Mutual Fund Guide

What are Mutual Funds?

Mutual Funds are investment schemes professionally managed by financial experts. It is a corpus of money pooled from several investors which is managed by a trust called Asset Management Company (AMC). An AMC is also known as a Mutual Fund House. The Fund house has experts, known as Fund Managers, who are responsible for investing the pooled money. Many investors, individuals and entities, invest money in these schemes or funds to generate better returns. These investment schemes could invest in Shares / Stocks (Equity), Government and Corporate Bonds / Securities / Debentures (Fixed Income) or a mixture of the Equity and Fixed Income Securities.

Mutual Funds are bought and sold in Units. Mutual Fund units are allocated to investors basis the proportion of their investments and value of these units is tracked as Net Asset Value (NAV) which is daily released by the Fund houses. The Securities and Exchange Board of India (SEBI) regulates the Mutual Funds industry, and there are around 45 different Mutual Fund houses and more than 12000+ Mutual Fund Schemes.

Difference between SIP and Mutual Fund

The systematic investment plan, popular as SIP, is one of the methods to invest in mutual funds. The mutual fund is the actual investment vehicle which pools the corpus of money from various investors and invests them in various asset classes.

Why Mutual Funds

There are several benefits of investing money in mutual funds. Some of them are...

• Liquidity
• Diversification
• Expert Fund Management
• Safety and Transparency
• Flexibility to do SIP
• Schemes for Financial Goals
• Safety & Transparency

For Tax Saving Funds

• Best Tax saving options
• Lowest Lock-in Period
• Lower Tax on the gains

Types of Mutual Funds in India

In India, you have several types of mutual fund schemes suitable for all types of investment requirements be it for HNIs or retail investors, for long term or short term investment horizon.

Due to time constraints and lack of expertise, you may find it very difficult to invest in financial instruments like T-Bills, G-Secs, NCDs, CP, CDs or Hybrid instruments.

Mutual funds invest pooled money in all types of financial instruments and the types of mutual funds are known by the underlying class of instruments in which the major portion of the investment is made.

Here are some of the types of mutual funds available in India.

• Mutual fund based on the structure like open-ended, closed-ended and interval mutual funds.
• Mutual fund based on asset class like equity mutual funds, debt mutual funds, money market funds and balance or hybrid funds.
• Mutual funds based on investment objectives like growth fund, income fund, ELSS and liquid funds.
• Mutual fund based on a specialty like sector funds, index funds, emerging market funds, fund of fund and theme-based mutual funds.

Type of Mutual Funds Available in the Market to Invest in India

1. Equity Mutual Funds

Mutual funds that invest in equity (also called stocks or shares) are called Equity Mutual Funds. The objective of Equity Mutual Funds is the Capital appreciation of the investments. The returns of these Equity funds are tied to the stock markets. Various types of Equity Mutual funds are Large Cap, Small/Mid Cap, Flexicap and Sector Funds.

Equity Mutual funds are best suited for aggressive investors who are looking for medium to long term investment horizon (at least 3 years +).

There is only 10% capital gains tax on equity mutual funds if the customer stays invested for more than 1 year. Moreover this 10% applies only to gains withdrawn above ₹1 lakh in a financial year. This minimizes impact on most investors.

Types:

Large Cap Mutual Funds

Large-cap mutual funds invest a major portion (minimum 80%), of the fund in companies with huge market capitalization and are top 100 companies on the index.

These are established companies with a strong performance record. The return from large-cap funds over a period of time is less volatile, relatively stable and sustainable.

Mid Cap Mutual Funds

A mid-cap mutual fund has a larger portion (65%) of the corpus invested in mid-cap companies, i.e. companies ranking from 101st to 250th in terms of market capitalization

Multi-Cap Mutual Funds

Multi-cap mutual funds invest 65% of the total assets in companies belonging to all types of market capitalization. They offer the desired diversification among the large, mid and small-cap funds. Hence, the risk and returns are lower than the individual cap fund.

Flexi-Cap Mutual Funds

These funds have the flexibility to invest in companies irrespective of their size. For example, The fund manager can invest in a large cap company like Infosys Ltd as well as Mid Cap company like Blue Dart if he/she believes that the stocks can give better returns. These funds give the flexibility to the fund manager to select the stocks of companies of his choice irrespective of their market capitalization.

This in turn can help him/her in generating better returns for the investors. Recommended period of investment is 5 years plus.

