Guide to Mutual Funds

Published on: Thu Jun 15 2023

In the rapidly evolving world of investment, mutual funds have become a popular choice among Indians looking for avenues to grow their wealth. They offer an attractive blend of diversification, professional management, and flexibility, making them a viable investment option for both seasoned and novice investors. This blog will elucidate the concept of mutual funds, their types, benefits, risks, taxation and will help demystify the investing process using examples.

Understanding Mutual Funds

A mutual fund is a financial vehicle that pools money from numerous investors to invest in a diversified portfolio of assets. These assets may include equities, bonds, money market instruments, or a combination thereof. A mutual fund is managed by professional fund managers who meticulously analyse the market trends and economic conditions to make investment decisions.

Each investor in a mutual fund owns 'units', which represent a portion of the holdings of the fund. The performance of the underlying assets, in turn, determines the profit or loss of investors.

Types of Mutual Funds in India

Mutual funds in India can be broadly classified based on structure, asset class, and investment objectives.

Structure-Wise:

Open-Ended Funds: These funds are available for subscription and redemption on a continuous basis. They offer high liquidity as investors can buy or sell units at any time at the prevailing Net Asset Value (NAV).

Close-Ended Funds: These funds have a stipulated maturity period, typically ranging from 3 to 15 years. Investors can subscribe only during the initial offer period.

Asset Class-Wise:

Equity Funds: These funds invest predominantly in stocks. They have the potential for high returns but are associated with higher risk.

Debt Funds: They invest in fixed-income securities like government bonds, corporate bonds etc. Debt funds are generally less risky than equity funds and provide regular income to investors.

Hybrid Funds: These funds invest in both equities and debt, offering a balance between risk and returns.

Investment Objective-Wise:

Growth Funds: They primarily aim for capital appreciation over the long term.

Income Funds: These funds focus on providing regular income to investors.

Liquid Funds: They aim at providing liquidity and preserving the capital of the investors.

Benefits of Mutual Funds

Diversification: By investing in a range of assets, mutual funds help to spread the risk. A slump in one sector or company's performance may be offset by gains in another.

Professional Management: Mutual funds are managed by seasoned professionals who bring their expertise to table, taking the onus of research and decision-making off the investor's shoulders.

Affordability: Mutual funds allow investors to start investing with small amounts, thus, making it affordable for retail investors.

Liquidity: Open-ended mutual funds provide high liquidity as they can be bought or sold at any time.

Risks in Mutual Funds

While mutual funds come with several benefits, they are not without risks. Market risk, interest rate risk, credit risk, and liquidity risk are some risks associated with mutual funds. It is crucial for investors to understand these risks and align them with their risk tolerance.

Taxation of Mutual Funds in India

The tax treatment of mutual funds in India varies based on the type of fund and the holding period. Equity funds held for more than a year are subject to Long Term Capital Gains (LTCG) tax of 10% on gains above Rs.1 lakh. Short-term capital gains are taxed at 15%. For debt funds, LTCG tax is 20% with indexation if held for more than three years, and the gains are added to the income and taxed as per the income slab for holding periods less than three years.

Example of Investing in a Mutual Fund

Suppose Mr. Sharma invests Rs. 5,000 per month in an Equity Mutual Fund via Systematic Investment Plan (SIP) for 20 years. The average annual return is 12%. At the end of 20 years, his investment of Rs. 12 lakhs (Rs. 5000 * 12 * 20) would have grown to approximately Rs. 49 lakhs, thanks to the power of compounding and the returns generated by the fund.

Mutual funds offer an excellent investment avenue to achieve various financial goals. However, understanding their working, benefits, risks, and taxation is crucial before investing. It's also essential to assess your risk profile, investment horizon, and financial goals to choose the right mutual fund. Whether you're saving for a new house, your child's education, or retirement, there's a mutual fund out there that can help you reach your financial goals.

Below is a list of some renowned mutual fund houses in India:

HDFC Mutual Fund: HDFC Asset Management Company Ltd (AMC) is one of the leading AMCs in India, known for its robust portfolio of funds that span across sectors and risk profiles. Some popular funds managed by this AMC include HDFC Balanced Advantage Fund and HDFC Equity Fund.

ICICI Prudential Mutual Fund: ICICI Prudential AMC is among India's top mutual fund houses. The company offers a plethora of investment options catering to the diverse needs of investors. ICICI Prudential Bluechip Fund and ICICI Prudential Balanced Advantage Fund are among its popular offerings.

SBI Mutual Fund: SBI Mutual Fund is one of the largest Indian AMCs, backed by the State Bank of India, India's largest lender. Some popular schemes under this AMC include SBI Bluechip Fund and SBI Equity Hybrid Fund.

Aditya Birla Sun Life Mutual Fund: This AMC is known for its diverse range of mutual fund schemes. The company offers a variety of fund categories, including equity, debt, hybrid, sectoral, and thematic funds. Aditya Birla Sun Life Frontline Equity Fund and Aditya Birla Sun Life Tax Relief 96 are some of their notable schemes.

Kotak Mahindra Mutual Fund: Kotak Mahindra AMC offers a variety of mutual funds, including equity, debt, balanced, and thematic funds, among others. Some well-known funds include Kotak Standard Multicap Fund and Kotak Corporate Bond Fund.

Axis Mutual Fund: Axis AMC, part of the leading private sector bank Axis Bank, offers a wide variety of funds catering to different investor needs. Its flagship Axis Bluechip Fund is quite popular among investors.

Reliance Nippon Life Asset Management (RNAM): RNAM is one of the largest asset management companies in India. The company offers a diverse range of mutual funds across different asset classes.

Remember, the performance of a mutual fund depends on the fund manager's expertise, economic conditions, and market trends. Therefore, it is recommended to thoroughly research and consider your financial goals and risk tolerance before investing. Please consult with a financial advisor or conduct your own research to get the most up-to-date and relevant information.

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