FAQS
FREQUENTLY ASKED QUESTIONS
Have you ever wondered if mutual funds are the right start for you?
The answer is yes.
Mutual funds are for all, irrespective of how much you are willing to set aside on a monthly basis or one-time. Anyone can kickstart their investments with amounts as low as Rs. 500 every month. Small investors reap better benefits from mutual funds ranging from tax-efficiency, maximum transparency and ease of transactions.
In a mutual fund scheme, you can make additional purchases in the same account if you are ready to invest more.
There are only three simple things that you need to follow when you are investing in mutual funds –
- ✓ Start early
- ✓ Invest regularly; and
- ✓ Stay invested for a long period
To most of us, the concept of investment may sound complex. Simply put, investing is the process of setting aside money from your earnings so that it may benefit you in the future.
You might say, that makes investing sound like saving. There’s a thin line between the two.
While saving, you are putting aside a sum of money for your future spending and the principal amount does not change. Saving is about working hard now so that you can sit back and relax later.
Investing, on the other hand, is a wealth-enhancing mechanism. It helps to steadily build your wealth. When you invest, you are not just making money, but you are also simultaneously creating time to spend it with those who matter to you the most.
Depending on how much you want to invest and how much risk you are willing to take, there are different investment products available. Gold, Real Estate, Stocks, Bonds and Mutual Funds are a few. Amongst them, Mutual Funds when held over a long duration have proven to offer better returns.
Debts funds refer to investments in fixed income securities such as Government securities, Corporate bonds or Gilt Funds, etc. A debt fund, simply put, is a collection of these funds that you loan out to various government and corporate bodies. Normally, one would invest in a debt fund for a regular income is risk-averse.
The income from this investment is steady and gives you high levels of liquidity and safety. Prospective mutual fund investors who have been investing in bank deposits tend to start with debt funds because of the low-cost structure. Debt funds also offer high liquidity.
| Credit Opportunities Funds | These funds invest in corporate bonds that have a rating of AAA or AA and the average maturity of the bonds is between 2 - 3 years. These funds are suitable for low-risk investors who are looking for short-term investments, with returns more than short-term debt funds. |
| Dynamic Bond Funds | These funds invest in Indian fixed-income securities. The plus point of these funds is that they do not have a fixed maturity date. The maturity period is flexible so as to benefit from the changing interest rates. These funds are suitable for investors with a moderate risk appetite and an investment horizon of up to 5 years. |
| Fixed Maturity Plans | These are close ended schemes. One can invest in them only during the offer period. As the name suggests, the tenure is fixed (from months to years). These funds invest in fixed income securities. These funds are suitable for low-risk investors who are looking for stable returns over a defined period. These funds offer better post-tax returns when compared with bank FDs. |
| Gilt Funds | Gilt funds invest only in Government securities. These are high-rated securities and very low credit risk. These funds are suitable for investors who are risk-averse. |
| Income Funds | Income funds invest in a mix of fixed income securities like bonds, debentures, etc. The investment horizon is generally long-term (more than 5-6 years). These funds are suitable for investors looking for both income and capital appreciation in varying interest rate regimes. |
| Liquid Funds | These funds primarily invest in fixed-income securities like treasury bills, commercial papers, certificate of deposits that have a maturity period of 91 days. They are suitable for parking your excess money instead of it lying idle in a bank account. These funds offer returns in the range of 7-9% and the money can be withdrawn within 24 working hours and do not have any exit load. |
| Short Term and Ultra Short-Term Debt Funds | These funds invest in instruments with shorter maturities, which range from around a year to 3 years. These funds are suitable for investors with a low risk appetite and shorter investment horizon. |
An equity fund investment allows you to directly invest in a company’s stocks and shares. The returns are based on the company’s performance in the stock market. These are commonly referred to as growth funds and the primary objective of these funds is capital appreciation.
Prospective investors do not have to worry about studying the market to find the right companies to invest in. Market research and stock market analysis are carried out by professional fund managers who help you identify the right companies. Once you invest, you become a partner of the firm, whose rising stock market prices will benefit you. This allows you to invest in an array of companies simultaneously.
These funds are ideally suited for long-term investors who also have a higher risk appetite. Systematic Investment Plan is one of the most effective way of investing in Equity Funds.
