Category: Mutual Funds

Multi-Cap Vs Flexi-Cap Mutual Funds? Which Is Better For You?

You are a well-versed investor and recently stumbled upon multi-cap and flexi-cap mutual funds and asked yourself, what exactly is the difference. We will unfold your question in today’s blog.

Firstly, if you are new to the world of mutual funds, check out our blog: Mutual Funds: Meaning, Types, Features, Benefits and How They Work.

Mutual funds are classified according to asset class, financial goals, and structure. Multi-cap and Flexi-cap are both similar to other equity mutual funds, which are pooled investments, and they aim to provide capital growth to investors in the long term. Both funds fall under the umbrella of active mutual funds.

Multi-Cap Funds

Multi-cap funds are active equity mutual funds that invest in large-cap, mid-cap, and small-cap stocks. As per the latest circular released by SEBI, at least 75% of the investments made by multi-cap mutual funds are in equity and equity-related instruments. The investments should be made in the following manner:

Investments in large-cap companies: at least 25% of the total assets.
Investments in mid-cap companies: at least 25% of the total assets.
Investments in small-cap companies: at least 25% of the total assets.

The advantage of multi-cap funds is that your capital is invested in all three caps (at least 25%), with mid and small caps being more volatile than large caps, which can yield an ample return in the long run. However, keep in mind that there is no guarantee that multi-cap funds will outperform other mutual fund classes; in fact, multi-cap funds can be more volatile in the short run.

Flexi-Cap Funds

The Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI) have launched a number of initiatives in India to raise public awareness and confidence in the financial sector.

SEBI introduced this category of mutual funds in November 2020 after receiving recommendations from the Mutual Fund Advisory Committee (MFAC). As per the circular released by SEBI, it is an open-ended, dynamic equity scheme investing across large-cap, mid-cap, and small-cap stocks.

In the flexi-cap fund, at least 65% of the investments should be invested in equity and equity-related instruments. However, as compared to multi-cap funds, there is no minimum criterion to invest this 65% across large, small, or mid-cap stocks. The advantage of flexi-cap funds is that fund managers have more investment flexibility to invest money across large, mid, and small caps.

Let’s look at the below comparison. We have selected one mutual fund from each category:

Parag Parikh Flexi Cap Fund
Nippon India Multi Cap Fund

Parag Parikh flexi cap vs Nippon India multi cap — *Source: Valueresearch*

As you can observe, the Parag Parikh flexi-cap fund has more investment in large-cap funds than the Nippon India multi-cap fund. Further, the Parag Parikh flexi-cap fund has only a 1% investment in small-cap stocks. Flexi-cap funds provide more flexibility for investments as compared to multi-cap funds, as there is no regulatory requirement for flexi-cap funds.

Choosing Between Multi-Cap and Flexi-Cap:

Particulars	Flexi-cap fund	Multi-cap fund
Equity Exposure	At-least 65% investment in equity and equity-related instruments	At-least 75% investment in equity and equity-related instruments
Asset Allocation	Fund managers have flexibility in asset allocation	At-least 25% in each of the cap: large, mid and small
Risk	Very High	Very high
Volatility	Low as compared to multi-cap	High as compared to flexi-cap
Tax	Subject to both STCG and LTCG	Subject to both STCG and LTCG

Conclusion

We have discussed the similarities and differences between flexi-cap and multi-cap mutual funds. Both are equity mutual funds and provide diversification to your mutual fund portfolio. However, the key difference in both is the equity exposure and the asset allocation. The minimum percentage of equity and equity-related instruments that flexi-cap funds and multi-cap funds can invest in is 65% and 75%, respectively. Further, multi-cap funds must invest at least 25% in each class: large, mid, and small-cap, whereas flexi-cap funds have greater flexibility.

The best mutual fund strategy is to select mutual funds based on your risk appetite and time horizon after consulting with your financial advisor.

Frequently Asked Questions (FAQs)

Are multi-cap and flexi-cap active or passive funds?
Both multi-cap and flexi-cap are active mutual funds means they are actively managed by a professional fund manager.
Can flexi-cap funds invest in debt securities?
Yes, as long as a fund has at least 65% of its investments in equity.
What is the risk profile of flexi-cap and multi-cap funds?
The risk profile for both funds is very high, as both are equity mutual funds.
Are multi-cap funds more volatile than flexi-cap funds?
In general, the answer is yes, because multi-cap funds must invest at least 25% in small-cap and mid-cap funds due to regulatory requirements, whereas no such requirement for flexi-cap funds.
When did flexi-cap funds launch?
In November 2020, SEBI introduced flexi-cap funds.

December 11, 2023

SIP in Stocks vs SIP in Mutual funds?

Which can be a better choice?

To choose between SIP in stocks and SIP in mutual funds, first we need to understand the fundamentals of mutual funds, stocks, and SIP. Check out this blog to get answers to all your questions.

What is a Mutual Fund?

It’s a pooled investment fund overseen by a professional fund manager. It gathers funds from investors who want to invest in the stock market. Depending on the type of mutual fund, these collected funds are then diversified into various asset classes. Mutual funds can differ from, open-ended to close-ended, and from actively managed funds to passively managed funds. Every mutual fund unit is allotted NAV, which is net asset value. It is the combined value of all the asset classes that you hold in your portfolio.

