Mutual fund investments are capable of creating wealth for you in the longer run. It is one of the good alternatives available to us for investment. Also, it is true that money cant buys everything for you. And at the same time, it is also true that it is the only medium which can help you achieve your monetary needs which in turn helps achieve and accelerate happiness. Your happiness as well as the happiness of the whole family. However, the major problem is how to choose among the variously available jungle of mutual funds scheme. To make the things easy let us start with the most common issues which any investor faces while selecting a right mutual fund scheme for a right purpose. After that each class of mutual fund schemes, I will explain briefly so that you will be in a position to pick a right one according to your need. So enjoy reading.
Mutual fund investing! Have you tried it?
It is a common problem for both, a novice and professionals, where to put their hard earned money so that their money should remain safe as well as investments grow. And mutual funds scheme is one of the various alternatives available to an individual in India. The various schemes of mutual funds are designed to cater the need of every aspect of investors, whether it is for the long-term or for the short-term or mid-term purpose. These different schemes also keep in mind the investment capacity of the investment community. So even a low earner can start investing with as little as Rs.500 per month. In this blog article, I am going to answer some of the most common and frequently sought for questions relating to investment in any mutual fund scheme.
The most common type of questions asked by any new investors is –
What is Mutual Fund?
What are types of Mutual funds?
Which is suitable for me?
What is the risk of losing money?
How much return will I get?
What is the lock-in period?
Answering the above questions, I have come up with very basic and simple writing. After finishing the reading of this blog you will equip yourself with the knowledge of various available alternatives in mutual fund investment. Also, with this, you will take an informed decision before making any actual investment.
What is mutual fund?
Mutual Funds are the pool of money collected from investors by fund house and investing the money in the different class of assets mainly stocks, bonds, gold etc. and the returns generated from these assets will be distributed to investors.
Types of mutual fund scheme
Classification based on investment style
There are mainly 3 types of mutual funds based on investment style.
Open-Ended, Closed-ended and Interval fund based on the constitution.
Classification based on asset type
There are broadly 4 categories of Mutual funds based assets selected for investing
Equity Fund, Debt Funds, Balanced Fund and Gold Funds
All the classifications are explained in detail below.
Open-ended mutual fund schemes
This fund is open to investments and redemption. Investors can invest at any point of time and withdraw when they needed. No restrictions are there. Few ELSS funds are also an open, but they have the lock-in period. Which will be discussed later in this series. SIP is possible only in open-ended funds. SIP stands for Systematic Investment Plan.
Close-ended mutual fund scheme
This fund is open for investments only during New Fund Offer period (Fund launch time). The later investor can neither invest in this fund nor he can withdraw. However, the investor can choose to withdraw or switch to other funds after the lock-in period. Usually, close-ended funds will have 3 years of the lock-in period. Few funds will have 5 years of the lock-in period. SIP is not allowed in close-ended funds
For example, “HDFC Housing Opportunities Fund” it is a close-ended fund. It is open for subscription from 16th of Nov till 30th Nov 2017. The later fund will be locked in for 1140 days. After this period either investor can choose to withdraw the full amount or invested amount along with the accumulated returns can be continued in another good performing fund in the same AMC (Asset Management Company).
These are similar to close-ended funds, except the fact that they will be open for reinvestment or withdrawal only during a certain period, which will be published by AMC’s. Having the understanding of different types of funds, now let us understand about 4 broad categories of funds based on the assets invested in the funds.
Equity funds predominantly invest in equity stocks or shares. These funds carry more risk with more returns. They are meant for long-term financial goals like children education, retirement goal which is more than 5 years. Interest earned via equity funds will be tax-free after one year.
Debt funds invest in government securities, bonds, corporate fixed deposits and some portion in equity may be 10-20% to achieve better returns. These are meant for meant for short-term goals ranging from 1 year to 3 years. For example, to pay school fees of the child after 2 years, or to plan the family vacation after 3 years. This fund carries moderately low risk with better returns. Capital gains are tax-free only after 3 years.
The balanced fund is a mix of equity and debt. The percentage may vary based on the investment objective. These funds are the ideal way for investing lump-sum money. Especially good when the market is trading high. These funds will give the better return than debt funds and carries moderate risks. Ideal for 3-6 years’ goals like planning to buy four-wheeler after 4 years or foreign trip after 5 years.
The fourth type is gold funds. These funds are investing in pure gold. They buy physical gold and give units to investors based on the gold price in the market. This form of Gold investments is good as there are no making or wastage expenses as in case of jewelry. Also, security is good as the investment will be in electronic form. No need of buying a locker in the bank. If one wants to save some money for jewelry purchase for his child future wedding, they can consider this is the ideal way of investing in gold funds. They also carry risk as gold prices fluctuate in the market. Ideally one should invest only 5-10% of his investments in gold. which will give him portfolio diversification.
I devoted a separate section to discuss different types of equity funds based on the market capitalization of companies. There are 4 subclasses of equity-based mutual funds schemes. They are, Large-cap, Mid-cap, Small-cap and Multi-cap funds.
Large-cap mutual fund schemes
Funds which invest their money in large market capitalization companies are known as large-cap funds. Examples for large-cap companies are HDFC, SBI, L&T, Maruti and many more companies whose market capitalization is more than 10K crores. These funds are relatively stable as companies they invest are there for a long time. It does not mean that they are risky, but the risk is low when compared to mid and small-caps schemes. Large-cap funds are suitable for long-term financial goals like retirement goal and ideal for the investment horizon of 5-7 years’ goals. Example of large-cap mutual funds schemes is – HDFC Top200 fund, Birla Sun life Top 100, Axis Equity Fund and SBI Blue-chip fund etc.
Mid-cap mutual fund
These funds invest in mid-cap companies whose market capitalization is between 5K to 10K crores. Examples of mid-cap companies are – Adani group, Apollo Tyres, Crompton Greaves, BEML and many more. Mid-cap funds are riskier when compared to large-caps funds. One should be cautious while investing the lump-sum amount in these funds. SIP is the best way to invest in mid-cap funds. The financial goals having the time horizon of 6-10 years’ goal is best for these funds. Example of mid-cap funds is – SBI Midcap fund, Kotak Midcap fund, Tata Midcap funds and etc.
Small-cap mutual fund
The listed companies with low market capitalization are small-cap stocks. The funds investing in these companies are small-cap funds. Examples for small-cap companies are Zydus group, VRL Logistics, and many others. These funds carry high risk and meant for the investment horizon of 8-10 year or more. One should avoid lump-sum investments in these funds. Examples of small-cap funds are Reliance Small-cap, DSP small and mid-cap, Franklin Smaller companies and etc.
Multi-cap mutual fund
Multi-cap mutual funds scheme is a mix of all the above mentioned three funds. These are suitable for investment horizon for 6-10 years. The risk is less than that of small and mid-cap mutual fund schemes but is more than large-cap funds. Examples of multi-cap funds are – Motilal Multi-cap35 fund, SBI Multi-cap, L&T India Value fund and etc.
Thank you for reading. Please write if you have any questions and I will be happier to clarify.