What is a mutual fund?
A mutual fund is a trust that pools the funds from various investors, and the funds thus collected are invested in various capital market instruments, such as shares, debentures, and other securities. The combined holdings the mutual fund owns, are known as its portfolio. Each unit represents an investor’s proportionate ownership of the fund’s holdings and the income those holdings generate.
The income earned through these investments is shared by its unit holders in proportion to the number of units owned by them. A Mutual Fund is a suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities, at a relatively low cost.
Investments in securities are generally spread across various industries and sectors, and thereby reduce the risk. Asset Management Companies (AMCs) normally come out with a number of schemes with different investment objectives from time to time.
A mutual fund is required to be registered with the Securities and Exchange Board of India (SEBI), which regulates securities markets, before it can collect funds from the public / investors.
Why invest in a mutual fund?
As investment goals vary from person to person – post-retirement expenses, money for children’s education or marriage, house purchase, etc. – the investment products required to achieve these goals too vary.
Mutual funds provide certain distinct advantages over investing in individual securities. Mutual funds offer multiple choices for investment across equity shares, corporate bonds, government securities, and money market instruments, providing an excellent avenue for retail investors to participate and benefit from the uptrends in capital markets. The main advantages are that you can invest in a variety of securities for a relatively low cost and leave the investment decisions to a professional manager.
Structure of Mutual Funds in India
In India, mutual funds function as trust created under the Indian Trust Act, 1882.
Sponsor
The sponsor is a person who establishes a mutual fund and gets it registered with Sebi. The sponsor forms the Trust, appoints the Board of Trustees, and has the right to appoint the Asset Management Company (AMC) or the fund manager.
Trustees
The mutual fund is managed by a Board of Trustees. The trustees act as a protector of unit holders' interests. They do not directly manage the portfolio of securities and appoint an AMC (with approval of Sebi) for fund management. If an AMC wishes to float additional or different schemes, it will need to be approved by the trustees. Trustees play a critical role in ensuring full compliance with SEBI's requirements.
Asset
Management
Company
The AMC is appointed by trustees for managing fund schemes and corpus. An AMC functions under the supervision of its own board of directors and also under the directions of trustees and Sebi. The market regulator has mandated the limit of independent directors to ensure independence in AMC workings.
Custodian and depositories
The fund management includes buying and selling of securities in large volumes. Therefore, keeping a track of such transactions is a specialist function. The custodian is appointed by trustees for safekeeping of physical securities while dematerialised securities holdings are held in a depository through a depository participant. The custodian and depositories work under the instructions of the AMC, although under the overall direction of trustees.
Registrar and transfer agents
These are responsible for issuing and redeeming units of the mutual fund as well as providing other related services, such as preparation of transfer documents and updating investor records. A fund can carry out these activities in-house or can outsource them. If it is done internally, the fund may charge the scheme for the service at a competitive market rate.
Advantages of a Mutual Fund
01
Professional Management
Mutual funds hire investment professionals as fund managers. Funds can afford to do so as they manage large pools of money. The Fund Managers are experienced individuals, whose time is devoted to tracking and updating the portfolio. They have real-time access to crucial market information and are able to execute trades on the largest and most cost-effective scale. Thus, investment in a mutual fund not only saves time and effort for the investor, but is also likely to produce better results.
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Portfolio Diversification
Diversified investment improves the risk return profile of the portfolio. Optimal diversification has limitations due to low liquidity among small investors. The large corpus of a mutual fund as compared to individual investments makes optimal diversification possible. Due to the pooling of capital, individual investors can derive benefits of diversification.
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Low Transaction Costs
Mutual fund transactions are generally very large. These large volumes attract lower brokerage commissions and other costs, as compared to smaller volumes of the transactions that individual investors enter into.
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Choice of products & assets
There are four basic types of mutual funds based on the asset class they invest in: equity, bond, hybrid and money market. Further, within each asset class there are further choices of products. For any investment objective of any investor, the choice of the products available are many.
