Category: Mutual Funds

How to Invest in Mutual Funds?

Mutual Funds are witnessing a record inflow of capital in India in 2024. Many individuals want to invest in them after seeing someone else use mutual funds to realize their financial goals. However, an individual must know the procedures, paperwork, and documentation needed to invest in mutual funds.

Don’t worry; we’ve got you covered. In this blog post, we will review the process of investing in mutual funds via offline and offline modes and factors to consider before investing.

Why Invest in Mutual Funds?

Mutual funds have become one of the most popular investment choices for investors for the reasons listed below:

It helps investors to diversify their investments.
Through mutual funds, investors can get access to professional expertise.
An individual can start his investing journey with a small amount of money.
Mutual funds provide the flexibility of lumpsum and SIP investments.
They are highly liquid.

How to Invest in Mutual Funds?

Investors follow the following 5 steps to invest in mutual funds:

Investors must understand their risk tolerance according to the expected returns and the financial objectives.
Investors should decide on asset allocation according to risk tolerance and financial objectives.
Identify mutual funds that invest in those specific asset classes and gather information about their past performance, etc.
Invest in selected mutual funds using online or offline mode.
Keep a check on mutual fund performance to ensure fulfillment of investment goals.

Modes of Investment in Mutual Funds

There are two modes of investment in Mutual Funds:

Online Mode
Offline Mode

Let’s dive deep into the details of both modes.

Online Mutual Fund Investment

Due to its convenience, online investing, sometimes called digital investing in mutual funds, is becoming increasingly popular. An individual must follow the steps mentioned below to start investing in mutual funds:

Visit the website of an asset management company, registered investment advisor, or mutual fund distributor and download the e-KYC form.
The next step is to finish the Know Your Customer (KYC) process. Fill out the e-KYC form and submit self-attested copies of identity proof, PAN card, address proof, and a passport-sized photograph.
In-person verification (IPV) is performed via video conferencing using a webcam at a prearranged time.
After completing the procedures mentioned above, you can choose a mutual fund scheme according to your risk tolerance and investing goal.
Submit the mutual fund application form. Next, you need to decide on the investment method. Lump sum payments can be made directly from your bank account using UPI apps or internet banking. If you use a SIP mode instead, you will need to set up an e-mandate, essentially a standing order instructing your bank account to take a certain amount of money each month and invest it in a specific fund.

Offline Mutual Fund Investment

The investment process will differ from the online mode if you invest in mutual funds and have chosen to go offline. The offline process to invest in mutual funds is mentioned below:

Visit the office of an asset management company, a bank, a mutual fund agent or distributor, or a Karvy/CAMS office and ask for a KYC form.
Fill out a KYC form and submit self-attested copies of identity proof, PAN card, address proof, and a passport-sized photograph.
In-person verification (IPV) is done by submitting the original copies of the documents mentioned above.
Following your fund selection, you must complete an application form that asks for basic information about the investor, the fund, the amount to be invested, the mode of investment (SIP or lump payment), nominee information, etc.
Submit the application form at the asset management company’s, RTA’s, or distributor’s office with the needed money by check or demand draft.
After submitting the application form, you will receive an acknowledgment slip, which will be treated as proof of your investment.

Points to Consider Before Investing in Mutual Funds

Before you start your investment in a mutual fund, there are several points one should keep in mind, a few of which are mentioned below:

Risk Appetite: When selecting a mutual fund for investment, one should consider their risk tolerance. For a conservative investor, a debt fund would be appropriate, while for an aggressive investor, an equity-oriented fund would be appropriate.
Investment Horizon: The next crucial consideration is time horizon; if you have a longer time horizon, you should consider investing in equity-oriented funds, yielding returns that will beat inflation. On the other hand, if you have a short-term investment horizon, you should consider investing in hybrid funds.
Past Performance: The fund’s historical performance is the next crucial factor an investor should consider. While it is not ideal to base an investment decision on past performance, a fund with a strong track record over several market cycles may perform better.
Expense Ratio: A mutual fund with a lower expense ratio is preferred by investors because less money is deducted as fees, which enhances returns.
Liquidity: Investors seeking liquidity in their portfolio or with short-term investment goals should consider an open-ended fund with a minimum exit load.

Conclusion

In conclusion, you have the chance to invest in mutual funds and reach your financial objectives using both online and offline modes. Before selecting a mutual fund, an individual must learn everything about the scheme and ensure it aligns with his financial goals.

However, it is always advised to seek the help of a financial advisor to select the best mutual fund according to your investment objective and risk tolerance.

Plan your finances with ease using our advanced Financial calculators.

Financial Calculators
Lumpsum Calculator	Mutual Fund Returns Calculator	ETF Return Calculator
EMI Calculator	SIP Calculator	Income Tax Calculator

S.NO.	Check Out These Interesting Posts You Might Enjoy!
1	Types of Mutual Funds in India
2	Mutual Fund Factsheet: Definition And Importance
3	Equity Mutual Funds: Meaning, Types & Features
4	What Is An IPO Mutual Fund? Should You Invest?
5	Mutual Fund Fees & Charges in India 2024

Frequently Asked Questions (FAQs)

Can I make a cash investment in a mutual fund?
Indeed, an investor may invest up to INR 50,000 in cash in a financial year, according to SEBI regulations.
What is the minimum investment amount required in a mutual fund?
One can start an SIP with a minimum amount of INR 100 and a lump sum of INR 500. However, this minimum investment limit varies from scheme to scheme.
Is it safe to invest in mutual funds online?
Yes, investing in mutual funds online or digitally is safe because SEBI regulates it and has rigorous guidelines.
Can I invest in mutual funds using both offline and online modes?
Yes, you can invest in mutual funds using both online and offline modes.
Are there any additional charges when investing online in mutual funds?
No, there are no additional charges levied while investing through online mode.