What are Stocks?

A stock, also known as equity or share, represents a part of ownership that an individual holds in a corporate or government company. Investing in stocks carries a level of higher risk because the value of a stock can be influenced by various factors, including the company’s financial performance, economic conditions, and market sentiment. However, stocks have historically offered higher returns compared to other investment options.

What is SIP?

SIP stands for Systematic Investment Plan. It is an investment method in mutual funds and stocks where you invest a fixed amount of money at regular intervals. SIP can be done for an amount as small as INR 500. SIPs are long-term investment strategies that help you compound your money over the years.

Having discussed the basics of mutual funds, stocks, and SIP, let us go through what SIP in mutual funds and SIP in stocks looks like.

SIP in Stocks

SIP in stocks involves regular investment in a specific stock at pre-determined intervals. Stock SIP can be used for averaging your shares, thereby reducing their purchase price. The concept of stock is more or less similar to SIP in mutual funds, which we shall discuss later in this blog.

Below are some key facts an investor should know before choosing stock SIPs.

SIP in stocks will give you direct exposure to individual stocks that can help you generate better returns, but as you know, reward and risk go hand in hand. This SIP method is susceptible to market fluctuations, which can significantly impact returns.
SIP in stocks will give you more freedom as you are solely responsible for selecting your allocation. However, selecting specific stocks involves in-depth research and analysis of companies as well as the overall trend of the market, which can be challenging and stressful at times.
Stock SIPs involve regular monitoring of the stocks and can be a tough task.
Diversification of the portfolio becomes difficult when using SIPs in stocks because it can be difficult to maintain multiple SIPs and stay current on research and new developments.

Stock SIPs can be a good option for investors who are well-versed in market fluctuations. However, for most of the investors, it is suggested to do SIP in mutual funds.

SIP in Mutual Funds

Mutual fund SIP involves regular investment of a fixed amount into a mutual fund. This method indirectly invests in multiple stocks and other instruments; therefore, it allows investors to allocate capital as per their risk profile. There are a plethora of mutual funds available in the industry, ranging from equity based to debt based.

Below are some key points that an investor should remember before choosing SIPs in mutual funds:

Mutual funds offer diversification and carry less risk as compared to stock, as mentioned earlier, and reduce the impact of poor performance of a single security.
Investors can start their financial journey with mutual fund SIPs from as low as INR 100, which makes it accessible to people of all income groups in a country like India, but keep in mind that mutual fund investments are always subject to market risk.
Mutual fund SIPs allow disciplined and regular investing. You do not need to monitor and analyze your portfolio on a daily basis.
There are two ways to transact SIPs:
- You can manually pay the amount via UPI, Net banking, etc., at intervals.
- You can set-up an auto mandate authorizing your bank to automatically deduct a specified amount from your bank account at every interval.
Similar to stock SIP, investors can enjoy the benefits of rupee cost averaging in mutual funds SIP. With this, the NAV of the mutual fund unit will be allotted at lower prices.
Investors can choose SIPs based on their risk profile and financial goals, such as equity funds for capital appreciation, debt funds for stability, or hybrid funds for a balanced approach. However, before choosing any scheme, be aware of the expense ratio and other fees associated with mutual funds.

Read Also: SIP vs Lump Sum: Which is Better?

SIP in stocks vs. SIP in mutual Fund

Let’s explore the table of differences below for a better understanding:

Basis	SIP in Stocks	SIP in Mutual Fund
Risk	High – Market expertise is required	Risk is comparatively lower as it is managed by a fund manager.
Research Requirement	High	Low to none
Management	Self-directed	Professionally managed
Ownership	Direct ownership in your de-mat account	Indirect ownership as shares are purchased by mutual funds and its units are allocated to you
Charges	Only transaction related expenses are incurred. Click here to learn more.	It includes several charges: expense ratio (covers admin-related expenses and fund manager fees), exit load, redemption fees, etc.

Conclusion

SIP in mutual funds offers a disciplined way of investing, and people who wish to stay committed to the markets for the long term can choose this route. However, it is suggested to only those investors who are aware of the market technicalities and are willing to research companies. It requires active involvement as compared to mutual fund SIPs.

In summation, before starting your SIPs, carefully assess your financial goals and risk appetite. It is advised that you speak with a financial advisor to receive individualized portfolio support.

S.NO.	Check Out These Interesting Posts You Might Enjoy!
1	Best Thematic Mutual Funds in India
2	Types of Mutual Funds in India
3	Best Long-Term Mutual Funds to Invest in India
4	Best SIP Mutual Funds in India
5	Debt Mutual Funds: Meaning, Types and Features
6	How to Check Mutual Fund Status with Folio Number?
7	Best Money Market Mutual Funds in India
8	Mutual Fund Fees & Charges in India
9	Best Performing Mutual Funds of the Last 10 Years
10	History of Mutual Funds in India

Frequently Answered Questions (FAQs)

What is the full form of SIP?
SIP stands for Systematic Investment Plan.
Which is better? Stock SIP or Mutual fund SIP?
It depends on individual financial goals and preferences.
How many stocks can you choose when doing Stock SIP?
You can start SIP in as many stocks as you want. However, in a well diversified portfolio, atleast 30 stocks are suggested.
Does SIP in stocks has higher risk than SIP in Mutual Funds?
Yes. SIP in stocks is comparatively riskier.
What is the minimum amount of SIP required to invest in Mutual Funds?
SIP in a mutual fund starts from as low as INR 100.

