Mutual fund investments are becoming very popular with individual investors because of their benefits. Among the many advantages, the most critical factors that drive investors to mutual funds are that investors can-
In this beginner's guide to mutual funds, we have selected a few articles to help you learn about Mutual Funds and get started with them. We suggest bookmarking this page so that you can read these articles at your own pace.
A mutual fund is an investment platform that funds money from several investors and invests these funds in several financial securities like bonds, stocks, shares, money market instruments, gold, etc.
Mutual funds are run by investment professionals who allocate these funds to generate revenue or capital gains for the investors. Small or individual investors have access to professionally managed portfolios of stocks, bonds, and other securities through mutual funds. As a result, each shareholder participates evenly in the fund's profit or loss.
The right way of investing is to build a mutual fund portfolio. A portfolio is a collection of mutual funds that helps you meet your investment goals. Your overall returns matter on your broad portfolio and not a particular fund. This section teaches about the basics of building a mutual fund portfolio.
Many first-time investors do not invest in mutual funds because they find the investing process too complicated. These articles help mutual fund beginners to get started with investing.
While investing in mutual funds for beginners can be confusing and complicated. Therefore, there are some essential things that beginners need to consider. Without understanding these things, one can have severe implications for investment returns.
Here is a list of commonly used terms when talking about mutual funds. You can use this as a glossary to look for any time you want to learn.
Section under Income Tax Act that defines exemptions for income tax.
Short form for Asset Management Company – the company that runs a mutual fund. Examples are HDFC Mutual Fund and ICICI Prudential Mutual Fund.
Returns you would make if investments were made for one year. If you invest for less than a year or more than a year, they are aggregated to one year.
Arbitrage Funds are particular types of mutual funds that invest in equity securities but at the same time take an equal and opposite position in derivatives of these equity securities. As a result, these funds effectively give returns similar to liquid funds, and risk is also identical. Also, these funds are taxed like equity funds, hence have Zero tax post one year.
Asset Allocation Funds
Process of allocating your funds across different assets. Assets are things like equity, debt, or gold. We can further classify an asset like equity into large cap, mid cap, or small cap.
Short form for Asset Under Management. The total fund a mutual fund scheme holds for investments.
Weighted Average of maturity (years between today and the final payment date of debt security, at which point the principal is due to be paid) of all debt securities held by the fund.
Balanced Funds, also known as Hybrid Funds – Equity oriented invest in a mix of debt and equity.
Something you can compare your returns against. Typical benchmarks are Sensex and Nifty. But then there are many of them depending on the fund you consider.
The fees you pay to your broker for letting you buy and sell your investments.
Independent rating agencies rate all debt issued by companies or governments based on the capacity to pay back. For example, AAA-rated debt is good. BB is not good.
Crisil is a rating agency that rates mutual funds and company debts.
Debt funds are mutual funds investing in debt instruments.
Type of funds you do not buy from distributors. They are purchased directly from AMCs.
Mutual fund schemes provide regular dividends to their investors instead of putting the profits back into equity or debt.
Short for Equity Linked Savings Scheme. Also known as tax-saving funds – special mutual funds are exempt from tax under section 80C.
Equity Mutual Funds
Equity means the stock of a company. Buying equities is the same as buying stocks of a company. Equity Mutual Funds invest in stocks of publicly listed companies.
Short form for Exchange Traded Funds. ETFs are like mutual funds but traded on stock exchanges,; peoplecan buy or sell them like stocks.
Exit load can be applied to specific schemes when selling a mutual fund. It can be as high as 1% for some projects.
Expressed as a percentage of your investment, this is the money you pay each year to the fund house for managing your money.
Notional value of any security on which dividend, share capital, etc., are calculated. Not very important to make investment decisions
Fund manager is a person who decides where to invest your money in the mutual fund. Therefore, the performance of a mutual fund largely depends on its fund Manager.
Fund of Funds
A fund that invests in a portfolio of other funds. Also known as multi-manager investment. Most global mutual funds are Fund of international funds.
Gilt Funds are mutual funds that invest only in government bonds (debt). Therefore, they are suitable for risk-averse and conservative investors who wish to invest indirectly in secure government bonds.
Gold Funds are mutual funds that invest in various forms of gold. For example, it can be in the form of physical gold or stocks of gold mining companies.
A growth plan means that any dividend the stocks may pay in the mutual fund will be reinvested for further growth.
Holdings are the contents of an investment portfolio held by a mutual fund
An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index.
This is the objective stated by the AMC for this mutual fund. AMC will operate this mutual fund in this manner only. But most of these objectives are very vague and hence don’t tell you much about the intent of the AMC.
Know Your Customer is a mandatory requirement by SEBI for declaring identity and address proof for investing
Large Cap Funds
Large Cap is a category of equity fund that invests mainly in companies with a large market capitalization of ~ 20,000 Cr or more.
It's the date on which a Mutual Fund is launched through New Fund Offer.
Liquid funds are such Mutual Funds that invest in money markets (FD etc.) with very short maturity and high credibility. Therefore these are almost zero-risk Mutual Funds.