Sector Mutual Funds

These funds invest in companies of particular industry sectors or business. For example Technology sector funds invest only in technology companies like Infosys Ltd, TCS, HCL Technologies etc. There are different kinds of sector funds like FMCG, Financial Services, Pharma, Energy, Precious metals etc.

The returns of these funds can be very cyclical in nature as the returns from these funds are totally dependent on that particular sector doing well and hence the risks of these funds are not diversified enough. Invest in these sector funds only and only if you have a very good understanding of the sector that you are going to invest in.

2. Debt Mutual Funds

The major portion of debt mutual funds comprises investments in non-convertible debentures (NCDs) and bonds. The primary objective of debt mutual fund is capital protection. Investors can look to get better returns in low interest environment by investing in these funds as they hold securities bearing higher interest rates. Investors can invest and stay invested in these funds for a period of 3 years to get Tax indexation benefits.

Types:

Debt-Long Term Government Bond Funds

These funds invest primarily in Government Securities of high term to maturity. Since these funds invest in government bonds there is no credit default risk on these funds. The valuations of these funds are very sensitive to Interest rate movement. If the interest rates go down, the valuations of these funds increase and vice versa. It is best to invest in these funds when interest rates are on a downward trend in the country.

Debt-Intermediate Term/Intermediate Term Government Bond Funds

These funds invest in Securities of medium term to maturity. The Intermediate term government bond funds only invest in government securities.

The valuations of these funds are less sensitive to Interest rate movement as compared to Long term funds. Investors can invest and stay invested in these funds for a period of 3 years to get Tax indexation benefits.

Debt-Corporate Credit Funds

These funds invest primarily into corporate debt, deposits and debentures.

Investors can look to get better returns in low interest environment by investing in these funds as they hold securities bearing higher interest rates. Investors can invest and stay invested in these funds for a period of 3 years to get Tax indexation benefits.

What are Liquid/Money Market Funds?

These funds invest in Money market instruments and securities with very short term to maturity (lesser than 90 days). These funds are not impacted too much by interest rate movements and typically give very stable returns to the customers.

Investors with less than 3 months of investment horizon can invest in these funds. Investors can also keep 10-20% of their investments in these funds to ensure that they do not have to prematurely withdraw their other investments in case of an emergency or urgent money requirement.

Ultra Short Term Funds

Ultra short term funds invest in fixed income instruments and debt securities which are mostly liquid and have short term maturities.

Investors can avoid the interest rate movement risks and generate more returns than Money market instruments by investing in Ultra Short terms funds. Investors with Investment horizon of less than 6 months should invest in these funds.

Short Term Funds/Short Term Government Bond

These funds invest in fixed income and debt instruments with short term maturity. Government bond funds invest only in Central and State government issued securities.

Investors with investment horizon of less than 1 year can invest in these funds and generate better returns than either Liquid or Ultra Short term funds. Investors who are very risk averse and want stable returns can also keep invested for 3 years to gain Indexation benefits for taxation.

Arbitrage Funds

These funds take advantage of the differential pricing between stocks in the Cash market vis a vis the prices of the same stock’s future in the futures markets. Additionally, these funds park their money in short term maturity debt securities and money market securities and hence have very low risk.

These funds can be invested in by customers with investment horizon of less than one year. Since these funds are treated like Equity funds from a taxation standpoint, the short term capital gains tax for these funds are only 15% as opposed to short term capital gains tax of almost 33% tax on debt funds and FDs.

3. Tax Saving Mutual Funds

The primary objective of tax saving mutual funds or Equity Linked Savings Schemes is saving of taxes, and generating higher returns with a lower lock-in period.

Investment in tax saving mutual funds or ELSS can be done in the same manner as investing in mutual funds by purchasing units in a lump sum or through regular systematic investment plan (SIP).

You can purchase the best tax saving ELSS mutual funds directly from the mutual fund house, your broker, online mutual fund investment platform, from registrars like Karvy and CAMS or through AMFI registered agents.

4. Liquid Mutual Funds

Liquid funds have a major holding in very short duration financial instruments like T-bills, fixed deposits, commercial papers (CPs) and certificate of deposits (CDs).

Investors with a short investment horizon of less than a year and those looking for an alternative to savings account and deposits can invest in liquid mutual funds.