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Liquidity
A mutual fund house stands ready to buy and sell its units at any point of time. Liquidating a portfolio is not often easy and you have to rely on the market liquidity for the security. Thus, it is easier to liquidate holdings in a Mutual Fund as compared to direct investment in securities. There are however also products like close-ended funds or intervals funds, which have restrictions on the buy and sell transactions.
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Tax benefits
Investments in the ELSS - equity-linked savings schemes qualify for tax saving under the section 80 C.
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Flexibility
There are many flexibilities available in terms of payment and credit modes, investing, switching and withdrawing from the portfolio. There are various options like SIP, SWP, STP and Switch. The schemes also offer flexibilities in the nature of plan – with dividend payout, reinvestment and growth options.
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Well Regulated & Transparent
All mutual funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interest of investors. The SEBI regularly monitors the operations of an AMC. There is high degree of disclosures and transparency also. You get regular information on the value of your investment in addition to disclosure on the specific investments made by the mutual fund scheme. You can also track your investments on a daily basis.
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Convenience
Operationally, there is a lot of convenience and ease in transacting with mutual funds. All your holdings and fund accounting is managed by high quality custodians and registrars. You may make use of auto-debit mandates, ECS, etc. to make & schedule investments. The redemption proceeds, dividends can be automatically credited into your accounts within few days of the transaction. Mutual funds are also available on the stock exchange and you can do transactions through online and other modes in a paper-less manner.
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Open to everyone
Any person, irrespective of its financial strength, can invest in mutual funds. You can even start an SIP, with amount as low as Rs.500/-. There is no upper limit on the amount of investment you can make. Any person – be it individual, trusts, firms or companies can invest in mutual funds.
Types of Mutual Funds
Mutual funds come in many varieties, designed to meet different investor goals.
Mutual funds can be broadly classified based on:
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Organisation Structure – Open ended, Close ended, Interval
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Management of Portfolio – Actively or Passively
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Investment Objective – Growth, Income, Liquidity
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Underlying Portfolio – Equity, Debt, Hybrid, Money market instruments, Multi Asset
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Thematic / solution oriented – Tax saving, Retirement benefit, Child welfare, Arbitrage
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Exchange Traded Funds
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Overseas funds
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Fund of funds
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Schemes according to Maturity Period or Organization Structure
Open-ended Fund/ Scheme
An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.
Close-ended Fund/ Scheme
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.
Interval Schemes
Operating as a combination of open and closed ended schemes, it allows investors to trade units at pre-defined intervals. Interval schemes allow purchase and redemption during specified transaction periods (intervals). The transaction period has to be for a minimum of 2 days and there should be at least a 15-day gap between two transaction periods. The units of interval schemes are also mandatorily listed on the stock exchanges.
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Scheme classification by Portfolio Management
Active Funds
In an Active Fund, the Fund Manager is ‘Active’ in deciding whether to Buy, Hold, or Sell the underlying securities and in stock selection. Active funds adopt different strategies and styles to create and manage the portfolio.
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The investment strategy and style are described upfront in the Scheme Information document (offer document)
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Active funds are expected to generate better returns (alpha) than the benchmark index.
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The risk and return in the fund will depend upon the strategy adopted.
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Active funds implement strategies to ‘select’ the stocks for the portfolio.
Passive Funds
Passive Funds hold a portfolio that replicates a stated Index or Benchmark e.g.
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Index Funds
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Exchange Traded Funds (ETFs)
In a Passive Fund, the fund manager has a passive role, as the stock selection / Buy, Hold, Sell decision is driven by the Benchmark Index, and the fund manager / dealer merely needs to replicate the same with minimal tracking error.
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Schemes according to Investment Objective
Growth / Equity Oriented Schemes
The aim is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities and have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. These schemes are good for investors having a long-term outlook seeking appreciation over a period of time.
Income / Debt Oriented Schemes
The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, government securities and money market instruments. Such funds are less risky compared to equity schemes and are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.
Money Market or Liquid Funds
These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.