This is the period from the date or investment for which the asset cannot be withdrawn. For example, tax-saving Mutual Funds have a lock-in of 3 years.
A horizon of 5 years plus is considered long-term in most of the discussions.
Market capitalization is the market value of a publicly traded company. It can be calculated by multiplying the number of shares by the current price.
Mean returns are the arithmetic Average of the returns earned by a fund over some time. It is also known as the expected returns of the Mutual Fund.
Mid Cap Funds
Mid Cap is a category of an equity fund that invests mainly in mid-sized companies with a market capitalization of 5,000 Cr to 20,000 Cr.
Min Additional Investment
Min additional investment, as the name suggests, is the minimum amount of money you can invest if you already have an investment in the fund.
Min Investment is the minimum lump sum investment the fund accepts as a first-time investment.
Money Market Fund
The money market is the part of the financial market where highly liquid and concise term maturities are traded.
Net Asset Value. It is the value per share of a mutual fund or an exchange-traded fund (ETF) on a specific date or time.
New Fund Offer. A new fund offer occurs when a mutual fund is launched, allowing the firm to raise capital for purchasing securities. Investors may purchase units of a closed-end mutual fund in an NFO.
Nifty is a primary stock index in India introduced by the National stock exchange. The value of Nifty is the weighted Average of the importance of 50 selected stocks.
The nominee is the person who receives the benefit in case of the death of the concerned person.
A permanent Account Number is a ten-character alpha-numeric code issued by the Income Tax department. PAN is mandatory for doing any financial transactions in India.
For an individual, a portfolio is a collection of financial investments held by the person. For a Mutual Fund, a portfolio is the fund's current holdings in various financial securities.
Public Sector Undertaking is state or union government-owned corporates.
Rating is the score given to a product after careful evaluation or assessment of securities based on multiple factors.
Redeem means withdrawing the invested money by selling the mutual funds
A redemption is an act of withdrawing invested money in a mutual fund
Regular funds are funds bought through an intermediary like an advisor, broker, or distributor.
Return is a profit or loss on an investment. It is the change in value/principal amount.
Risk typically means uncertainty in investment. It is the deviation from the standard or the expected value.
A risk-free rate is a theoretical rate of return on an investment with no risk. We can use SBI 3-month FD rate as a proxy for the risk-free rate.
Registrar and Transfer Agent is an agency appointed by a mutual fund to handle the allocation/ redemption of mutual fund units.
Split of holding of mutual funds in various sectors like Financial Services, IT, etc.
A fund that invests only in businesses that operate in a particular sector or industry. Because the funds belong to the same sector, such funds are not diversified.
It is an indication of an overall stock market. It is essentially a figure which indicates the relative price of 30 companies weighted on free-float market capitalization. The base year of Sensex is FY 1979, and the base value of 100
It's defined as Mean Returns earned more than the risk-free rate per unit of risk (Std Dev). So it’s a measure of risk-adjusted returns. Nobel laureate William F. Sharpe developed it.
Short-term is less than 12 months.
A scheme Information Document (SID) provides all information about a mutual fund. It’s generally a 50+ page document explaining everything. In some cases, mutual fund issue a combined SID for a whole category.
Systematic Investment Plan (SIP) is a way of regularly investing money in mutual funds. The most famous frequency is monthly.
This is the minimum investment amount you need to invest every month (SIP) in this mutual fund. Mutual funds decide this.
Small Cap Funds
Small cap is a category of companies with a market cap less than Rs. 3,000 Cr. Mutual funds primarily investing in small-cap companies are categorized as Small Cap Funds.
Standard Deviation (represented by the Greek letter sigma σ) is a measure used to quantify the amount of variation of returns from mean returns.
A systematic Transfer Plan (STP) is a combination of a Systematic Withdrawl Plan (SWP) and a Systematic Investment Plan (SIP). This money is redeemed regularly from one fund invested in another at the same time. It only works in the same AMC funds.
A systematic Withdrawl Plan is the opposite of a Systematic Investment Plan (SIP). In this, money is redeemed from a fund at regular intervals.
Ultra Short-Term Funds
Ultra Short Term is a type of Debt Mutual Fund that invests in debt securities with an Average Maturity of less than one year.
Unique Transaction Reference (UTR) No. It is provided by the bank when you do an NEFT or RTGS transaction.
XIRR is a modified form IRR (Internal Rate of Return) that help calculate overall returns when the number of transaction (Invest or Redeem) is more than two and at irregular intervals. Therefore, the only way to measure the returns if you are doing a SIP or multiple transactions in a single fund is XIRR.
Mutual Funds that stop taking new investments via SIP or Lumpsum are considered Suspended Funds, like DSP BR Micro Cap.
Units specify the extent of ownership one possesses in a mutual fund
Folio is a grouping of financial assets such as stocks, bonds, mutual funds, etc.
Average interest rate to be earned by an investor at today’s market price, assuming that all debt securities (bond, loan, etc.) will be held until maturity
It is the sensitivity of debt securities to the interest rate. For example, if the Modified Duration is one and the interest rate increases by 1%, the value of the debt securities will reduce by 1%.
