Signals, Powered By EquityPandit
Mutual funds have become one of the most popular investment options in India, offering a simple and effective way to grow your money. With options for every type of investor, they make it easy to dive into the financial markets without the need of expert knowledge. Let’s explore how mutual funds work, the different types available, and how they can help you achieve your financial goals.
Understanding Mutual Funds
Just like any other such fund, mutual funds are actually investment companies pooling money from various individuals with the aim of investing it in mostly a mix of stocks and bonds, sometimes even into other types of securities. Each investor owning units within the fund essentially is owning their share of that pooled investment.
Managed by professional fund managers, mutual funds make investing easy by offering a ready-made, diversified portfolio. They are great for beginners, since you can just start small without the hassle of picking individual stocks or bonds.
Understanding How Mutual Funds Operate
Here’s how mutual funds work, step by step:
- Fund Creation: Asset management companies (AMCs) create funds with specific investment goals, strategies, and risk profiles.
- Pooling Funds: Investors buy units of the fund at the current Net Asset Value (NAV), which reflects the fund’s per-unit value.
- Portfolio Management: Expert fund managers build and manage a diversified portfolio, aligning it with the fund’s objectives. A small fee is charged for this service.
- Regular Reporting: Fund managers ensure investors receive updates on the fund’s performance, holdings, and any strategy changes.
- Redemption and Exit: Investors can sell their units at the current NAV for liquidity. Some funds may charge an exit load if withdrawn early.
Types of Mutual Funds
Equity Funds: Invest in stocks for long-term growth. High risk, but high potential returns. They can be further categorised into:
- Stock Funds: Focus on investing in individual stocks of companies with high growth potential.
- Index Funds: Invest in a broad market index (like the Nifty or Sensex), aiming to match its performance.
They can also be classified on the basis of their market capitalisation, namely Large-cap, Mid-cap, Small-cap.
Debt Funds: Invest in bonds for stable returns and lower risk.
Money Market Funds: Invest in short-term debt like treasury bills, offering low risk and modest returns.
Hybrid Funds: Combine stocks and bonds for a balanced risk-to-return ratio.
Growth Funds: Focus on companies with high growth potential for capital appreciation over time.
Income Funds: Invest in fixed-income securities, providing steady income through interest payments.
Liquid Funds: Invest in short-term, liquid assets, offering easy access to funds with minimal risk.
Tax-saving Funds: Offer tax benefits under Section 80C while primarily investing in equities.
Aggressive Growth Funds: Aim for high returns by investing in high-risk assets like small-cap stocks.
Capital Protection Funds: Focus on preserving capital while offering modest returns, investing in a mix of debt and equity.
Fixed Maturity Funds: Invest in debt securities with fixed maturity periods, providing predictable returns.
Pension Funds: Designed to build a retirement corpus with a mix of equities and debt, offering long-term growth potential.
Key Factors to Consider Before Investing in Mutual Funds
Investment Objective: Define your goal—whether it’s income, growth, short-term gains, or long-term goals.
Risk Profile: Assess your risk tolerance to choose funds that match your comfort level with risk.
Investment Horizon: Know your investment timeline to select mutual funds that align with your duration.
Asset Allocation: Diversify your investments across asset classes like equities, debt, and gold to manage risk and optimise returns.
Fund Performance: Evaluate the fund’s past performance against its benchmark and peers to gauge potential growth.
Expense Ratio: Consider funds with lower expense ratios to maximize your returns by minimising costs.
Fund Manager: Look at the track record and expertise of the fund manager, as they play a key role in investment decisions.
Investing in Mutual Funds
Here are two common ways to invest in mutual funds:
Lump Sum Investment: This is when the entire investment amount is put in at once. It would work best for someone who believes that market conditions are really good and hence good returns would come. However, such an investment is risky with fluctuations in the market.
Systematic Investment Plan (SIP): SIP Investment plans are those where periodic small amounts like monthly or quarterly are invested. It would average out the price swings on the purchase. In fact, even while such a purchase is made, the more of the units would be bought when prices fall.
Taxation of Mutual Funds
Asset Categorisation: Mutual funds are taxed based on whether they are equity or non-equity. Hybrid funds are taxed based on whether they invest more than 65% in equities.
Holding Period: The tax rate depends on how long you hold the investment:
- Short-term Capital Gains Tax (STCG): For investments held less than 12 months:
- 15% for equity funds.
- Taxed based on your income slab for debt funds.
- Long-term Capital Gains Tax (LTCG): For investments held more than 12 months:
- 10% on gains above Rs. 1 lakh for equity funds (gains up to Rs. 1 lakh are tax-free).
Tax-saving Funds (ELSS): ELSS funds offer tax-saving benefits under Section 80C, allowing you to claim up to Rs. 1.5 lakh in deductions. They also have a 3-year lock-in period.
Securities Transaction Tax (STT): When redeeming equity funds, a 0.001% STT is automatically deducted from your profits.
Some Well-Known Examples of Mutual Funds
For Equity Funds: Kotak Small Cap Fund, SBI Bluechip Fund.
For Index Funds: Motilal Oswal Nifty Midcap 150 Index Fund Direct – Growth, Motilal Oswal Nasdaq 100 FOF Direct – Growth.
For Debt Funds: ICICI Prudential Liquid Fund, Aditya Birla Sun Life Corporate Bond Fund.
For Hybrid Funds: Kotak Balanced Advantage Fund, Quant Multi Asset Fund.
Ongoing & Upcoming NFOs
| NFO Name | Launch Date | Closing Date |
| Baroda BNP Paribas Children’s Fund – Direct (G) | 6th Dec 2024 | 20th Dec 2024 |
| Bajaj Finserv Healthcare Fund – Direct (G) | 6th Dec 2024 | 20th Dec 2024 |
| Mirae Asset Nifty India New Age Consumption ETF Fund of Fund-Dir (G) | 12th Dec 2024 | 26th Dec 2024 |
| WhiteOak Capital Quality Equity Fund – Direct (G) | 8th Jan 2025 | 22nd Jan 2025 |
| Mirae Asset Small Cap Fund – Direct (G) | 9th Jan 2025 | 23rd Jan 2025 |
Some Frequently Asked Questions (FAQs)
What do you mean by mutual funds?
Different individuals pool in their money through a mutual fund, which then invests in a mixture of stocks, bonds, and other securities. Fund managers manage these investments.
What are the various types of mutual funds?
Types include, among many others, equity funds, debt funds, money market funds, hybrid funds, tax-saving funds, etc, all of which have different risk and return profiles.
How to invest in mutual funds?
Invest in a lump sum or through a systematic plan (SIP), which allows dividing a rather huge amount into smaller amounts that you will pay regularly.
How are mutual funds taxed?
The tax treatment of mutual funds depends on the holding period. Short-term capital gains (less than 12 months) are subject to a tax at 15% for equity funds, while long-term capital gains exceeding Rs 1 lakh are taxed at 10%.
Unlock profitable opportunities every day! Unicorn Signals provides actionable intraday trading signals for stocks and futures. Don’t miss out – download Unicorn Signals and start winning now!
