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Mutual Fund

A mutual fund is a pool of money from numerous investors who wish to save or make money just like you. Investing in a mutual fund can be a lot easier than buying and selling individual stocks and bonds on your own. Investors can sell their shares when they want.

Professional Management: Each fund's investments are chosen and monitored by qualified professionals who use this money to create a portfolio. That portfolio could consist of stocks, bonds, money market instruments or a combination of those.

Fund Ownership: As an investor, you own shares of the mutual fund, not the individual securities. Mutual funds permit you to invest small amounts of money, however much you would like, but even so, you can benefit from being involved in a large pool of cash invested by other people. All shareholders share in the fund' s gains and losses on an equal basis, proportionately to the amount they've invested.

Mutual Funds are Diversified By investing in mutual funds, you could diversify your portfolio across a large number of securities so as to minimise risk. By spreading your money over numerous securities, which is what a mutual fund does, you need not worry about the fluctuation of the individual securities in the fund's portfolio.

Mutual Fund Objectives There are many different types of mutual funds, each with its own set of goals. The investment objective is the goal that the fund manager sets for the mutual fund when deciding which stocks and bonds should be in the fund's portfolio. For example, an objective of a growth stock fund might be: This fund invests primarily in the equity markets with the objective of providing long-term capital appreciation towards meeting your long-term financial needs such as retirement or a child' s education.

Types of mutual funds in India

There are many different types of mutual funds categorised based on structure, asset class and

Based on asset class

  • Equity Funds: These are funds that invest in equity stocks/shares of companies. These are considered high-risk funds but also tend to provide high returns.
  • Debt Funds: These are funds that invest in debt instruments e.g. company debentures, government bonds and other fixed income assets. They are considered safe investments and provide fixed returns.
  • Money Market Funds: These are funds that invest in liquid instruments e.g. T-Bills, CPs etc. They are considered safe investments for those looking to park surplus funds for immediate but moderate returns.
  • Balanced or Hybrid Funds: These are funds that invest in a mix of asset classes. In some cases, the proportion of equity is higher than debt while in others it is the other way round. Risk and returns are balanced out this way.
  • Sector Funds: These are funds that invest in a particular sector of the market e.g. Infrastructure funds invest only in those instruments or companies that relate to the infrastructure sector. Returns are tied to the performance of the chosen sector. The risk involved in these schemes dependS on the nature of the sector.
  • Index Funds: These are funds that invest in instruments that represent a particular index on an exchange so as to mirror the movement and returns of the index e.g. buying shares representative of the BSE Sensex.
  • Tax-Saving Funds: These are funds that invest primarily in equity shares. Investments made in these funds qualify for deductions under the Income Tax Act. They are considered high on risk but also offer high returns if the fund performs well.
  • Fund of funds: These are funds that invest in other mutual funds and returns depend on the performance of the target fund.

Based on structure

  • Open-Ended Funds: These are funds in which units are open for purchase or redemption through the year. All purchases/redemption of these fund units are done at prevailing NAVs. These funds are preferred since they offer liquidity to investors.
  • Close-Ended Funds: These are funds in which units can be purchased only during the initial offer period. Units can be redeemed at a specified maturity date. To provide for liquidity, these schemes are often listed for trade on a stock exchange.

Based on investment objective

  • Growth funds: Under these schemes, money is invested primarily in equity stocks with the purpose of providing capital appreciation. They are considered to be risky funds ideal for investors with a long-term investment timeline.
  • Income funds: Under these schemes, money is invested primarily in fixed-income instruments e.g. bonds, debentures etc. with the purpose of providing capital protection and regular income to investors.
  • Liquid funds: Under these schemes, money is invested primarily in short-term or very short-term instruments e.g. T-Bills, CPs etc. with the purpose of providing liquidity. They are considered to be low on risk with moderate returns and are ideal for investors with short-term investment timelines.

Benefits of investing in a mutual fund ?

As an investor, you would like to get maximum returns on your investments, but you may not have the time to continuously study the stock market to keep track of them. You need a lot of time and knowledge to decide what to buy or when to sell. A lot of people take a chance and speculate, some get lucky, most don t. This is where mutual funds come in. Mutual funds offer you the following advantages :

Professional management: Qualified professionals manage your money, but they are not alone. They have a research team that continuously analyses the performance and prospects of companies. They also select suitable investments to achieve the objectives of the scheme. It is a continuous process that takes time and expertise which will add value to your investment. Fund managers are in a better position to manage your investments and get higher returns.

Diversification: The cliché, "don't put all your eggs in one basket" really applies to the concept of intelligent investing. Diversification lowers your risk of loss by spreading your money across various industries and geographic regions. It is a rare occasion when all stocks decline at the same time and in the same proportion. Sector funds spread your investment across only one industry so they are less diversified and therefore generally more volatile.

More choice: Mutual funds offer a variety of schemes that will suit your needs over a lifetime. When you enter a new stage in your life, all you need to do is sit down with your financial advisor who will help you to rearrange your portfolio to suit your altered lifestyle.

Affordability: As a small investor, you may find that it is not possible to buy shares of larger corporations. Mutual funds generally buy and sell securities in large volumes which allow investors to benefit from lower trading costs. The smallest investor can get started on mutual funds because of the minimal investment requirements. You can invest with a minimum of Rs.500 in a Systematic Investment Plan on a regular basis.

Tax benefits: Investments held by investors for a period of 12 months or more qualify for capital gains and will be taxed accordingly. These investments also get the benefit of indexation.

Liquidity: With open-end funds, you can redeem all or part of your investment any time you wish and receive the current value of the shares. Funds are more liquid than most investments in shares, deposits and bonds. Moreover, the process is standardised, making it quick and efficient so that you can get your cash in hand as soon as possible.