5. Gold Mutual Funds

In India, Gold mutual funds are primarily funds of funds with the objective of investing in gold ETFs. Gold mutual funds closely mimic the returns generated by the gold ETF over a period of time.

6. Index Funds

Index funds are mutual funds with investment in equities of companies comprising the underlying index. For example, the index fund tracking BSE index will invest in 30 companies, which constitutes the BSE Sensex. Index funds are passive funds and the returns are almost the same as that generated by the said index.

7. Hybrid Funds

Hybrid Funds are mutual funds with investments in equity and debt in a fixed proportion. For example, a conservative hybrid fund will have 75% to 90% of investment in debt. A balanced hybrid fund will have 40% to 60% of the investment in debt and an aggressive hybrid fund will have 65% to 80% of the investment in equity instruments.

Best Ways to Invest in Mutual Funds

You can start investing in mutual funds in two ways, lump sum, and SIP.

• Lump-sum investment in Mutual Funds

  In lump sum investment, you make a single payment to purchase units of mutual funds. The investment is best suited in case you already have surplus cash to invest.

• SIP Investment in Mutual Funds

  In a systematic investment plan (SIP), you have the flexibility to split your purchase into smaller amounts, usually in the form of monthly investments. The method is especially suitable for salaried professionals.

  For example, using SIP you can start purchasing 1000 units of the mutual fund every month. In fact, you can start using SIP with as low as Rs. 1000 per month. SIP also gives you the flexibility to invest on fortnightly, monthly and quarterly periods.

Is there any tax on Mutual Funds?

In Mutual Funds, your returns would be taxed as below:

Holding Period	Less than 1 year	1-3 years	More than 3 years
Types of Funds
Equity/Hybrid	15% tax applicable	10% tax applicable if gains are more than 1 lakhs	10% tax applicable if gains are more than 1 lakhs
Debt	Taxed per income tax slab	Taxed per income tax slab	20% tax applicable with benefit of indexation

SIP -Each installment is considered as an individual investment. Tax will be applicable as per the above table.

Startaegic would provide you Capital gains statement to assist you in your tax computation.

What is a lock-in period? Is there a lock in period for my investments?

Lock in period is the time during which an investor can not withdraw/redeem his/her investments. Some mutual fund schemes like ELSS/Tax saving funds come with a lock-in period of 3 years as mandated by the government. This essentially means that the investments cannot be redeemed before a period of 3 years from the date of investment in any circumstances. Apart from the ELSS/Tax Saving Funds, we do not distribute any funds with lock-in period. In a fund with no lock in period, you can redeem or withdraw your investment at any point in time. Once you redeem these funds, the money would be credited back to your bank account within 1-3 days.

What is exit load? How to avoid exit load for my investments?

Some Mutual fund schemes have an exit load, and some schemes don’t. The schemes which have an exit load will incur a small charge if they redeem/withdraw their investments before the stipulated time. For example, a mutual fund scheme with an exit load of 0.25% for 3 months, will incur a charge of 0.25% if the investment is withdrawn before 3 months of investment. Please note that the same fund will not incur any charges if the investment is withdrawn/redeemed after a period of 3 months. Strataegic recommends an investment into funds and rebalancing taking into account the exit loads and your investment horizon. So for example, if you want to invest for 6 months, Strataegic would suggest a fund which does not have any exit load after 6 months. The exit loads of these funds are mentioned on our website. Strataegic would also calculate the exit load applicable to you once you are redeeming/selling the fund.

What are various mutual fund scheme options like growth option, dividend option?

Mutual Fund schemes are available in growth and dividend option. Within the dividend option, payout or reinvestment options are available. In the growth option of Mutual fund schemes, profits made by the scheme are invested back into it. This results in the net asset value (NAV) of the scheme rising over time. When the scheme gains, the NAV rises, and in the case of a loss, it goes down. The only option to realise the profit in growth option is to sell or redeem your investments. The dividend option can re-invest (dividend reinvestment option) or pay out the dividends (dividend payout option) the profits made by the fund. Profits or dividends are distributed to the investor from time to time depending on the profits made. Dividends are declared only when the scheme makes a profit, and it is at the discretion of the fund manager. The dividend is paid from the NAV of the unit. Strataegic advises the right investment strategy for you based on your investment horizon and tax implications.

What are open ended, closed ended and interval funds?

