Mutual Funds


Mutual funds are the best thing that you can do with your savings. Not only are they very simple to understand and invest in, they also offer the best returns over long term.
There are mutual funds available for all types of investment objectives. Whether you are planning to save for retirement or to buy a house in 10 years, Mutual Funds Sahi Hai!

What are Mutual Funds?

Mutual Funds offer you a way to invest your money through the help of investment experts.

Simply put, it's a mechanism by which many investors pool their money. This pooled money is handed over to a fund manager to manage and grow systematically.

Depending on the type of mutual fund, this pooled money is then invested by the fund manager in either shares, bonds, money market instruments or a mix of all of them.

Total pooled amount is divided into units. When you buy a mutual fund of certain amount, you are allotted units of mutual funds which is equal to amount divided by the price. The price of a unit is called Net Asset Value or NAV.

Over time, as the price of the underlying investment securities (shares and/or bonds) increases, the NAV of your mutual fund unit also increases. When you sell at a higher NAV, you end up making money.

How does Mutual Funds work?

Why should you invest in Mutual Funds?

Mutual Funds offer a perfect balance of long-term returns, lower risk, fitment to your financial needs and liquidity.

Unmatched ease and simplicity
Investing in mutual funds is super easy and simple. And if you plan to do it through an online platform, its also completely paperless.

Most of us do not have the required expertise to participate in equity markets. Mutual Funds give us a way by leveraging the expertise of a fund manager. You don't have to actively manage your investments.

Better long-term returns
In long-term, no other asset class has provided better returns than equity. Equity as an asset class is the best wealth builder. If you are looking to invest for long-term, equities are your best bet. And what better way to invest in equities than letting a professional fund manager do it for you.

Highly liquid
Another important aspect of mutual funds is that they are highly liquid. You can sell your units anytime and you get your money back. Liquidity is important. Consider Real Estate for example. What if you are not able to sell your property investment at the time you want money? No such case with Mutual Funds.

Fits all financial needs
The beauty of mutual funds is that there is a type of mutual fund for every type of financial need and investment objective. Looking to save up for retirement or buying a house in 10 years or planning to go on a vacation in 6 months or saving up for your child's education? There are mutual funds available for all of these.

Different Types of Mutual Funds

Equity
Debt
Liquid/Money Market
Arbitrage
Hybrid
Tax Saver (ELSS)

There are mutual funds that invest the money in equity shares. The returns in these funds are linked to equity markets and hence are volatile in short term.

Investment Objective

The primary objective of equity mutual fund is to deliver capital appreciation over long term allowing investor's money to grow and compound at rates higher than inflation.

Suited For

Anyone who is looking to grow their money at rates higher than inflation and has a long-term horizon. Best suited for acheiving long-term goals like retirement.

Sub Categories

Large Cap Funds, Mid Cap Funds, Mutli Cap Funds, Small Cap Funds and so on.

Taxation

If units are sold within 1 year of purchase, a Short-term Capital Gains Tax (STCG) of 15% is applicable. If sold after 1 year, Long-term Capital Gains Tax (LTCG) of 10% is applicable.

There are mutual funds that invest the money in interest earning instruments like government bond, corporate bonds etc. These are relatively less risky as compared to equity mutual funds.

Investment Objective

Depending on the type, the objective of debt fund is to yield stable interest income (based on credit risk and duration) and/or allow capital appreciation from changes in interest rate.

Suited For

Anyone looking to earn stable returns in short to medium term (3-5 years). Short-term investors can also use debt funds to take interest rate calls. Also, used by long-term investors to add diversification to their portfolio.

Sub Categories

Duration (from ultra short to long) Funds, Corporate Bond Funds, Dynamic Bond Funds, Banking and PSU Funds, Gilt Funds.

Taxation

If units are sold within 3 years of purchase, they are taxed at your personal income tax rate. If sold after 3 years, Long-term Capital Gains Tax (LTCG) of 20% is applicable along with indexation benefits.