Hybrid / Balanced Funds
The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds. There are also MIP products which invest anywhere between 5% to 20% of the portfolio into equities
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Some specific type of funds based on underlying asset class /security choices
Gilt Fund
These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.
Index Funds
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc. These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.
Sector specific funds/schemes
These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert.
Fund of Funds (FoF) scheme
A scheme that invests primarily in other schemes of the same mutual fund or other mutual funds is known as a FoF scheme. An FoF scheme enables the investors to achieve greater diversification through one scheme. It spreads risks across a greater universe.
Other types of funds
Capital Protection
The primary objective of this scheme is to safeguard the principal amount while trying to deliver reasonable returns. These invest in high-quality fixed income securities with marginal exposure to equities and mature along with the maturity period of the scheme.
Fixed Maturity Plans (FMPs)
FMPs, as the name suggests, are mutual fund schemes with a defined maturity period. These schemes normally comprise of debt instruments which mature in line with the maturity of the scheme, thereby earning through the interest component (also called coupons) of the securities in the portfolio. FMPs are normally passively managed, i.e. there is no active trading of debt instruments in the portfolio. The expenses which are charged to the scheme, are hence, generally lower than actively managed schemes.
Tax Saving
As the name suggests, this scheme offers tax benefits to its investors. The funds are invested in equities thereby offering long-term growth opportunities. Tax saving mutual funds, called Equity Linked Savings Schemes - ELSS has a 3-year lock-in period.
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Categorization of Mutual Fund Schemes
01.
Equity Schemes
02.
Debt Schemes
03.
Hybrid Schemes
04.
Solution Oriented Schemes - Retirement / Children
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Other Schemes
Index / ETF / FoF
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Under Equity category, Large, Mid and Small cap stocks have now been defined.
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Naming convention of the schemes, especially debt schemes, as per the risk level of underlying portfolio (e.g., the erstwhile ‘Credit Opportunity Fund’ is now called “Credit Risk Fund”)
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Balanced / Hybrid funds are further categorised into conservative hybrid fund, balanced hybrid fund and aggressive hybrid fund.
Equity Schemes
An equity Scheme is a fund that
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Primarily invests in equities and equity related instruments.
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Seeks long term growth but could be volatile in the short term.
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Suitable for investors with higher risk appetite and longer investment horizon.
The objective of an equity fund is generally to seek long-term capital appreciation. Equity funds may focus on certain sectors of the market or may have a specific investment style, such as investing in value or growth stocks.
Equity Fund Categories as per SEBI guidelines on Categorization and Rationalization of schemes
Large Cap Fund | At least 80% investment in large cap stocks |
Large & Mid Cap Fund | At least 35% investment in large cap stocks and 35% in mid cap stocks |
Mid Cap Fund | At least 65% investment in mid cap stocks |
Small cap Fund | At least 65% investment in small cap stocks |
Multi Cap Fund* | At least 75% investment in equity & equity related instruments |
Flexi Cap Fund | At least 65% investments in equity & equity related instruments |
Dividend Yield Fund | Predominantly invest in dividend yielding stocks, with at least 65% in stocks |
Value Fund | Value investment strategy, with at least 65% in stocks |
Contra Fund | Scheme follows contrarian investment strategy with at least 65% in stocks |
Focused Fund | Focused on the number of stocks (maximum 30) with at least 65% in equity & equity related instruments |
Sectoral/ Thematic Fund | At least 80% investment in stocks of a particular sector/ theme |
ELSS | At least 80% in stocks in accordance with Equity Linked Saving Scheme, 2005, notified by Ministry of Finance |
*Also referred to as Diversified Equity Funds – as they invest across stocks of different sectors and segments of the market. Diversification minimizes the risk of high exposure to a few stocks, sectors or segment.
Sector Specific Funds
Sectoral funds invest in a particular sector of the economy such as infrastructure, banking, technology or pharmaceuticals etc.
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Since these funds focus on just one sector of the economy, they limit diversification, and are thus riskier.
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Timing of investment into such funds are important, because the performance of the sectors tend to be cyclical.