Open-ended funds are those which can be purchased and sold anytime. Closed-ended funds can be purchased from the fund house only at the time of the new fund offering (NFO) and can be sold only once the period of the closed-ended fund has ended. Interval funds have periodic intervals specified by the funds when they can be purchased and sold. Strataegic only distributes open-ended funds to its customers. Please note that even though the fund may be an open-ended fund the exit loads, if any, would be applicable.

Are returns guaranteed on Mutual Funds?

Mutual funds are market linked instruments. They invest in stocks, fixed income securities, arbitrage opportunities deemed fit by the Fund manager who is a financial expert. These market linked securities can go up or down in value as per the various macro and micro economic conditions. There is no guarantee of return on Mutual funds. The mutual fund returns can vary from past returns as well. We create balanced and personalized portfolios for you based on your Investment Horizon and Risk Profiles while accounting for the prevailing Market Conditions like Stock Markets performance ( Price to Earning, Price to Book, Dividend Yield), Interest Rates, GDP growth Rates and other important macroeconomic factors. We optimize your portfolio to offer maximum possible expected return for a given level of risk through careful selection of asset classes and mutual funds using our proprietary ranking frameworks.

Comparison with other Investments

1. Mutual Funds Vs Stocks

Basis	Mutual funds	Stocks
Ownership	Shares in Fund	Shares in company
Managed by	Fund Manager	Investor
Value calculation	Net Asset Value	Price per share
Risk	High	High
Investment tracking	By the investment team at AMC	Investor
Expertise required?	NIL, as the fund manager, exercises his expertise to find stocks.	Investor
Stock selection	No, because the fund manager does everything on your behalf	Investor
Diversified portfolio	Yes	Need to buy several shares to create a diversified portfolio
Expenses	Yes, need to pay fees called expense ratio	No, but need to pay STT
Tax deduction	Only in ELSS under section 80C	No

2. ELSS Vs PPF

Basis	Tax Saving Mutual Funds or ELSS	Public Provident Fund (PPF)
Returns	12% & more	Declared by Govt. every year presently 7.9%
Tax benefit	Yes, a deduction up to Rs 1.5 Lakh under section 80C	Yes, a deduction up to Rs 1.5 Lakh under section 80C
Taxation of returns	Gains above Rs. 1 Lakh are taxable @ 10%	Tax-Free
Risk	Market risk	Govt. backed
Lock-in period	3 years	15 Years
Backing	Mutual fund house	Government
Partial withdrawal	No	After the fifth year
Time period of investment	No upper time limit	15 years, can be extended by another 5 years

3. ULIP Vs Mutual Fund

Basis	ULIPs	Mutual Fund
Product Type	Insurance + Investment	Investment
Tax savings	Yes, a deduction of up to Rs. 1.5 Lakh eligible for tax savings	Only ELSS provides tax benefits
Returns	10%-12%	12%
Lock-in Period	5 years	For ELSS 3 years. In case of other mutual funds, there is no lock-in period
Life cover	Yes, you get sum assured in case of death	NO, you need to buy it separately

4. ETF Vs Mutual Fund

Basis	ETF	Mutual Fund
Composition	As per the underlying index	Depends on the investment objective
Product	Pooled investment product	Pooled investment product
Trading	Can be like stocks	Not traded
Management	Passively managed by the fund manager	Depending on the type can be actively managed by the fund manager
Fees & Expenses	Low	Varies with type
Lock-in Period	No	Close-ended mutual fund and ELSS have a lock-in period

How to Calculate Mutual Fund Returns

The returns from mutual fund investment can be calculated in two ways;

1. Absolute Returns

Absolute return is used when you want to calculate point to point returns. The holding period does not come into the picture.

Formula for calculating absolute returns = (current NAV - initial NAV) / initial NAV x 100.

2. Annualised Returns

Annualised returns do not account for the holding period. The annualised returns calculation is used when the holding period is less than 12 months.

Annualised returns are also known as effective annual yield.

Formula for calculating annualised returns = (( 1+ absolute return) ^ (365 / number of days)) - 1.

How to Track All Mutual Funds Investments in One Place

You can use the MF Utility portal to have a consolidated view of all your mutual fund investments. To use the portal, you need to create an e-CAN (Common Account Number).

Otherwise, you can get a Consolidated Account Statement (CAS) from Karvy and CAMS to view all your mutual fund investments. Online mutual fund investment platforms can help you track only those investments which are done through them.