There are mutual funds that invest in highly liquid money market instruments like Bank FDs, commercial papers, treasury bills. The maturity of the instruments have to be less than 90 days.

Investment Objective

As the name suggests, the objective of liquid funds is to provide easy liquidity and returns with extremely low risk. The idea is to generate stable accrual returns with high liquidity and zero to low risk.

Suited For

Anyone looking to park their money for very short-term, liquid funds offer a better alternative than your savings bank account. Also used by corporates and institutions for their daily cash management.

Taxation

If units are sold within 3 years of purchase, they are taxed at your personal income tax rate. If sold after 3 years, Long-term Capital Gains Tax (LTCG) of 20% is applicable along with indexation benefits.

These are similar to liquid funds in terms of risk and return profile. These funds generate returns by spotting arbitrage opportunities in the market. They are more tax efficient than liquid funds as they are classified under equity category.

Investment Objective

Objective is to generate income through arbitrage opportunities by taking fully hedged equity positions so that the risk is minimal.

Suited For

Anyone looking to park their money for very short-term. While arbitrage funds are more tax efficient than liquid funds, they have an exit load of upto 1 month and lower liquidity.

Taxation

If units are sold within 1 year of purchase, a Short-term Capital Gains Tax (STCG) of 15% is applicable. If sold after 1 year, Long-term Capital Gains Tax (LTCG) of 10% is applicable.

As the name suggests, Hybrid mutual funds invest in both debt and equity instruments. The idea is to achieve diversification and reduce the risk in case of equity dominant hybrid and provide extra return boost in debt dominant hybrid.

Investment Objective

Depending on the risk profile of the fund, objective ranges from providing long-term appreciation of capital at relatively lower risk to generating stable interest income with extra equity kicker.

Suited For

Conservative equity investors looking to grow their capital at relaitively lower risk. Aggressive debt investors looking to give a kicker to their returns through small participation in equities.

Sub Categories

Conservative Hybrid Funds, Balanced Funds, Aggressive Hybrid Funds, Balanced Advantage Fund, Multi Asset Allocation

Taxation

Depending on the sub category, the scheme will qualify for either equity or debt taxation.

These are Equity mutual funds that offer tax benefits to investors under section 80 C of the Income Tax Act. The risk and return profile is same as equity mutual funds.

Investment Objective

The primary objective is to deliver capital appreciation over long term allowing investor's money to grow and compound at rates higher than inflation.

Suited For

Suited for investors with long-term horizon looking to grow their capital and at the same time avail the tax incentive every year.

Taxation

If units are sold within 1 year of purchase, a Short-term Capital Gains Tax (STCG) of 15% is applicable. If sold after 1 year, Long-term Capital Gains Tax (LTCG) of 10% is applicable.

For more insights into types of Mutual Funds and find what's best for you - refer our blog here.

Systematic Investment Plan (SIP)

SIPs have become a very popular term whenever one talks about investments or about achieving financial goals. The AMFI’s “Mutual Fund Sahi Hai “campaign has made this particular concept quite popular and also left numerous new investors curious about investing in this pattern. However, majority of the new investors are often confused about SIPs.
Numerous investors confuse SIP as a product and one often come across a query – “can I invest in a SIP to achieve my goal?” SIPs are not synonyms for mutual fund schemes but it is a very effective and efficient tool which helps one to regularly invest in Mutual Fund Schemes.

Let’s clear the definition first.

What is a SIP?
A SIP is a tool to invest in mutual fund schemes in a disciplined manner. SIPs allow an investor to invest a pre-determined amount of money at fixed intervals in selected mutual fund schemes. The amount can be as low as 100 depending on the requirement of the scheme and the interval can be monthly/quarterly/semi-annually or annually. Sip help the investor to safeguard its investments during high market volatility and also stands to benefit due to low average costing and the power of compounding.

What are the Benefits of SIP?

Brings In Discipline

Investing on a preset date every month, makes you set aside fixed sum of money to invest and gradually turns you into a disciplined investor.