December 4, 2023

ETF vs Mutual Fund: Key Differences

A lot of people who are just getting started with investing hit the same wall: ETF vs mutual fund. Both sound similar on the surface, as these are regulated by SEBI, pool money from investors, and are good for diversification.

But when you actually start comparing and analysing these, you will find that there are differences that are left unnoticed, which can impact your investment journey and goals a lot. This is one of the reasons why you need to know the difference between ETFs and mutual funds well.

So, for those who are planning to start investing, this guide is everything you need. Explore the complete mutual fund vs ETF details here and ensure that you have a better plan to start with.

What Is an ETF?

ETF stands for Exchange Traded Fund. It is an investment option that pools money and then invests in various assets. These assets are like stocks, bonds, and others.

Most ETFs in India track a popular index. Like the Nifty 50 ETF tracks the Nifty 50 index. When the Nifty goes up, your ETF goes up. When it falls, so does the ETF. There is no fund manager trying to outsmart the market here. The fund just mirrors the index.

Because there is no active research or stock-picking involved, the costs are much lower. And since prices update in real time, you can buy at 10 AM and sell at 2 PM if you want to. That kind of flexibility is not possible with a regular mutual fund.

If you are willing to invest in ETFs, some of the options are:

Equity Index ETFs (Nifty 50, Sensex, Nifty Next 50)
Gold and Silver ETFs
International index ETFs like those tracking the Nasdaq 100

What Is a Mutual Fund?

A mutual fund is a pool of money. It is collected from thousands of investors, and this is managed by a professional fund manager. All this is done at an Asset Management Company (AMC). The fund manager decides where to invest this money and how much based on the goals.

Mutual funds are mostly actively managed. This means that, based on the market conditions, these funds are evaluated, and the investment in assets is changed. The investment is done based on the Net Asset Value (NAV).

You can go for lumpsum or even SIP based investment. There are certain conditions linked to the withdrawal and redemption of some of the funds. This is perfect for beginners as well.

ETF vs Mutual Fund: Quick Comparison

Features	ETF	Mutual Fund
How do you buy it	Through a stock exchange, like buying shares.	Through AMC, a broker, or an investment app
Pricing	Real-time changes throughout the day	Fixed end-of-day NAV
Management	Mostly passive (tracks an index)	Active or passive
Expense ratio	Low, often 0.05% to 1%	Higher, up to 2.5% for active funds
Demat account needed	Yes	No
SIP option	Not straight forward	Easy, starts at Rs 500
Minimum investment	Cost of 1 unit	Rs 100 via SIP
Transparency	Daily portfolio disclosure	Monthly disclosure
Best for	Cost-conscious, market-savvy investors	Beginners, SIP investors, hands-off approach

The Cost Difference – Here is What You Must Know

This is where ETFs genuinely shine. The expense ratio of an ETF is low. It can be Average something around 0.10% per year as well. But when it comes to the mutual funds, it is bit higher. This can be around 1.5% per year as well.

Now, both these numbers really look small. But when you actually calculate these, the ETF vs mutual fund choice becomes even more clear.

Check the same here.

If you invest Rs 10 lakh and your fund grows at 12% per year, here is how the expense ratio affects your returns over 20 years:

At 0.10% expense ratio (ETF): approximately Rs 94.8 lakh
At 1.5% expense ratio (active mutual fund): approximately Rs 73.7 lakh

That is a difference of roughly Rs 20 lakh, purely from fees. And you did not do anything differently. The market gave the same returns. Costs just ate into them.

This is not an argument against mutual funds. Active funds can and do outperform. But it is worth knowing what you are paying for.

Read Also: ETF vs FOF: Key Differences

Trading Flexibility: ETF Has the Edge

Because ETFs are listed on exchanges, you have full control over when you buy and sell. You can place limit orders, stop-loss orders, and buy during intraday dips. If there is a big market event and you want to act immediately, you can.

With a mutual fund, you are always at the mercy of the end-of-day NAV. Even if you place an order at 9:30 AM, your buy or sell goes through at the NAV declared at 4 PM. During volatile days, this can sometimes work in your favour or against you, depending on how the market moves after your order.

For most long-term retail investors, though, this difference rarely matters much in practice. If you are investing with a 10 to 15-year horizon, whether you bought at Rs 100 or Rs 101 today is not what determines your outcome.

ETF vs Mutual Fund: Tax Treatment

When it comes to taxation, both of these follow the same form as follows:

Held for more than 1 year: Long Term Capital Gains (LTCG) at 12.5%, with gains up to Rs 1.25 lakh per year exempt
Held for less than 1 year: Short Term Capital Gains (STCG) at 20%

So, if you see this, there is not much difference when it comes to taxes.

Active vs Passive Investing: The Real ETF vs Mutual Fund Debate

The ETF vs mutual fund discussion is often a debate. But it is not about which is better, but more about the difference between passive and active investing. Both are great choices but still you would need to make decision at times.

Most ETFs are passively managed. They aim to replicate the performance of a market index such as the Nifty 50 or Sensex. Their target is to match the performance and not outperform.

