The size of the Mutual Fund market in India has crossed Rs.23000 lakh crores in 2018, making it one the most favored investment options. Investors are spoilt for choice with large branded Asset Management Companies. Each offers an array of schemes of all types to suit the individual as well as collective needs to make it a thriving investment destination.
Since it marshals higher market linked returns from asset classes of all types of risk profiles, you are in a position to choose your investment vehicle to suit your risk appetite and achieve your financial goal. This will also help you to create wealth and meet your life milestones comfortably. Before you get onto the bandwagon of Mutual Fund investment and creation of a robust portfolio, it is necessary to know the basics and what it actually means.
What is a Mutual Fund?
It is a pool of funds collected from multiple investors who bear a similar financial goal, which when invested in vehicles like equities, debt instruments, a combination of these two or other securities earn handsome market-driven returns. These returns are shared proportionately amongst the investors after deducting the expenses and charges. The funds are managed by professional Fund Managers belonging to the Asset Management Company (AMC) or Fund Houses who formulate and offer schemes of different terms and tenor.
What are the types of Mutual Funds?
Mutual Funds are classified on various parameters that determine the nature, characteristic and tenor of the instrument with the element of risk built in. Based on specific parameters, the different types of Mutual Funds are:
- Asset Class:
- Equity Funds: Investments are primarily in stock or shares. Market volatility makes this a high-risk instrument.
- Debt Funds: The holdings are primarily in short or long-term fixed income instruments like bonds and securitized products.
- Hybrid or Balanced Funds: The holdings are a mix of equity and debt instruments.
- Money Market Funds: They are generally short-term debt instruments like treasury bills.
- Structure:
- Open-Ended Funds: Units can be traded on demand based on the current NAV.
- Close-Ended Funds: The units are held for specific fixed terms, and entry and exit are not possible after in the initial NFO period is over.
- Interval Funds: It is a type of close-ended fund that offers a percentage of units for buyback at NAV. It yields high returns.
- Investment Goal:
- Growth Funds: A diversified portfolio that aims at capital appreciation primarily.
- Income Funds: Investments that generate income from dividends or interest payments for shareholders through ETFs and REITs.
- Liquid Funds: Investments primarily are in money market instruments like a certificate of deposits, treasury bills, commercial papers or term deposits.
- Tax-Saving Funds: Investment is focused on equity or equity related instruments eg. ELSS.
- Risk:
- Very Low-Risk Funds: Investments are primarily in fixed income securities, but are not totally free of risk.
- Low-Risk Funds: Where investment are made in a mix of asset classes comprising of equity and debt funds in the ratio of 60:40 respectively.
- Medium Risk Funds: Investment in preferred and utility stock fall in this category.
- High-Risk Funds: Investment in equities, especially in the Small and Mid Cap varieties carry the highest risk, but are also potentially the highest yielding instruments.
- Specialized: Investments in a particular industry or sector comprise such funds. Due to lack of diversification they are categorized as High Risk.
Features of Mutual Funds:
The key features that make Mutual Fund investment a worthwhile proposition for Indian investors are:
- Liquidity: The single most important feature. You can trade on your Mutual Fund on any business day unlike other investment options like PPF or bank deposits.
- Cost Effective: The fees charged for fund administration and the fund manager are typically 1.5 to 2.5% of your investment, making it beneficial as it does not eat into your returns.
- Transparent: Regulated by SEBI, the monitoring is very stringent. Daily declaration of NAV, monthly disclosure of portfolio and other relevant information in public domain assures transparency.
- Diversity: The exposure to a wide basket of asset classes at a low cost makes your investment paying.
- Low investment: You can start with a small investment as low as Rs.500 through the SIP mode, which makes even a budding investor welcome.
Portfolio approach for Mutual Fund Investment:
In spite of the various benefits that the Mutual Fund investment offers, there are limitations that you need to factor in. Most important among them is that Mutual Funds comprise of thousands of schemes that are designed for a class of investors, precluding .individual specific customization. This is overcome by you by creating a portfolio that matches your specific needs. The reasons why a portfolio approach is ideal are:
- Personal Return: You have your own financial planning and envisaged goal. A bouquet of diverse assets in a portfolio is crucial to meet your need.
- Personal Risk Tolerance: Your risk attitude and capacity determine your risk appetite. A portfolio is just the solution to satiate your appetite.
- Liquidity: As a retail investor, your financial planning must factor in this feature for meeting a financial crunch. A portfolio is just the aid you need to liquidate a part of your assets to overcome the crisis, without hampering much of your eventual yield prospects.
- Rebalancing: It is a means to maintain asset allocation in conformity with the changing economic scenario in general. Your own financial priorities may change with emerging life stages and passage of time. The former is managed by the fund manager, but the latter has to be by you which is possible only with the portfolio approach in place.
- Diversity in Fund Management: Fund management skill plays an important role in the strategy of fund allocation for superior yield. To reap the benefits of diversification fully, the portfolio plays a decisive role.
Bottom Line:
Your portfolios are basically core, satellite and most importantly, goal based. The various benefits that come your way through Mutual Fund investment are best exemplified by the portfolio you are able to create boasting diversity as a major element. While the former two add muscle to your wealth creation, the latter actually will reach you to your destination. The portfolio approach will effectively help you to harvest capital appreciation through your ability at judicious management catering to your risk perception and liquidity needs