July 15, 2024

Types of Mutual Funds in India

After putting in much effort to earn money, you may wonder where to invest. One option that crosses your mind is a mutual fund. However, if you decide to invest in mutual funds, you might need to know which kind is best for you.

In this blog post, we will discuss the different types of mutual funds offered in India.

Overview of Mutual Fund

An investment product known as a mutual fund pools the capital of several investors who share a common investment objective or goal. The fund managers use the pooled capital to invest it in various asset classes, such as stocks, bonds, commodities, etc. The investor receives the return on their investment after the costs and fees of mutual funds are subtracted. The company responsible for this process is called an asset management company.

Types of Mutual Funds in India

The mutual funds in India have 4 major categories, some of which are mentioned below:

Equity Mutual Fund
Debt Mutual Fund
Hybrid Fund
Money Market Fund
Open-Ended Fund
Closed-Ended Fund
Interval Funds
Growth Fund
Income Fund
Tax Saving Funds
Liquid Funds
Very Low-Risk Funds
Low-Risk Funds
Medium Risk Funds
High-Risk Funds

Types of Mutual Funds Based on Asset Class

There are 4 types of mutual funds in India based on asset class-

Equity Mutual Fund: This particular mutual fund category primarily invests in stocks or equities, making it riskier than other categories due to its sensitivity to changes in the market.
Debt Mutual Fund: Fund managers of these mutual funds invest money in fixed-income instruments like bonds, treasury bills, commercial papers, etc. Investors in this category of mutual funds are risk-averse.
Hybrid Fund: This fund combines debt and equity investments since the portfolio of hybrid funds will have a specific allocation of debt to give stability and predictable returns, along with some equity to support portfolio growth.
Money Market Fund: This mutual fund allocates to low-risk money market instruments, including commercial paper and treasury bills that mature in less than a year.

Types of Mutual Funds Based on Organization Structure

There are 3 types of mutual funds in India based on organization structure-

Open-Ended Fund: This type of mutual fund has no limit on the number of units that can be traded, and the capital under management continuously changes with new entries and exits. Depending on the fund’s net asset value (NAV), an investor is fully entitled to make investments or withdraw money at any moment in this type of mutual fund.
Closed-Ended Fund: Mutual funds in this category can only offer a specified number of units. When a mutual fund falls into the close-ended category, the investor can only redeem their units on the maturity date, which is issued at the time of the original offer. Nonetheless, SEBI has given close-ended fund investors a way out via the stock exchange.
Interval Funds: Under this plan, mutual fund units may be bought and redeemed only during specific intervals designated by the asset management business. By designating specific intervals, fund managers can focus on developing an investment strategy without worrying about redemptions.

Types of Mutual Funds Based on Investment Objectives

There are 4 types of mutual funds in India based on investment objectives-

Growth Fund: These funds primarily invest in growth-oriented asset classes like equity. These funds are suitable for investors looking for capital appreciation. An extended investment horizon is necessary, though, for the investor.
Income Fund: The managers of these funds allocate the capital to fixed-income instruments like corporate bonds, debentures, etc. Investors of this fund receive a consistent and predictable income.
Tax Saving Funds: Mutual funds in this category invest primarily in equities, also known as equity-linked saving schemes (ELSS). The funds offer tax benefits under section 80C.
Liquid Funds: Mutual funds in this category invest in money market instruments that provide liquidity to investors. Still, they give you a higher return than conservative liquid investing options like fixed deposits and bank savings accounts.

Types of Mutual Funds Based on Risk

There are 4 types of mutual funds in India based on risk-

Very Low-Risk Funds: Investment in money market funds, such as liquid funds and ultrashort duration funds, are considered the safest option among all categories of mutual funds.
Low-Risk Funds: Your money is invested in low-risk fixed-income assets like corporate and government bonds in a low-risk fund since these products are deemed to be marginally riskier than money market funds.
Medium Risk Funds: These funds combine various asset classes, such as debt and equities, to provide a blend of stability and return.
High-Risk Funds: These funds are considered the riskiest because their allocation is concentrated in the equities asset class. Only investors who can handle portfolio volatility should consider these types of funds.

Conclusion

Investing in mutual funds can help you grow your capital over time. However, many different types of mutual funds are available for investors to select from based on their preferences. Before making investment decisions, you must speak with your financial advisor, as each mutual fund category has a distinct risk-return profile.

Plan your finances with ease using our advanced Financial calculators.

Financial Calculators
Lumpsum Calculator	Mutual Fund Returns Calculator	ETF Return Calculator
EMI Calculator	SIP Calculator	Income Tax Calculator

S.NO.	Check Out These Interesting Posts You Might Enjoy!
1	What Is An IPO Mutual Fund? Should You Invest?
2	Mutual Fund Taxation – How Mutual Funds Are Taxed?
3	Is Your Mutual Fund Investment Safe?
4	What is an Open-Ended Mutual Fund & How to Invest in it?
5	How to Cancel Mutual Fund SIP?

