Mutual Fund

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The corpus of the fund is then deployed in investment alternatives (these could be equities, debentures / bonds or money market instruments.) that help to meet predefined investment objectives. The income earned through these investments are shared by its unit holders in proportion to the number of units they own.

Investor who don’t have the time to study and monitor the market constantly, or the deep understanding of the financial market, a Mutual Fund offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

Professional Management: Your money is managed by experienced fund managers using who are experts in their field, after much solid research and in-depth study.

Constant monitoring: Your investments are monitored on an ongoing basis for best returns.

Research: A through study is made before investing. Market conditions, global trends, industry growth predictions, sector future, Company profile, financials, growth potential … everything is considered.

Liquidity: Open-ended mutual funds are priced daily and are always willing to buy back units from investors. This means that investors can sell their investments in mutual fund anytime without worrying about finding a buyer at the right price.

Diversification: Mutual funds aim to minimize risk through diversification by investing in a number of companies across a broad section of industries and sectors. Through Mutual Funds, you can achieve diversification that would have otherwise not been possible.

Tax Efficiency* The dividends are tax-free in the hands of the investor. . Also Investments for over 12 months qualify for long-term capital gains, which are currently exempt from tax. For Resident Indians there is no TDS on redemption of the units under the Indian Income Tax Act, 1961.

Transparency: Prices of open ended mutual funds are declared daily. Regular updates on the value of your investment are available.

Regulated industry: Mutual funds are registered with SEBI and they function under strict regulations designed to protect the interests of investors.

Mutual fund schemes are normally classified on the basis of their structure and their investment objective.

By Structure

Open-ended Funds
An Open-ended Fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can buy and sell units of the schemes at Net Asset Value (NAV) prices anything they want.

Close-ended Funds
A Close-ended Fund has a stipulated maturity period, which generally ranges from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public Offering and thereafter they can buy or sell the units of the scheme on the Stock Exchanges, if they are listed.

By Investment Objective

Growth Funds
Growth funds aim to provide capital appreciation over the medium to long term. Growth schemes normally invest a majority of their corpus in equities.

Income Funds
Income Funds aim to provide regular and steady income to investors. Income schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities.

Balanced Funds
Balanced Funds aim to provide both growth and regular income. Balanced schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents.

Money Market Funds
Money Market Funds aim to provide easy liquidity, preservation of capital and moderate income. Money Market Funds schemes generally invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit, Inter-Bank Call money and Commercial Paper

Other Equity Related Schemes

Tax Saving Schemes
These schemes offer tax rebates to investors under specific provisions of the Indian Income Tax laws, as the Government offers tax incentives for investments in specified avenues.

Sectoral Schemes
Sectoral Funds are those which invest exclusively in specified sector(s) such as IT, entertainment, Pharmaceuticals, FMCG, etc.

Index Schemes
Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE S&P CNX 50.

Investors have varying investment needs. To meet this, Mutual Funds offer various investment plans like.

Growth Option
Dividend is not paid-out under a Growth Plan and the investor realises only the capital appreciation on the investment.

Dividend Payout Option
Dividends are paid-out to investors under a Dividend Payout Option. However, the NAV of the mutual fund scheme falls to the extent of the dividend payout.

Dividend Re-investment Plan
The dividend accrued on mutual funds is automatically re-invested in purchasing additional units in open-ended funds.

Insurance Plan
These schemes offer insurance cover as part of the investment to investors.

Systematic Investment Plan (SIP)
Investors are given the option of giving post-dated cheques (or a direct debit of the bank account) in favour of the fund. The investor is allotted units on a pre-determined date specified in the Offer Document at the applicable NAV.

Systematic Encashment Plan (SEP)
The Systematic Encashment Plan allows the investor the facility to withdraw a pre-determined amount / units from his fund at a pre-determined interval. The investor's units will be redeemed at the applicable NAV as on that day.

An investor can save on taxes by investing under the following sections of the Income Tax Act, 1961

  • Section 80C (Investment avenues are discussed below in detail)
  • Section 80D (Health Insurance premium etc.)
  • Section 80E (Educational loan)
  • Section 80G (Donation to specified institutions)
  • Section 80U (deduction for handicapped person)
  • Section 24 (Housing loan interest)

Under Section 80C for tax deduction an individual could invest up to a maximum limit of Rs 1 lakh in one or more of the following options put together:

(a) PPF (Public Provident Fund) - under this scheme the maximum investment permissible in a financial year is Rs 70,000
(b) EPF ( Employees Provident Fund)
(c) Life Insurance Premium
(d) Pension Plan premium (under Sec 80CCC)
(e) ULIP
(f) ELSS (Equity Linked Saving Scheme) - offered by Mutual Funds
(g) NSC (National Savings Certificate)
(h) 5 yrs Bank Fixed Deposit
(i) 5 yrs Post Office Time Deposit
(j) Infrastructure Bonds / NABARD Rural Bonds
(k) NPS - New Pension Scheme (under Sec 80CCD)

The Equity Linked Savings Scheme (ELSS) could be open-ended or close-ended in nature. Majority of the ELSS schemes are open-ended. This means that they are open for subscription on all business days. As the name suggests, the scheme primarily invests in equity market by buying equity stocks of companies listed on the stock exchanges. The units of the scheme are offered at the NAV (net asset value). The NAV is announced for all business days and keeps changing primarily depending upon the movement in the prices of stocks held in the portfolio of the scheme.

