MFs (Mutual Funds) are entities that collect /pool the money from different investors who are willing to invest in various equity/stocks or debt of companies or also in government bonds. Mutual funds are managed by the fund manager of respective AMC (Asset Management Companies), AMCs charges some % as a charge for running these MFs and paying fund manager for managing schemes of funds these expenses are called the expense ratio.

Various AMCs, currently 35+ like Kotak MF, L&T MF, Mirae asset India, ICICI Prudential, HDFC AMC, SBI MF, etc offer a large no. of MF schemes broadly categorized into Equity, debt, hybrid, gold, etc. catering to need of investors.

MF works in a simple way like if you have 1000 Rs invested in any scheme and that scheme has NAV ( (Net asset value ) of 10 Rs on the day of buying, then you will get 100 units of that scheme for 1000 Rs invested. In this way, the investor will get 1000 Rs invested in all those debt/equity instruments of companies or govt bonds the fund has invested in. So for a little amount of 1000 Rs investors may get part of share /bond of all companies the fund invested in that may range from 10-100 in numbers. On redeeming your invested money you will get Amount= (current NAV*no. of units)-expenses-exit load if any. NAV is updated on the fund’s site /app at end of every trading day.

MF can be further classified into Open-ended and close-ended. In open-ended schemes, investors can buy/sell units of schemes based on applicable NAV (Net Asset Value) of the day. Liquidity is this type is very high so you can sell/but at ease. So it is advisable to buy open-ended MF only.

Close-ended funds have fixed maturity and in this liquidity depends on the availability of buyers, sellers, and is less compare to open-ended funds. Liquidity is similar to that of listed stocks.

The mutual fund also has exit loads in addition to expense ratio. Exit load refers to some % charge if you redeem invested amount within a set time period as defined by the scheme and can vary from scheme to scheme.

MF scheme can be classified broadly into – Equity Oriented, Debt Oriented, Hybrid etc.

1. Equity Oriented Mutual Funds:

These invest pooled money from investors into different stocks of companies listed on stock exchanges and generate capital appreciation or depreciation depending on the performance of shares of companies it is investing. These schemes are further classified into Large Cap, Midcap, Small Cap, Multicap, Sector-specific schemes. Large-cap schemes invest predominantly in Companies having large market capitalization or in simple terms Big companies also know as Blue chip companies these schemes are less risky compare to Mid /small-cap schemes which invests in Medium/small-capitalization companies but also their return is less as the saying more the risk more the reward. Multicap schemes invest in a mix of Large, mid, small companies. The proportion of Large, Medium, small-cap are decided based on SEBI guidelines.

Sector-specific schemes invest in that specific sector companies like –Sector MF in banking companies, Pharma health, FMCG, Technology, and so on. Sector MF schemes have the highest risk but can give better rewards also.

There is also one Category of ELSS (Equity Linked Saving Scheme) which can have Largecap,multi-cap, etc behavior depending on the scheme , these schemes provide tax deduction under section 80C and have a lock-in period of 3 Years from date of investment i.e. they cannot be redeemed before 3 Years. These are preferred by investors who want tax deduction/benefits along with investment in MF schemes.

Return on Equity MF is very volatile and the investor should hold them for a long time i.e. for a goal at least beyond 5 Years because these MFs can give a return of 10-15% in one year but in next year they can also give -10 to -15 % too so better to prepare with this volatility while investing in pure equity MFs. If investing then it is suggested to have 60-70% of large caps in equity MF and rest can be Mid, small caps as Large-cap will have less risk and can provide a better return than FD, RDs, and also tax efficient.

Sector-specific MFs are very risky and returns depend on the time of entry as for some years one sector can give very high returns but then for some years they may give –ve returns, so better to not invest them if you don’t know the sector-specific knowledge and not confident.

2. Debt Oriented Mutual Funds:

These invest in debt instruments that are relatively safer but give less return (6-9%) relative to equity. Debt instruments are Govt Bonds, Company bonds, Debentures, Certificate of deposits of companies. All these are rated by credit rating agencies. Debt funds do not require frequent management by investors but investors should look for any abrupt changes in NAV and portfolio of debt MF scheme they are invested periodically for any bad bonds, papers scheme are buying. There are recent cases of defaults and hence NAV decreased significantly of some scheme which invested heavily in those bonds/papers. Debt funds are further classified as a liquid fund, ultra short term, short term, and long terms, etc. based on maturing of paper/bonds they are invested in. Debt funds are efficient in term of taxation compare to FD RDs but have risk in term of liquidity, credit (default) risks, and Interest rate risks.

3. Hybrid funds:

These are a mix of Equity & Debt MFs and contain some percentage of both and carry vary their debt/equity ratio as defined in the scheme category. Generally, it provides more return than debt MF but less than Equity MF.

