Mutual funds are getting popular every day as more and more people are opting for mutual fund investments. Campaigns such as Mutual Fund Sahi Hai have done a great job in promoting the new way of investing.
But, are you aware of the mutual fund characteristics?
In this blog, we seek to discuss the important features of a mutual fund. As an investor, it is essential that you are aware of the fundamental characteristics that define and guide your hard-earned money.
Managed by a qualified expert
An expert fund manager manages a mutual fund and takes care of your hard earned money. It goes on without saying that managing financial investments is not an easy task. Amidst this, if you don’t get the help of an expert, you may get lost in the financial ocean.
Mutual fund schemes provide you with the service of an expert who takes care of your money along with the other investments.
Open-ended and close-ended funds
Based on the constitution there are two types of mutual funds – open-ended and close-ended.
In an open-ended fund, an investor is free to invest money whenever he/she feels like. Similarly, you are also free to withdraw money anytime. These are the funds in which the freedom or flexibility of investment timing is highest.
In a close-ended fund, an investor has limited time to invest money in the fund. Whenever a scheme is launched, investors are offered with a time frame to invest. If an investor is interested in investing, he/she is required to put in money during the time period failing which he/she is not provided with units of the fund nor another time frame for investing.
Lump Sum and SIP Investment
As seen in the previous point, in an open-ended fund, you have the timing flexibility for investment. Similarly, you have no restriction on the frequency or amount you can invest per year.
If you are investing Rs 50000 at a time or making any irregular investments such as Rs 10000 in one month and Rs 25000 in another, all these are considered to be the lump-sum investment.
These funds also provide you with an option of investing regularly.
However, mutual funds allow you to invest regularly. In this case, when you invest a fixed amount at a fixed interval, it is called the Systematic Investment Plan (SIP). In a SIP, you can decide the amount and interval such as monthly, quarterly, weekly, etc. SIP is very similar to recurring deposit.
No fixed returns
Mutual funds invest in capital market instruments such as bonds, equities, and money market instruments. The price of these instruments change as per the market dynamics, and thus it is not possible to predict the returns a mutual fund.
Mutual fund schemes buy and sell bonds and equities from the market, the profit of such as transactions are also re-invested in subsequent transactions. Also, redemption by investors often lead to selling decisions by fund managers, and thus the returns from the mutual fund are not fixed and are purely dependent on the market condition.
Equities can make losses
Equity mutual funds are the funds that invest in equities. Equities by nature are riskier instruments and come with high profitability and high risk. While an investor may generate healthy returns, he/she may have to go through a harrowing period as well depending on the market dynamics.
Check best equity funds to invest
Debt funds are relatively safer
Mutual funds that invest in debt instruments are relatively safer. This is because the debt instrument, in which a fund invests, comes with an external credit rating that defines its degree of safety. Also, these debt instruments have a fixed interest rate and are not heavily dependent on the capital market. While some impact in the yield may be seen depending on the inflation rate in the economy, and the Reserve Bank of India’s monetary policy but the volatility is controlled.
While debt funds do have some volatility, seldom you will see losses in the debt funds. Thus, these are safer than the equity counterpart.
Check best debt funds to invest
Different ways of investing
Off late, you would have seen a lot of articles, blogs, videos and other content being created over the web that talks about the different ways of investing in mutual funds.
While the fund houses have a limited physical presence, and practically it isn’t feasible for fund houses to open physical branches in all the cities of a country that is huge like India. Amidst this internet has done wonders. In addition to the offices of fund houses, you can invest through their online website.
Also, the regulators have allowed distributors to be appointed by the fund house, and thus banks, brokers, individuals and a plethora of start-ups are engaged in the business of mutual fund distribution.
You can purchase a fund from any of the following –
• Branch office or Online Portal – Fund house has its branch office and website. An individual can invest in either manner.
• Mutual Fund Distributors – These are the agents of fund houses and are paid commission for facilitating the sale.
• Banks – To offer a bouquet of financial services, banks have partnered with fund house and offer mutual fund investment through their channel
• Stockbrokers – In addition to equities, the brokers are not distributing mutual fund scheme. You can always check HDFC securities, Kotak securities, and the likes.
• Third-party aggregators – One of the recent entries in the domain, these are platform developed using current technology. These platforms offer mutual funds from multiple fund houses in one place — for example, Orowealth.
Charges of mutual funds
A mutual fund involves a fund manager, his team, infrastructure, selling and distribution fees, marketing expenses, regulatory cost, transaction cost, and the likes. All these are subsumed into one and are charged as expense ratio from an investor.
The fund house charges some amount from your corpus that is deployed for the functioning of the fund house.
You also pay a commission to the distributor. This has resulted in two plans for each fund – regular plan and direct plan. If you are buying a regular plan, the expense ratio is high as the commission to the distributor is involved. On the other hand, if you are purchasing a direct plan, you are not required to pay any commission as you deal directly with the fund house and thus the expense ratio is lower.
Lot of start-ups such as Orowealth has redefined the industry and has made the direct plan available to investors so that investors’ returns are maximized.
No tax deducted at source
Tax Deducted at Source (TDS) has now become a part of earning and is debited from all your transaction – be it your salary or professional income or any other income such as interest on the fixed deposit, you get the amount after tax deduction.
However, there is no TDS deduction on mutual fund earning. This doesn’t imply there is no tax applied, but it merely means that you will have to assess your tax liability from the sale of funds at the time of filing of income tax returns.
Mutual funds provide tax benefits
There is a type of equity fund known as Equity Linked Savings Scheme (ELSS). These funds invest in equities and offer tax benefits up to Rs 1.5 Lakhs under Section 80C of the IT Act.
Given these funds provide tax benefits, they come with a lock-in period of three years.
Check best ELSS funds to invest
Should you wish to know more about mutual funds or parameters to assess while evaluating a fund, feel free to connect with us.
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