Everyone wants to spend an easy life without any stress specially related to money. And this is why people are becoming more and more conscious about their savings and investment.
It is good for now that you are working and earning good enough to cover your expenses, but what after your retirement? Have you thought how will you manage your expenses after your retirement?
Let me tell you, there are options like EPF and PPF in which you can invest and save your money which you can utilize after your retirement.
Let’s see each of EPF and PPF in detail. Both are provident fund benefits for retirement.
Employee Provident Fund (EPF)
The Employee Provident Fund is a retirement benefits scheme that is available to salaried employees. Under this scheme, a stipulated amount (currently 12%) is deducted from the employee’s salary and contributed towards the fund.
This amount is decided by the government. The employer also contributes an equal amount to the fund. However, an employee can contribute more than the stipulated amount if the scheme allows for it. So, let’s say the employee decides 15% must be deducted towards the EPF.
In this case, the employer is not obligated to pay any contribution over and above the amount as stipulated, which is 12%.
There are some specific features of EPF which are beneficial for the account holder. These features are as follows –
Return on Investment: 8.65%
If you urgently need the money, you can take a loan on your PF. You can also make a premature withdrawal on the condition that you are withdrawing the money for your daughter’s wedding (not son or not even yours) or you are buying a home.
tax benefit under Sec 80C.
The amount if withdrawn after completing 5 years in job will not be taxable.
Public Provident Fund (PPF)
The Public Provident Fund has been established by the central government. You can voluntarily decide to open one. For that you need not be a salaried individual, you could be a consultant, a freelancer or even working on a contract basis.
You can also open this account if you are not earning. Any individual can open a PPF account in any nationalized bank or its branches that handle PPF accounts. You can also open it at the head post office or certain select post offices.
You can take a loan on the PPF from the third year of opening your account to the sixth year. So, if the account is opened during the financial year 1997-98, the first loan can be taken during the financial year 1999-2000 (the financial year is from April 1 to March 31).
The loan amount will be up to a maximum of 25% of the balance in your account at the end of the first financial year. In this case, it will be March 31, 1998.
You can make withdrawals during any one year from the sixth year. You are allowed to withdraw 50% of the balance at the end of the fourth year, preceding the year in which the amount is withdrawn or the end of the preceding year whichever is lower.
For example:
If the account was opened in 1993-94 and the first withdrawal was made during 1999-2000, the amount you can withdraw is limited to 50% of the balance as on March 31, 1996, or March 31, 1999, whichever is lower.
If the account extended beyond 15 years, partial withdrawal — up to 60% of the balance you have at the end of the 15 year period — is allowed.
Watch this video to learn more clearly about PPF and EPF:
Features of PPF:
The minimum amount to be deposited in this account is Rs 500 per year. The maximum amount you can deposit every year is Rs 70,000.
Return on investment : 8%
tax benefit under Sec 80C , no tax on the maturity and no tax on interest earned.
If you’re involved in a legal dispute, a court cannot attach or question the money in your PPF account.
Who should invest in PPF?
Usually, everyone can invest in PPF but it’s mainly for those people who are very conservative and cant take risks to a great extent.
Anyone who wants to invest in the long term in some secure saving instrument must invest in PPF. To achieve long term goals there are many option like:
Out of these, all under the Debt category are safe. PPF is the most recommended if the investment horizon is very long like 15+ years. Because of compounding your money will grow into a big amount.
I would be happy to read your comments or disagreement on any topic. Please leave your queries or doubts in our comment’s section.
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This post targets those who already know ELSS or Taxsaver mutual funds. But many people do not know that not all ELSS are the same.
They might know that Tax saver funds are Diversified Equity Mutual funds, yes they are !!! But still, they can be differentiated in the category of :
Aggressive Tax savers :
These are the ELSS who bet more on small-cap and mid-cap, stock and hence have more return potential.
Safe and balanced Tax savers :
They heavily bet on Large Companies, which are more safe then mid-cap or small-cap stocks.