Frequently Asked Questions (FAQs)

What are hybrid mutual funds?
In a hybrid mutual fund, your money is invested by the fund manager across various debt and equity asset classes, giving you the advantage of both portfolio stability from the debt allocation and a better return from the equity allocation.
Which type of mutual fund is considered the safest among all available options?
Debt mutual funds are considered the safest among all available mutual fund types as they only invest in fixed-income securities, which are safer than equities.
Which type of mutual fund gives the highest return?
Equity mutual funds often generate the highest return of all the mutual fund types.
What is the NAV of a mutual fund?
NAV, or the Net Asset Value, is the market price of all the securities currently held by the mutual fund.
Do mutual funds offer tax benefits?
Tax-saving mutual funds offer tax benefits under Section 80C.

July 11, 2024

Shariah-Compliant Mutual Funds: Should You Invest?

Did you know you can grow wealth while staying true to your Islamic values? Shariah-compliant mutual funds provide investors with the solution who seek the balance between ethics and investments.

In this blog, we will explore the key features, benefits, risks, etc. of Shariah-compliant mutual funds.

Overview Shariah-Compliant Mutual Funds

Sharia-compliant mutual funds are a form of investment vehicle curated for investors who want to align their investments with Islamic principles. These funds follow the guidelines of Sharia law, which forbids activities such as interest-based earnings, gambling, and investing in sin industries like alcohol and tobacco.

What is Shariah Law?

Shariah law is a religious law in the Islamic culture. It is not a set of fixed rules but divine guidance for Muslims to lead an ethical and moral life. It is derived from two sources:

Quran – the holy book of Islam.

Hadith – teachings and practices attributed to Prophet Muhammad.

The main objective of this law is to guide Muslims in every aspect of life, including religious practices, social interactions, and business & financial dealings.

Features of Shariah-compliant Mutual Funds

These mutual funds invest only in companies that follow Islamic law. They prefer investing in companies with lower debt levels and ethical business practices.
Interest income is prohibited (Riba), i.e., investment in companies that deal with interest-bearing instruments are not allowed including traditional banks and financial institutions.
A board consisting of Islamic scholars supervises these funds to ensure that the investments comply with the Shariah law and check the fund’s investments and strategies to ensure they follow Islamic principles.
These funds use profit-sharing structures instead of earning interest, which means that the investors share the profits or losses of the companies in which they have invested.
Transactions with excessive uncertainty or speculation are not permitted. This includes derivatives and speculative trading.
Investments can sometimes generate income from activities that do not comply with the Sharia law. However, such income is donated to the charity.

Shariah Indices of Shariah-Compliant Mutual Funds

The Shariah Indices are designed to offer investors Shariah-compliant investment solutions. In India, both the leading exchanges, i.e., NSE and BSE have their own Sharia Indices.

Shariah-compliant BSE Indices:

1. BSE Tasis Shariah 50 Index: It is the first Shariah compliant equity index in India constructed using the strict guidelines and local expertise of India-based Shariah advisory board. The index consists of the 50 largest and most liquid Shariah compliant stocks within the BSE 500 universe.

Shariah-compliant NSE Indices:

NSE Indices Limited calculates three Shariah indices: Nifty 50 Shariah, Nifty 500 Shariah, and Nifty Shariah 25.

1. Nifty Shariah 25: It represents 25 Shariah compliant stocks selected based on higher free-float market capitalization and aggregate traded turnover.

2. Nifty 500 Shariah: In this, constituents of the Nifty 500 index are screened for Shariah compliance. The compliant stocks form the Nifty 500 Shariah index.

3. Nifty 50 Shariah: In this index, the constituents of the Nifty 50 index are screened for Shariah compliance. The compliant stocks form the Nifty 50 Shariah index.

The top constituents of Nifty 50 Shariah by weightage are as follows:

Company’s Name	Weight (%)
Tata Consultancy Services Ltd.	20.54
Hindustan Unilever Ltd.	15.21
Sun Pharmaceutical Industries Ltd	8.51
HCL Technologies Ltd.	6.45
Asian Paints Ltd.	5.73
UltraTech Cement Ltd	5.31
Coal India Ltd.	4.68
Oil & Natural Gas Corporation Ltd.	4.58
Nestle India Ltd.	4.22

Shariah-compliant Funds in India

Tata Ethical Fund

This is the mutual fund offered by Tata Mutual Fund in India. It invests in equity and equity-related instruments of companies that comply with Islamic investment guidelines and is meant for medium to long-term investors.

Nippon India ETF Shariah Bees

It is an Exchange Traded Fund (ETF) that helps investors to invest in Shariah-compliant fund. It mirrors the Nifty 50 Shariah Index.

Taurus Ethical Fund

It is a Shariah-compliant mutual fund launched by Taurus Mutual Fund in April 2009. Investors looking for investment opportunities that comply with Shariah norms can invest in this fund with a medium to long term investment horizon.

Tax Implications of Shariah-Compliant Mutual Funds

Shariah-compliant mutual funds are subject to the same tax regulations as conventional mutual funds, i.e., their gains are taxed according to the existing tax laws. These funds invest majorly in equity and equity related instruments. As per current taxation law in India, if a mutual fund has at least 65% investments in equity then it will carry equity taxation.