When it comes to mutual funds, these are mostly actively managed. They aim to offer higher returns to the investors. Also, these funds are being managed by experts and so changes in the composition are quite common based on the market conditions.

Index mutual funds offer a middle ground. Like ETFs, they follow a passive investment strategy, but they function like regular mutual funds. Investors can start SIPs, invest without a Demat account, and enjoy a simpler investment experience. This is good for all investors in general.

So Which One Should You Actually Go With?

Now this is one of the most important questions. This is where many people get confused. While both of these are great choices, you need to ensure that you follow based on detailed analysis and understanding of the market.

To help you out, here is a quick idea for you:

Go with a mutual fund (or index fund) if you are just starting out, want to invest via SIP every month without much effort, do not have a Demat account yet, or prefer professional management and are okay paying a slightly higher fee for it.

Go with an ETF if you already have a Demat account, want to keep costs as low as possible, are comfortable with placing buy and sell orders yourself, or want real-time flexibility in your investing.

And honestly, for most people who have been investing for a year or two, a combination works well. A few low-cost ETFs for the core of your portfolio, and selective actively managed mutual funds where you believe active management adds genuine value, particularly in mid or small cap categories.

Read Also: ETF vs Index Fund: Key Differences

Conclusion

Whether you lean towards ETFs or prefer the simplicity of mutual funds, where you invest matters as much as what you invest in. Pocketful lets you do both from a single platform, trade ETFs like shares with zero commission, and invest in direct mutual fund plans without any distributor fees cutting into your returns.

If you have been sitting on the sidelines thinking you will figure this out later, this is a good time to start. Open your Pocketful account today and put your money to work.

S.NO.	Check Out These Interesting Posts You Might Enjoy!
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3	ETF vs Stock – Which One is the Better Investment Option?
4	Gold ETF vs Gold Mutual Fund: Differences and Similarities
5	SIP in ETF: How to Invest Regularly in ETFs

Frequently Asked Questions (FAQs)

Which is better for beginners: ETF or mutual fund?
Beginners can invest in either based on their target. ETF is good when they want a passive option. A mutual fund is when they are looking for an active investment. But in general, a mutual fund is a way better choice.
Do ETFs give higher returns than mutual funds?
Not necessarily. ETF returns depend on the index they track, while mutual fund returns depend on the fund manager’s investment decisions. So, you can find mutual funds that offer better returns.
Can I start a SIP in an ETF?
Yes, but the process is not as seamless as a mutual fund SIP. You generally need to place ETF purchase orders regularly through your broker, whereas mutual funds offer automated SIP facilities.
Do I need a Demat account to invest in ETFs?
Yes. ETFs are traded on stock exchanges like shares, so a Demat and trading account are required. Mutual funds can be purchased directly from an AMC or investment platform without a Demat account.
Can I invest in both ETFs and mutual funds?
Yes. Many investors combine both. This is a good plan for diversification and a balanced result. ETF will help you with exposure and low-cost. A mutual fund can offer expert support and growth.

November 30, 2023

What is Asset Under Management (AUM) in Mutual Funds

Before learning about AUM, let us know a little about AMCs.

AMC stands for Asset Management Company and manages and operates the mutual funds. It pools money from retail and institutional investors and invests that fund in a diversified portfolio of stocks, bonds, and other financial instruments. AMCs have dedicated research teams and fund managers who make decisions on the allocation of assets and portfolio management. AMCs earn fees for managing mutual funds, a percentage of the fund’s AUM.

What is AUM?

AUM stands for asset under management. AUM in mutual funds refers to the total market value of all the assets a mutual fund manages on behalf of its customers. It is an essential metric in the financial markets. A larger AUM generally implies a larger fund with more investors. The respective mutual fund scheme AUMs can be found in the monthly fact sheet of the AMCs on their website or online mutual fund research platforms.

Indian Mutual Funds Industry

Before getting into the Indian mutual funds industry, let us know about the history of mutual funds. To make India financially stable, strong, and independent and encourage saving and investment, the first mutual fund was established in 1963, Unit Trust of India, by a combined initiative of the Government and the Reserve Bank of India by an act of Parliament. The mutual funds industry has grown significantly over the years. Unit Scheme 1964 was the first scheme that UTI launched.

In 1993, the first set of SEBI Mutual Fund Regulations existed for all mutual funds except UTI. The former Kothari Pioneer (now merged with Franklin Templeton Mutual Fund) was the first private-sector mutual fund registered in July 1993.

With the entry of private sector funds in 1993, a new age began in the Indian MF industry, giving Indian investors a wider and better choice of Mutual fund products.

The MF Industry’s AUM has grown from ₹ 22.24 trillion as of October 31, 2018, to ₹46.72 trillion as of October 31, 2023, more than a 2-fold increase in 5 years (source- AMFI website). The Indian Mutual Funds industry has witnessed robust growth over the years. The sector provides investors with different mutual fund categories like equity, debt, and hybrid funds catering to their risk profiles and preferences. Not only this, the mutual fund industry in India has also undergone a digital transformation.

Calculation of AUM

AUM in mutual funds is calculated by adding up the market value of all the securities, cash, and other assets mutual funds hold.