A person who wants to invest in ELSS shall not put money in just 1 ELSS, but 2-3 different ELSS. Again Putting all money in the same type of ELSS is not good, as they will be of the same portfolio type ( i mean more stake in Huge companies and less in Mid and Small-cap)
They don’t understand that insurance gives financial security to their dependents in case of there death, rather they see it as the last benefit provided to them and the most important thing for them it that they get the money-back in case they survive the tenure of Insurance.
Common people’s mindset about life insurance
People are ready to pay higher premiums to Insurance Companies for a policy which gives them death and survival benefits like Endowment plans and Money-back plans.
People are not ready to pay premiums if they don’t get any thing in case of surviving the tenure and that’s the reason why Term Insurance never became popular in this Country. That’s also the reason why many people are under-insured because of the high premium, they cant pay for higher insured sum.
Many People even don’t know that Term Insurance exists, the reason for that is their insurance agent never told them about it, because they get a very little commission on it unlike Endowment Plans.
Life Insurance is to provide a good enough cover to dependents in case of death. This is the only target for life insurance.
Watch this video to know the difference between life insurance and term insurance:
Case Study
——————-
Rajesh is a salaried person with a salary of around Rs 20000 per month, He has 2-3 dependents like his parents and wife.
Rajesh can afford a maximum of 10% of his salary as an insurance premium outgo in a year.
So Rajesh takes Endowment plan of Rs 10 lacs for 20 years in 2005.
If he dies between 2005 – 2025, his family will get Rs 10 lacs.
If he survives till 2025. He will get Rs 10 lacs.
Monthly premium = Rs 2,000
Total premium in a year is 24,000
Cover: Rs 10 lac
There are some points to consider here.
He is highly Uninsured, Rs 10 lacs is very less amount to get covered. He needs at least Rs 25-30 lacs as cover, as he has financial dependents.
The premium of Rs 2,000 monthly or Rs 24,000 yearly is not a small amount at the moment and adds to his financial burden a lot.
In case of survival, he gets Rs 10 lacs but in 2025. Considering inflation at an average of 5%, the current value of that amount will be Rs 3.5 lacs.
This means in 2025 the value of that 10 lacs will be very less and considering that after 20 years Rajesh will be earning very good money and Rs 10 lac at that time will be a small amount for him, may be less than what he may be earning in a year.
It means It does not benefit him a lot after 20 years.
He could have solved all of his problems if he would have taken term insurance instead of Endowment Plan …
If he takes Term Plan, he can get a lot more cover in very less premium and can invest the surplus money in much better investment avenues like Diversified Mutual funds or Equities.
He can take a term plan of Rs 30 lacs for 30 years, with an annual premium of 9,000 per year. (including service tax, approx).
So instead of Rs 24000 in a year, he can just pay 9,000 can be covered for 30 lacs and that too for 30 years.
He can invest the extra 15,000 (24000 – 9000) in diversified mutual funds with good track record for the next 20 years through SIP every month or yearly lump sum.
Equities in long term outperform all the investment options, In the last 10 years HDFC tax saver has given around 43% CAGR … that’s the magical returns one can expect … SBI MAGNUM Taxgain has done much better …
Let be on the safe side and be pessimistic and consider returns around 18-20% CAGR for the next 20 years.
The investment will be worth
Rs 16 lacs at 15% return
Rs 22 lacs at 18% return
Rs 28 lacs at 20% return
Rs 94 lacs at 30% return (less chance)
Rs 3.14 crore at 40% return (very less chance)
remember that this is for 20 years and not 30 years. In 30 years it will be much much more … for eg at 20% it will be 1.77 crores and 13 crores at 30%.
If we consider this case :
when he has taken Term Insurance He is in profit at any point of time
– If he dies early his family will get 30 lacs + some investments
– If he dies late , his family gets 30 lacs + his investments which has grown a lot now.
– If he survives , his investments are enough 🙂
The biggest thing to consider is that his Family is covered with good amount in case of his death, which is the main factor and sole idea of Life Insurance.