And for that, STCG and LTCG will apply if the holding period is less than a year and LTCG if the holding period exceeds one year.

Short-term Capital Gains (STCG) – If holding period is less than a year, then STCG will apply @15% on gains without any indexation benefit.
Long-term Capital Gains (LTCG) – If the holding period exceeds one year, then LTCG will apply @10% on gains. Also, there is no LTCG tax till the income of INR 1 lakh.

Key Points to Consider

When analysing Shariah-compliant mutual funds, it is necessary to consider multiple factors. Below mentioned are some of the factors:

Companies involved in activities prohibited by the Shariah law are excluded. For example, alcohol, tobacco, gambling, etc. are prohibited.
The law discourages excessive debt financing. Hence, the company’s debt should be limited in relation to its equity.
Investors must ensure that only a minimal portion of a company’s income is derived from the restricted activities mentioned in points one and two.
Shariah law mandates that compliant funds must emphasize ethical business practices and social responsibility alongside financial performance.

Benefits of Shariah-Compliant Funds

These funds let investors invest in companies that function according to Islamic ethical guidelines. Investors of Shariah compliant mutual funds can grow wealth while staying true to your Islamic values.
With a major focus on lower debt levels, Shariah-compliant mutual funds can offer long-term growth to investors.
The screening process assures investors that their money is being managed according to Islamic principles.

Risks involved in Shariah Compliant Funds

These funds have fewer companies to invest in than traditional funds because the screening process eventually limits diversification and exposure to high-growth sectors.
A smaller investment universe can lead to overall lower returns if the excluded sectors perform better than the overall market.
Shariah-compliant funds focus more on specific sectors that follow Shariah law during the screening process. This increases the concentration risk for the fund if those sectors witness a significant downfall.

Conclusion

To sum it up, Sharia-compliant mutual funds assist you in growing your wealth in line with the Islamic values. While these funds are a great way to participate in the financial markets ethically, they also come with specific risks and considerations.

It is crucial to understand the screening process, as well as the benefits and risks involved before investing in these funds.

S.NO.	Check Out These Interesting Posts You Might Enjoy!
1	What Is An IPO Mutual Fund? Should You Invest?
2	Mutual Fund Taxation – How Mutual Funds Are Taxed?
3	Is Your Mutual Fund Investment Safe?
4	What is an Open-Ended Mutual Fund & How to Invest in it?
5	How to Cancel Mutual Fund SIP?

Frequently Asked Questions (FAQs)

What is a Sharia-compliant mutual fund?
Sharia-compliant mutual fund invests in companies that follow Islamic principles and prevent things like interest, alcohol, and gambling.
Why should I invest in Sharia-compliant funds?
One can invest in such funds because they align investments with Islamic values and promote ethical business practices.
What lead to the evolution of Shariah-compliant mutual funds?
The idea likely arose in the mid of 1960s as Muslim communities in regions like Southeast Asia sought financial instruments that followed Islamic principles and the evolution is not attributed to a single person.
What is TASIS?
Taqwaa Advisory and Shariah Investment Solutions, or TASIS is India’s Shariah advisory institution in the field of Finance. Their advisory board boasts internationally renowned Shariah scholars.
What is Shariah law?
It is a religious law in the Islamic culture and serves as a divine guidance for Muslims to lead an ethical and moral life. It is derived from the Quran and Hadith.

July 4, 2024

SIP vs Lump Sum: Which is Better?

Over time, mutual funds have become an investment option for people who want to increase their wealth gradually. Systematic Investment Plans (SIPs) and lump sum investments are popular ways to invest in mutual funds.

This blog highlights the differences between SIP and lump sum investments and their advantages and disadvantages. We’ll also discuss examples of when one might be preferable over the other.

What is a Systematic Investment Plan (SIP)?

SIP, or systematic investment plan, involves investing a sum into mutual funds periodically, generally every month. If you are a salaried individual or earn income at regular intervals, investing via the SIP method makes more sense. Generally, SIPs can be started with as little as ₹ 500 a month, making them accessible to a broad range of investors.

SIP is an organized method of investing. Rupee cost averaging, in which investment costs average over time due to fluctuating NAVs (Net Asset Values), is a significant advantage of SIP, especially in a volatile market. SIPs are quite versatile as they offer investors options to step up SIP, pause, continue, or increase their regular contributions.

For example, consider an investor contributing ₹10,000 monthly to an equity mutual fund. The investor will get more units in a month when the NAV is lower and fewer units in a month when the NAV is higher. This strategy helps to average the purchase cost and reduces the impact of market volatility. This process is also known as rupee cost averaging.

What is a Lump Sum Investment?

A lump sum investment in mutual funds may be appropriate if you are a business owner, have inconsistent income, or have a sizable amount of money to invest (such as a bonus). Lump sum investment involves investing money in mutual funds in one go. The investors must be able to identify the low point of the market. You can invest and generate a good return if the market moves up from that point. However, the major challenge here is that it is difficult to analyze whether or not the market is at its lowest point.

For example, consider an investor who invests ₹5,00,000 into an equities mutual fund at any point for some time. The investor would only benefit if the market rises and the NAV or investment value grows with time.

Evaluation Metrics of SIP and Lump Sum

There are three methods for calculating the historical returns of any mutual fund.

