Mutual Fund

What are mutual funds?

A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The
combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part
ownership in the fund and the income it generates.

It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money
market instruments and/or other securities. And the income / gains generated from this collective investment is distributed proportionately amongst the
investors after deducting applicable expenses and levies, by calculating a scheme’s “Net Asset Value” or NAV. Simply put, the money pooled in by a large
number of investors is what makes up a Mutual Fund.

Why do people buy mutual funds?

Mutual funds are a popular choice among investors because they generally offer the following features:

Professional Management. The fund managers do the research for you. They select the securities and monitor the performance.

Diversification or “Don’t put all your eggs in one basket.” Mutual funds typically invest in a range of companies and industries. This helps to lower your
risk if one company fails.

Affordability. Most mutual funds set a relatively low dollar amount for initial investment and subsequent purchases.

Liquidity. Mutual fund investors can easily redeem their shares at any time, for the current net asset value (NAV) plus any redemption fees.

What types of mutual funds are there?

Most mutual funds fall into one of four main categories – money market funds, bond funds, stock funds, and target date funds. Each type has different
features, risks, and rewards.

Money market funds have relatively low risks. By law, they can invest only in certain high-quality, short-term investments issued by U.S. corporations,
and federal, state and local governments.

Bond funds have higher risks than money market funds because they typically aim to produce higher returns. Because there are many different types of
bonds, the risks and rewards of bond funds can vary dramatically.

Stock funds invest in corporate stocks. Not all stock funds are the same. Some examples are:

Growth funds focus on stocks that may not pay a regular dividend but have potential for above-average financial gains.

Income funds invest in stocks that pay regular dividends.

Index funds track a particular market index such as the Standard & Poor’s 500 Index.

Sector funds specialize in a particular industry segment.

Target date funds hold a mix of stocks, bonds, and other investments. Over time, the mix gradually shifts according to the fund’s strategy. Target date
funds, sometimes known as lifecycle funds, are designed for individuals with particular retirement dates in mind.

What are the benefits and risks of mutual funds?

Mutual funds offer professional investment management and potential diversification. They also offer three ways to earn money:
Dividend Payments. A fund may earn income from dividends on stock or interest on bonds. The fund then pays the shareholders nearly all the income,
less expenses.

Capital Gains Distributions. The price of the securities in a fund may increase. When a fund sells a security that has increased in price, the fund has a
capital gain. At the end of the year, the fund distributes these capital gains, minus any capital losses, to investors.

Increased NAV. If the market value of a fund’s portfolio increases, after deducting expenses, then the value of the fund and its shares increases. The
higher NAV reflects the higher value of your investment.

All funds carry some level of risk. With mutual funds, you may lose some or all of the money you invest because the securities held by a fund can go down
in value. Dividends or interest payments may also change as market conditions change.

A fund’s past performance is not as important as you might think because past performance does not predict future returns. But past performance can
tell you how volatile or stable a fund has been over a period of time. The more volatile the fund, the higher the investment risk.

Tax benefits

Mutual fund investors can claim a tax deduction of up to Rs. 1.5 lakh by investing in Equity Linked Savings Schemes (ELSS). This tax benefit is eligible
under Section 80C of the Income Tax Act. ELSS funds come with a lock-in period of 3 years. Hence, if you invest in ELSS funds, you can only withdraw your
money after the lock-in period ends.

Another tax benefit is indexation benefit available on debt funds. In case of traditional products, all interest earned is subject to tax. However, in case of
debt mutual funds, only the returns earned over and above the inflation rate (embedded in cost inflation index {CII}) are subject to tax. This could also
help investors earn higher post tax returns.

What are different types of mutual funds?

When you enter a car showroom, you see lots of different cars. There are hatchbacks, sedans, SUVs and maybe even sports cars. Each car in the
showroom serves a different purpose. An adventurous person may prefer a sports car while a family man with kids (and a pet) may opt for an SUV. In the
same way, there are different types of mutual funds in India.

Each fund type aims to achieve specific goals. Here are the most popular types of mutual funds you can find:

Types of funds based on asset class:

Debt Fund

Debt funds (also known as fixed income funds) invest in assets like government securities and corporate bonds. These funds aim to offer reasonable
returns to the investor and are considered relatively less risky. These funds are ideal if you aim for a steady income and are averse to risk.