A lot of people avoid investing in shares because of the lack of knowledge about stock market investments. In this article, I’m going to tell you about the important terms and terminologies related to investment, finances, insurance, and tax.
First of all let’s know the meaning of each term.
Share or Stock: A Share is a representation of the amount of a company that you own. So if you own 100 shares of a company that has 100000 shares you are an owner for 1/1000th part.
Entry Load: Commission paid while purchasing units of a mutual fund from a broker, No Entry Load to be paid if directly purchased from Mutual Fund Office or its Website online.
Exit Load: Commission paid while selling off the mutual funds before a specified time limit. generally it is. 5% or 1% if exit before 6 months or 1 year.
NAV: The current price of each Unit of Mutual Fund, it goes up or down depending on the growth or decline in value of mutual fund investment.
NFO: New Fund Offer, When a new Mutual Fund is Launched, its call NFO of that Mutual Fund.
Different types of funds
Open Ended Mutual Funds: Mutual funds without restriction on Entry or Exit, Anyone can buy or sell the units anytime.
Close Ended Mutual Funds: Mutual Funds having restriction time on entry and exit , there is some particular time duration to buy the units and then its locked for some pre-decided period. For Eg. ABC mutual fund, a 3 years Close Ended Fund.
Growth option in Mutual Funds: Upon choosing this option, a unit holder does not receives any dividend from Mutual funds but the money it is added to investments which helps in increasing the NAV of mutual fund. Its good for people who do not want to receive cash regularly as dividend.
Dividend Option in Mutual Funds: By choosing this option a investor receives the dividend from the mutual funds whenever it is declared. Its good for investors who need regular cash.
Equity Fund: These are the funds which put most of there money in Equity and less in Debt. Equity refers to instruments with high risk and high returns like Shares, and Debt refers to instruments with no risk or low risk and less returns like bonds, Fixed deposits etc. These are high risky and with high returns.
Debt Fund: The funds which put more money in Debt and less in Equity. these are Less risky and with less returns.
Balanced Fund: The Funds which have money in both the categories in a ratio such that it makes it medium risk and medium return Fund. The ratio need not be 50:50 … even a ratio of 70:30 in booming markets can be considered as balanced. and 20:80 in bad situation will be considered as balanced.
Fund House: A Fund House is a company which manages money invested in different kind of mutual funds. Like all the HDFC Mutual funds belong to
Sectoral Funds: These funds put money in a specific sector or a group of inter-related sectors. They have high risk, high return nature.
Fund Managers: These are the experts who manage he Mutual Fund, they take the decisions like, which sectors to put money in, and which company they will pick up, the strategy, the road map, etc …
Watch this video to learn about different terms of the stock market:
Mutual Fund Benchmark: Every mutual fund has a benchmark against which they measure their performance, they perform better than there benchmark it’s considered that they have done good, else bad. For Eg. A lot of mutual funds have Sensex as the benchmark, some sectoral fund investing in Pharmaceutical may have BSE Heath care as its benchmark.
SIP (Systematic Investment Plan): This an investment method through which you can invest in mutual funds every month. Instead of paying 60,000 together, one can take a SIP of 5,000 for a year.
Stock Market: It’s a market that facilitates the buying and selling the shares of companies by connecting buyers and sellers. It can be considered as a mediator between buyer and seller. So anyone who wants to buy or sell shares can do it from the stock market.
Sensex and Nifty: These are indexes of BSE (Bombay Stock Exchange) and NSE(National Stock Exchange). Sensex and Nifty, are indicators of how prices of major stocks are moving at any point in time. Sensex comprises of 30 Shares and Nifty comprises of 50 shares.
They are calculated by a method called “Free Flow Market Capitalization” . When Sensex moves up it indicates that on an average more shares have increased there value and some have declined and vice-versa. It moves up or down depending on the combined valuations of the shares they comprise of.
Market Capitalization: This means how much worth all company shares collectively are. Simply putting:
Market Capitalization = Total number of shares available X Current Price .
Its the total money required to buy all the shares of the company available to the public.