Equity as an asset class has given a higher return over the long term. ELSS has the potential to give substantially higher returns as compared to that from PPF or NSC over the long-term. The returns from PPF or NSC are in the range of 8% and at times may not beat the inflation. Returns from ELSS could fluctuate depending upon the performance of the equity market and also the stock selection criteria of the particular fund manager. Returns from ELSS could even be negative in the short to medium term. As on 31st December, 2009, the average compounded annualized growth rate (CAGR) over 3 and 5 years period by the ELSS category of Funds was 8.2% & 20.1% respectively.

ELSS also scores over other tax saving schemes since it offers tax free return (long-term capital gains and dividends are totally tax free as per the current tax structure). Only PPF offers tax free return but it has a maturity period of 15 years.

There is a lock-in period of 3 years from the date of allotment. This means that after investing in the Scheme, the investor can not redeem or withdraw the invested amount for a period of 3 years.

But, this is one of the major advantages of ELSS since it has the lowest lock-in period as compared to the other tax saving instruments like PPF, NSC and Bank Deposits etc. Investors who want periodic dividends can consider the dividend payout option under the ELSS category, wherein the dividends received are also tax free. In fact, this is the only investment option under Section 80C which provides interim cash flow during the lock-in period.

The investor should apply the following criteria while selecting an ELSS for an investment:

  • The track record of the fund at least over the last 2 to 3 years. One should not attach too much importance to the recent 1 month or 3 months performance.
  • The dividend history of the fund.
  • It is not necessary that the investor should select an ELSS based on its large size.
  • The discerning investor could also look at the portfolio of the scheme to ensure that it is well diversified across market caps.
  • If the investment amount is more than Rs 20,000, then probably the Investor could select two ELSS funds instead of one - one could be an established name while the other could be an upcoming fund.

The investor can use the services of a mutual fund distributor or directly approach the fund house for making investment in the ELSS. The distributor would provide the application form or one could download it from the website of the Fund House. The investment could be made in a single name or one could add second and/or third applicant. For investing in ELSS or for that matter in any scheme of a Mutual Fund the investor should have a PAN card. If he or she wishes to invest Rs 50,000 or more he or she should be Know Your Client (KYC) compliant. These criteria would also be applicable for all the joint applicants. The duly filled-in application form along with the cheque and other documents need to be submitted at the Investor Service Centre of the Fund House on any business day before the cut-off time of 3.00 p.m. to get the units allotted at the NAV of that day. The Fund House normally sends the Account Statement within 3 to 4 working days. If the investor provides the e-mail ID in the application form, the account statement could be sent by e-mail. Many Fund Houses also offer the facility of investing in the Fund online through their websites. Recently, the regulator has also allowed the registered stock brokers to offer the facility of investing in Mutual Fund Schemes to their clients through the stock exchange mechanism.

The amount that needs to be invested in ELSS would depend on the other investments already committed towards PPF, EPF, Insurance etc. An young investor could use the entire limit of Rs 1 lakh for investing in ELSS if he is not investing in other tax saving instruments under Section 80C whereas an aged investor could decide on a mix of three or four investment options. But, an investor should not ignore the ELSS option because this is the only option which has the potential of delivering a higher return.

Most of the fund houses offer ELSS. Yes, ELSS funds offer the facility of SIP. Ideally, a salaried investor should start his SIP in an ELSS fund in the month of April itself so that he gets the benefit of rupee cost averaging and he need not have to worry about the cash flow problem at the end of the financial year.

An ELSS fund should definitely figure in the tax saving list of every tax payer. Tax saving is not only about investing for saving taxes but it should also have the potential for wealth creation in the long run. Among all the tax saving instruments only ELSS offers this potential for wealth creation. Even though ELSS fund has lock-in period of 3 years it does not mean that the investor should necessarily redeem his holdings after completion of 3 years. It could happen that at that given point of time the equity markets may be down and consequently the NAV of the ELSS fund could also be low. One could allow it to remain in the Fund for a much longer period. One should think of redeeming only if he or she are genuinely in need of funds or the ELSS, where the investor has invested, has underperformed the peer group.

Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.

Load is a charge collected by a mutual fund when it sells units. It can be levied as an entry load* (i.e., the charge is collected when an investor buys the units) and as an exit load (i.e, the charge is collected when the investor sells back the units).

Schemes that do not charge any load are called No Load Schemes.

Purchase price is the price paid by a customer to purchase a unit of the fund.

