Mutual Fund

SIP

A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. These investors may be retail or institutional in nature.Primary structures of mutual funds include open-end funds, unit investment trusts, and closed-end funds. Exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade on an exchange. Some close- ended funds also resemble exchange traded funds as they are traded on stock exchanges to improve their liquidity. Mutual funds are also classified by their principal investments as money market funds, bond or fixed income funds, stock or equity funds, hybrid funds or other. Funds may also be categorized as index funds, which are passively managed funds that match the performance of an index, or actively managed funds. Hedge funds are not mutual funds; hedge funds cannot be sold to the general public as they require huge investments. They are more risky than mutual funds and are subject to different government regulations.

Advantages and Disadvantages to Investors

Mutual funds have advantages and disadvantages compared to investing directly in individual securities

Advantages
  • Increased diversification:

    A fund diversifies holding many securities. This diversification decreases risk.

  • Daily liquidity:

    Shareholders of open-end funds and unit investment trusts may sell their holdings back to the fund at regular intervals at a price equal to the net asset value of the fund's holdings. Most funds allow investors to redeem in this way at the close of every trading day.

  • Professional investment management:

    Open-and closed-end funds hire portfolio managers to supervise the fund's investments.

  • Ability to participate in investments that may be available only to larger investors:

    For example, individual investors often find it difficult to invest directly in foreign markets.

  • Service and convenience:

    Funds often provide services such as check writing.

  • Government oversight:

    Mutual funds are regulated by a governmental body.

  • Transparency and ease of comparison:

    All mutual funds are required to report the same information to investors, which makes them easier to compare to each other.

Disadvantages
  • Less control over timing of recognition of gains
  • Less predictable income
  • No opportunity to customize
1. Mutual Fund Types Based on Asset Class
a). Equity Funds

Primarily investing in stocks, they also go by the name stock funds. They invest the money amassed from investors from diverse backgrounds into shares of different companies. The returns or losses are determined by how these shares perform (price-hikes or price-drops) in the stock market. As equity funds come with a quick growth, the risk of losing money is comparatively higher.

b). Debt Funds

Debt funds invest in fixed-income securities like bonds, securities and treasury bills – Fixed Maturity Plans (FMPs), Gilt Fund, Liquid Funds, Short Term Plans, Long Term Bonds and Monthly Income Plans among others – with fixed interest rate and maturity date. Go for it, only if you are a passive investor looking for a small but regular income (interest and capital appreciation) with minimal risks.

c). Money Market Funds

Just as some investors trade stocks in the stock market, some trade money in the money market, also known as capital market or cash market. It is usually run by the government, banks or corporations by issuing money market securities like bonds, T-bills, dated securities and certificate of deposits among others. The fund manager invests your money and disburses regular dividends to you in return. If you opt for a short-term plan (13 months max), the risk is relatively less.

d). Hybrid Funds

As the name implies, Hybrid Funds (also go by the name Balanced Funds) is an optimum mix of bonds and stocks, thereby bridging the gap between equity funds and debt funds. The ratio can be variable or fixed. In short, it takes the best of two mutual funds by distributing, say, 60% of assets in stocks and the rest in bonds or vice versa. This is suitable for investors willing to take more risks for ‘debt plus returns’ benefit rather than sticking to lower but steady income schemes.

2. Mutual Fund Types Based On Structure

Mutual funds can be categorized based on different attributes (like risk profile, asset class etc.). Structural classification – open-ended funds, close-ended funds, and interval funds – is broad in nature and the difference depends on how flexible is the purchase and sales of individual mutual fund units.

a). Open-Ended Funds

These funds don’t have any constraints in a time period or number of units – an investor can trade funds at their convenience and exit when they like at the current NAV (Net Asset Value). This is why its unit capital changes constantly with new entries and exits. An open-ended fund may also decide to stop taking in new investors if they do not want to (or cannot manage large funds).

b). Closed-Ended Funds

Here, the unit capital to invest is fixed beforehand, and hence they cannot sell a more than a pre-agreed number of units. Some funds also come with an NFO period, wherein there is a deadline to buy units. It has specific maturity tenure and fund managers are open to any fund size, however large. SEBI mandates investors to be given either repurchase option or listing on stock exchanges to exit the scheme.

c). Interval Funds

This has traits of both open-ended and closed-ended funds. Interval funds can be purchased or exited only at specific intervals (decided by the fund house) and are closed the rest of the time. No transactions will be permitted for at least 2 years. This is suitable for those who want to save a lump sum for an immediate goal (3-12 months).