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Examples : Equity Mutual Funds with an investment objective to invest in a sector such as
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Pharma & Healthcare
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Banking & Finance
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FMCG (fast moving consumer goods) and related
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Technology and related
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Thematic Funds
Thematic funds select stocks of companies in industries that belong to a particular theme - For example, Infrastructure, Service industries, PSUs or MNCs. They are more diversified than Sectoral Funds and hence have lower risk than Sectoral funds.
Value Funds (Strategy and Style based funds)
Equity funds may be categorized based on the valuation parameters adopted in stock selection, such as
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Growth funds identify momentum stocks that are expected to perform better than the market
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Value funds identify stocks that are currently undervalued but are expected to perform well over time as the value is unlocked
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Equity funds may hold a concentrated portfolio to benefit from stock selection.
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Funds with higher risk since the effect of a wrong selection can be substantial on the portfolio’s return
Contra Funds
Contra funds are equity mutual funds that take a contrarian view on the market. Underperforming stocks and sectors are picked at low price points with a view that they will perform in the long run. The portfolios of contra funds have defensive and beaten down stocks that have given negative returns during bear markets. These funds carry the risk of getting calls wrong as catching a trend before the herd is not possible in every market cycle and these funds typically underperform in a bull market.
As per the SEBI guidelines on Scheme categorisation of mutual funds, a fund house can either offer a Contra Fund or a Value Fund, not both.
Equity Linked Savings Scheme (ELSS)
ELSS invests at least 80% in stocks in accordance with Equity Linked Saving Scheme, 2005, notified by Ministry of Finance. Has lock-in period of 3 years (which is shortest amongst all other tax saving options)
Currently eligible for deduction under Sec 80C of the Income Tax Act upto ₹1,50,000
Debt Schemes
A debt fund (also known as income fund) is a fund that invests primarily in bonds or other debt securities.
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Debt funds invest in short and long-term securities issued by government, public financial institutions, companies
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Treasury bills, Government Securities, Debentures, Commercial paper, Certificates of Deposit and others
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Debt funds can be categorized based on the tenor of the securities held in the portfolio and/or on the basis of the issuers of the securities or their fund management strategies, such as
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Short-term funds, Medium-term funds, Long-term funds
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Gilt fund, Treasury fund, Corporate bond fund, Infrastructure debt fund
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Floating rate funds, Dynamic Bond funds, Fixed Maturity Plans
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Debt funds have potential for income generation and capital preservation.
Overnight Fund | Overnight securities having maturity of 1 day |
Liquid Fund | Debt and money market securities with maturity of upto 91 days only |
Ultra Short Duration Fund | Debt & Money Market instruments with Macaulay duration of the portfolio between 3 months - 6 months |
Low Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration portfolio between 6 months- 12 months |
Money Market Fund | Investment in Money Market instruments having maturity upto 1 Year |
Short Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration of the portfolio between 1 year - 3 years |
Medium Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration of portfolio between 3 years - 4 years |
Medium to Long Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration of the portfolio between 4 - 7 years |
Long Duration Fund | Investment in Debt & Money Market Instruments with Macaulay duration of the portfolio greater than 7 years |
Dynamic Bond | Investment across duration |
Corporate Bond Fund | Minimum 80% investment in corporate bonds only in AA+ and above rated corporate bonds |
Credit Risk Fund | Minimum 65% investment in corporate bonds, only in AA and below rated corporate bonds |
Banking and PSU Fund | Minimum 80% in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds |
Gilt Fund | Minimum 80% in G-secs, across maturity |
Gilt Fund with 10 year constant Duration | Minimum 80% in G-secs, such that the Macaulay duration of the portfolio is equal to 10 years |
Floater Fund | Minimum 65% in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps/ derivatives) |
Dynamic Bond funds alter the tenor of the securities in the portfolio in line with expectation on interest rates. The tenor is increased if interest rates are expected to go down and vice versa
Floating rate funds invest in bonds whose interest are reset periodically so that the fund earns coupon income that is in line with current rates in the market, and eliminates interest rate risk to a large extent
Short-Term Debt Funds
The primary focus of short-term debt funds is coupon income. Short term debt funds have to also be evaluated for the credit risk they may take to earn higher coupon income. The tenor of the securities will define the return and risk of the fund. Funds holding securities with lower tenors have lower risk and lower return.