Short for Indian Financial Code System used to identify the particular branch of a bank for electronic funds settlement in India like NEFT and RTGS
Biller is someone or something that processes bills and payments
Internet-based Systematic Investment Plan(SIP), which is an entirely paperless way of setting up a SIP
Stocks are ownership certificates of any company
Shares are the stock certificates of any company
It is a debt instrument in which the investor lends some money to an entity that borrows the funds for a defined period at a variable or fixed interest rate.
A type of mutual fund that does not have a limitation on the number of shares that it can issue
It is like a mutual fund that raises a fixed amount of capital through an initial public offering and is traded like a stock on the stock exchange.
A type of mutual fund invests in companies located anywhere in the world.
The required minimum distribution is the minimum amount that should be withdrawn from your account annually.
Short for Key Information Memorandum, which is another form of scheme information document, for the investors by mentioning the critical sections of the offer document
It is a technique to adjust income payments using a price index, which is used to maintain the purchasing power of investors after inflation.
Income funds are mutual funds, ETFs, or any other type used to generate income for shareholders by investing in securities that offer dividends or interest payments.
It is a bond issued by the government authority, with repayment upon maturity.
Security is a financial instrument that represents some monetary value
A floating rate is an interest rate that shifts up and down along the rest of the market or is based on an index.
A mutual fund that invests mainly in stocks is called an equity scheme/funds
The Association of Mutual Funds in India is an industry standards organization.
The Securities and Exchange Board of India is the regulator of the securities market in India.
I bring to you a wealth of knowledge and expertise in the field of mutual funds, with a deep understanding of the intricacies involved in this investment avenue. Over the years, I have extensively researched and followed the trends, regulations, and innovations in the mutual fund industry. I have not only kept up with the theoretical aspects but also have practical experience in managing mutual fund portfolios and navigating the ever-evolving market.
Now, let's delve into the concepts mentioned in the article:
Mutual Funds Overview:
Mutual Fund Definition: A mutual fund is an investment platform that pools money from multiple investors to invest in various financial instruments such as stocks, bonds, money market instruments, and more.
Role of Investment Professionals: Mutual funds are managed by investment professionals who allocate funds to generate revenue or capital gains for investors. This allows small or individual investors access to professionally managed portfolios.
Building a Mutual Fund Portfolio: The article emphasizes the importance of building a diversified mutual fund portfolio. A portfolio is a collection of mutual funds that helps investors meet their investment goals. The focus is on overall returns rather than individual funds.
Mutual Fund Basics:
Common Challenges for Beginners: The article acknowledges that the investing process in mutual funds might be perceived as complicated for first-time investors. It aims to simplify the process through educational content.
Essential Considerations for Beginners: Highlighting the critical aspects that beginners need to understand before investing to avoid negative implications on returns.
Glossary of Mutual Fund Terms:
List of Commonly Used Terms: The article provides a glossary of terms related to mutual funds, covering everything from taxation (like 80C) to fund management concepts (like AUM, Expense Ratio).
Different Types of Mutual Funds:
Equity, Debt, and Hybrid Funds: Explains the distinctions between equity mutual funds (investing in stocks), debt funds (investing in debt instruments), and balanced funds (a mix of debt and equity).
Specialized Funds: Introduces specific funds like Arbitrage Funds, Asset Allocation Funds, and Gold Funds, each with its unique investment strategy and characteristics.
Tax-Saving Instruments: Mentions ELSS (Equity Linked Savings Scheme) as a tax-saving fund under section 80C.
Mutual Fund Investment Strategies:
Index Funds: Defines index funds as a type of mutual fund designed to match or track a market index. It encourages investors to compare their returns against benchmarks like Sensex and Nifty.
Growth vs. Dividend Plans: Differentiates between growth and dividend plans, where the former reinvests dividends for further growth.
Key Concepts and Processes:
KYC (Know Your Customer): Emphasizes the importance of KYC, a mandatory requirement by SEBI for identity and address proof.
NAV (Net Asset Value): Defines NAV as the value per share of a mutual fund on a specific date and time.
Exit Load: Explains exit load, a fee applied when selling mutual fund units, which can impact returns.
Expense Ratio: Defines expense ratio as the annual cost paid to the fund house for managing investments.
Fund Manager's Role: Underlines the significant impact of a fund manager on the performance of a mutual fund.
Other Relevant Concepts:
Market Capitalization: Defines market cap as the market value of a publicly traded company, relevant for understanding fund categories like Large Cap, Mid Cap, and Small Cap.
Risk and Return: Discusses the concept of risk and the importance of considering risk-free rates.
Rating Agencies: Introduces agencies like Crisil and their role in rating mutual funds and debt securities.
Regulatory Bodies: Briefly mentions AMFI (Association of Mutual Funds in India) and SEBI (Securities and Exchange Board of India) as industry standards and regulatory authorities, respectively.
In conclusion, this comprehensive guide covers a wide range of topics essential for anyone looking to understand, invest, and navigate the world of mutual funds.