Rupee Cost Averaging

You get more units when the markets go down and less when it goes up. Thus you average out the cost of buying mutual fund units.

Power Of Compounding

The longer you stay invested, more is the benefit of compounding. It is like earning interest on interest. Hence start an SIP early & enjoy the power of compounding.

Convenience

SIP offers convenience since you invest a small amount periodically without affecting your household budget.

No Need To Time The Market

No Need To Time The Market Investing through SIP helps you avoid timing the market.

Helps in Achieving Financial Goals

SIP is a smart tool that helps break your big goals into small amounts. Just ascertain the investment amount & start investing regularly through a SIP to achieve your dreams.

Flexibility To Select Investment Frequency

Select an investment frequency based on your convenience and need.

Any Drawbacks?

  • Averaged returns – If there is strong belief that the markets would be positive in the coming periods then investing lumpsum would be much more beneficial.

  • Less Control – Since one needs to invest a fixed amount in a fixed chosen mutual fund if the investor changes his mind then one needs to stop the first then start a new one if there is limited source of investment amount.

  • Cumbersome return’s calculation – Since investment is made every month one needs to get properly advised as to invest the optimum amount to get the desired financial result so there is always a need to consult a expert.


SIP vs Lumpsum Investment

Basis SIP Lumpsum
Concept
  • Sum of money invested at fixed intervals regularly
  • A large sum of money is invested once or multiple time with a considerable gap of time
Reason & Time to Invest
  • Useful when market dynamics are not positive
  • Useful when there is great market volatility
  • Useful when the market is about to turnaround from a bear phase or downtrend
  • When there is a great market sell-off due to any geo-political or any other reason like the coronavirus
Pros
  • Low Cost Averaging
  • High Compounding Benefit
  • Better returns over long-term
  • Simple & Convenient
  • Higher returns if invested at correct time
  • Good for tax-saving instrument like ELSS fund
Cons
  • Moderate returns even if the market is witnessing record highs
  • Require Close monitoring
  • Higher risk as compared to SIP
Suitability
  • Suitable for beginners
  • Suitable for people with great knowledge of markets


Let’s conclude with 2 important takeaways:

  • Stay Invested for a longer period – Investing for a greater period is important as it helps to smoothen the risk periods and periods of negative return and help the customers earn better yield. Suppose a customer had started a SIP during 2015-16 when the markets were giving positive returns, but due to the coronavirus pandemic shock the markets have come down considerably so if the investor takes out his money now he will lose on to the returns earned before and may even lose money due to the shock in the market.

  • Patience is the key – The most important thing of investing in SIP is to be calm and patient because the period of investing is huge and then only the good returns kick in so if a investor turns impatient and takes out his investments early he will lose out the high returns stored for him because the effect to compounding becomes more and more significant with each passing time period.

Mutual Fund - FAQs

▶ Are mutual funds safe?

The answer to this question is both Yes & No. All investments are somewhat risky because the market is unpredictable and is dependent on many factors outside the control of the investor. There are many different types of mutual funds that invest in different companies, in different ways, and even in different proportions of equity and debt. Mutual fund managers actively manage the investments of a certain mutual fund scheme and monitor the risk and reward possibilities daily. Mutual Funds also diversify your portfolio which decreases risk automatically. All in all, Mutual funds are a safer place to invest in, but not as safe as some investments with guaranteed returns such as FD, MIS of Post Offices etc.

▶ How do I invest my money to make money?

Working hard is one way to make money, but to grow that money into more money i.e. create wealth, one must invest it. To grow rich faster than any traditional method of wealth generation, online investment portals like ourselves allow users to invest quickly over the internet with 100% security

▶ How do you make money from a mutual fund?

A mutual fund scheme invests in certain companies and opportunities. When these invested companies perform well, or the opportunities pan out in a positive way, the fund scheme earns a share of that prosperity. The share so earned is then divided amongst all investors in proportion to their investment.

▶ How much money do you need to start investing in a mutual fund?