IPO (Initial Public Offer): When a company offers shares to the general public for the first time, its call IPO. The purpose of this is generally to raise funds to finance their future projects and expanding there business.
Correction: It is a sharp increase or decrease in the stock market which was overdue for long. When market goes more up or down than expected because of rumors or for some short term reason, then to average out that correction happens …
Term Insurance: In this, you are insured for a big amount for a very less annual premium, but don’t receive anything when your maturity expires. Its a very cheap form of insurance and considered the best insurance anyone can get.
Endowment and Money Back Plans: In this you get insurance and you get a big lump sum after the tenure expires along with periodic payments in between. The premium is high per Annam.
ULIP’s: These are insurance+investment product, from the premium you pay, some amount is used as your premium towards insurance and rest is invested as per your choice. this product needs a lot of questions to be answered before taking it.
Short Term and Long term Capital Gain and Loss :
In the case of Shares and Mutual Funds, Any profit or loss made within 1 year. Tax treatment will be:
– Short term profits : 15% flat. (2008-2009)
– Long term Profits : Nil
In the case of Land, House, Jewellery, Any profit or loss made within 3 years. Tax treatment will be:
– Short term profits : 20% Flat
– Long term Profits : 30% Flat
Portfolio: Total investments combined are called Portfolio. So if Person ABC has invested Rs x in shares, Rs.y in Insurance, Rs z in PPF and Rs k in Real Estate, it will be combined to his Portfolio.
Trading Account: An account through which a person deals in instruments on the stock market.
Demat Account: An account where shares are stored in electronic format. It’s just an account which stores shares.
Commodities: Commodities are things like sugar, steel, etc … A person can trade in these things also just like shares and mutual funds. Multi Commodity Exchange of India Limited (MCX) is the commodity exchange in India just like BSE and NSE for shares.
I would be happy to read your comments or disagreement on any topic. Please leave a comment.
Do you know about the types of mutual funds you are going to invest in?
A lot of people are unaware of these different types of mutual funds even though they invest in it on a regular basis. Every mutual fund investor either he is beginner or regular must know about the categories in which mutual funds are classified in order to generate a good return.
In this article I will tell you 10 different categories of mutual funds which will be helpful for you to improve your investment portfolio.
Mutual Funds
You must be aware of what are mutual funds. If not the click here to read the basics of mutual funds.
A mutual fund is the advance tool of investment which has a large number of investors. These funds are classified into different categories based on the goal of investors.
Let’s see the categories of mutual funds.
Types of Mutual Funds
Mutual funds are categorized on the basis of their objectives, style, and strategy. Investing in Mutual Funds only is not enough to get good returns. You should know about the types of mutual funds and then invest in different funds by deciding your goal.
The different types of mutual funds are enlisted below:
Diversified Equity Funds
Tax saving Funds (ELSS)
Balanced Funds
Sectoral Funds
Mid Cap and Small Cap Funds
Index funds
Exchange-Traded Funds
Fund of Funds
Debt Funds
Liquid Funds
Watch this video to know more about the types of mutual funds:
1. Diversified Equity Funds :
These are those mutual funds which invest across all sectors and diversify their portfolio. They invest in large companies to small companies. Which results in wide diversification. It helps in spreading risk across all sectors and return potential is very good.
2. Tax saving Funds (ELSS) :
These are a special category of mutual funds which are tax saving funds called ELSS (Equity Linked Saving Schemes). These have a lock-in period of 3 years. They are Diversified mutual funds in nature.
3. Balanced Funds :
These are the funds that put money in Equity and Debt in some balanced proportion. Balanced does not mean 50:50, it may happen that they put money in the ratio of 70:30 or 60:20 or may be 80:20 … but the ideal ratio would be 50:50. It depends on market conditions.
In a very fast booming market, a fund with 7:30 mat is a balanced one. And in a bearish market, a combination of 50:50 may be considered are an aggressive fund. These funds have low risk and low return capacity in comparison with normal equity funds.