3. Mutual Fund Types Based on Investment Goals
a). Growth Funds

Growth funds usually put a huge portion in shares and growth sectors, suitable for investors (mostly Millennials) who have a surplus of idle money to be distributed in riskier plans (albeit with possibly high returns) or are positive about the scheme.

b). Income Funds

This belongs to the family of debt mutual funds that distribute their money in a mix of bonds, certificate of deposits and securities among others. Helmed by skilled fund managers who keep the portfolio in tandem with the rate fluctuations without compromising on the portfolio’s creditworthiness, Income Funds have historically earned investors better returns than deposits and are best suited for risk-averse individuals from a 2-3 years perspective.

c). Liquid Funds

Like Income Funds, this too belongs to the debt fund category as they invest in debt instruments and money market with a tenure of up to 91 days. The maximum sum allowed to invest is Rs 10 lakhs. One feature that differentiates Liquid Funds from other debt funds is how the Net Asset Value is calculated – NAV of liquid funds are calculated for 365 days (including Sundays) while for others, only business days are calculated.

d). Tax-Saving Funds

ELSS or Equity Linked Saving Scheme is gaining popularity as it serves investors the double benefit of building wealth as well as save on taxes – all in the lowest lock-in period of only 3 years. Investing predominantly in equity (and related products), it has been known to earn you non-taxed returns from 14-16%. This is best-suited for long-term and salaried investors.

e). Aggressive Growth Funds

Slightly on the riskier side when choosing where to invest in, Aggressive Growth Fund is designed to make steep monetary gains. Though susceptible to market volatility, you may choose one as per the beta (the tool to gauge the fund’s movement in comparison with the market). Example, if the market shows a beta of 1, an aggressive growth fund will reflect a higher beta, say, 1.10 or above.

f). Capital Protection Funds

If protecting your principal is your priority, Capital Protection Funds can serve the purpose while earning relatively smaller returns (12% at best). The fund manager invests a portion of your money in bonds or CDs and the rest in equities. You will not incur any loss. However, you need a least 3 years (closed-ended) to safeguard your money and the returns are taxable.

g). Fixed Maturity Funds

Investors choose as the FY ends to take advantage of triple indexation, thereby bringing down tax burden. If uncomfortable with the debt market trends and related risks, Fixed Maturity Plans (FMP) – investing in bonds, securities, money market etc. – present a great opportunity. As a close-ended plan, FMP functions on a fixed maturity period, which could range from 1 month to 5 years (like FDs). The Fund Manager makes sure to put the money in an investment with the same tenure, to reap accrual interest at the time of FMP maturity.

h). Pension Funds

Putting away a portion of your income in a chosen Pension Fund to accrue over a long period to secure you and your family’s financial future after retiring from regular employment – it can take care of most contingencies (like a medical emergency or children’s wedding). Relying solely on savings to get through your golden years is not recommended as savings (no matter how big) get used up. EPF is an example, but there are many lucrative schemes offered by banks, insurance firms etc.

Mutual Fund Serviced
Axis Mutual Fund
Aditya Birla Capital
Canara Robeco
DSP Mutual Fund
HDFC Mutual Fund
HSBC Mutual Fund
ICICI Mutual Fund
IDFC Mutual Fund
IIFL
Kotak
L&T
Mahindra Mutual Fund
Mirae Asset Mutual Funds
PPFAS Mutual Fund
Principal Mutual Fund
Reliance Mutual Fund
SBI Mutual Fund
Sri Ram Mutual Fund
TATA Mutual Fund
Union Mutual Fund
UTI Mutual Fund
Yes Mutual Fund

Insurance

Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss.

An entity which provides insurance is known as an insurer, insurance company, insurance carrier or underwriter. A person or entity who buys insurance is known as an insured or as a policyholder. The insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate the insured in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial terms, and usually involves something in which the insured has an insurable interest established by ownership, possession, or pre-existing relationship.