You can start investing in mutual funds and SIP with as little as ₹ 1,000.

▶ How much should I invest in mutual funds?

How much to invest in mutual funds largely depends on three factors:

  1. How much you have available to invest after deducting living expenses.
  2. How much risk you are willing to undertake.
  3. For how long you wish to remain invested.

Experts recommend investing 80% of your monthly surplus (amount remaining after deducting for monthly living expenses) into mutual funds either through lump sum or SIP.

▶ Is it a right time to invest in mutual funds?

It is always the right time to invest in mutual funds. You may have heard of fund managers and investors waiting to “time the market” correctly before they make their investments – but at any given time, there will be certain funds performing poorly and certain funds performing exceptionally well.

Also, in the case of SIPs - the benefits of Rupee Cost Averaging and regular investment instalments means that timing the market is of little importance.

▶ What are the benefits of a mutual fund?

  • Mutual funds investment can multiply your wealth.
  • Minimal risk as compared to other investments.
  • Portfolio diversification is possible - meaning that you don’t put all your eggs in one basket.
  • More chances of success and profitable returns thanks to investment diversification.
  • Mutual funds are actively managed and employ a professional fund manager whose performance parameters are directly linked to the performance of the fund scheme.

Investments in a mutual fund through a particular AMC can be switched - meaning that the investment can be redirected into another mutual fund scheme at any time depending on market conditions.

  • ELSS investments can help you save up to ₹ 1,50,000 from taxation under Section 80C.
  • Mutual funds provide higher potential returns than any other type of investment avenue.
  • Mutual funds can be invested through a method called SIP - Systematic Investment Planning - which carries a host of benefits to the investor.

▶ What is the average return on mutual funds?

There are thousands of mutual fund schemes that offer varying levels of returns. Usually, the higher the returns, the higher the risk being undertaken. The returns of a mutual fund scheme vary based on many other factors as well, but the average returns generated over a certain period of time, say, 5 years, is much higher than other investments with similar lock-in periods such as FDs.
Mutual Funds are companies that bring together a group of people and invests on their behalf.

▶ Why Mutual Funds?

  • Diversification -'Don't put all your eggs in one basket' Concept.
  • Professional Management - Qualified professionals with research teams manage your funds.
  • Transparency - Sharing account statements, factsheets and declaring NAVs daily.
  • Regulation - Funds follow strict regulations to protect investors.
  • Rupee Cost Averaging - Your money buys more units when markets are low and vice-versa.
  • Liquidity - Redeem your investments with convenient payout options.

▶ How to Invest in SIP?

As an investor, you need to set your investment goals and then choose the fund as per your risk appetite and return requirements. We at Richfield Fintech will prepare a risk profile basis your inputs and will take proper care of every penny invested with us.

How to choose a SIP?

Due to Mutual Funds being such a hype, the internet provides you with innumerable options and a prudent investor must shun the noise and focus on his/her goal-based needs. We will help you provide data points on all the available funds along-with some top highlights which keep updating every few months depending upon the market cycle.

▶ How much should I invest in a mutual fund through SIP?

It totally depends on your income and the financial goals you have set you can start with an amount as moderate as 500.

▶ Can a SIP payment be missed?

The account won’t be deactivated even if you miss your payments. You can also pause your SIPs in case of an emergency.

▶ Are SIPs tax exempt investments?

Only Investment done in ELSS mutual funds through SIP are tax exempt under Sec 80 C.

▶ Is SIP safe?

SIP is just another mode of investment. The safety is measured on the basis of the mutual fund chosen.

▶ Does SIP mean invest only in Equity funds?

There is a great misconception that investing in mutual fund is investing in equities and the same is felt about SIPs. But SIPs can be made in equity, debt or hybrid schemes depending on the risk appetite of the investors.

▶ When is the best time to invest in SIP?

When it come to the markets you can never time them so going by the rupee cost averaging logic, anytime is the best time to invest. In fact in time value terms, earlier you start, larger is your wealth creation.

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