4. Sectoral Funds :
These are Funds that invest all its money in companies of a particular sector or a bunch of sectors related to each other. The reason for this is high faith in the sector for growth and return potential because of which these funds are very risky and have high return potential.
For example Reliance Diversified Power Fund.
5. Mid Cap and Small Cap Funds :
These funds are those funds that invest their money in Midcap Stocks or small Cap stocks … Mid-cap and Small Cap companies are companies categorized by there market capitalization.
Large Cap: greater than $10 billion
Mid Cap: Between $2 and $10 billion
Small-Cap: Less than $2 billion
Mid-cap and Small Cap stocks are riskier as they are small compared to large Cap stocks because of size and reachability in the market. They also have huge potential for growth so they can give superb returns too. For eg:
“Sanghvi Movers” gave a return of around 4500% in 5 years from 1992 – 1997. An investment of Rs 1 Lac was worth Rs 45 lacs in just 5 years.
In the same period “Jindal Power and Steel” gave a return of 20000 %. So an investment of Rs 50,000 was worth Rs 1 crore in just 5 years.
6. Index funds :
Index Funds are mutual funds which mirror a particular mutual fund. They put their money in the companies which are part of that index and in the same proportion as per the weightage of the company in that index. For Eg:
Franklin India Index Fund which tracks S&P CNX Nifty Fund will invest in companies in that fund in the same ratio as their weights. Suppose following is the weightage table for index:
Then the fund will also invest in these companies’ stocks in the same proportion. The NAV’s of these mutual funds increase or decrease in the same way as the index. if the index will grow by 2.4% then NAV will also increase by 2.4 %.
7. Exchange-Traded Funds :
ETFs are just like Index funds with some differences, ETFs are a mix of a stock and an MF in the sense that
Like ‘mutual funds’ they comprise a set of specified stocks e.g. an index like Nifty/Sensex or a commodity e.g. gold; and like equity shares they are ‘traded’ on the stock exchange on a real-time basis
ETFs are passively managed, have low distribution costs and minimal administrative charges. Hence most ETFs have lower expense ratios than conventional MFs.
Convenient to trade as it can be bought/sold on the stock exchange at any time of the day when the market is open (index funds can be bought only at NAV based on closing prices)
8. Fund of Funds :
These are mutual funds that invest in other mutual funds. They put money in different mutual funds in some proportion depending on their goals and objectives.
9. Debt Funds :
Debt funds are mutual funds that have their major holdings in secure and fixed income instruments like Fixed deposits, bonds. They also put a small proportion of Equity (High risk, high returns). These are secure in nature and provide low returns.
10. Liquid Funds :
Liquid funds are used primarily as an alternative to short-term fix deposits. They invest with minimal risk (like money market funds).
Most funds have a lock-in period of a maximum of three days to protect against procedural (primarily banking) glitches, and offer redemption proceeds within 24 hours. Liquid funds score over short term fix deposits.
Conclusion –
I hope you have become aware of all these types of mutual funds and now you can improve your investment by considering the funds according to your goal of an investment.
If you have any doubt you can leave your query in the comment section.
Before investing in mutual funds an investor should understand if it suits his requirement of not. Therefore one should go through all the advantages and disadvantages of mutual funds.
Advantages of Mutual Funds
Management: One of the biggest advantage is that in very low cost the investor gets his investment managed by experts. If they want to get the services solely for their investment , it can be very expensive but by investing in MF they can take advantage of the scale.
Scale Advantage : The transaction costs of a single individual is very less because mutual funds buy and sell in big volumes.
Diversification: With mutual fund investment your money gets diversified in a lot of things, which helps in minimizing the risk factor. Also if one particular sector doesn’t perform well the loss can be compensated with profits made in other sectors.
Liquidity and Simplicity: You can sell or buy mutual funds anytime. So mutual funds are good if you want to invest in something which you can liquidate easily. Also, MF is very simple to buy and sell.
Disadvantages of Mutual Funds
Risks and Costs: Changing market conditions can create fluctuations in the value of a mutual fund investment. Also there are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly.