The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insurer will compensate the insured. The amount of money charged by the insurer to the Policyholder for the coverage set forth in the insurance policy is called the premium. If the insured experiences a loss which is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster. The insurer may hedge its own risk by taking out reinsurance, whereby another insurance company agrees to carry some of the risk, especially if the primary insurer deems the risk too large for it to carry.

Insurance is broadly divided into

  • Life insurance
  • Vehicle Insurance
  • Health Insurance
  • General insurance

Bonds & FDs

Bonds and FD

Bonds and Fixed Deposits (FD's) are widely considered the two most popular alternatives for risk-averse investors across the world. While both bonds and FD's are 'fixed income' instruments in the sense that they offer interest income to investors, they actually differ markedly across various parameters. It's worthwhile to educate yourself on the nuances of bond and fixed deposit investing in order to make an informed investment decision.

WHAT ARE FIXED DEPOSITS?

Fixed deposits are financial instruments issued by banks, NBFC's (Non-Banking Financial Companies), as well as regular corporate entities. Fixed Deposits, as their name suggests, as 'fixed' for a particular duration, during which time the investor enjoys periodic interest payouts. Payouts can be monthly, quarterly, annually or cumulative in nature. Fixed Deposits differ from bonds in five major aspects. These are described below.

SAFETY :

You'll find that most Bonds are secured in nature, as they are backed by physical assets. However, if the credit rating of the issuing entity deteriorates, the bond holder may not receive timely interest and principal payouts - therefore, it is advisable to check for credit ratings and stick to AAA, AA or A rated bonds only. Upon the unlikely event that a company goes bankrupt and its assets get liquidated, it is actually the bond holders who stand first in the pecking order. FD's, on the other hand, are unsecured and not backed by assets. You may be surprised to discover that even Bank FD's are insured only up to Rs. 100,000 (capital and interest) per depositor. There is however, a very slim chance that Bank FD investors will lose money - a case in point is Global Trust Bank which, embroiled in the stock market scam of 2001, went under in 2004. While shareholders booked massive losses, deposit investors didn't lose a cent.

LIQUIDITY :

Bonds are tradeable on exchanges and can therefore said to be more liquid. However, remember that interest rate movements can impact bond prices (especially longer term bonds), and so the liquidity comes at the cost of price volatility. Fixed Deposits, on the other hand, can be withdrawn prematurely - although they aren't traded on the exchange. The premature withdrawals come at the cost of reduced interest.

RETURNS :

Both Bonds and FD's offer a fixed payout at predefined periodicities (unless the bond in question is a zero coupon one which is issued at a discount to its face value and matures at its face value). However, Bonds offer the additional scope of earning Capital Gains, as Bond prices fluctuate either based on changes in market interest rates, changes in the creditworthiness of the issuer, or both. FD's are not tradeable on an exchange, and hence don't offer the scope of earning capital gains. It's worth noting, however, that bond trading isn't everyone's cup of tea, and an uninstructed retail investor will be taking a big risk by aiming to trade in bonds without an adequate degree of familiarity with the brass tacks of the debt market.

CREDIT RATING :

It is a mandate for Bond Issuers to get their instrument rated by at least one rating agency such us CARE, ICRA or CRISIL. Issuers are strict about disclosure requirements and will typically not offer a rating without adequate information about the company that the general public are not privy to. For FD's those issued by NBFC's must mandatorily be rated; there's no such mandate levied on Bank FD's though. Ratings are useful as they allow greenhorn bond investors to easily evaluate the returns on offer in light of the risk they are taking on in the process.

TAXATION :

Interest from Bonds as well as FD's are subject to income tax as per the tax slab of the individual (taxed "at the margin"). However, there are tax free bonds issued by the government, on whose interest no income tax is payable. Examples of some upcoming tax free bonds include PFC, REC, NTPC, IREDA, HUDCO, IRFC and NHAI. The NHAI issue is expected to be sizable (at ~ Rs. 24,000 Crores). In case you choose to sell your bonds on an exchange prior to maturity, capital gains will apply.

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