Absolute Return: This is the most basic method of calculating historical returns. It doesn’t consider the total period for which the money was invested. The formula for calculating absolute return is as follows:

CAGR (Compound Annual Growth Rate): Think of CAGR as the yearly growth of an investor’s capital. The assumption here is that all annual profits are put back into the invested funds. This rate is not the simple average of the returns earned each year. Rather, this rate is compounded annually, and it smoothes out fluctuations and provides a consistent growth rate, which is useful for comparing different fund’s returns.

XIRR (Extended Internal Rate of Return): It is best suited to calculate the mutual fund investment return through SIPs. XIRR considers multiple transactions at different points in time. XIRR gives a more accurate picture of investment returns as it calculates the returns by considering all aspects of each SIP installment, including amount, dates, cash inflows, and outflows.

Use our XIRR Calculator to calculate the actual returns on multiple investments made at different time intervals.

Scenario Analysis of SIP and Lump Sum

Let’s understand the calculation of lump sum and SIP investment returns through examples under two scenarios – a bull market and a bear market. Assume an investor made a lump sum investment of ₹1,20,000 on 1 January 2021 for three years, while another investor started quarterly SIP payments of ₹10,000 on that day for 3 years.

Bear Market Scenario

The performance of SIP and lump sum investment strategy in a bear market is given below:

SIP: The calculations for the SIP investment strategy are as follows:

Date	NAV (in INR)	Investment	Units Allotted
01-Jan-21	₹ 251.25	₹ 10,000	39.80
01-Apr-21	₹ 246.08	₹ 10,000	40.64
01-Jul-21	₹ 223.17	₹ 10,000	44.81
01-Oct-21	₹ 193.41	₹ 10,000	51.70
02-Jan-22	₹ 197.30	₹ 10,000	50.68
03-Apr-22	₹ 189.46	₹ 10,000	52.78
01-Jul-22	₹ 177.41	₹ 10,000	56.37
01-Oct-22	₹ 171.56	₹ 10,000	58.29
01-Jan-23	₹ 161.91	₹ 10,000	61.76
01-Apr-23	₹ 164.99	₹ 10,000	60.61
01-Jul-23	₹ 154.81	₹ 10,000	64.59
01-Oct-23	₹ 150.45	₹ 10,000	66.47
Total		₹ 1,20,000	648.5

Average purchase price= ₹ 1,20,000 / 648.5 = ₹ 185.05

If the investor sells 648.5 units at ₹ 160 per unit on 1 January 2024, he receives ₹ 1,03,760.

XIRR = -0.08725 = – 8.73 %

Lump sum: The calculations for the lump sum investment are as follows:

Date	NAV (in INR)	Investment	Units allotted
01-Jan-21	₹ 251.25	₹ 1,20,000	477.62

Purchase Price = ₹ 251.25

If the investor sells 477.62 units at ₹ 160 per unit on 1 January 2024, then:

Absolute Return = (160 – 251.25) / (251.25) = – 0.363 = – 36.3%

CAGR = [(160 / 251.25) ^ (⅓)] – 1 = – 0.1397 = -13.97%

In the bear market scenario, SIP generally gives the investor a higher return than lumpsum investment as the investor benefits from the rupee cost averaging in the falling market and has more units at lower NAVs.

Bull Market Scenario

The performance of SIP and lump sum investment strategy in a bull market is given below:

SIP: The calculations for the SIP investment strategy are as follows:

Date	NAV (in INR)	Investment	Units allotted
01-Jan-21	₹ 22.93	₹ 10,000	436.16
01-Apr-21	₹ 26.39	₹ 10,000	378.92
01-Jul-21	₹ 26.59	₹ 10,000	376.03
01-Oct-21	₹ 27.64	₹ 10,000	361.79
02-Jan-22	₹ 32.66	₹ 10,000	306.18
03-Apr-22	₹ 36.08	₹ 10,000	277.17
01-Jul-22	₹ 37.58	₹ 10,000	266.12
01-Oct-22	₹ 29.17	₹ 10,000	342.86
01-Jan-23	₹ 31.40	₹ 10,000	318.45
01-Apr-23	₹ 34.13	₹ 10,000	292.99
01-Jul-23	₹ 35.15	₹ 10,000	284.47
01-Oct-23	₹ 37.65	₹ 10,000	265.59
Total		₹ 1,20,000	3906.73

Average purchase price= ₹ 1,20,000 / 3906.73 = ₹ 30.72

If the investor sells 3906.73 units at ₹ 36.16 per unit on 1 January 2024, he receives ₹ 1,41,267.

XIRR = 0.1031 = 10.31%

Lump sum

The calculations for the lump sum investment are as follows:

Date	NAV (in INR)	Investment	Units allotted
01-Jan-21	₹ 22.93	₹ 1,20,000	5233.32

Purchase Price = ₹ 22.93

If the investor sells 5233.32 units at ₹ 36.16 per unit on 1 January 2024.

Absolute Return = (36.16 – 22.93) / (22.93) =0.5770 = 57.70%

CAGR = [(36.16 / 22.93) ^ (⅓)] – 1 = 0.1640 = 16.40%

From the above calculations, we can conclude that the returns of the lump sum investment strategy are superior to those of the SIP strategy in a bull market.