Liquid funds invest in securities with not more than 91 days to maturity.
Ultra Short-Term Debt Funds hold a portfolio with a slightly higher tenor to earn higher coupon income.
Short-Term Fund combine coupon income earned from a pre-dominantly short-term debt portfolio with some exposure to longer term securities to benefit from appreciation in price.
Fixed Maturity Plans (FMPs)
FMPs are closed-ended funds which eliminate interest rate risk and lock-in a yield by investing only in securities whose maturity matches the maturity of the fund.
FMPs create an investment portfolio whose maturity profile match that of the FMP tenor.
Potential to provide better returns than liquid funds and Ultra Short Term Funds since investments are locked in
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Low mark to market risk as investments are liquidated at maturity.
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Investors commit money for a fixed period.
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Investors cannot prematurely redeem the units from the fund
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FMPs, being closed-end schemes are mandatorily listed - investors can buy or sell units of FMPs only on the stock exchange after the NFO.
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Only Units held in dematerialized mode can be traded; therefore investors seeking liquidity in such schemes need to have a demat account.
Capital Protection Oriented Funds
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Capital Protection Oriented Funds are close-ended hybrid funds that create a portfolio of debt instruments and equity derivatives
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The portfolio is structured to provide capital protection and is rated by a credit rating agency on its ability to do so. The rating is reviewed every quarter.
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The debt component of the portfolio has to be invested in instruments with the highest investment grade rating.
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A portion of the amount brought in by the investors is invested in debt instruments that is expected to mature to the par value of the capital invested by investors into the fund. The capital is thus protected.
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The remaining portion of the funds is used to invest in equity derivatives to generate higher returns
Hybrid Funds
Hybrid funds Invest in a mix of equities and debt securities.
SEBI has classified Hybrid funds into 7 sub-categories as follows:
Balanced Hybrid Fund | 40% to 60% investment in equity & equity related instruments; and 40% to 60% in Debt instruments |
Aggressive Hybrid Fund | 65% to 80% investment in equity & equity related instruments; and 20% to 35% in Debt instruments |
Dynamic Asset Allocation or Balanced Advantage Fund | Investment in equity/ debt that is managed dynamically (0% to 100% in equity & equity related instruments; and 0% to 100% in Debt instruments) |
Multi Asset Allocation Fund | Investment in at least 3 asset classes with a minimum allocation of at least 10% in each asset class |
Arbitrage Fund | Scheme following arbitrage strategy, with minimum 65% investment in equity & equity related instruments |
Equity Savings | Equity and equity related instruments (min.65%); debt instruments (min.10%) and derivatives (min. for hedging to be specified in the SID) |
Conservative Hybrid Fund | 10% to 25% investment in equity & equity related instruments; and 75% to 90% in Debt instruments |
Hybrid funds invest in a mix of equities and debt securities. They seek to find a ‘balance’ between growth and income by investing in both equity and debt.
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The regular income earned from the debt instruments provide greater stability to the returns from such funds.
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The proportion of equity and debt that will be held in the portfolio is indicated in the Scheme Information Document
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Equity oriented hybrid funds (Aggressive Hybrid Funds) are ideal for investors looking for growth in their investment with some stability.
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Debt-oriented hybrid funds (Conservative Hybrid Fund) are suitable for conservative investors looking for a boost in returns with a small exposure to equity.
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The risk and return of the fund will depend upon the equity exposure taken by the portfolio - Higher the allocation to equity, greater is the risk.