Rupee-cost averaging: With rupee-cost averaging, you invest a specific rupee amount at regular intervals regardless of the investment's unit price. As a result, your money buys more units when the price is low and fewer units when the price is high, which can mean a lower average cost per unit over time. Rupee-cost averaging allows you to discipline yourself by investing every month or quarter rather than making sporadic investments.

Transparency: The performance of a mutual fund is reviewed by various publications and rating agencies, making it easy for investors to compare fund to another. As a unitholder, you are provided with regular updates, for example daily NAVs, as well as information on the fund's holdings and the fund manager's strategy.

Regulations: All mutual funds are required to register with SEBI (Securities Exchange Board of India). They are obliged to follow strict regulations designed to protect investors. All operations are also regularly monitored by the SEBI.

How to select a fund ?

Before looking at the mutual funds available to you, it may be best to decide the mix of stock, bond, and money market funds you prefer. Some experts believe this is the most important decision in investing. Here are some general points to keep in mind when deciding what your investment strategy should be.

Diversify: It is a good idea to spread your investment among mutual funds that invest in different types of securities. Stocks, bonds, and money market securities work differently. Each offers different advantages and disadvantages. You may also want to diversify within the same class of securities. Diversifying can keep you from putting all your eggs in one basket and therefore, may increase your returns over a long period of time.

Consider the effects of inflation: Since the money you set aside today may be intended to be used several years down the road, you need to look at inflation. Inflation measures the increase of general prices over time. 

Patience is a virtue: It's no secret—the prices of common stocks can change quite a bit from day to day. Therefore, the part of your account invested in stock funds would likely fluctuate in value much the same way. 

Look at your age: Younger investors may be more at ease with stock funds, because they have time to wait out the short-term ups and downs of stock prices. By investing in a stock fund, they might be able to receive high returns over the long-term. 

How can you determine an investment mix appropriate for your age?  One way is to subtract your age from 100. The answer you come up with may be a good number to start with in deciding what portion of your total investments to put into stock mutual funds.

Risk: When you are choosing funds, be sure to consider how much risk you are comfortable with and how close you are to retirement. If retirement is around the corner, you may want a portfolio with very little risk. On the other hand, if you are younger, and have the time to weather the market's ups and downs, you may want to choose a more aggressive investment strategy.

Mutual Fund FAQs

Why should I invest in mutual funds? These days between work, family, and friends, most of us do not have the time to make or monitor personal investment decisions on a regular basis. Mutual funds have qualified professionals who do all this for you. This is the reason why, the world over, they have become the most popular means of investing. Mutual funds minimise risk by creating a diversified portfolio while providing the necessary liquidity. Additionally, you benefit from the convenience of not having to bother with too much paperwork or repeat transactions. It is our belief that investors differ in their investment needs based on their personal financial goals.

Is there a guaranteed return on the mutual funds? No, we do not give any guarantees on the returns on any of our funds. See Assured return schemes for additional information.

Are mutual funds insured? No. Mutual fund units are not insured by the government, or any government agency, and do not have any other type of insurance, unlike certain types of checking or savings accounts and certificates of deposit.

What should I look for in an investment? Are the investments I have now the right ones for me? Investors differ in their investment needs based on their personal financial goals. It is recommended that you should, at the very beginning, identify your own financial goals, be it planning for a comfortable retired life or children's education. After defining the financial goals, you need to plan for them in an organised manner and look at investments that help achieve these goals.

How do I enrol in the Systematic Investment Plan? You can participate in the Systematic Investment Plan (SIP) of Franklin Templeton Funds by investing a minimum of Rs.500/- or more either on a monthly or quarterly basis by providing us with post-dated cheques (dated the 1st or the 7th of each month) for at least one year. The cheques may be made payable anywhere in India. You may also give cheques in 2 lots of 6 cheques each. We would present the cheques at the dates mentioned and add units to you account (subject to the realisation of cheques) at the prices prevailing either on the 1st or the 7th as may be applicable. You would receive a statement of account for each such transaction.

How do I enrol in the Systematic Withdrawal Plan? Depending on your needs for monthly or quarterly income, you can then choose to withdraw wither a fixed sum per month or quarter, or the capital appreciation in the Net Asset Value of your investment.

When is the right time to invest in equities? No matter how hard we try, it is rarely possible to predict the short-term movements in the equity market and therefore it is difficult to determine the right time to invest. However, "Rupee-Cost Averaging" could help you even out your investment costs and hence use the short-term market fluctuations to your advantage.

What is the procedure for redeeming fund units? All you need to do is fill in the detachable redemption request on the account statement and deposit it with any of our Investor Service Centers. The redemption price per unit is the net asset value per unit on the relevant day, without any discount.

What is net asset value? Net asset value (NAV) represents the market value of all assets per unit, held by the fund. For an investor, it simply signifies the current value of his or her investment in the fund. The NAVs of all the Templeton Funds are determined at the end of every business day. The NAV is computed by dividing the fund's net assets by the number of units outstanding on the validation date and is illustrated below:

What do I get as proof of my holdings? You get an "account statement" which is similar to a bank passbook. The account statement is a non-transferable document which shows details of all purchases and sales, along with the price at which the purchase or sale was made. It will also show the, amount invested and redeemed to date and the number of units held, helping you track your investments.

Can I follow my investments in the daily paper? Yes. Most mutual funds and publicly traded stocks are listed in the business section of your local newspaper or in financial publications such as the Economic Times. Mutual funds are listed in a separate section and are categorised by the stock exchange on which they trade (e.g. the BSE Sensex).

Will I have a switching facility between funds? Unitholders will have an option to switch all or part of their investment in one fund to another which is available for investment at that time. The Asset Management Company would currently not charge any fees for such switching

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