Advantages and Disadvantages of SIP and Lump Sum

SIP

Advantages	Disadvantages
SIP provides flexibility to stop, restart, or increase investment amounts.	In a consistently rising market, lump sum investments outperform SIPs.
SIP encourages regular savings and investment habits.	It requires regular investment, which might be challenging for some investors
Investors can start with a small amount, making it suitable for new investors.

Lump Sum

Advantages	Disadvantages
It offers higher returns in a bull market than the SIP strategy.	It is difficult to predict market lows, risking investment at a high point.
Investors do a single transaction without the need for regular follow-ups.	Investing large amounts in one go restricts funds availability to the investor for other needs.

Suitability for Investors of SIP and Lump Sum

SIP Suitability

Salaried Individuals: People with a steady income who are ready to commit to periodic investments.
New Investors: They are the ones who wish to start their investments with smaller amounts.
Volatile Markets: Investors worried about market volatility can use the SIP strategy as the risk is reduced by spreading the investments over time.

Lump Sum Suitability

High net worth individuals: They have large amounts of money to invest.
Experienced Investors: These are experts in studying market conditions and investing at appropriate times.
Rising Markets: A lump sum investment strategy is better suited to take advantage of the bull market.

Conclusion

The choice between SIP and lump sum investments in mutual funds depends on various factors such as personal circumstances, financial goals, and market conditions. SIPs are structured to be disciplined, flexible, and accessible, which suits recurring income earners when the markets are volatile. However, lump sum investing can generate more returns during a bull market but exposes one to the risk of investing at an inappropriate time.

Investors should consider their financial position, investment time frame, and risk appetite before making an investment decision. SIPs and lump sum investments have different advantages that enable one to achieve one’s financial objectives.

S.NO.	Check Out These Interesting Posts You Might Enjoy!
1	SIP in Stocks vs SIP in Mutual funds?
2	SBI vs ICICI Bank: Which is Better?
3	Punjab National Bank vs State Bank of India
4	Bank of Baroda Vs Canara Bank: Which is Better?
5	HDFC Bank vs Axis Bank: Which is Better?

Frequently Asked Questions (FAQs)

What key differences do SIP and lump sum investments for mutual funds have?
SIP has regular small payments, while a lump sum is one big payment. SIP offers rupee cost averaging and flexibility, whereas a well-timed lump sum can give high returns.
How does rupee-cost averaging help investors with their SIP?
Rupee cost averaging lowers the impact of market volatility by spreading the investments over time. Investors get more units when prices are low and fewer units when prices are high.
What are the techniques for calculating historical returns of mutual funds, and which one is best for SIP as opposed to lump sum investments?
CAGR is suitable for lump sum, while XIRR is ideal for SIP because it considers multiple transactions.
Who should invest in an SIP, and who should do a lump sum investment?
Salaried individuals and beginners should prefer a Systematic Investment Plan (SIP) as they have a regular monthly income. At the same time, those with irregular income or skills in doing market analysis should consider lump sum investments.
Can I stop or change the amount of my sip after starting it? How does this feature help you?
Yes, SIP contributions can be stopped, restarted or changed. This feature helps individuals adapt to changing financial circumstances.

July 4, 2024

Mutual Fund Fees & Charges in India 2024

Mutual funds have become increasingly popular over the last few years as a solution to earn significant investment returns. But, one must also pay attention to the fees a mutual fund charges as they reduce investment returns. In today’s blog, we will discuss the various fees a mutual fund charges and their meaning.

Depending on the goal of the investment scheme, fund managers chosen by mutual fund firms, sometimes referred to as asset management companies (AMCs), allocate their money across different asset classes. These firms charge their investors a nominal fee for the entire process to cover their ongoing costs, also known as the expense ratio. These asset management companies get their revenue from the fees that they charge.

Types of Fees Charged by Mutual Fund

There are several kinds of fees charged by the AMC, a few of which are mentioned below-

Entry Load: Asset management firms impose a fee on investors when they invest for the first time in the scheme. In the early stages of the mutual fund industry, this was imposed to cover the distribution expenses related to the mutual fund industry’s marketing and sales. The Securities Exchange Board of India eliminated this charge later in 2009 (SEBI).
Exit Load: This is a fee that investors must pay if they withdraw their money before a certain time. The time frame is known as the lock-in period, and it varies from plan to plan. The exit load typically ranges from 0.25% to 4% of the redemption value. There is no exit load if you redeem your money after the lock-in period. The AMC imposes this fee to deter investors from withdrawing early.
Transaction Charges: Mutual funds impose these fees on you upon buying and selling mutual fund units when the transaction amount goes above a certain threshold. In India, this threshold is INR 10,000. If you buy units worth more than INR 10,000 as a new investor, you will be charged a maximum of INR 150 as transaction costs, and if you are an existing investor, the maximum amount that can be charged is INR100.
Expense Ratio: The mutual fund companies also impose other fees, which typically include fund management fees, audit fees, marketing and sales costs, and administration and distribution costs. This charge is computed by dividing the total expenses of the scheme by the total assets managed by AMC. This fee is typically charged on an annual basis.

Calculation of Total Expense Ratio

The total expenses charged by the mutual fund can be calculated by using the below-mentioned formula:

Total Expense Ratio(TER) = [(Total Costs of the Fund during the period) / (Total Fund Assets)]*100

Let us understand this with an example.