Solution - oriented Funds
Retirement Fund | Lock-in for at least 5 years or till retirement age whichever is earlier |
Children’s Fund | Lock-in for at least 5 years or till the child attains age of majority whichever is earlier |
Index Funds/ ETFs | Minimum 95% investment in securities of a particular index |
Fund of Funds (Overseas/ Domestic) | Minimum 95% investment in the underlying fund(s) |
Other Funds
Multi Asset Funds
A multi-asset fund offers exposure to a broad number of asset classes, often offering a level of diversification typically associated with institutional investing.
Multi-asset funds may invest in a number of traditional equity and fixed income strategies, index-tracking funds, financial derivatives as well as commodity like gold.
This diversity allows portfolio managers to potentially balance risk with reward and deliver steady, long-term returns for investors, particularly in volatile markets.
Arbitrage Funds
“Arbitrage” is the simultaneous purchase and sale of an asset to take advantage of the price differential in the two markets and profit from price difference of the asset on different markets or in different forms.
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Arbitrage fund buys a stock in the cash market and simultaneously sells it in the Futures market at a higher price to generate returns from the difference in the price of the security in the two markets.
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The fund takes equal but opposite positions in both the markets, thereby locking in the difference.
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The positions have to be held until expiry of the derivative cycle and both positions need to be closed at the same price to realize the difference.
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The cash market price converges with the Futures market price at the end of the contract period.
Thus it delivers risk-free profit for the investor/trader.
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Price movements do not affect initial price differential because the profit in one market is set-off by the loss in the other market.
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Since mutual funds invest own funds, the difference is fully the return.
Hence, Arbitrage funds are considered to be a good choice for cautious investors who want to benefit from a volatile market without taking on too much risk.
Index Funds
Index funds create a portfolio that mirrors a market index.
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The securities included in the portfolio and their weights are the same as that in the index
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The fund manager does not rebalance the portfolio based on their view of the market or sector
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Index funds are passively managed, which means that the fund manager makes only minor, periodic adjustments to keep the fund in line with its index. Hence, Index fund offers the same return and risk represented by the index it tracks.
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The fees that an index fund can charge is capped at 1.5%
Investors have the comfort of knowing the stocks that will form part of the portfolio, since the composition of the index is known.
Exchange Traded Funds (ETFs)
An ETF is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. ETFs are listed on stock exchanges.
Unlike regular mutual funds, an ETF trades like a common stock on a stock exchange. The traded price of an ETF changes throughout the day like any other stock, as it is bought and sold on the stock exchange.
ETF Units are compulsorily held in Demat mode. ETFs are passively managed, which means that the fund manager makes only minor, periodic adjustments to keep the fund in line with its index. Because an ETF tracks an index without trying to outperform it, it incurs lower administrative costs than actively managed portfolios.Rather than investing in an ‘active’ fund managed by a fund manager, when one buy units of an ETF one is harnessing the power of the market itself.
Suitable for investors seeking returns similar to index and liquidity similar to stocks
Fund of Funds (FoF)
Fund of funds are mutual fund schemes that invest in the units of other schemes of the same mutual fund or other mutual funds.
The schemes selected for investment will be based on the investment objective of the FoF
The FoF have two levels of expenses: that of the scheme whose units the FoF invests in and the expense of the FoF itself. Regulations limit the total expenses that can be charged across both levels as follows:
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TER in respect of FoF investing liquid schemes, index funds & ETFs has been capped @ 1%
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TER of FoF investing in equity-oriented schemes has been capped @ 2.25%
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TER of FoF investing in other schemes than mentioned above has been capped @2%.
Gold Exchange Traded Funds (FoF)
Gold ETFs are ETFs with gold as the underlying asset
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The scheme will issue units against gold held. Each unit will represent a defined weight in gold, typically one gram.
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The scheme will hold gold in form of physical gold or gold related instruments approved by SEBI.
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Schemes can invest up to 20% of net assets in Gold Deposit Scheme of banks
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The price of ETF units moves in line with the price of gold on metal exchange.
After the NFO, units are issued to intermediaries called authorized participants against gold or funds submitted. They can also redeem the units for the underlying gold.
Benefits of Gold ETFs
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Convenience : option of holding gold electronically instead of physical gold.