Within Equity Funds, there are different types of Funds.
| Large Cap Funds | These funds invest in companies that are into large established business. These are prime contributors to the economy as well. These companies are in the Top 100 stocks in terms of equity market captilisation. |
| Mid Cap Funds | These funds invest in mid-size companies. Stock prices of these companies are generally volatile and their returns are also therefore fluctuating. These companies are in the top 101-250 stocks in terms of equity market capitalisation. |
| Small Cap Funds | These funds invest in small-sized companies that have stocks that are outside the top 250 stocks in terms of equity market capitalisation. These funds are for those who have a high-risk appetite. |
| Multi Cap Funds | These are diversified equity funds that invest across large-cap, mid-cap and small-cap stocks, are called multi-cap funds. These funds offer a potential for better returns in the long-term as they invest across the entire market. |
| Sector and Thematic Funds | Sector funds invest in a specific industry, e.g. Technology. Since they are focused on one sector, their returns are linked to the performance of the sector. These funds invest in a common theme, e.g. Infrastructure Funds will invest in the infrastructure segment only. |
These funds help in creating wealth and saving on taxes, and usually come with a three-year lock-in period. Tax-saving funds make investments mainly in equity and equity-related instruments, and are ideal for salaried investors who seek long-term returns.
Equity Linked Savings Scheme (ELSS) are funds that have a dual benefit – long-term growth and tax savings. They typically invest in a mix of equity and equity-related instruments. Since ELSS have a lock-in period of three years, it allows the investment to remain untouched and thereby has a better chance of capital appreciation. The investment can be redeemed or switched on completion of the three-years at the prevailing market rate.
Under Section 80C of the Income Tax Act 1961, ELSS also allows a deduction of up to Rs. 1.5 lakhs of your total income. Investments made in ELSS also help reduce the tax burden and are ideally suited for a salaried individual.
Hybrid Funds (earlier known as Balanced Funds) basically invest in a combination of equity and debt. They are ideally suited for someone who does not want complete exposure of one’s investment into the stock market or only bonds. The funds can be either equity oriented or debt oriented.
These funds are ideally suited for conservative investors or first-time investors as it gives an exposure in both equity and debt at the same time, offering both high and stable returns at the same time.
Equity Oriented Hybrid Funds - More than 65% of the fund’s assets are invested in equity and rest in debt or money market instruments. The equity investment is diversified across various sectors.
Debt Oriented Hybrid Funds - More than 60% of the fund’s assets are invested in equity and rest in debt or money market instruments. The debt component comprises of government securities, debentures, bonds, treasury bills, etc.
| Balanced Funds | These funds are the classical hybrid funds which invest at least 65% of their assets in equity and the remaining in debt or cash. These funds are ideal for first-time investors or those with a moderate risk appetite. |
| Monthly Income Plans | These are debt-oriented funds where over 70% of the assets are invested in debt instruments. They offer high liquidity and regular dividends. These funds are ideally suited for investors who are looking for a steady income stream on a regular basis. |
| Arbitrage Funds | These are equity-oriented funds that typically make money by buying stocks in the cash market and sell in the futures market. These funds are ideally suited for risk-averse investors who have an investment horizon of at least 3 – 5 years. |
Mutual Funds comprise of three key elements.
- A large group of people like you who pool in a sum of money from their individual savings
- Their savings are invested into a common investment vehicle like company stocks, bonds or money market instruments etc. for better growth over a period of time
- This pool of money is typically managed by professional fund managers
In return for the money contributed by you as an investor, you get units in the Mutual Fund that is representative of your share in the Mutual Fund.
Mutual funds also open the doors to the diversification of personal investment. You do not have to restrict yourself to one type of security. You can invest in as many as you like, enjoying the benefits of all.
The questions that most potential investors have are, “How much should I invest?” or “Am I investing too little?”.
On this front, it is not about how much you are investing, but for how long you are going to invest for. If you start investing early, you are giving yourself the time to explore all the options available in the market. And if you invest for a long period of time, you will reap the benefits of it.
Investment in mutual funds is about being patient and consistent.
There are great advantages when investing in mutual funds over traditional investments like fixed deposits:
- ✓ Better returns: Mutual funds have the ability to generate better returns over a period of time.
- ✓ More flexibility: Since the investor owns only portions of the fund, selling or redeeming individual units is much easier.
- ✓ Better liquidity: The units can also be sold easily due to the low lock-in period. Some funds may have an exit load of up to 1% on the investment value. Please refer to the scheme details before investing.
- ✓ More variety: A single fund invests in multiple stocks and securities bringing in variety, thereby reducing the risk of putting all your eggs in a single basket.
- ✓ Tax Savings: Tax Saving Mutual Funds are a category in which tax benefits can be reaped by investing under Section 80C. ELSS invests in equity and has advantages of a low lock-in period of 3 years and can be used in both SIP and lump-sum investment options.