No Guarantees: As Mutual funds invest in debt as well equities, there are no sure returns . Returns depends on the market conditions .
No Control: Investor does not have control on investment , all the decisions are taken by the fund manager. Investor can just join or leave the show.
There are many common myths about Mutual funds. Common investors do not apply their thinking a lot of times and agents/sellers of products a lot times are successful in taking advantage of this and cheat them .
Lets see some of the common myths associated with mutual funds below .
1. A Mutual fund with low NAV is better than other MF’s with high NAV.
This fallacy is due to the fact that investors perceive the NAV of a mutual fund (MF) as similar to the price of equity shares. Comparison of NAV of MF unit and Share price
NAV = (market value of all the shares held in the portfolio + Cash – Liabilities)/ total number of units
Share Price = combination of company’s fundamentals, demand-supply, public perception about the company + other complicated things
It is Funds Quality , Fundamentals and values that determines your returns and not NAV , its just the “book value” of the unit.
Example : Consider Fund A with NAV Rs 100 and Fund B with NAV Rs 5 . Both has corpus of Rs 10,00,000, Fund A has good fundamentals and is better mutual fund in terms of strategy compared to Fund B. After 1 year say their return is 40% and 30% as expected. So the NAV for A will be 140 and for B will be Rs 6.5 and fund A will give better returns compared to fund B.
The point to understand is its the strategy and the asset allocation which matters. Low NAV can only get you more units and nothing else 🙂
2. Mutual funds with good Past Performance are best choice
This is a common misconception among the Mutual funds investors that funds which have performed very well in past are the best choice . People believe that if a ABC mutual fund has given 60% return in past year and XYZ has given 45% return , then ABC is a definite choice this year also.
They should understand that performance over 1 or 2 years have very little to say about them. They must analyse performance over 4-5 years atleast to understand how a mutual fund has performed.
You can watch this video given below to know more about performance analysis:
3. NFO’s give better returns
NFO’s are more risky than the existing mutual funds as they don’t have no track record to compare. There is no advantage with NFO when it comes to investments , they have no extra magic. A NFO must be generally avoided until they have very strong strategy and unique and strong idea.
4. Putting money in lots of mutual funds will help
As a rule of thumb , no one should have more than 5-6 different mutual funds . and even those must be different kind of mutual funds . People buy 20-30 mutual funds and don’t see that all of them are of similar nature and with same kind of strategy. All of them have same kind investment portfolio. They should put money in some limited mutual funds and all should be of different type.
So these are the 4 most common myths that every beginner investor have while investing in mutual funds. Once you start your investments in mutual funds there are lot of things you should know about it to maintain a healthy portfolio and generate a good return.
Let us know if you have any query regarding mutual funds by leaving your reply in the comment section.
Lots of people believe in investing their money in traditional investment tools, because of the concern of security. You must have seen your parents investing in FD and RD, which are considered as safe tools of investment. But now a days, lot of investors are choosing a trending tool of investment i.e. Mutual funds.
But before investing in MF, one should know all the basics of mutual fund. Most people still don’t know what is mutual fund. They are not clear about even the basics of MF’s in India as an investment instrument.
Through this article, I will try to answer all the questions related to mutual funds.
Mutual fund is an advanced, low cost and tax efficient tool of investment.
There are thousands of mutual funds in India which are almost similar to each other and this created confusion among investors; some of the examples of MF’s are Fidelity mutual funds, SBI mutual funds or Reliance mutual funds.
Here is a video on basics of Mutual Funds which will help you understand some facts about MF’s in easy manner. Let’s first understand from very basic which will be helpful of a person totally outside the personal finance space.
To know MF in detail, you must understand all the related factors like what is company, what are shares, how mutual funds are classified etc. So let me explain you each term in detail.
What is Company?
Company is a voluntary association of persons formed for the purpose of doing business having a distinct name and limited liability. These company needs to be registered under The Companies Act, 1956, however, company is not a citizen so as to claim fundamental rights granted to citizens.
What are Shares?
