MUTUAL FUND

MEANING
•Mutual funds are one of the most popular investment options these days.
•A mutual fund is an investment vehicle formed when an Asset Management
Company (AMC) or fund house pools investments from several individuals and
institutional investors with common investment objectives.
•A fund manager, who is a finance professional, manages the pooled investment.
The fund manager purchases securities such as stocks and bonds that are in line
with the investment mandate.
•Mutual funds are an excellent investment option for individual investors to get
exposure to an expert managed portfolio.
• Investors would be allocated with fund units based on the amount they invest.
•Each investor would hence experience profits or losses that are directly
proportional to the amount they invest.
•The main intention of the fund manager is to provide optimum returns to
investors by investing in securities that are in sync with the fund’s objectives.
TYPES OF MUTUAL FUNDS

EQUITY MUTUAL FUNDS

•An equity fund is a type of mutual fund where at least 65% of the fund's corpus is dedicated to equity and
equity-oriented investments. Equity mutual funds are known for their high-return potential. However, there
are various type of equity funds, based on their characteristics and risk-reward potential.
Small-Cap Funds
•Small-cap funds are those equity funds that invest your money in stocks of companies that have a market
capitalization of less than Rs. 500 crores. On stock indices such as Sensex, small-cap companies are generally
ones that are ranked below the 250th spot.
Mid-Cap Funds
•Mid-cap funds are those equity funds that invest your money in stocks of companies that have a market
capitalization of Rs. 500 crores to Rs. 10,000 crores. Mid-cap companies are ranked from 101 to 250 on stock
indices.
Large-Cap Funds
•Large-cap funds are those equity funds that invest your money in stocks of companies that have a large
market capitalization. Large-cap companies are ranked from 1 to 100 on stock indices.
Multi-Cap Funds
•Multi-Cap Funds are types of equity funds that invest in shares of
companies of all market capitalizations. Asset allocation is changed by
the fund manager based on market conditions to yield better returns.
Equity-linked savings scheme (ELSS)
•ELSS is the type of mutual funds covered under Section 80C of the
Income Tax Act, 1961. With investment in ELSS funds, an investor can
claim tax deductions up to Rs. 1,50,000 per year.
Index Funds
•Index Fund is a type of fund that invests in the index (Nifty50, Sensex,
sectoral indices, etc.). Its performance tends to mirror that of the index
it is replicating.
Sector Funds
•Sectoral fund or thematic fund is a type of fund that invests in stocks
of a particular sector or industry like Pharma and FMCG.
Advantages
Liquidity
•The most important benefit of investing in a Mutual Fund is that the
investor can redeem the units at any point in time. Unlike Fixed Deposits,
Mutual Funds have flexible withdrawal but factors like the pre-exit penalty
and exit load should be taken into consideration.
Diversification
•The value of an investment may not rise or fall in tandem. When the value
of one investment is on the rise the value of another may be in decline. As a
result, the portfolio’s overall performance has a lesser chance of being
volatile.
•Diversification reduces the risk involved in building a portfolio thereby
further reducing the risk for an investor. As Mutual Funds consist of many
securities, investor’s interests are safeguarded if there is a downfall in other
securities so purchased.
Expert Management
•A novice investor may not have much knowledge or information on how and where to invest.
The experts manage and operate mutual funds. The experts pool in money from investors and
allocates this money in different securities thereby helping the investors incur a profit.
•The expert keeps a watch on timely exit and entry and takes care of all the challenges. One
only needs to invest and be least assured that rest will be taken care of by the experts who
excel in this field. This is one of the most important advantages of mutual funds.
Flexibility to invest in Smaller Amounts
•Among other benefits of Mutual Funds the most important benefit is its flexible nature.
Investors need not put in a huge amount of money to invest in a Mutual Fund. Investment can
be as per the cash flow position.