The formula for the same is listed below

AUM= Market Value of Securities + Cash & Cash equivalents + Other Assets

For example, a mutual fund holds the following

The market value of securities = Rs. 50 Crore

Cash & Cash equivalents = Rs. 7 Crore

Other Assets = Rs. 3 Crore

Therefore, AUM = Rs. 50 Cr. + Rs. 7 Cr. + Rs. 3 Cr. amounts to Rs. 60 Crore.

It’s important to note that the actual calculation may involve more detailed considerations, especially in a real-world scenario where the portfolio may consist of various types of securities, derivatives, and other financial instruments. Moreover, the market values of securities can fluctuate, affecting the AUM over time.

Remember that the total value of AUM keeps changing depending on the performance of the assets.

Significance of AUM in different Mutual Funds Categories

Larger AUM in equity funds, whether large or mid-cap, reflects a broader investor base and better scale of operations. However, a larger AUM while investing in small-cap companies can pose challenges. Therefore, small caps do not concentrate much on AUM.
Smaller AUM in sectoral and thematic funds may indicate a more focused approach to investment since these funds often focus on specific sectors and themes.
In the case of hybrid funds, a mixture of equity and debt, a larger AUM can provide better diversification benefits.
Fixed-income funds like bonds also need a larger AUM for better diversification.

Factors affecting AUM

Performance of the Market

When markets are performing and in a rising phase, investors are more likely to invest, resulting in increased inflows and higher AUM for investment companies. In falling markets, investors redeem the funds, resulting in a decline in AUM.

Fees & Expenses

The expenses charged by asset management companies can influence AUM. Lower fees can make the funds more eye-catching to investors.

Advertisement & Distribution of Funds

Effective marketing and distribution policies are vital in attracting new investors and growing a firm’s investor base. Successful marketing campaigns and a strong distribution network can help the MF house generate inflows and increase AUM.

Economic Conditions

The global economic environment can also affect AUM. When a country is economically stable and in its growth phase, more investments will occur, leading to higher inflows.

Past performance

The historical show of a company plays a vital role in determining AUM. Funds generating consistent positive returns will eventually attract new investors.

For this, first, we need to understand what is the expense ratio. The expense ratio is defined as the annual cost of managing and operating mutual funds. AMCs charge these expenses and are a percentage of AUM., for example, management fees, administrative expenses, and Distribution expenses. Formula for calculating Expense Ratio = (Total Fund Expenses / AUM) *100. Therefore, there is an inverse relationship between AUM and the expense ratio.

As AUM increases, the overall percentage of expenses relative to assets decreases. Keep in mind that AUM influences the calculation of the expense ratio and plays a vital role in structuring the overall cost of the fund and

Conclusion

To wrap it up, AUM is an important metric for investors when it comes to selecting mutual funds. It can only provide insight about the AMC but cannot be the sole factor when making investment decisions also, a higher AUM does not signify better returns and performance by the mutual funds. The significance of AUM can fluctuate across different fund categories.

Read Also: History of Mutual Funds in India

Frequently Answered Questions (FAQs)

What is AUM?
AUM stands for asset under management and is the total market value of all the assets that a mutual fund manages on behalf of its customers
What is the formula for calculating AUM?
The formula for calculating AUM isAUM= Market Value of Securities + Cash & Cash equivalents + Other Assets
How is the expense ratio and AUM related?
Expense ratio and AUM share an inverse relationship, i.e., an increase in AUM decreases the expense ratio.
Who manages the mutual fund?
Asset Management companies manage mutual funds.
When was the first mutual fund in India established?
1^st mutual fund in India was established in the year 1963.

November 25, 2023

What is Debt Mutual Funds: Invest in the Best Debt Funds in India

What are Debt Mutual Funds?

Debt mutual fund is a category of mutual fund that invests in fixed-income instruments such as Corporate and Government bonds, commercial papers, treasury bills, state development bonds, etc. (T-bills are short-term debt instruments or money market instruments that the government of India issues. These are generally given for 91 days, 182 days, or 364 days. They are provided to fulfill the short-term financial needs of the government).

The primary objective of debt mutual funds is to generate income for investors through interest payments while preserving the capital invested. Debt mutual funds allocate their holdings across various debt instruments to diversify the risk. This helps the fund manager reduce the impact of poor performance by any single security.

Debt funds invest in listed or unlisted securities, including corporate and government bonds. The NAV of the fund is calculated as the difference between the buy price and the sell price. Debt funds also receive regular interest from the underlying debt, which is added daily.

A debt fund’s NAV also depends on the interest rate. Debt mutual funds are open-ended funds, which means investors can buy or sell fund units on any business day at the fund’s net asset value (NAV). When considering debt mutual funds, it’s essential to assess your investment goals, risk tolerance, and time horizon and select funds that align with your financial objectives.

Who should invest in Debt Funds?

Debt Funds are suggested for individuals who prefer capital preservation to higher returns because debt funds provide investors with consistent returns and are less volatile. Investors who want a regular income but are risk-averse i.e., refrain from taking risks with their investments.

How to invest in Debt funds

You can invest in direct debt funds through Asset Management Companies (AMCs), and in the case of regular debt funds, you need to contact mutual funds distributors (MFDs).

Types of Debt Mutual Funds

These categories of debt funds cater to different investor preferences and financial goals.

