Types of Mutual Funds in India

The COVID-19 global pandemic forced people to look at new avenues of generating income. As working from home became the norm, people started realising that if they wanted to live a comfortable life, they should look at places other than full-time employment for extra income. That’s where financial planning stepped in. The procedure involves prospective investors ascertaining how much of their income is to be invested in an investment plan. After determining fund allocation, investors are supposed to choose the investment option that will help them achieve their financial goals. One of the prominent investment options that are available in India is mutual funds.

The simple definition of mutual fund plans is that they are investment tools that pool money from a group of investors to purchase different securities. The fund consisting of pooled money is used to invest in various financial securities like stocks, gold, and money market instruments. By buying a unit in a mutual fund, you own a small stake in all the investments that are a part of the fund. Thanks to their numerous benefits, mutual funds are considered a smart investment choice.

How do they work?
Each scheme in mutual funds has a specific investment objective that is known to cater to distinct investment needs. Based on the fund’s objective, the money from the pooled fund is allocated to various securities such as stocks, gold, bonds, and other money market instruments. A professional who is referred to as a fund manager oversees each fund. The main goal of a fund manager is to help earn optimum returns on the fund’s investments. The revenue generated by the fund is divided and distributed among the investors proportionately.

What should be done to select the right mutual fund schemes?
To ensure that investors get the best returns from mutual funds scheme, they need to do the following things:

• Ascertain the investment objective:
Before opting for a mutual fund scheme, it is of utmost importance for you to determine the main objective behind choosing the scheme. Consider this. You want to grow your savings in the long term. To do so, you could opt to invest in mutual fund plans for ten or more years so that the money can be used for things like children’s education or business ventures. It is important to note that identifying the objective is not only applicable for long term but also short term goals. For instance, you want to buy a high-end car. So, you could opt for a systematic investment plan for a shorter period.

• Thoroughly study the market condition:
Before opting to invest in mutual funds, it is prudent on the part of the investors to thoroughly study the market conditions regularly. While the market may be growing at a particular time, it does not mean that it will perform well every day.

• Check the SIP rankings of a scheme:
Apart from identifying the objective and studying the market condition, it is also better if mutual funds’ investors could check the ranking of the scheme in the market. Nowadays, thanks to the internet, it is very easy to find if a mutual funds scheme is beneficial to the investor. However, there is a catch. Different portals may have different rankings for different plans. So, to avoid confusion, you need to ascertain the legitimacy of the third-party aggregator you are referring to before investing.

• Check the performance of a scheme:
The best mutual fund scheme is the one that is known to offer best returns to the investors regularly. It is very important to check the consistency offered by the SIP. All that an investor needs to do is evaluate a scheme based on its past returns. However, it is also important to note that only focussing on the past performance of a scheme is not enough. That’s where the internet comes in. Checking for the performance of the SIP will help you to ascertain whether the scheme is a long-time performer or just a fad. Sometimes, investors will find several SIPs with higher ratings that provided greater returns to the investors for one year, but as time passed by, they were seen to deliver poor returns. Hence, it is before opting to invest in mutual funds, it is of utmost importance on the part of investors to look out for fads.

Are there any benefits of investing in mutual funds?
Some of the advantages of investing in mutual funds are listed below:

• These funds are professionally managed:
A certain amount of skill is required for investing in financial markets. First of all, you need to thoroughly research the market and determine the best investment options available there. To invest in a market, you need to be knowledgeable about aspects such as company financials, macroeconomy, and the different sectors, from an asset class perspective. In simple terms, all of this requires a significant amount of time and commitment from you. But, if you don’t possess the skill or the time to delve deep into the market, investing in mutual funds may be an excellent alternative. In these schemes, a professional fund manager takes care of your investments and strives hard to provide reasonable revenue. For the services provided by the fund manager, you are required to pay specific fees for the professional management of your mutual fund investments. Regularly, a fund manager monitors a mutual funds investment and rebalances the portfolio accordingly to meet the scheme’s objectives. Portfolio management by professional fund managers is one of the most important advantages of a mutual fund.

• ELSS, a variant of mutual funds comes with tax benefits:
Another major advantage is that mutual fund investors can claim a tax deduction of approximately ? 1.5 lakh by investing in Equity Linked Savings Schemes (ELSS). Under Section 80C of the Indian Income Tax Act, 1961, investors can avail of tax benefits. Generally, ELSS funds come with a lock-in period of 3 years. Thus, if you are going to invest in ELSS funds, you can only withdraw your money after the lock-in period ends. Other than tax benefits for ELSS, another advantage is the indexation benefit available on debt funds. For traditional products, all interest earned is subject to tax. However, in the case of debt mutual funds, only the revenue earned over and above the inflation rate is subjected to tax. Through this benefit, investors get to earn post-tax revenue.

• They are affordable:
One of the things that cause prospective investors to hesitate before investing in the market is the notion that they might be expensive. While some might be costly, the same can’t be said for an investment in mutual funds. The minimum initial investments for most mutual funds are affordable, making them light on the wallet.

• Mutual funds are well-regulated:
Another reason to consider investing in mutual funds is that they are regulated by the capital markets regulator i.e., the Securities and Exchange Board of India (SEBI). With the help of the SEBI (Mutual Funds) Regulations, 1996, the Securities and Exchange Board of India has laid down stringent rules and regulations regarding things like investor protection, transparency with an appropriate risk mitigation framework, and fair valuation principles.