Assume that an AMC pays 10 crores in total expenses, which includes fund manager fees, marketing and distribution costs, etc., for a fund with a total asset value of 1000 crores. Next, the ratio of expenses will be computed as

(10 Crores/1000 Crores)*100 = 1%.

Suppose an investor has invested INR 5,00,000 in the scheme, and then the total expense ratio of the scheme is 1% of 5,00,000 = INR 5,000. Investors get charged this amount annually.

Read Also: Types of Mutual Funds in India

SEBI Guidelines on Mutual Fund Charges

The maximum TER (Total Expense Ratio) limit for mutual funds is determined by the Securities and Exchange Board of India (SEBI). It depends on the amount of assets the company manages. Guidelines on charges are as follows:

Asset Under Management (Crores)	Equity-oriented mutual funds (Max. TER)	Other mutual funds (Excluding FoFs, ETFs and index funds) (Max. TER)
Up to 500	2.25%	2.00%
500- 750	2.00%	1.75%
750- 2000	1.75%	1.50%
2000- 5000	1.60%	1.35%
5000- 10,000	1.50%	1.25%
10,000- 50,000	TER decreases by 0.05% for every increase of 5000 crore in AUM	TER decreases by 0.05% for every increase of 5000 crore in AUM
> 50,000	1.05%	0.80%

To boost the penetration of mutual funds in Tier 2 and Tier 3 cities in India, SEBI has further permitted the AMCs to charge an extra 0.30% on top of the previously indicated restrictions for selling their products in cities outside of the top 30 cities in the country.

Impact of Expense Ratio

The expense ratio directly impacts your mutual fund investment’s returns. However, these costs represent a minor amount of your investment; over time, they may consume a greater share of your return. Generally speaking, investors believe that a fund with a larger expense ratio will yield higher returns. However, this is not a suitable strategy for selecting a mutual fund because skilled fund managers can manage funds with a lower expense ratio. Therefore, it is important to review the fund’s expense ratio if you are currently investing or plan to do so.

Read Also: History of Mutual Funds in India

Conclusion

Mutual funds are becoming increasingly popular as they provide investors access to professional market expertise to earn substantial returns. However, investors must be careful of the fees they charge and have a good understanding of them to minimize the impact of mutual fund fees on investment returns and select the best mutual fund.

S.NO.	Check Out These Interesting Posts You Might Enjoy!
1	Shariah-Compliant Mutual Funds: Should You Invest?
2	Regular vs Direct Mutual Funds: Make The Right Investment Decision
3	A Comprehensive Guide on Mutual Fund Analysis
4	What are Small Cap Mutual Funds?
5	Who Regulates Mutual Funds in India?

Frequently Asked Questions (FAQs)

What are the charges associated with the mutual fund investments?
Exit load, transaction charges, and expense ratio are the costs related to mutual funds.
What is the exit load?
Mutual fund firms impose this fee to prevent investors from making early withdrawals. It is based on the investor’s holding term; for instance, 1% is charged as an exit load if the withdrawal is made within a year after the investment.
Is there any restriction on fees charged by mutual fund companies?
Yes, official norms specify a threshold that no asset management business may charge fees above, as provided by the mutual fund regulatory body SEBI.
Do investors pay fees to start investing in a mutual fund?
No, there aren’t any costs to start investing in mutual funds. In the past, AMCs levied a fee known as an entry load, but SEBI eliminated that fee in 2009.
Do I need to pay transaction charges every time I invest in a mutual fund?
If you are investing or withdrawing more than INR 10,000, the regulation allows mutual funds to charge INR 100 for existing investors and INR 150 for new investors as transaction charges.

July 2, 2024

What is NFO? Features, Types, & How to Invest in It

In the stock market, there are lots of investing opportunities for different participants, whether traders or investors. Investment options such as stocks, ETFs, mutual funds, etc. However, what would happen if a brand-new fund enters the market with no prior performance history? It is known as the “New Fund Offer,” or NFO.

In this blog, we will deep dive into the NFO, along with the benefits and risks of investing in it.

What is NFO (New Fund Offer)?

Asset Management Companies (AMCs) come up with NFOs, or new fund offerings, as an investment product. The process by which AMCs offer a new mutual fund for subscription to the general public is called an NFO. The NFOs offer investors a chance to invest in emerging trends or themes such as Green Energy, AI, Electric Vehicles, etc.

Further, when new indices are launched by exchanges like NSE and BSE in India, and there is significant demand for them by investors, AMCs often introduce NFOs for such indices as a passive investment option.

The aim of the AMCs in initiating the NFO is to procure funds and allocate them to buy the securities of the underlying fund. Investors may subscribe to it during the NFO period, or in the case of open-ended schemes, they can invest in the fund later as well once the allotment is done.

Features of NFO

The NFO is opened for a specific period in which investors can subscribe.
Most of the NFOs are initially offered for INR 10.
An offer document that contains information on the fund manager’s strategy, investment goal, risk, and other details is attached to NFOs.
NFOs offer you an opportunity to invest in a new theme or indices, which might not be available in the market.