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Safer option to hold gold since there are no risks of theft or purity.
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Provides easy liquidity and ease of transaction.
Gold ETFs are treated as non-equity oriented mutual funds for the purpose of taxation.
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Eligible for long-term capital gains benefits if held for three years.
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No wealth tax is applicable on Gold ETFs
International Funds
International funds enable investments in markets outside India, by holding in their portfolio one or more of the following:
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Equity of companies listed abroad.
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ADRs and GDRs of Indian companies.
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Debt of companies listed abroad.
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ETFs of other countries.
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Units of passive index funds in other countries.
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Units of actively managed mutual funds in other countries.
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International equity funds may also hold some of their portfolios in Indian equity or debt.
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They can hold some portion of the portfolio in money market instruments to manage liquidity.
International funds gives the investor additional benefits of
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Diversification, since global markets may have a low correlation with domestic markets.
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Investment options that may not be available domestically.
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Access to companies that are global leaders in their field.
There are risks associated with investing in such funds, such as Political events and macro economic factors that are less familiar and therefore difficult to interpret
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Movements in foreign exchange rate may affect the return on redemption
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Countries may change their investment policy towards global investors.
For the purpose of taxation, these funds are considered as non-equity oriented mutual fund schemes.
Risk Factors in Mutual Funds
Standard Risk Factors
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Mutual Fund Schemes are not guaranteed or assured return products.
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Investment in Mutual Fund Units involves investment risks such as trading volumes, settlement risk, liquidity risk, default risk including the possible loss of principal.
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As the price / value / interest rates of the securities in which the Scheme invests fluctuates, the value of investment in a mutual fund Scheme may go up or down.
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In addition to the factors that affect the value of individual investments in the Scheme, the NAV of the Scheme may fluctuate with movements in the broader equity and bond markets and may be influenced by factors affecting capital and money markets in general, such as, but not limited to, changes in interest rates, currency exchange rates, changes in Government policies, taxation, political, economic or other developments and increased volatility in the stock and bond markets.
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Past performance does not guarantee future performance of any Mutual Fund Scheme.
Specific Risk Factors
Risks associated with investments in Equities & Equity Mutual Fund
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Price Risk
Equity shares and equity related instruments are volatile and prone to price fluctuations on a daily basis.
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Risk of loss
Investments in equity and equity related instruments involve a degree of risk and investors should not invest in the equity schemes unless they can afford to take the risk of possible loss of principal.
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Liquidity Risk for listed securities
The liquidity of investments made in the equities may be restricted by trading volumes and settlement periods. Settlement periods may be extended significantly by unforeseen circumstances. While securities that are listed on the stock exchange carry lower liquidity risk, the ability to sell these investments is limited by the overall trading volume on the stock exchanges. The inability of a mutual fund to sell securities held in the portfolio could result in potential losses to the scheme, should there be a subsequent decline in the value of securities held in the scheme portfolio and may thus lead to the fund incurring losses till the security is finally sold.
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Event Risk
Price risk due to company or sector specific event.
Risks associated with investments in Debt Securities and Money Market Instruments
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Debt Securities are subject to the risk of an issuer’s inability to meet principal and interest payments on the obligation (Credit Risk) on the due date(s) and may also be subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (Market Risk).
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The timing of transactions in debt obligations, which will often depend on the timing of the Purchases and Redemptions in the Scheme, may result in capital appreciation or depreciation because the value of debt obligations generally varies inversely with the prevailing interest rates.
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Interest Rate Risk
Market value of fixed income securities is generally inversely related to interest rate movement. Generally, when interest rates rise, prices of existing fixed income securities fall and when interest rates drop, such prices increase. Accordingly, value of a scheme portfolio may fall if the market interest rate rise and may appreciate when the market interest rate comes down. The extent of fall or rise in the prices depends upon the coupon and maturity of the security. It also depends upon the yield level at which the security is being traded.