To put in simple terms, it’s a share in a company. So it can be a very minuscule part of ownership in some company.
For Example, if someone has 100 shares of Rs.100 each for Company XYZ, it means that he has invested that much money in that company and is owner for that much part, which is commonly called as “stocks” and “equities.”
As we have got some understanding of what are these terms, we can proceed further:
Now anyone who has good knowledge of Stock markets, good knowledge of analyzing the company performance, buying and selling of shares, timing the market, etc. can directly buy and sell shares and do the investment directly in stock market.
But there are people who have no good understanding of these things and they can’t take good decisions themselves, for them MF comes into picture.
Mutual Funds Pool the money
So, MF is a financial instrument that allows a group of people to pool their money to build a huge corpus, and then this money is invested by group of people (refereed as FUND MANAGERS), who are investment experts, have deep understanding of investing in stock market and overall financial markets.
All the mutual Funds have their Units just like “shares” in Company. So if someone wants to invest Rs.10,000 in ABC MF and price for a unit is Rs.10, he gets 1000 units of ABC MF, and over a period of time as the MF investment grows, the unit price also grows with almost same ratio.
The price of these units is referred as Mutual Funds NAV (Net Asset Value). When a new MF launches, it’s called NFO of Mutual Funds (New Fund Offer, just like IPO in case of new Company’s Share issue to public)
So for example the total corpus of the MF on 1/1/2007 was Rs.100,000,000 and per unit price was Rs.10. and after an year on 1/1/2008 the total investment has grown to Rs.134,000,000, the unit price will be now Rs.13.40 (approx. it may be little less as there are some administrative cost and other expenses to be incurred).
Classification of Mutual Funds
A mutual fund can invest your money in different kind of tools like shares, debentures, gold, Fixed Deposits and cash also. So based on where it will invest and what kind of risk it will take there are 2 different ways of classifying mutual funds.
#1 Open end or Close Ended mutual Funds
One way of classifying mutual funds can be close ended and open ended funds. An open ended mutual fund is open at all time for entry and exit. So one can invest in it anytime and can get out of it anytime.
Whereas, in a close ended fund, there is a specified entry time and exit time and it comes with duration.
#2. 10 types of Mutual Funds
Mutual funds are categorized on the basis of its objectives, style and strategy. Investing in Mutual Funds only is not enough to get good returns. You should know about the types of mutual funds and then invest in different funds by deciding your goal.
The different types of mutual funds are enlisted below:
Diversified Equity Funds
Tax saving Funds (ELSS)
Balanced Funds
Sectoral Funds
Mid Cap and Small Cap Funds
Index funds
Exchange Traded Funds
Fund of Funds
Debt Funds
Liquid Funds
1. Diversified Equity Funds :
These are those mutual funds which invests across all sectors and diversify their portfolio. They invest in large companies to small companies. Which results in wide diversification. It helps in spreading risk across all sector and return potential is very good.
2. Tax saving Funds (ELSS) :
These are special category of mutual funds which are tax saving funds called ELSS (Equity Linked Saving Schemes). These have a lock in period of 3 years. They are Diversified mutual funds in nature.
3. Balanced Funds :
These are the funds which put money in Equity and Debt in some balanced proportion. Balanced does not mean 50:50 , it may happen that they put money in ratio of 70:30 or 60:20 or may be 80:20 … but the ideal ratio would be 50:50. It depends on market conditions.
In a very fast booming market, a fund with 7:30 mat be a balanced one. And in a bearish market a combination of 50:50 may be considered are an aggressive fund. These funds have low risk and low return capacity in comparison with normal equity funds.
4. Sectoral Funds :
These are Funds which invests all its money in companies of a particular sector or a bunch of sectors related to each others. The reason for this is high faith in the sector for growth and return potential because of which these funds are very risky and have high return potential.
For example: Reliance Diversified Power Fund .
5. Large cap, Mid Cap and Small Cap Funds :
These funds are those funds which invest there money in Mid cap Stocks or small Cap stocks … Mid cap and Small Cap companies are companies categorized by there market capitalization.