Repurchase price is the price at which a close-ended scheme repurchases its units. Repurchase can either be at NAV or can have an exit load.

Redemption price is the price received by the customer on selling units of an open-ended scheme to the fund.

Mutual Funds provide investors with an option to shift their investments from one scheme to another within that fund. Switching enables investors to move his investment from one scheme to another to meet his investment needs.

Every Mutual Fund has an Asset Management Company (AMC) associated with it. The AMC is responsible for managing the investments for the various schemes operated by the Mutual Fund.

The Trust oversees the performance of the AMC. The AMC employs professionals to manage the funds. The AMC may be assisted by a custodian and a registrar.

AMCs are obliged to make investments in compliance with SEBI regulations.

No, Mutual funds are not permitted to speculate.

A debt fund invests in fixed-income instruments. These include Commercial Paper, Certificates of Deposit, debentures and bonds. While the rate of interest on these instruments stays the same throughout their tenure, their market value keeps changing, depending on how the interest rates in the economy move.

A debt fund's NAV is the market value of its portfolio holdings at a given point in time. As interest rates change, so do the market value of fixed-income instruments - and hence, the NAV of a debt fund. Thus it is a misnomer that the debt fund's NAV does not fall.

Besides Net Asset Value, the following parameters should be considered while comparing the funds:

AVERAGE RETURNS : An investor should look at the returns given by the fund over a period of time. Care should be taken to see whether all dividends and bonuses have been accounted for. The higher and more consistent the returns the better is the fund.

VOLATILITY In addition to the returns one should also look at the volatility of the returns given by the fund. Volatility is essentially the fluctuation of the returns about the mean return over a period of time. A fund giving consistent returns is better than a fund whose returns fluctuate a lot.

CORPUS SIZE A Large corpus is generally considered good because large funds have lower costs, as expenses are spread over large assets but at the same time a large corpus has some inefficiencies too. A large corpus may become unwieldy and thus difficult to manage.

PERFORMANCE VIS A VIS BENCHMARKS / OTHER SCHEMESInvestors should not only look at the returns given by the scheme they have invested in, but also compare it with benchmarks like the BSE Sensex, Nifty, etc.

Fixed Deposit

Company Fixed Deposit is the deposit placed by investors with companies for a fixed term carrying a prescribed rate of interest.

Interest is paid on monthly/quarterly/half yearly/yearly or on maturity basis and is sent either through cheque or ECS facility.

Ignore the unrated Company Deposit Schemes. Ignore deposit schemes of little known manufacturing companies. For NBFC's, RBI has made it mandatory to have an 'A' rating to be eligible to accept public deposits, one should go further and look at only AA or AAA schemes.

Within a given rating grade, choose the company with a better reputation.

Once you decide on a company, next choose the schemes that has given a better return. Unless you need income regularly, you should prefer cumulative to regular income option since the interest earned automatically gets reinvested at the same coupon rate giving upon better yields. It also gives you a lump-sum amount at one go.

It is better to make shorter deposit of around 1 year to 3 years. This way you not only can keep a watch on the company's rating and servicing but can also plan to have your money back in case of emergency.

Check on the servicing standards of the company. You should not oblige companies that care little about investor services like promptly sending interest warrants or the principal cheque.

Involve your reputed Financial planner / Investment Advisor like us for advice in all your transactions. Do not bypass and invest directly just to earn an extra incentive.

For investors living in outstation city, check whether the company accepts outstation cheques and makes payment through at par cheques.

  • Companies which offer interest higher than 15%.
  • Companies which are not paying regular dividends to the shareholder.
  • Companies whose Balance Sheet shows losses.
  • Companies which are below investment grade (A or under) rating.

No, at the end of deposit period principal is returned to the deposit holder.

  • A Non-Banking Non-Finance Company(Manufacturing Company) can accept deposit subject to following limits
  • Upto 10% of aggregate of paid-up share capital and free reserves if the deposits are from shareholders or guaranteed by directors.
  • Otherwise upto 25% of aggregate of paid-up share capital and free reserves. A Non-Banking Finance Company can accept deposits upto following limits:
  • Equipment Leasing Company can accept four times of its net owned fund.
  • Loan or investment company can accept deposit upto one and half time of its net owned funds.

Company Fixed Deposits can be accepted by a Manufacturing Company having duration from 6 months to 3 years. Non-Banking Finance Company can accept deposit from 1 year to 5 years period. A Housing Finance Company can accept deposit from 1 year to 7 years.

TDS is deducted if the interest on fixed deposit exceeds Rs.5000/- in a financial year.

  • Companies registered under Companies Act 1956, such as:
  • Manufacturing Companies.
  • Non-Banking Finance Companies.
  • Housing Finance Companies.
  • Financial Institutions.
  • Government Companies.

Company Fixed Deposit have always offered interest which is 2-3% higher than Bank Deposit rate. Because they have to pay higher interest to banks for borrowing money.

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