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Mutual Funds

What is a mutual fund?

A mutual fund pools your money along with that of several other investors and invests this money, depending on the type of mutual fund you choose. It invests in different stocks if you choose equity or equity diversified mutual funds, in bonds or fixed income securities, if you choose debt mutual funds and a mix of equity and debt if you choose a balanced mutual fund.

The Company which manages the mutual fund is called an AMC or an asset management Company. An AMC may manage several mutual fund schemes.

The money you and several investors invest in the mutual fund, is managed by a professional called a fund manager, appointed by the AMC. Fees are paid to the fund manager for managing your money, which is deducted from the money, you invest in the mutual fund.

The activities of the AMC are regulated by SEBI (The Securities and Exchange Board of India). You have to pay money when you enter and exit a mutual fund scheme, called the entry load and exit load.

Why invest in Mutual Funds
Diversification Benefit

Diversification Benefit

Mutual funds invest in stocks of different Companies across sectors. This reduces risk through diversification.

Small is Big

Small is Big

Invest small amounts systematically in mutual funds, through SIP. You are always invested in the stock market and profit in bull markets.

Professional Management

Professional Management

You have a professional fund manager managing your investment. You don't have the headache of buying and selling stocks.

Tax Benefits

Tax Benefits

You get tax deductions on your salary, if you invest in an ELSS. You also get the benefits of compounding.

Mutual funds in India can be open ended or close ended

Open ended schemes: They don't have a fixed maturity date. Investors can buy and sell units of mutual fund, at any time within market trading hours.

Close ended schemes: These schemes are open for investment only for a short period of time. You have to invest within this time frame. The close ended schemes are listed on a stock exchange. You can buy and sell units on the stock exchange through a broker just like stocks.

Net Asset Value (NAV)

You have the total market value of all the assets of the mutual fund portfolio such as Cash, Securities, Shares, Bonds, Liquid Assets, Dividends to be received and interest accrued. You have the liabilities, which is money owed to its creditors or investors redeeming their money. There will be certain expenses accrued over time yet to be paid.

Net Asset Value is basically the difference between these assets and liabilities divided by the outstanding units. The outstanding units are those which are taken up by the investor.

Direct Plan mutual funds

You can directly invest in the asset management Company. You do not invest through agents and Distributors. A mutual fund scheme has to affix the word "DIRECT" in the scheme name.

SIP in a mutual fund

In case of SIP, on a specified date a fixed amount as specified by you, is deducted from your bank amount. The amount debited is then invested in a particular mutual fund scheme of your choice, at fixed time periods such as the first day of each month. Many AMC and fund houses provide the online option for your SIP investments.

Types of equity mutual funds

Equity Diversified mutual fund: The mutual fund looks to invest in a wide variety of companies. These may be small to medium sized companies or even large companies. These companies may be spread across sectors and industries. These may be into oil and gas, pharmaceuticals or infrastructure. Investment across sectors and Companies reduces risk in investing.

Sectoral Mutual Funds: A Sectoral fund is a mutual fund which basically invests in stocks of a particular sector. It remains focused on the stocks of a particular business. These may be the Technology, Financial services, Telecommunications, Metals and Mining, Healthcare and Pharma, Real Estate and Infrastructure, Power, Oil and Gas, Shipping, Airlines Industry, Banking, FMCG and so on.

Index Schemes

An index fund is basically an equity fund, that mirrors or replicates a particular stock market index such as the CNX Nifty also called Nifty 50 or the S&P BSE Sensex. An index fund which tracks the S&P BSE Sensex will invest only in the thirty stocks which this index comprises of. The proportions of investment in each stock will exactly match with the weight of the stock in the index. All the fund manager has to do is to follow and replicate the index he tracks and invest in all the constituent shares in the same proportion or ratio as the index.

Equity Linked Savings Schemes (ELSS)

As the name suggests, ELSS invests the whole corpus in equities. Proportions as high as 80-90% in equities are found in an Equity Linked Savings Schemes. It is a special kind of mutual fund that qualifies for tax benefits.

Lock in: ELSS has a 3 year lock in. You cannot touch your money in the ELSS for 3 years.

ELSS enjoys EEE exemptions

"EEE" means exempt exempt exempt. The ELSS enjoys a deduction under Section 80 C of the income tax act, up to INR 1.5 Lakhs a year. You can invest a maximum amount of INR 1.5 Lakhs a year in an ELSS and avail a deduction under Section 80 C of the income tax act on the full amount invested.

The money accumulates with time (if the value of the ELSS increases) and no tax is charged on this amount. The money you withdraw on maturity after 3 years is tax free.

Risk in mutual funds

As per SEBI rules the level of risk in a mutual fund is denoted through colors.
Blue : Your principal is at low risk.
Yellow : Your principal is at medium risk.
Brown : Your principal is at high risk.

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