The latest Mutual fund investment scheme in India is developing at a really fast rate. In February 2019, this sector recorded a total amount of up to 23.16 trillion in AAUM (Average Assets Under Management). In 2009, AAUM showed approximately 5 trillion. The figures clearly suggest how this industry has increased by 4 times within 10 years. Currently, India has over 2,500 mutual fund schemes and 44 AMFI.
As mutual funds differ in types, it gets quite challenging for investors to pick the right type of investment funds and kickstart their investment careers. In this post, we'll talk about mutual funds, the types, benefits of investing in MF, total schemes, and etc. But before we get started, let's have a quick look at the meaning of mutual funds investment.
A mutual fund is one of the famous investment instruments that collect money from novices and professional investors. The money is collected in different asset classes namely equity shares, debt, gold, foreign securities, and the list goes on. Mutual Funds are regulated and managed by SEBI and the Association of Mutual Funds in India. They are safe, transparent, reliable, and flexible forms of investment. But, the question is why people love to invest in mutual funds?
It is no longer an era when people would invest in traditional investment instruments. Whether it is a beginner or professional investor, mutual funds seem the most reliable and secure option for investment. Furthermore, these funds come in a wide range of schemes and types. You can build your investment portfolio for just 500/-
Depending on the investment plan you choose, mutual funds allow investors to build their investment portfolio for Rs 500 and get started with the investment procedure. Another major advantage of mutual funds is that it is handled by professional fund managers, who possess years of experience in managing financial profiles of the investors. No matter which mutual fund investment scheme you opt for, you can rest assured that your money is safe with financial experts. Let’s learn about the types of mutual funds in India.
Basically, there are three types of mutual funds categories in India – debt funds, equity funds, and hybrid funds. Depending on your risk appetite, investment goals, and overall investment profile; you can pick any of the below-listed mutual funds.
One of the most common types of equity funds, in which more than 65% of the investments are used for equity instruments, are known as equity funds. In the simplest terms, equity funds are long-term investment plans where investors put their money in reputable companies. The growth of the companies decides the rate of returns for investors. Equity funds are the most reliable option for investors who are ready to bear significant risk in order to obtain fruitful results.
As equity funds depend on the stock and economy, they come with a high risk. That's the reason why they are only preferred by professional investors. According to SEBI and AMFI, there are a total of 11 types of equity funds out on the market. However, the most common type of equity fund is ELSS (Equity Linked Savings Scheme). It is specially developed for investors who are on the lookout for a tax-saving investment funds option.
The investments in ELSS can save you up to 1.5 lakh on tax. However, there is a specific lock-in period (usually, 3 years) in the tax-saving investment funds. It is important to note that equity funds come with a lock-in period. You might need to invest funds for as long as 5 years if you want to receive the maximum perks. This is because the growth of the companies takes years. If you want your money to grow rapidly, then equity funds are the best pick!
Another famous type of Mutual fund is debt funds, where a major portion of the money is invested in money market securities and debt. Any mutual fund where less than 65% of the total money is invested in the equity market is debt fund. Debt Funds is a reliable and secure form of investment option for investors with low-risk appetite. If you are not willing to take higher risks, then debt funds should be your number 1 priority.
Now that these funds are associated with lower risk, they offer a comparatively lower rate of returns than equity funds. However, they are far better than fixed deposits and other traditional investment instruments. Debt funds offer higher ROI than fixed investment funds, but their results are not as fruitful as equity funds. SEBI has introduced 16 types of debt funds.
One of the most popular debt fund investment options is liquid funds. Not only are they less risky, but debt funds offer a maximum rate of returns to the investors. In liquid funds, the money is invested in the money market securities that come with a maturity period of 91 days. As they have a shorter maturity period, they carry the least amount of risk.
As the name implies, hybrid funds are the special mutual fund's type where the money is invested in either two or more than 2 securities. For example, investors can opt for hybrid funds where they can invest in both equity and debt funds.
Hybrid funds are often considered balanced funds since they lower the risk of your investment while increasing the chance of high returns. As you invest in equity funds, you get a higher ROI. On the contrary, your risk is lowered as the portion of your money is also invested in debt funds. There are 7 types of hybrid mutual funds available on the market.
The most popular type of hybrid funds is Dynamic Asset Allocation Funds. The best part about this mutual fund investment scheme is the investors get an opportunity of investing their money i.e. anywhere between 0 to 100 percent in equity and debt. There is no fixed ratio that you are obligated to follow.