• Other Mutual Funds:

 There are various other MF schemes like Gold MFs- investing in Gold, International MFs – investing in International Stocks, Fund of Funds- a fund investing the amount in a large no. of MF schemes, Index ( or Passive) funds- Funds which track Major Indices like Nifty 50, Sensex, Nifty Next 50, S&P 500, etc these just hold stocks in the same weightage as held by these indices and provide returns corresponding to Index with very low expense ratio compared to active MFs. (Active MFs which are actively managed by Fund Managers and involve a lot of buying & selling).

How to Start Investing in MFs:

Once you have selected the scheme and AMCs you want to invest. You need to decide how you want to invest- there are the following ways-

1. Directly with AMCs site: you can visit AMC site and register with PAN, Adhaar ,Bank and other details, if you are not KYC compliant first do KYC , some AMCs offer adhaar based eKYC do that and later do full KYC by visiting AMC office or Karvy/Cams center in your city. But note if you want to invest in the scheme of various AMCs then you have to register in all those AMCs which is troublesome.
2. Online apps/Platform: Today there are various online apps and Platform available which facilitates investment in almost all schemes of all AMCs.In this way, you don’t need to maintain different accounts with all AMCs.These apps also provide Bank Mandate facilities so you don’t need to use Net Banking/debit cards for payment for every investment. They also provide the facility of video KYC, so no need to visit any centers and filling forms. All these facilities and few others like portfolio details, investment according to goal, redemption according to exit load, taxation, etc. Some famous platforms/apps are Kuvera, ET money.
3. Through Agent/Broker/Distributors: You can also invest by contacting Broker/Agent of respective AMCs after doing all formalities. You can either give cheque or Mandate to your bank to transfer the amount to AMCs each time you want to invest.

Note: If you have already had trading and demat account, you are already KYC compliant and don’t need to do KYC again. Also once you have done KYC with any AMC you don’t need to do KYC again while investing with other AMCs.

Ways to Invest in MF:

Lump-sum: In this, you deposit a fixed one-time amount in the MF scheme; you can do this as many times you want. There is a minimum amount of restriction which depends on scheme to scheme. Payment for lump sum investment can be done through Net Banking/debit card/UPI /Bank Mandate in case of online investment (AMC website, Apps, etc).
SIP: or Systematic Investment Plan this popular method you must have seen in TV/print advertisements. SIP works in the same way as your RD- Recurring Deposits. In SIP you give authorization to your bank through biller addition/mandate to transfer a fixed amount every month towards the MF scheme you opted. So in this way you don’t need to transact every month, it will be automatically done as per options selected by you. You can select periodicity and term of SIP at the time of opening SIP like monthly, quarterly, weekly, and till 1 year, 2 years …or until not canceled. You can stop any SIP at any time and restart again when you want in the same Folio. ( Folio is a unique account no. linked to your AMC account under which all investment with that particular AMC is done), You can also open multiple folios for each scheme or can do all investment of that AMC under the same folio. Also, many AMCs provide the facility of pause SIP or skip the next SIP which will come handy in case you don’t have enough money for the next installment.SIP helps to average out your investment as some time you will buy your scheme’s NAV will be high and other time NAV will be less. But remember SIPs do not remove risk completely and also averaging out happens mostly when your investment is low and later on when your monthly installment becomes very less compare to the investment already made the averaging out don’t make much difference.

TIPS:

1. MF investment is subjected to Market risk hence before investing taking into consideration your risk appetite i.e. how much capital loss can you take in short term, duration of MF investment should be longer. Although the long term also doesn’t guarantee a return.
2. So if the long term also doesn’t guarantee returns then how to get MF investment benefits? In the long term, duration also returns can be negative if the market suddenly falls when you require the money. So it is better to shift Equity MF investment to less risky investment like FD, debt MFs when the goal is near after they achieved reasonable return as per the category of MFs. Don’t invest in equity MF if your goal is less than 3-5 years.
3. Note past returns of MF do not guarantee that future returns will be like that. So don’t read too much into past returns, fund ratings, etc. Returns depend on fund manager capability to buy/sell stocks/bonds etc at right time and his/her selection of stocks/bonds etc.
4. There are Hundreds of MF schemes of 30-40 AMCs so to shortlist you should take help of MF research sites like Morningstar, Value research, etc, shortlist can be based on rolling returns, risk vs. return, downside protection, recent performance try to combine all these factors and select scheme in which you are comfortable or take help of advisors.
5. Always opt for direct plans and not regular plans of the scheme as regular plans have extra fees of distribution in built-in it which can range from 1-2% extra.
6. If you don’t want some part of the money as a dividend then go for growth plan in of the scheme you are investing which your amount will grow faster.

Thanks for reading! I will try to cover other aspects of MF in the next posts.