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Credit Risk
This is risk associated with default on interest and /or principal amounts by issuers of fixed income securities. In case of a default, scheme may not fully receive the due amounts and NAV of the scheme may fall to the extent of default. Even when there is no default, the price of a security may change with expected changes in the credit rating of the issuer. It may be mentioned here that a government security is a sovereign security and is safer. Corporate bonds carry a higher amount of credit risk than government securities. Within corporate bonds also there are different levels of safety and a bond rated higher by a rating agency is safer than a bond rated lower by the same rating agency.
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Spread Risk
Credit spreads on corporate bonds may change with varying market conditions. Market value of debt securities in portfolio may depreciate if the credit spreads widen and vice versa. Similarly, in case of floating rate securities, if the spreads over the benchmark security / index widen, then the value of such securities may depreciate.
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Liquidity Risk
The primary measure of liquidity risk is the spread between the bid price and the offer price quoted by a dealer. Trading volumes, settlement periods and transfer procedures may restrict the liquidity of some of these investments. Different segments of the Indian financial markets have different settlement periods, and such periods may be extended significantly by unforeseen circumstances. Further, delays in settlement could result in temporary periods when a portion of the assets of the Scheme are not invested and no return is earned thereon or the Scheme may miss attractive investment opportunities.
At the time of selling the security, the security may become illiquid, leading to loss in value of the portfolio. The purchase price and subsequent valuation of restricted and illiquid securities may reflect a discount, which may be significant, from the market price of comparable securities for which a liquid market exists.
Liquidity risk refers to the ease with which securities can be sold at or near its valuation yield-to-maturity (YTM) or true value. Liquidity condition in market varies from time to time. The liquidity of a bond may change, depending on market conditions leading to changes in the liquidity premium attached to the price of the bond. In an environment of tight liquidity, necessity to sell securities may have higher than usual impact cost. Further, liquidity of any particular security in portfolio may lessen depending on market condition, requiring higher discount at the time of selling.
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Counterparty Risk
This is the risk of failure of the counterparty to a transaction to deliver securities against consideration received or to pay consideration against securities delivered, in full or in part or as per the agreed specification. There could be losses to the fund in case of a counterparty default.
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Prepayment Risk
This arises when the borrower pays off the loan sooner than the due date. This may result in a change in the yield and tenor for the mutual fund scheme. When interest rates decline, borrowers tend to pay off high interest loans with money borrowed at a lower interest rate, which shortens the average maturity of Asset-backed securities (ABS). However, there is some prepayment risk even if interest rates rise, such as when an owner pays off a mortgage when the house is sold or an auto loan is paid off when the car is sold. Since prepayment risk increases when interest rates decline, this also introduces reinvestment risk, which is the risk that the principal may only be reinvested at a lower rate.
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Re-investment Risk
Investments in fixed income securities carry re-investment risk as the interest rates prevailing on the coupon payment or maturity dates may differ from the original coupon of the bond (the purchase yield of the security). This may result in final realized yield to be lower than that expected at the time.
The additional income from reinvestment is the "interest on interest" component. There may be a risk that the rate at which interim cash flows can be reinvested are lower than that originally assumed.
Disclaimer
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It may be noted that the above mentioned are subject to change, in accordance with the guidelines being issued from various regulatory and statutory authorities from time to time. Investments are subject to market risks. Investors are requested to read all the offer related and other documents carefully.
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The data / information contained in this Website has been prepared solely for the purpose of providing information to interested parties, and is not in any way binding on the Founder / Proprietor.
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This Website has been compiled in good faith and no representation is made or warranty given (either express or implied) as to the adequacy, completeness or accuracy of the information or materials it contains. You are therefore requested to verify this information before you act upon it.
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By accessing this Website, you agree that Proprietor its associates will not be liable for any direct or indirect loss arising from the use of the information and the material contained in this Website.
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Investments in Mutual Funds are subject to Market Risks. Read all scheme related documents carefully before investing. Mutual Fund Schemes do not assure or guarantee any returns. Past performances of any Mutual Fund Scheme may or may not be sustained in future. There is no guarantee that the investment objective of any suggested scheme shall be achieved.