•If You draw a monthly salary then you can go for a Systematic Investment Plan (SIP). Through
SIP a fixed amount is invested either monthly or quarterly as per your budget and
convenience.
Accessibility – Mutual Funds are Easy to Buy
•Mutual Funds are easily accessible and you can start investing and buy mutual funds from
anywhere in the world. An asset management companies (AMC) offers the funds and distributes
through channels like :
•Brokerage Firms
•Registrars like Karvy and CAMS
•AMC’S Themselves
•Online Mutual Fund Investment Platforms
•Agents and Banks
•This factor makes mutual funds universally available and easily accessible. More so, you do not
require a Demat Account to invest in Mutual Funds. Mutual funds are easy to buy, track
performance and one-click investment with Scripbox
Schemes for Every Financial Goals
•The best part of the Mutual Fund is the minimum amount of investment can be Rs. 500. And the
maximum can go up to whatever an investor wishes to invest.
•The only point one should consider before investing in the Mutual Funds is their income, expenses,
risk-taking ability, and investment goals. Therefore, every individual from all walks of life is free to
invest in a Mutual Fund irrespective of their income.
Safety and Transparency
•With the introduction of SEBI guidelines, all products of a Mutual Fund have been labeled. This
means that all Mutual Fund schemes will have a color-coding. This helps an investor to ascertain
the risk level of his investment, thus making the entire process of investment transparent and safe.
•This color-coding uses 3 colors indicating different levels of risk-
•Blue indicates low risk
•Yellow indicates medium risk, and
•Brown indicates a high risk.
•Investors are also free to verify the credentials of the fund manager, his qualifications, years of
experience, and AUM, solvency details of the fund house.
Lower cost
•In a Mutual Fund, funds are collected from many investors, and then the same is used to purchase
securities. These funds are however invested in assets which therefore helps one save on
transaction and other costs as compared to a single transaction. The savings are passed on to the
investors as lower costs of investing in Mutual Funds.
•Besides, the Asset Management Services fee cost is lowered and the same is divided between all
the investors of the fund.
Best Tax Saving Option
•Mutual Funds provide the best tax saving options. ELSS Mutual Funds have a tax exemption
of Rs. 1.5 lakh a year under section 80C of the Income Tax Act. You can use Scripbox’s income
tax calculator to ensure tax plan requirement
•All other Mutual Funds in India are taxed based on the type of investment and the tenure of
investment.
•ELSS Tax Saving Mutual Funds has the potential to deliver higher returns than other tax-
saving instruments like PPF, NPS, and Tax Saving FDs.
Lowest Lock-in Period
•Tax Saving Mutual Funds have the lowest lock-in periods of only 3 years. This is lower as
compared to a maximum of 5 years for other tax saving options like FD, ULIPs, and PPF.
•On top of that one has the option to stay invested even after the completion of the lock-in
period.
Lower Tax on the Gains
•With Equity linked saving scheme you can save tax up to Rs. 1.5 Lakh a year under section
80C of Income Tax (IT) Act. All other types of Mutual Funds are taxable depending on the type
of fund and tenure.
Disadvantages of Mutual Fund
Cost to Manage the Mutual Fund scheme
•As mentioned above, Market Analysts or Fund Managers manage and operate the mutual funds. These
Fund Managers work for the fund houses that manage huge investments every day. This requires a lot of
efficiencies, expertise, and experience in the subject matter.
Dilution
•Due to dilution, it is not recommended to invest in too many Mutual Funds at the same time.
Diversification, although saves an investor from major losses, also restricts one from making a higher
profit.
Lock-in Periods
•Equity-linked Saving Scheme (ELSS) have a longer lock-in period of 3 years. This debars an investor from
withdrawing the investment before the lock-in period is over. However, withdrawing these funds before
the lock-in period could lead to huge penalties.
•A portion of the fund is kept in cash to safeguard investor’s interest . This is done to compensate the
investor in case he desires to withdraw the fund before maturity. This part of the cash fund does not earn
any interest.