Overview
The one investment vehicle that has truly come of age in India in the past decade is mutual funds. Today, the mutual fund industry in the country manages around Rs 100,000 crore of assets, a large part of which comes from retail investors. And this amount is invested not just in equities, but also in the entire gamut of debt instruments. Mutual funds have emerged as a proxy for investing in avenues that are out of reach of most retail investors, particularly government securities and money market instruments.
Specialisation is the order of the day, be it with regard to a scheme’s investment objective or its targeted investment universe. Given the plethora of options on hand and the hard-sell adopted by mutual funds saving for a piece of your savings, finding the right scheme can sometimes seem a bit daunting. Mind you, it’s not just about going with the fund that gives you the highest returns. It’s also about managing risk–finding funds that suit your risk appetite and investment needs.
So, how can you, the retail investor, create wealth for yourself by investing through mutual funds? To answer that, we need to get down to brass tacks–what exactly is a mutual fund? Very simply, A mutual fund is simply a financial intermediary that allows a group of investor to invest their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks orbonds). When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund.
Mutual funds are one of the best investments ever created because they are very cost efficient and veryeasy to invest in (you don't have to figure out which stocks or bonds to buy).
Mutual funds: The advantages...
And that, naturally, begs the question: why can’t invest directly in, say, equity? Why go through a mutual fund at all? Here are some compelling arguments in favour of mutual funds:
Professional Management
Take equities. Most of us have neither the skill to find good stocks that suit our risk and returns profile nor the time to track our investments–but still want the returns that can be had from equities. That’s where mutual funds come in.
When you invest in mutual funds, it is your fund manager who will take care of your investments. A fund manager is an investment specialist, who brings to the table an in-depth understanding of the financial markets. By virtue of being in the market, the fund manager is ideally placed to research various investment options, and invest accordingly for you.
Small Investments
Today, if you wanted to buy government securities, you would have to invest a minimum amount of Rs 25,000. Much the same is the case if you want to build a decent-sized portfolio of shares of blue-chips. Now, the amount for many small investors.
A mutual fund, however, gives you an ownership of the same investment pie–at an outlay of Rs 1,000-5,000. That’s because a mutual fund pools the monies of severalinvestors, and invests the resultant large sum in a numberof securities. So, on a small outlay, you get to participate in the investment prospects of a number of securities.
Diversified Portofolio
One of the soft-mentioned tenets of portfolio management is: diversify. In other words, don’t put all your eggs in one basket. The rationale for this is that even if one pick in your portfolio turns bad, the others can check the erosion in the portfolio value. Take a simple–even if extreme– example. Say, you have Rs 10,000 invested in one stock, Reliance. Now, for some reason, the stock drops 50 per cent. The value of your investment will halve to Rs 5,000. Now, say you had invested the same amount in a mutual fund, which had parked 10 per cent of its corpus in the Reliance stock. Assuming prices of other stocks in its portfolio stay the same, the depreciation in the fund’s portfolio– and hence, your investment will be 5 per cent. That’s one of the merits of diversification.
Liquidity
You are free to take your money out of open-ended mutual funds whenever you want, no questions asked. Most open-ended funds mail your redemption proceeds, which are linked to the fund’s prevailing NAV (net asset value), within three to five working days of your putting in your request
Tax Breaks
Last but not the least, mutual funds offer significant tax advantages. Dividends distributed by them are tax-free in the hands of the investor.hey also give you the advantages of capital gains taxation. If you hold units beyond one year, you get the benefits of indexation. Simply put, indexation benefits increase your purchase cost by a certain portion, depending upon the yearly cost-inflation index (which is calculated to account for rising inflation), thereby reducing the gap between your actual purchase cost and selling price. This reduces your tax liability.What’s more, tax-saving schemes and pension schemes give you the added advantage of benefits under Section 80(C). You can avail a tax exemption on an investment of up to Rs 10,0000 in the scheme in a year
Mutual funds: The disadvantages...
Mutual funds are good investment vehicles to navigate the complex and unpredictable world of investments. However, even mutual funds have some inherent drawbacks. Understand these before you commit your money to a mutual fund.
No assured returns and no protection of capital
If you are planning to go with a mutual fund, this must be your mantra: mutual funds do not offer assured returns and carry risk. For instance, unlike bank deposits, your investment in a mutual fund can fall in value. In addition, mutual funds are not insured or guaranteed by any government body (unlike a bank deposit, where up to Rs 1 lakh per bank is insured by the Deposit and Credit Insurance Corporation, a subsidiary of the Reserve Bank of India).
There are strict norms for any fund that assures returns and it is now compulsory for funds to establish that they have resources to back such assurances. This is because most closed-end funds that assured returns in the early-nineties failed to stick to their assurances made at the time of launch, resulting in losses to investors.
TYPES OF MUTUAL FUNDS
Equity Funds
The highest rung on the mutual fund risk ladder, such funds invest only in stocks. Most equity funds are general in nature, and can invest in the entire basket of stocks available in the market. There are also ‘specialised’ equity funds, such as index funds and sector funds, which invest only in specific categories of stocks.
Debt Funds
Such funds invest only in debt instruments, and are a good option for investors averse to taking on the risk associated with equities. Here too, there are specialised schemes, namely liquid funds and gilt funds. While the former invests predominantly in money market instruments, gilt funds do so in securities issued by the central and state governments.
Balanced Funds
Lastly, there are balanced funds, whose investment portfolio includes both debt and equity. As a result, on the risk ladder, they fall somewhere between equity and debt funds. Balanced funds are the ideal mutual funds vehicle for investors who prefer spreading their risk across various instruments
Reliance Mutual Fund Transact through Online
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