1. Liquid Funds

Liquid funds invest in very short-term debt instruments like T-bills, Certificates of deposits, and commercial paper and have a maturity of 91 days to generate optimum returns. Liquid fund invests in highly liquid money market instruments and debt securities. The best liquid funds to invest in India are ABSL Liquid Fund, Mahindra Manulife Liquid, PGIM India Liquid, SBI Liquid Fund, and Nippon Liquid Fund.

2. Short-term Funds

These funds invest in money and debt market instruments and government securities. The investment duration of these funds is longer than that of Liquid Funds. The best Short-term funds to invest in India are ICICI Prudential ST, UTI SD, HDFC ST Debt, Sundaram SD, and ABSL SD.

3. Credit Risk Funds

These funds invest in lower-rated corporate bonds and debt instruments to earn higher returns. The best Credit Rating Funds in India to invest in are DSP Credit Risk, Baroda BNP Paribas Credit Risk, Nippon India Credit Risk, and ABSL Credit Risk.

4. Fixed Maturity Plans (FMPs)

FMPs are close-ended mutual fund schemes, and the maturity dates in FMPs are decided beforehand. They invest in debt instruments with a specific date of maturity. FMPs are issued for a period ranging from 30 days to 60 months, and units of FMPs are listed on the stock exchange.

5. Floating Rate Funds (FRFs)

FRFs invest in instruments that offer a floating interest rate on your investments in bonds, government securities, and debentures. The best-floating Rate Funds to invest In India are ABSL Floating Rate, Franklin Ind Floating Rate, and HDFC Floating Rate.

6. Gilt Funds

Gilt in Gilt funds stands for government securities. This fund invests your capital in government securities issued by central and state governments. This fund offers you low credit risk and moderate returns. The best Gilt Funds to invest in India are ICICI Pru Gilt Fund, SBI Magnum Gilt Fund, DSP Govt. Securities Gilt Fund, and Kotak Gilt Investment.

7. Dynamic Bond Funds

These funds invest in debt securities with different maturity periods and actively manage the fund’s interest rate risk. Returns vary based on market conditions. Above mentioned are some of the types of debt mutual funds. There are various other types, which we shall discuss later. The best Dynamic Bond funds to invest in India are ABSL Dynamic Bond Fund, ICICI All Seasons Bond Dir, HDFC Dynamic Debt, and 360 ONE Dynamic Bond.

8. Monthly Income Plans (MIPs)

MIPs are hybrid schemes that invest in a mixture of debt and equity. However, the allocation in equity is about 15-20% only. These funds offer regular income in the form of dividend payouts. However, you don’t need to receive dividend payments because it is at the discretion of the AMCs and depends on the surplus left from realized gains.

Taxation of Debt in India

Tax in debt is divided into two parts.

Short-term gain and long-term gain where the short-term duration is less than three years as per your income tax slab, and for long-term, it is more than three years at the rate of 20% with indexation benefit. (Indexation- means adjusting your purchase cost based on inflation). Now let us go through the advantages and disadvantages of investing in debt funds before jumping to any conclusion as to why to choose debt funds.

Advantages of Investing in Debt Funds

1. Stability & Safety

Debt Funds invest in fixed-income securities, which are stable and safe compared to other investment options like stocks.

2. Regular Income

Debt securities like MIPs and FMPs help the investor receive regular income through interest payments.

3. Diversification

With the help of debt funds, investors’ exposure to risk is reduced because debt funds generally have less exposure to equities, reducing the portfolio’s overall risk.

4. Tax Efficiency

If you want an escape from taxes, debt funds can be a solution because these funds carry more tax efficiency than any other traditional investment option like FDs and post office schemes. FMPs can offer investors tax advantages because of indexation benefits.

5. Liquidity

Debt funds are generally more liquid than FDs. Investors can buy or sell these funds on any business day, providing liquidity when needed, and these funds do not have any lock-in period. However, they do carry minimal exit load in some funds.

Conclusion

Debt mutual funds play a vital role in an investor’s portfolio by providing a range of fixed-income investment options. These funds offer stability, regular income, and diversification by investing in various debt instruments. The choice of debt funds depends upon factors like risk appetite, investment horizon, and financial goals. But it would help if you remember that debt funds are not entirely risk-free. Investors should consider consulting a financial advisor for personalized advice.

Frequently Answered Questions (FAQs)

What are debt mutual Funds?
Debt mutual fund is a category of mutual fund that invests in fixed-income instruments such as Corporate and Government bonds.
What are the different types of debt funds?
Different types of debt mutual funds include short-term funds, Fixed maturity period funds, gilt funds, credit risk funds, etc.
What is the taxation rate on long-term capital gains in debt mutual funds?
The tax rate on debt mutual funds for the long-term is more than 3 years at 20% with an indexation benefit.
What are T-bills?
T-bills are treasury bills that the Government of India issues to meet short-term financial needs.
What is the complete form of MIPs?
MIP stands for monthly income plan.

November 24, 2023

Mutual Funds: Meaning, Types, Features, Benefits and How They Work.

In the last 10 years, the mutual fund industry in India has experienced a growth of ₹ 40,00,000 crore in the value of AUM (Assets Under Management). It implies that India is unleashing the full potential of mutual funds to grow their money. Investing directly in the stock market can be an overwhelming task. Thus, investing in mutual funds offers a more straightforward way to create long-term wealth.

