage multiple schemes at the same time. Fund managers are usually highly skilled, qualified and experienced investment managers. They are responsible for invest, hold, withdraw decisions of the scheme and backed by an extensive team of professionals.

Distributors

Distributors are the last mile connect for the mutual fund. These are financial advisors who will help you choose a suitable mutual fund scheme.

Association of Mutual Funds in India

AMFI works as a self-regulatory body of Mutual Funds in India, under SEBI’s guidance and overwatch. AMFI is responsible for regulating and guiding conducts of mutual funds in India.

Different Types of Mutual Funds and Their Advantages

Based on the nature of the investment, mutual funds can be classified into three types mainly: Equity Schemes, Debt Schemes, and Hybrid Schemes. Equity-based mutual funds are by far the most popular choice and can be further classified into 11 categories.

Fund TypeMF Intro & Risk ProfileWhy Invest
Equity FundsInvests up to 95% of portfolio in equity stocks of listed companies. Can have classifications based on market cap, sector, or geographical location of businesses.

Risk: Considered highly risky due to market volatility
Investor: Recommended for only aggressive investors
Investment Horizon: 5 years or more.
Wealth generation & Long-term growth
Debt FundsInvests up to 95% of the portfolio in fixed income securities such as govt and corporate bonds, debentures, commercial papers, short-term debt, T-bills, money market instruments

Risk: Varies largely based on the type of fixed income assets, but usually enjoys lower volatility than equity funds
Investor: Anyone can invest, however, should select carefully and match risk profile of the fund with their own
Investment Horizon: Starts from 1 year, however for best tax treatment consider min. 3 years
Stable portfolio growth, more peace of mind with better returns than traditional investments
Liquid FundsInvests up to 95% of their portfolio in ultra-short-term debt securities like treasury bills, commercial papers and money market instruments

Risks: Very Low
Investor: Any
Investment Horizon: Less than 1 year
Investment is highly liquid with short-term maturity period. Consider an alternative to savings account with better returns.
Fund of FundsThis type of funds invests in other mutual funds and hedge funds. Fund of Funds may often provide exposure to investments usually unavailable for direct investments to Indian investors. Such as – international mutual funds, or indices

Risk: Depends on the type of mutual funds they are investing. However, considered riskier than the equity funds
Investor: Highly aggressive investors who understand foreign currency conversion risks
Investment Horizon: May vary vastly based on the type of funds in the portfolio and fund objective
Gives better market exposure while limiting the risks
Balanced FundsCan invest anywhere from 40% to 95% in equities while the remaining in long and short-term debt. These funds have dynamic asset allocation and keep changing the balance based on market factors.

Risk: Lower than equity mutual funds but higher than most safe debt and liquid funds.
Investor: Recommended for young aggressive investors
Investment Horizon: 3 years plus
These funds can be very useful in scaling wealth ladder with their dynamic asset allocation.

5 Reasons Why Should You Invest in Mutual Funds

#1 Portfolio Diversification

Mutual funds provide exposure to a variety of stocks and fixed income instruments. For example, if you buy shares worth Rs 500, you’ll get one of two inventories. But when you invest that money through an MF, you’re spending the same amount in several stocks and other securities.

#2 Flexibility in Investment

Investment in mutual funds starts as low as Rs 500. You can build your portfolio over time through a Systematic Investment Plan (SIP). Also, if you have any idle cash, you can invest it in MF as a lump sum investment. Lumpsum investment starts from Rs 5000 only.

#3 Professional Fund Management

Fund managers and business analysts, working in an AMC, wake up every morning with one goal – to research, study, and analyze potential holdings for the fund’s corpus. They use all their resources to determine which stocks can generate a decent profit in the near future.

#4 High Liquidity

To meet your urgent financial needs, you can sell your MF holdings at any point in time. The money will hit your bank account within two days of redemption. Some funds even do instant credit. They send the cash your way within a couple of minutes. 

#5 Choose from a Wide Range of Funds

We have discussed this part in the previous segment. Depending on your risk-taking capability, you can select a fund that suits your needs. You can also opt for sector-specific funds, tax savings funds, and dividend-paying funds. In a nutshell, there’s a fund for everyone.

How to Buy Mutual Funds in India?

Mutual funds can be brought through online and offline mediums. However, before investing in any MF, you have to register yourself as a client by filling up SEBI’s Know Your Customer (KYC) questionnaire. You can complete the whole KYC procedure online with any five SEBI-registered KYC Registration Agencies (KRA). Here’s the checklist for KYC completion.

  • Valid proof of identity i.e., Pan card
  • Valid proof of address i.e., Aadhar card, Voter’s identity card, etc
  • Personalized cancelled cheque
  • Passport-sized photograph
  • Net banking enabled bank account

How to Buy Mutual Funds Online?

Once your KYC application is verified by SEBI, you can start purchasing MFs online. Here’s how it can be done.

  1. Select a specific fund first and go to their website
  2. Create an account with the AMC of your selected fund
  3. Now choose your desired scheme and select the plan type as Direct. After selecting a Direct plan, you will get the Growth and Dividend option. Choose the option that matches with your financial goal
  4. Then, you will have to fill out some additional information like investment amount, investment type, nature of holding, investment adviser code, mode of payment and bank account details
  5. After submitting all this information, you’ll be redirected to the payment gateway page. Process the online payment successfully to complete your online MF purchase

How to Buy Mutual Funds Offline?

If you’re not so tech-savvy and wants investment to be made in traditional ways, you can choose the following offline modes for mutual fund investment.

  • By Visiting AMC Office: If you want a direct scheme for yourself, you can visit the AMC office. There you’ll have to fill up the common application form along with submitting necessary documents. If you’re investing through SIP, submit your mandate form to enable AMC for auto-debit from your bank account.
  • Through a Mutual Fund Advisor: If you need guidance in choosing the right fund for yourself, you can take the help of a mutual fund distributor. He or she will help you with documentation as well as selecting the best fund catering to your needs.

You can benefit from professional management of investment using mutual funds as investments. Select mutual funds as per your risk appetite and enjoy long-term growth in your wealth while you build your life.

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