Did you ever think of investing in a financial instrument that has less/no lock-in period and can give you great returns without extra charges? Yes, we are talking about mutual funds! Mutual Funds are a considerably secure investment option because it can spread your investments across various assets to reduce your risk and help grow your money in the days to come.
What is a Mutual Fund?
A mutual fund is an investment fund which is managed by professionals who have extensive research on the market. These funds are run by Asset Management Company that brings together the group of investors and pool their money in different stocks, securities, bonds etc. The main motive of mutual fund investments is to diversify the portfolio of investors and provide a high return to them. A mutual fund may invest only in equities or debt instruments or a mixture of both, called balanced funds.
Types of Mutual funds
- Open-ended scheme- These schemes do not have a maturity period. Investors can easily buy and sell units at declared Net Asset Value (NAV) on a daily basis. They can buy these schemes at NAV price.
- Close-ended scheme- Investors can subscribe to this scheme at the time of public issue. Thereafter they can buy or sell the units on stock exchanges where the units are listed. Investors can buy these scheme at market price. This scheme has a lock-in period as well.
- Equity-oriented Mutual Funds- This scheme provides capital appreciation over the medium or long-term. One should look for longer periods, typically 5 years and above.
- Fixed Income-oriented Mutual Funds- The aim of this scheme is to provide regular income over the period
- Balanced fund- Investors can expect moderate growth under this scheme.They generally invest in 40%-60% in equity and debt instruments.
- Index funds- These funds invest in the particular index such as BSE index or NIFTY index.
The traditional method for the charge of mutual funds
Before 2013, the most common plan was the regular plan. Under the regular plan, we buy a scheme through a bank with the involvement of a distributor/broker.These brokers will get a brokerage and this will come out of your investments. Under the regular plan, the commission will get deducted from your earnings and you will get balance earnings. This deduction will not affect your Net Asset value if your investment size is small or your holding period is short. The commission is around 1% in this plan and this is a worry for the mutual fund investors. This 1% looks very small, but it eats your earnings when your investment amount is huge.
The modern method for the charge of mutual funds
SEBI introduced direct mutual fund scheme reform in the mutual fund sector in 2013. One can buy mutual funds directly from AMC without the involvement of a broker/distributor. This scheme is getting famous not only with just corporate or high net worth investors but also with the retail investors. Investments under the Direct Plan are open to all investors who choose to invest without a distributor. And you don’t need to pay commission to anyone. Rather this commission will add up to your investment and your NAV will be higher. So in the nutshell, your NAV with the direct plan will be higher than that of a Regular plan.
Different expenses of Direct and regular/existing plans lead to different NAVs for both plans. But the real question arises as to whether we should choose a direct plan or a regular plan? Except for the broker’s commission expense, everything looks same in both these plans. Though this commission seems hidden expense and not shown in the fund. A scheme’s portfolio is same for both, Regular plan and Direct Plan. If we notice about other features of the scheme such as investment objective, Asset allocation pattern, Exit load, risk factors etc. will continue to be same.
Tax effect on Mutual funds
Why we are even talking about the tax on mutual funds as it is exempt from tax in case of equity oriented mutual funds. Well, the new LTCG tax has been introduced from FY 2018-19 with grand-fathering of gains till January 31, 2018. This means gains up to January 31, 2018, shall not be considered. This is not a concern for short-term investors. However one must accept the fact that equity instruments still attract the lowest rate of tax and the asset class will continue to see good flows. Moreover, if you have a Dividend plan, now mutual fund companies have to pay dividend distribution tax at 10%.
All you need to know about the Expense ratio
Do you need to know about this term expense ratio? Well, you definitely need to because this expense percentage will get deducted from your earnings at the time of sale of your fund positions. What comes under expense ratio is not so surprising, it includes AUM expenses, administrative expenses and may be other expenses. These expenses are borne by all the investors, no matter they buy a direct or a regular plan. But wait, Do this expense ratio includes expenses of broker’s commission? If that is the case, then there might be some difference in the returns of a direct and regular plan. Although AMC never show these expenses in the statement of the fund, yet it has to be borne by the investors.You can refer to https://www.sebi.gov.in/sebi_data/faqfiles/may-2017/1494501305219.pdf to know types of expenses in Mutual fund.