• Mutual funds are also highly liquid:
A mutual fund portfolio can be redeemed on any business day i.e., whenever the market or banks are open. This means that you have easy access to your money. After redemption, the redeemed amount will be credited into your bank account within one day to 3-4 days. The number of days is dependent upon the type of scheme. In the case of liquid funds and overnight funds, the redemption amount is paid to the investors on the next business day. However, it is important to note that if you have opted to invest in close-ended mutual fund schemes, they can be redeemed only on maturity. Similarly, ELSS has a 3-year lock-in period and can be liquidated only after that.

• Mutual funds also offer a chance for diversification:
Amongst the easy ways to diversify your investments across different securities and asset categories such as debt, equity and gold is by buying units in a mutual fund scheme. This helps in distributing the risk factor. Diversifying mutual funds ensures that all of the investors’ money isn’t invested in a single place. Diversification proves to be beneficial when one of the assets of the mutual fund isn’t performing well but others are. Through the diversification process, the risk associated with one asset class is countered by the others. This procedure ensures that the investors don’t lose out on the entire value of their investment even if a particular component of the portfolio goes through a turbulent period. Therefore, risk diversification is one of the most prominent advantages of investing in mutual funds.

How to invest in mutual funds?
For investing in mutual funds, you first need to have a mutual fund folio. Opening a mutual fund portfolio involves the steps mentioned below:

• Filling out the registration form:
Firstly, you need to fill out the registration form with details such as your name, number, address, and email address. After doing that, you can proceed to the next step.

• Completing the KYC process:
After providing personal details on the registration form, you need to provide documents that will verify the details on the form. Some of the documents that can be used for the KYC process are Aadhar card, PAN card, bank documents, and passport.

• Determining the suitable mutual fund:
After submitting the KYC documents, you need to determine the mutual fund that will help you to reach your financial goals. Once you have selected the mutual fund, you can proceed to the next step, which is to invest the required amount.

• Investing the required amount:
The final step in this process is investing the amount which is required for the mutual fund. Moreover, you can also leave a standing instruction with your bank if you are investing in a mutual fund every month.

What are the types of mutual funds?
Listed below are the numerous types of mutual funds:

1. Equity mutual funds:
This category of mutual fund plans invests the investors’ money in equities. Investors invest in these funds because capital appreciation is one of their main objectives. However, the income on equity funds is linked to the market movements of stocks. Therefore, investors need to brace themselves for the high degree of risks. They are an ideal investment choice if you want to invest for long-term goals such as buying a house or retirement planning as the level of risk may come down over time.

https://www.sebi.gov.in/sebi_data/docfiles/20616_t.html

2. Hybrid funds:
Also referred to as balanced funds, hybrid funds are a subcategory of mutual funds that consist of a debt and equity component in a specific ratio. They are known to help investors diversify their investment portfolios by investing in asset classes such as equity and debt.

3. Debt funds:
Debt funds or fixed-income funds generally invest in assets like government securities and corporate bonds. Their main objective is to offer reasonable revenue to the investors. These funds are an ideal investment option if your financial goal is to acquire a steady income over time.

4. International mutual funds:
International mutual funds have the potential to generate capital appreciation by investing across global economies. They invest in securities of international companies that aren’t publicly listed in India. Moreover, they are schemes that predominantly invest in equity and equity-related instruments. Other than equity and related instruments, they also invest in debt instruments of big corporations that aren’t available for direct investment to the Indian investors. These funds can be an ideal investment option for those who wish to invest in foreign markets but do not have the resources to do so.

5. Exchange-traded funds:
Exchange-traded funds or ETFs, are a collection of various securities such as money market instruments, shares, bonds, etc. In simple terms, an ETF is a combination of different investment avenues. They are known to offer the best attributes of two popular financial assets, i.e., stocks and mutual funds.

6. Solution-oriented schemes:
Solution-oriented schemes are close-ended funds that provide investors with the flexibility to design their mutual fund portfolio. They are ideal for investors looking for long-term wealth accumulation. The wealth accumulated through this scheme can be used for a myriad of purposes such as personal expenses after retiring. These schemes have made it simple for processes such as financial planning of complicated long-term goals that may or may not need a change of strategy in the future.

With so many different types of mutual funds available in the market, it is understandable that picking the right one is not an easy task. The simplest thing you can do is understand your own financial needs first.

*ELSS Investments are subject to a 3-year lock-in period and are eligible for tax benefit under section 80C of the Income Tax Act, 1961.

#As per the present tax laws, eligible investors (individual/HUF) are entitled to deduction from their gross income of the amount invested in Equity Linked Saving Scheme (ELSS) up to Rs.1.5 lakhs (along with other prescribed investments) under section 80C of the Income Tax Act, 1961. Tax savings of Rs. 46,800 mentioned above is calculated for the highest income tax slab.

Finance Act, 2020 has announced a new tax regime giving taxpayers an option to pay taxes at a concessional rate (new slab rates) from FY 2020-21 onwards. Any individual/ HUF opting to be taxed under the new tax regime from FY 2020-21 onwards will have to give up certain exemptions and deductions. Since, individuals/ HUF opting for the new tax regime are not eligible for Chapter VI-A deductions, the investment in ELSS Funds cannot be claimed as deduction from the total income.

Investors are advised to consult his/her own Tax Consultant with respect to the specific amount of tax and other implications arising out of his/her participation in ELSS'

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.