Mutual Funds in a Nutshell

What is Mutual Fund?

Mutual Funds (MF) are the investment schemes managed by professionals who collect money from investors and invest the pool money into securities. Returns achieved on such investments are distributed among investors in proportion of their investment amount.

Simply put, mutual funds invest on investors behalf so that even an uninitiated person without any expertise can invest judiciously.

Advantages of MF

(1) Mutual funds are beneficial for people with no knowledge of capital markets but desirous of investing in it.

(2)Investors get the benefit of diversification even if they invest small amounts

(3)Transparency of the investing procedure

(4)Low cost (this cost is generally the expenses incurred in running the scheme)

(5) MFs are professionally managed.

(6)Tax benefits-some MF schemes (ELSS) give tax benefits under section 80 c. These benefits could be taken away with the implementation of DTC (Direct Tax Code).

What is the best time to invest in mutual Funds?

Mutual Fund taxation in India

As far as mutual funds in India are concerned, there are 2 types of taxes-

      

      (1)    Dividend Tax

Dividend Tax on different type of Mutual Fund schemes

Schemes	Individual/HUF/NRI
Equity oriented schemes	Nil
Debt oriented schemes	Nil

Take care before investing in ELSS schemes

Don’t blindly follow MF ratings and dividend payouts history while investing in ELSS

As the year-end nears, many of you shall be investing in EquityLinked Saving Schemes to save tax under section 80 C of Indian IT Act.  Many of you must have zeroed-in a scheme to invest.

But wait,

What is Multi Asset Funds (MAF)?

Let us first understand different types of Assets before jumping to this topic.

An asset is something which has some economic value and it can be liquefied to cash. Appreciation of this economic value is the capital gain at the hands of the investor and the sole purpose for the investment.

Generally Assets are of two types -debt and equity.

NCDs, Fixed Deposits, bonds, commercial papers, debentures, treasury bills etc fall under the debt category. On the other hand shares of a company, share warrants, equity-based mutual fund units all these belong to the equity category.

Some assets are hybrid in nature. The best example is the Convertible debentures which are basically debt instruments but can be converted to equity.

Apart from debt and equity a few more classes are now considered as the significant debt classes-

Commodities and Real Estate.

Investing across different classes is called diversification. Diversification is the best hedge against the macro economic situation.

In India, Sensex, the benchmark index of Indian capital market gave negative return of 25% in the CY 2011 while Gold has given 28 % return (in rupee terms).

So the basic tenet of diversification is safety of the capital. If one asset class fails to deliver the returns other asset class compensates for the same.

To address this concern Multi Asset Funds have been designed. These funds invest their corpus across various asset classes thus creating the best hedge against the unpredictable macroeconomic concerns.

Multi Asset Funds should not be confused with diversified funds where investment is done across various sectors of the same asset class while In Multi Asset Funds investment is spread across various asset classes.

MAF’s are more diversified that the hybrid funds which predominantly invests in only 2 asset classes –debt and equity.

But one should not forget the basic tenet of the investment -diversification is not the sole key for better returns and any investment if not done judiciously might results in financial disaster.

Performance of the fund depends on the theme of the fund and the stock-selection done by the fund manager. Diversification is just an approach towards the risk minimization. .

MAFs are best options for risk-averse investors especially those who had been hesitating so for to invest in equity-mutual funds.

Gold ETF vs. Gold Mutual Fund(MF)

Gold MF falls under FOF (Fund of Funds) category where AMC (Asset Management Company) invests 90-95 percent of its corpus into various gold ETFs, and rest is invested in money market instruments, short term fixed deposits and other liquid schemes.

Pro’s : ( 1) Demat and trading accounts are not required, which are necessary for buying gold ETFs.

(2) Gold MF comes with the benefit of Auto SIP (Systematic Investment Plan), while investor has to make his buying plan to simulate the Auto SIP.

(3) Like other MFs investor can buy, sell or conduct SIP/STP/SWP directly with the AMC.

(4)Investor can redeem investments on any business day directly from the AMC.

(5)Demat account charges and brokerage charges are saved, which are applicable in case of ETF.

(6) Like ETFs, no wealth tax is applicable.

(7)Taxation is similar to ETFs.

(Within 1 year)Short term capital Gain: As per slab

(After 1 year)Long term capital Gain: 10% without indexation or 20% with indexation,which ever is lower.

Cons: (1)Expense charges are more than ETFs.

(2)Performance depends on the returns of invested ETFs and short term investments. Thus higher tracking error than ETFs

For which option one should go?

Well this depends on the investor, if an investor is already having demat and trading account (for other investments like shares, bonds etc) then he should go for ETFs, as expense ratio and tracking error is lesser than gold MFs.

Gold MFs are suitable for those investors who don’t want to open demat and trading account just to start investing in gold through ETF. Thus investor’s saves demat account and broking charges.

Apart from this, they avail auto SIP facility, while ETF investors have to simulate SIP by themselves.

When to invest in Mutual Funds

General rule of thumb is-

As far as equity MF's are concerned, the best time to buy is down market. During down market NAV's are low and more units can be bought for a specific amount.
When recovery comes, much appreciation is seen.

Best time for buying debt MF's is when interest rates are at its peak.

Generally higher interest rates are unfavourable for growing stock markets.
As it is very difficult to time the market correctly, best option is to invest through SIP (Systematic Investment Plan).