So you do not have any option to save yourself from these expenses. The only thing you can do is to invest in a larger fund which won’t affect your overall NAV at the end. Higher the fund’s asset, lower is the expense ratio and vice-versa. SEBI always make policies, guidelines to protect the interest of the investors.
Why invest in Mutual fund?
In the Mutual fund, there are different types of schemes and plans. Investor chose schemes which are performing well in the market. However, all Mutual Fund schemes do not carry the same risk when it comes to returns on investment. If we talk about Equity scheme, it has the potential to deliver huge returns over the long term that can create wealth. Remember, inflation is a risk, and equities are the best asset class to beat inflation.on the basis of their risk-taking capabilities. Same in case of mutual funds, there are many types of schemes.
Where to buy mutual funds plans in India?
Investing in mutual funds via websites of AMC is one of the traditional ways for retailers. However, we would not recommend you to invest directly if you are new to mutual fund investing. Some of the available ways for investing in mutual funds are as below.
Invest through platforms deal with the Direct plan
You can make direct investment in mutual fund plans through online platforms. They don’t charge anything and provide a range of products including mutual funds.You can also easily track your investments with them. However, they don’t provide advisory services. Moreover, they charge you after a certain period. If you are a new or old investor, you definitely need unbiased advisory services.
Invest through Online MF Apps
There are lots of MF apps where investors can buy mutual funds directly. One of the apps is provided by AMFI. They claim it like there is no cost for investing in mutual funds through those apps. However, it does not provide any advice, and retail investors ultimately have to do their own research before investing. It is purely transactional in nature, and not advisory.
Investing through Robo advisors
This is a new type of investing in mutual fund. This helps an investor by answering their questions and obtain all relevant details to construct the perfect portfolio. After taking the information, the system carefully runs through the scenarios and creates a diversified portfolio for the investor. The problem with robot advisor is that it cannot take care of human emotions. It also may fail in providing the well-balanced portfolio to the investor.
Investing through Exchanges
Exchanges such as NSE also provide good trading experience for investing in mutual funds. They give you a similar Demat related to your bank account. You get a consolidated view and can use the same account to invest in multiple fund houses. However, it has many cons like no advisory, high maintenance charges of accounts. You can avoid this cost if you invest through a mutual fund advisor or an online mutual fund platform.
Invest through Financial Advisors
IFAs are independent certified Financial Advisors from AMFI (Association of mutual funds of India). They are individuals who help investors in choosing the best mutual fund investment on the basis of their risk capacity. A Financial Advisor also helps you fill the application form and also submit the same with the AMC. They will provide you unbiased professional advice and help you what are the best mutual fund plans for your portfolio.
The need for a Certified mutual financial advisor
SEBI introduced the concept of registered investment advisers to eliminate the conflict of interest in the sale of mutual funds, which arises in case of distributors. These advisors are educated, have required qualifications and are not allowed to make commissions. They must be paid only by their investors and work only for them. Since they don’t rely on commissions and payouts, they can offer their investors unbiased investment advice. Mutual Fund investments are a wide subject and there are more than 10000 schemes & plans of Mutual Funds. Hence, the investors surely need expert guidance and that’s where the advisor’s role comes into play. A Mutual Fund advisor offers advice on identifying your investment goals, picking the right funds as per your plans, an effective means of diversification of your investments. His financial advisory services have the expertise to study the markets in depth. As mutual funds have a bit of risk, so these advisors can provide the best suitable portfolio on the basis of your risk tolerance.
It is obviously sensible to invest in direct plans to get higher returns, but this also requires more hard work from the investor point of view as he has to do the much paperwork and choose a suitable fund on the basis of risk-return. So choose a financial advisor at your fingertips whose financial advisory services will take care of all your financial goals at a reasonable cost. They provide a professional advice that costs less and provide multiple benefits.
If you still have any doubt about mutual funds, don’t worry. Our Advisory team will recommend you the best suitable scheme to invest on the basis of your risk preferences. Mutual fund investments are subject to market risk, so you must read the offer document carefully before investing.