Mutual Funds

A Mutual Fund, by definition, is a pool of money managed by professional Fund Managers of Asset Management Companies.

Mutual Funds in India are established in the form of a Trust under the Indian Trust Act, 1882, in accordance with SEBI (Mutual Funds) Regulations, 1996.

The funds are then invested in different asset classes, such as Equities, Bonds, Money Market instruments, Precious Metals, or other Asset Classes. The category and objective of the fund determine the type of securities or asset classes in which the investments would be made.

Any income/returns generated from the collective investments are distributed proportionately to the investors after deducting the applicable fees and levies by calculating a scheme’s “Net Asset Value” also known as NAV.

Mutual funds have been categorized and rationalized under the guidelines issued by the Securities and Exchange Board of India (SEBI) in October 2017. They are predominantly divided into five major categories, each with subdivisions based on the investment objectives of an individual fund.

1. EQUITY SCHEMES: These schemes predominantly invest in equity and equity-related instruments, catering to investors seeking capital appreciation over the long term. They are further classified into 12 subcategories based on the objective of a fund.
   

2. DEBT SCHEMES: Debt schemes (Also known as income funds) primarily invest in fixed-income securities such as bonds, debentures, and other debt instruments. They are suitable for investors looking for regular income with relatively lower risk. Debt funds can further be categorized into 16 subcategories based on the tenor of the securities held in the portfolio and/or the basis of the issuers of the securities or their fund management strategies.
   

3. HYBRID SCHEMES: Hybrid schemes, also called balanced schemes, invest in a mix of equity and debt instruments to provide a balanced portfolio. These are suitable for investors looking for a combination of capital appreciation and income. These funds are further classified into 7 categories based on the mix ratio of the categories within the funds.
   

4. SOLUTION ORIENTED SCHEMES: These schemes are designed to meet specific financial goals, such as retirement planning or children's education. They have a lock-in period and a defined maturity date aligned with the financial objective.
   

5. OTHER SCHEMES: This category includes schemes such as Index Funds and Exchange Traded Funds (ETFs), which aim to replicate the performance of a specific index. It also encompasses Fund of Funds (FoF) that invest in other mutual fund schemes, offering diversification. These schemes also offer investors an opportunity to invest in foreign markets and precious metals at a much lower cost.

Investing in mutual funds offers several advantages, making them an attractive option for a wide range of investors. Here are key reasons why you should consider investing in mutual funds:

1. PROFESSIONAL MANAGEMENT: A fund manager possesses the experience, expertise, and resources to actively make decisions on mutual fund investments. This is highly beneficial as most investors lack the time and resources to actively manage their investments.
   

2. DIVERSIFICATION: Mutual funds invest in diversified portfolios, mitigating the risk that arises from an individual stock, bond, or other independent asset underperforming. Mutual funds also offer a wide range of investment categories, allowing investors to build a diversified portfolio tailored to their requirements.
   

3. ACCESSIBILITY: Mutual funds provide investment opportunities in a broad range of securities or asset classes that may not be independently accessible to investors. This includes access to foreign markets, bonds, and securities that may be challenging to invest in directly.
   

4. LIQUIDITY: Mutual funds offer investors high liquidity. Investors can transact in a mutual fund on any business day and have access to their money whenever needed. However, this advantage is applicable only in open-ended funds that do not have lock-in periods.
   

5. AFFORDABILITY: Mutual funds have minimal minimum investment requirements, making them affordable for investors with various financial capacities to start their investment journey.
   

6. RISK MANAGEMENT: The risks associated with investments can be mitigated through careful analysis and selection of mutual funds. Investors who are not comfortable with volatility or have a shorter investment horizon can create a low-risk portfolio, while those with a high-risk appetite can choose otherwise.
   

7. SYSTEMATIC INVESTMENT PLANS (SIPs): Systematic Investment Plans, commonly referred to as SIPs, offer investors an easy way to build their assets. These plans allow investors to contribute a fixed amount towards their investments at regular intervals, aiding in "Cost Averaging" and proving extremely beneficial for long-term compounding.
   

8. WELL-REGULATED: Mutual funds are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Mutual Funds) Regulations, 1996. SEBI has established stringent rules and measures for investor protection, transparency, grievance resolution, risk mitigation, and fair valuation principles.
   

9. TAX BENEFITS: ELSS categories of mutual funds are eligible for tax deductions of ₹1,50,000 under Section 80C of the Income Tax Act, 1961. Mutual fund investments, when held for a longer period, also offer higher post-tax returns."

Mutual funds are open to different categories of investors, and the eligibility criteria are generally inclusive. Investments in Mutual Funds are subject to the KYC Compliance of an investor or group of investors. Here's a list of who can invest in Mutual Funds:

1. Individual Investors: Any individual, whether a resident or non-resident, can invest in mutual funds. This includes adults, minors (through a guardian), and senior citizens.
   

2. Hindu Undivided Families (HUFs): HUFs are recognized as a separate legal entity under Hindu Law and can invest in mutual funds.
   

3. Non-Resident Indians (NRIs) and Person of Indian Origin(PIOs): NRIs and PIOs are allowed to invest in mutual funds in India, subject to the guidelines set by the Reserve Bank of India (RBI).
   

4. Minors: Investments made on behalf of minors are typically managed by their parents or legal guardians. In this arrangement, the minor becomes the unit holder, and the parent or guardian oversees the investment until the minor reaches the age of majority.

5. Joint Holders: Mutual fund units can be held jointly by individuals. Joint holding can be "either" or "survivor," specifying the conditions under which the joint holding operates.
   

6. Partnership Firms: Registered partnership firms can invest in mutual funds. The investment is made in the name of the partnership.
   

7. Corporate Entities: Established Companies, both private and public, can invest in mutual funds. Corporate investments are usually governed by their board resolutions.
   

8. Trusts: Trusts, whether public or private, can invest in mutual funds. The trustees manage the investments on behalf of the trust.
   

9. Sole Proprietorship: Sole proprietors or individuals operating their businesses can invest in mutual funds.