Understanding What are Mutual Funds

As stated earlier, mutual funds pool the money from small investors and invest them in the securities of other companies listed on the stock exchange. Investment holders share the income earned through these investments of interest and dividends with the capital gains benefits. Thus, a mutual fund is the most suitable form of investment for the common man, as it allows them to diversify and invest in a more professionally managed security basket, without them being actively involved.

Mutual Funds as a concept first originated in Britain in the 19th century but developed in the U.S. in the late 19th and early 20th century at the principal money centres of the North-East. These funds were primarily close-ended and used to finance growth in the U.S.A. after the Civil War. However, the crash of stock markets in 1929 led to the demise of these close-ended funds. In 1940, the U.S. had about 68 funds; currently, there are several thousands of schemes. More significantly, in the year 1965 only 2 to 3% of U.S. households, owned fund shares. Nearly one-fourth of all U.S. households invest today in Mutual Funds.

The Indian mutual fund industry began with the formation of Unit Trust of India (UTI) in 1963 with the introduction of its first biggest scheme ‘Unit Scheme ’64’. The UTI then introduced several schemes for different sections of people. The public sector monolith operated under monopoly conditions and in an over-regulated economy till the mid-eighties. In 1987, commercial banks and insurance companies were also permitted to launch schemes.

Read Also: Types of Mutual Funds in India

Features of Mutual Funds

Professional management

Mutual funds are managed by professional experts, who are experienced in their respective fields. It gives the investor a sense of satisfaction that their hard-earned money is in good hands. These professionals are highly skilled and know when to enter and exit the market and accordingly churn the portfolio depending on the market dynamics.

Diversification

Mutual Funds let you invest in a more diversified portfolio without setting in much time. The main idea behind diversification is the simple reason given by the investor Mr. Warren Buffet, that never put all your eggs in one basket. Diversification helps to lower the risk of the investor. Diversification in mutual funds is done based on the objectives of the investors.

Liquidity

The liquidity of any asset shows how quickly it can be converted into cash. Assets that take less time to convert are highly liquid and the assets which take more time to convert into cash are less liquid. Mutual funds allow the investors to withdraw their money anytime until there are some restrictions by selling them at the current NPV.

Time-Saving

People who want to grow their money but do not have time to be actively indulged in the financial markets invest in mutual funds. Since mutual funds are managed by professionals investors do not have to spend their time researching every single company they want to invest in.

Types of Mutual Funds

There are various types of mutual funds present in the market. A person can invest in diverse mutual funds depending upon their needs. Mutual Funds could be differentiated based on their structure, choice of asset class and financial goals. Let’s try to understand each one of them one by one.

Based on the choice of the asset class

1. Equity Mutual Funds

Equity Mutual Funds are the one wherein the pooled money of the investors are invested in different companies listed on the stock exchange. They are expected to yield more returns as compared to debt and hybrid funds. Therefore, the risk associated with them is also higher. The investment holders earn through dividends and capital gains in Equity mutual funds.

2. Debt Mutual Funds

When the pooled money of the investors is invested in the debt securities of the company they are called debt mutual funds. Debt mutual funds are suitable for investors who do not want to bear high risk and want consistent returns. Investors earn an interest income on them and also capital gains.

3. Hybrid Mutual Funds

Hybrid mutual funds are a mix of both debt and equity funds. The money of the investors is invested in such a way that they could earn higher returns compared to debt funds & the risk involved is less than the equity funds.

Based on the Financial Goal

1. Growth Mutual Funds

When the majority amount of the investor’s money is invested in growth companies or equity funds, they are called growth mutual funds. The investor should have a high-risk tolerance to invest in growth mutual funds.

2. Income Mutual Funds

People who want a consistent stream of passive income generally invest in Income mutual funds. Funds that fall under this category generally invest in securities like bonds, corporate debentures and Government securities.

3. Balance Mutual Funds

Investing in balanced mutual funds provides the best of both worlds. The basic objective of the portfolio manager handling balanced Mutual funds is to provide the investors with a steady income flow along with growth.

Based on their structure

1. Open-ended Mutual funds

Open-ended mutual funds do not have any kind of restrictions over them. Restrictions could be the number of units sold, or having a maturity date. Open-ended funds are very flexible and allow the investors to exit anytime at the given NPV.

2. Close-ended Mutual Funds

Close-ended mutual funds have some restrictions over them like no repurchase facility and a pre-defined maturity period. With all the restrictions they have lost their significance among the investors and now are hardly in any use.

Benefits of investing in Mutual Funds

Convenience

Mutual funds are a convenient form of investing. You can start investing in mutual funds with as little as Rs.500 per month through an SIP investment. You can invest in mutual funds depending upon your convenience. Investing in mutual funds can be done through either SIP or lumpsum investment.

Financial discipline

It is very important to have financial discipline nowadays. Because today life is more unpredictable than ever before. Everyone wants to give a secure future to their loved ones and investing in mutual funds is one way of doing it. Doing early financial planning not only helps oneself but also ensures a secure future for the people who are dependent on you.

Low-cost

Since so many investors pool their money to invest in mutual funds, therefore, the cost of mutual funds per investor comes out to be less. The expense ratio of managing mutual funds is also less as compared to when an investor invests his money directly into the markets.