Large Cap : greater than $10 billion
Mid Cap : Between $2 and $10 billion
Small Cap : Less then $2 billion
Mid cap and Small Cap stocks are more riskier as they are small compared to large Cap stocks because of size and reachability in market. They also have huge potential for growth so they can give superb returns too. For eg:
“Sanghvi Movers” gave a return of around 4500% in 5 years from 1992 – 1997. An investment of Rs 1 Lac was worth Rs 45 lacs in just 5 years.
In the same period “Jindal Power and Steel” gave return of 20000% . So investment of Rs 50,000 was worth Rs 1 crore in just 5 years.
6. Index funds :
Index Funds are mutual funds which mirrors a particular mutual fund. They Put there money in the companies which are part of that index and in same proportion as per the weightage of the company in that index. For Eg:
Franklin India Index Fund which tracks S&P CNX Nifty Fund will invest in companies in that fund in the same ratio as their weights. Suppose following is the weightage table for index:
Then the fund will also invest in these companies stocks in same proportion. The NAV’s of these mutual funds increase or decrease in the same way as the index. if index will grow by 2.4% then NAV will also increase by 2.4% .
7. Exchange Traded Funds :
ETFs are just like Index funds with some differences, ETFs are a mix of a stock and a MF in the sense that
Like ‘mutual funds’ they comprise a set of specified stocks e.g. an index lik Nifty/Sensex or a commodity e.g. gold; and like equity shares they are ‘traded’ on the stock exchange on real-time basis
ETFs are passively managed, have low distribution costs and minimal administrative charges. Hence most ETFs have lower expense ratios than conventional MFs.
Convenient to trade as it can be bought/sold on the stock exchange at any time of the day when the market is open (index funds can be bought only at NAV based on closing prices)
8. Fund of Funds :
These are mutual funds which invests in other mutual funds. They put money in different mutual funds in some proportion depending on their goals and objectives.
9. Debt Funds :
Debt funds are mutual funds which have their major holdings in secure and fixed income instruments like Fixed deposits , bonds . They also put a small proportion in Equity (High risk , high returns). These are secure in nature and provide low returns.
10. Liquid Funds :
Liquid funds are used primarily as an alternative to short-term fix deposits. They invest with minimal risk (like money market funds).
Most funds have a lock-in period of a maximum of three days to protect against procedural (primarily banking) glitches, and offer redemption proceeds within 24 hours. Liquid funds score over short term fix deposits.
Watch the video given below to know about mutual funds schemes in detail.
Balanced mutual funds are those funds which invest in both equity and debt in a balanced ratio (like 60:40 or 50:50 for example).
Advantages and Disadvantages of Mutual Funds
Before investing in mutual funds an investor should understand if it suits his requirement of not . Therefore one should go through all the advantages and disadvantages of mutual funds .
Advantages of Mutual Funds
Management: One of the biggest advantage is that in very low cost the investor gets his investment managed by experts. If they want to get the services solely for their investment , it can be very expensive but by investing in MF they can take advantage of the scale.
Scale Advantage : The transaction costs of a single indivisual is very less because mutual funds buy and sell in big volumes.
Diversification : With mutual fund investment your money gets diversified in a lot of things, which helps in minimising the risk factor. Also if one particular sector does’nt perform well the loss can be compensated with profits made in other sectors.
Liquidity and Simplicity : You can sell or buy mutual funds anytime. So mutual funds are good if you want to invest in something which you can liquidate easily . Also MF are very simple to buy and sell .
Disadvantages of Mutual Funds
Risks and Costs: Changing market conditions can create fluctuations in the value of a mutual fund investment. Also there are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly.
No Guarantees: As MF invest in debt as well equities , there are no sure returns . Returns depends on the market conditions .
No Control: Investor does not have control on investment , all the decisions are taken by the fund manager. Investor can just join or leave the show.
I am sure this must have given you a good enough idea of basics of Mutual Funds in India and a general idea of types of mutual funds. In case you have any comments or any query, please leave your message in the comment section.