Equity funds

In contrast to debt funds, equity funds invest your money in stocks. Capital appreciation is an important objective for these funds. But since the returns
on equity funds are linked to market movements of stocks, these funds have a higher degree of risk. They are a good choice if you want to invest for long
term goals such as retirement planning or buying a house as the level of risk comes down over time.

Hybrid funds

What if you want equity as well as debt in your investment? Well, hybrid funds are the answer. Hybrid funds invest in a mix of both equity and fixed
income securities. Based on the allocation between equity and debt (asset allocation), hybrid funds are further classified into various sub-categories.

Types funds based on structure:

Open-ended mutual funds:

Open-ended funds are mutual funds where an investor can invest on any business day. These funds are bought and sold at their Net Asset Value (NAV).
Open-ended funds are highly liquid because you can redeem your units from the fund on any business day at your convenience.

Close-ended mutual funds:

Close-ended funds come with a pre-defined maturity period. Investors can invest in the fund only when it is launched and can withdraw their money
from the fund only at the time of maturity. These funds are listed just like shares in the stock market. However, they are not very liquid because trading
volumes are very less.

Types of funds based on investment objective:

Mutual funds can also be classified basis investment objectives

Growth Fund

The main objective of growth funds is capital appreciation. These funds put a significant portion of the money in stocks. These funds can be relatively
more risky due to high exposure to equity and hence it is good to invest in them for the long-term. But if you are nearing your goal, for example, you may
want to avoid these funds.

Income Fund

As the name suggests, income funds try to provide investors with a stable income. These are debt funds that invest mostly in bonds, government
securities and certificate of deposits, etc. They are suitable for different -term goals and for investors with a lower-risk appetite.

Liquid funds

Liquid funds put money in short-term money market instruments like treasury bills, Certificate of Deposits (CDs), term deposits, commercial papers and
so on. Liquid funds help to park your surplus money for a few days to a few months or create an emergency fund.

Tax saving funds

Tax saving funds offer you tax benefits under Section 80C of the Income Tax Act. When you invest in these funds, you can claim deductions up to Rs 1.5
lakh each year. Equity Linked Saving Scheme (ELSS) are an example of tax saving funds.

How to buy and sell mutual funds

Investors buy mutual fund shares from the fund itself or through a broker for the fund, rather than from other investors. The price that investors pay for
the mutual fund is the fund’s per share net asset value plus any fees charged at the time of purchase, such as sales loads.

Mutual fund shares are “redeemable,” meaning investors can sell the shares back to the fund at any time. The fund usually must send you the payment
within seven days.

Before buying shares in a mutual fund, read the prospectus carefully. The prospectus contains information about the mutual fund’s investment
objectives, risks, performance, and expenses. See How to Read a Mutual Fund Prospectus Part 1 (Investor Objective, Strategies, and Risks), Part 2 (Fee
Table and Performance), and Part 3 (Management, Shareholder Information, and Statement of Additional Information) to learn more about key
information in a prospectus and How to Read a Mutual Fund Shareholder Report to learn more about key information in a shareholder report.

Understanding fees

As with any business, running a mutual fund involves costs. Funds pass along these costs to investors by charging fees and expenses. Fees and expenses
vary from fund to fund. A fund with high costs must perform better than a low-cost fund to generate the same returns for you.

Even small differences in fees can mean large differences in returns over time. For example, if you invested $10,000 in a fund with a 10% annual return,
and annual operating expenses of 1.5%, after 20 years you would have roughly $49,725. If you invested in a fund with the same performance and
expenses of 0.5%, after 20 years you would end up with $60,858.
It takes only minutes to use a mutual fund cost calculator to compute how the costs of different mutual funds add up over time and eat into your returns.
See Mutual Fees and Expenses to learn about some of the most common mutual fund fees and expenses.

Avoiding fraud

By law, each mutual fund is required to file a prospectus and regular shareholder reports with the SEC. Before you invest, be sure to read the prospectus
and the required shareholder reports. Additionally, the investment portfolios of mutual funds are managed by separate entities know as “investment
advisers” that are registered with the SEC. Always check that the investment adviser is registered before investing.