Reliability

Mutual funds are very reliable as they are watched by the regulatory body SEBI (Security Exchange Board of India). There are various mutual funds present in the market like the ICICI prudential mutual fund, SBI mutual fund, HDFC mutual fund etc.

How do Mutual Funds work?

First, many small investors come together who share a common financial objective. The objective could be, investing in growth funds or having a regular source of passive income.
Then, these small investors pool their funds together.
After that, these funds are transferred to the portfolio manager who will manage these funds.
He will then invest these funds in various financial securities depending upon the financial expectations of the investors.
After investing, the portfolio manager analyses how the investments are performing and accordingly sells and buys the new and existing mutual fund units.
Then, the returns generated on investments are returned to the investors.
Bonus tip mutual fund units are deposited in the investor’s Demat account. Open your Demat account today with Pocketful.

Conclusion

Thus, after reading the above article, you must be clear that investing in mutual funds is a simple and easy way to invest your money in the stock market. Investing in mutual funds lets you experience the massive potential of the stock market without devoting much time to it. But one thing that you should keep in mind is that investing in mutual funds is subject to market risk so invest accordingly. As stock market is highly volatile and reacts aggressively to market news.

S.NO.	Check Out These Interesting Posts You Might Enjoy!
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2	Features and Benefits of Demat Account
3	Can I Have Multiple Demat Accounts in India?
4	How to Open a Demat Account Online?
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6	Best Sip Apps in India for Investment

FAQs (Frequently Asked Questions)

How to invest in mutual funds?
To invest in a mutual fund, you need to have a demat account. Open your Demat account today using Pocketful.
What is NAV in mutual funds?
NAV stands for Net Asset Value in mutual funds. It tells about the performance of the mutual funds.
What is SIP in Mutual Fund?
SIP in mutual funds is a way of investing in mutual funds. Wherein you invest a small amount regularly in mutual funds.
Can I invest Rs. 2000 in mutual funds?
Yes, you can invest Rs.2000 in mutual funds using SIP.
What are Tax-saving mutual funds?
ELSS is an example of a Tax-saving mutual fund. Tax saving mutual fund is like any other regular mutual fund with added tax advantage.

September 16, 2023

Category: Mutual Funds

Multi-Cap Vs Flexi-Cap Mutual Funds? Which Is Better For You?

Multi-Cap Funds

Flexi-Cap Funds

Choosing Between Multi-Cap and Flexi-Cap:

Conclusion

Frequently Asked Questions (FAQs)

Are multi-cap and flexi-cap active or passive funds?

Can flexi-cap funds invest in debt securities?

What is the risk profile of flexi-cap and multi-cap funds?

Are multi-cap funds more volatile than flexi-cap funds?

When did flexi-cap funds launch?

SIP in Stocks vs SIP in Mutual funds?

Which can be a better choice?

What is a Mutual Fund?

What are Stocks?

What is SIP?

SIP in Stocks

SIP in Mutual Funds

SIP in stocks vs. SIP in mutual Fund

Conclusion

Frequently Answered Questions (FAQs)

What is the full form of SIP?

Which is better? Stock SIP or Mutual fund SIP?

How many stocks can you choose when doing Stock SIP?

Does SIP in stocks has higher risk than SIP in Mutual Funds?

What is the minimum amount of SIP required to invest in Mutual Funds?

ETF vs Mutual Fund: Key Differences

What Is an ETF?

What Is a Mutual Fund?

ETF vs Mutual Fund: Quick Comparison

The Cost Difference – Here is What You Must Know

Trading Flexibility: ETF Has the Edge

ETF vs Mutual Fund: Tax Treatment

Active vs Passive Investing: The Real ETF vs Mutual Fund Debate

So Which One Should You Actually Go With?

Conclusion

Frequently Asked Questions (FAQs)

Which is better for beginners: ETF or mutual fund?

Do ETFs give higher returns than mutual funds?

Can I start a SIP in an ETF?

Do I need a Demat account to invest in ETFs?

Can I invest in both ETFs and mutual funds?

What is Asset Under Management (AUM) in Mutual Funds

What is AUM?

Indian Mutual Funds Industry

Calculation of AUM

Significance of AUM in different Mutual Funds Categories

Factors affecting AUM

How Expense ratio is related to AUM

Conclusion

Frequently Answered Questions (FAQs)

What is AUM?

What is the formula for calculating AUM?

How is the expense ratio and AUM related?

Who manages the mutual fund?

When was the first mutual fund in India established?

What is Debt Mutual Funds: Invest in the Best Debt Funds in India

What are Debt Mutual Funds?

Who should invest in Debt Funds?

How to invest in Debt funds

Types of Debt Mutual Funds

1. Liquid Funds

2. Short-term Funds

3. Credit Risk Funds

4. Fixed Maturity Plans (FMPs)

5. Floating Rate Funds (FRFs)

6. Gilt Funds

7. Dynamic Bond Funds

8. Monthly Income Plans (MIPs)

Taxation of Debt in India

Advantages of Investing in Debt Funds

1. Stability & Safety

2. Regular Income

3. Diversification

4. Tax Efficiency

5. Liquidity

Conclusion

Frequently Answered Questions (FAQs)

What are debt mutual Funds?