From the above examples and schemes, we assume that the meaning and purpose of mutual funds are already clear to you. On that note, let’s move to the other section of the post which is “benefits of investing in mutual funds”.
When you invest in mutual funds, you allow an expert financial manager to track, monitor, and look after all your investments. You don’t have to manage your investments. In fact, all your investments are managed by professionals who possess years of experience in dealing with investment instruments. Every investor is liable to pay a certain percentage of fees on their returns. This fee is known as expense ratio and is paid for the administration and management works.
The expense ratio can vary from 0.5% to 1.5%. But, it must not go beyond 2.5%. Mutual fund houses reveal the rate of returns in each mutual fund scheme after deducting the expense ratio.
The reason why a majority of investors’ interest is shifting towards mutual funds investment is the high rate of returns. Gone are the days when traditional investment methods such as Gold, commodities, FD’s, and precious metals were popular. Today, mutual funds are considered the most reliable and flexible investment solution for investors across India.
You can expect up to 7% of ROI in investments. The rate of returns can go up to 15% if you invest in equity funds for over 5 years. The high rate of returns is the main reason why most of the investors prefer mutual funds instead of relying on the traditional form of investments.
You don't have to invest all your savings in one go if you choose mutual funds investment. Mutual funds come with two types of investment plans i.e. lump-sum payment and SIP. If you choose the latter, you get a chance of starting your investment with as slow as Rs 500/- in your investment account. Yes, you read it right! The minimum amount you need to get started with the mutual fund's investment is Rs 500 whereas the maximum limit is not available.
If you opt for SIP investment plan, a set amount of money automatically deducts from your bank account every month and transfers to the mutual fund's account. For example, if you select a 500/- per month investment, this amount will be debited from your bank every month automatically. The small investments generate high returns at the time of maturity.
Mutual funds are known for three main fund categories that are mentioned above. You can always balance your risk by investing in different funds and diversify your investment portfolio. For example, if you choose a hybrid funds investment option, you can minimize the risk while increasing the chances of higher returns.
As discussed above, the systematic investment plan (SIP) is the best mutual fund investment scheme for investors who do not want to risk all their savings by paying the entire amount in one go. SIP allows investors to choose the interval period as well as the amount they want to get deducted at each interval. For example, you can fix monthly, quarterly, or weekly mutual funds investment option where a specific amount set by you will be deducted from your bank account automatically.
Furthermore, this plan allows you to modify the monthly payment amount according to your financial condition.
A lot of investors consider the ELSS (Equity Liked Saving Scheme) investment plan to avail of tax benefits. Under section 80c of the Income Tax Act, the investors who put their money in ELSS can save up to 1.5 lakh on tax. However, ELSS comes with a lock-in period that is up to 3 years. You won't be able to redeem money before the ELSS reaches its maturity period.
The best part is even if you choose the other types of investment options (which don't specifically focus on tax saving benefit); you won't be charged tax for amount up to 1 lakh. You are only liable to pay tax on the earnings that exceed 1 lakh.
Everyone knows how important mutual funds are and how can they grow your money rapidly. But the question is “how exactly the mutual funds work”? Before you invest in mutual funds, it is important to learn the working of this investment product right from the launch of MF to its maturity period.
1) The mutual fund investment process starts when AMC discovers the right money-making opportunity that is subject to certain risks in the market.
2) The fund house or AMC compares the latest investment opportunities with the ones already existing. They also take into consideration the pros, risks, and drawbacks of the new investment products and analyze if the same can outperform the existing investment plans.
3) The AMC selects a financial investment manager who's responsible for creating a portfolio of multiple asset classes. The fund manager then chooses the right mutual fund category for the new investment product.
4) As soon as the fund house gets SEBI’s approval for the launch of the new mutual fund investment product, they introduce it in the market. Also known as New Fund Offer, the NFO stays on the market for a week or 10 days.
Some of the most common mutual fund's investment houses in our country are as follows:
1) ICICI Prudential Mutual Fund
2) Reliance Mutual Fund
3) Franklin Templeton Mutual Fund
4) Aditya Birla Sun Life Mutual Fund
5) HDFC Mutual Fund
6) SBI Mutual Fund
7) Axis Mutual Fund
8) Kotak Mahindra Mutual Fund
According to the subscription period, one can categorize the funds as close-ended and open-ended mutual funds investment plans. The latter allows people to enter and leave the funds’ investment whenever they want. However, the close-ended investment plan restricts the exit of investors until the maturity period of the scheme (which is usually 3 to 4 years).