Types of NFOs

There are various types of NFOs-

1. Based on Structure

Generally, there are 3 types of NFO based on the structure:

Open-Ended Fund: These funds allow you the flexibility to invest and withdraw from the fund at any point in time.
Close-Ended Fund: An investor can invest during the NFO period, but cannot exit until the lock-in period is over, but they have the option to exit from the fund by selling it in a secondary market.
Interval Funds: These funds have all the features of a close-ended fund, but an investor can exit from this fund during the exit interval provided by the scheme.

2. Based on Asset Classes

There are 3 different types of NFO based on asset class-

Equity Fund: In an equity-oriented mutual fund, a predominant part of your capital is invested into equity and equity-related instruments.
Debt Fund: The NFOs of debt funds invest in fixed-income securities, which include bonds, government securities, debentures, etc.
Hybrid Fund: These NFOs invest in a combination of both equity and debt asset classes, providing you with a combination of both stability and growth in your portfolio.

Did you know?

As per SEBI, for open-ended schemes (except ELSS), the NFO should be open for 15 days.

Advantages of Investing in NFO

NFOs allow you to invest in emerging sectors or new themes of the economy such as green energy, AI, ESG, etc.
Certain NFOs provide an excellent opportunity for diversification in the investment portfolio.
Generally, units of NFOs are offered at a fixed price of INR 10 per unit, which makes them accessible to a diverse set of investors.
NFOs are managed by an experienced fund manager who invests the proceeds of the fund as per the investment objective defined by the scheme.

Disadvantages of Investing in NFO

Since NFOs lack a track record, it can be challenging for investors to compare the performance of the schemes.
In NFOs, there is no assurance that the fund manager will perform well.
Most of the thematic NFOs generally have a higher expense ratio as compared to existing funds.
As per the trend, AMCs often launch NFOs during a bull market phase. However, if the market is at its peak during the NFO launch, these unfavorable conditions can negatively impact future returns of the fund.

Key points before investing in NFOs

AMC Reputation: It’s crucial to consider the reputation of the Asset Management Company; an established fund house typically offers greater security and stability.
Cost: Always check the total expense ratio (TER) of the NFOs before investment. The TER of the NFO should not be very high, as this may erode your returns over time.
Sectoral NFO: If the NFO is investing in a particular sector or theme, one must analyze the growth prospects of that particular sector before making any investment.
Flexibility: One must check if the fund is open-ended or close-ended, as close-ended funds do not provide liquidity.
Investment Goal: As a prudent investor, one should invest in NFOs only if the investment objective and risk profile are aligned with the NFO.

How to invest in NFO

There are multiple ways to participate in the NFOs, whether online or offline. There is a direct way to invest by visiting the office or website of the AMC offering NFOs. Further, various investment platforms and stock brokers in India provide the facility of participating in the NFOs.

What happens after the NFO period

Within five working days of the NFO period, the units are allocated to the investors by the Asset Management Company (AMC).

If the fund is open-ended, the AMC will permit investors to make regular contributions and withdrawals from the fund once the allotment of NFO is done. However, if the fund is close-ended, investors cannot sell the units before the lock-in period. However, they have an option to sell the units of fund in the secondary market if there is enough liquidity.

Conclusion

In conclusion, NFOs present new investment opportunities offered by asset management companies, allowing investors to invest in indices or themes not currently provided by the existing mutual funds.

However, the lack of a historical track record makes it challenging for investors to compare the performance. Additionally, AMCs often launch NFOs in a bull market with investment objectives similar to existing options in the market. Therefore, it is crucial to consult with your financial advisor and consider all the associated risks before investing in an NFO.

S.NO.	Check Out These Interesting Posts You Might Enjoy!
1	What Is An IPO Mutual Fund? Should You Invest?
2	Mutual Fund Taxation – How Mutual Funds Are Taxed?
3	What is Solution Oriented Mutual Funds?
4	What is TREPS & Why Mutual Funds Invest in it?
5	Debt Mutual Funds: Meaning, Types and Features

Frequently Asked Questions (FAQs)

Is NFO good for investment?
Investors with a high tolerance for risk can invest in NFOs; or investors can wait for a while to assess the fund’s performance, compare it to other funds in the same category, and then decide whether to invest.
Can I withdraw my money during the NFO period?
No, withdrawals are not permitted during the NFO open period. However, investors can sell their investment once allotment is done.
What are the risks involved while investing in NFO?
Investing in New Fund Offerings (NFOs) entails various risks due to their lack of performance history.
How can I invest in NFOs?
There are multiple options to invest in NFOs. One can visit the AMC website and use their online platform or can apply via stock brokers as well.
Is NFO better than existing mutual funds?
Since NFOs do not have an established track record of performance, it is challenging to compare them to existing mutual funds.

July 1, 2024

What is Solution Oriented Mutual Funds?

Are you worried about your retirement plan or are anxious about being able to pay for your child’s education? You don’t need to worry anymore because there exists a type of mutual fund to get you out of your misery. This specific type is called “Solution Oriented Mutual Fund,” it aims to meet your two most important financial needs responsibly, i.e., children education and retirement planning.

Solution Oriented Mutual Fund

There are five main categories of mutual funds in India. These categories are equity funds, debt funds, hybrid funds, solution-oriented funds, and other schemes.

Solution Oriented Mutual Funds are made to help investors reach their particular financial objectives. The preparation for retirement and the building of funds for the future needs of the children are the financial goals here. Typically, these funds have a five-year lock-in period. They often invest your money across a range of asset types, including debt and equity, to protect and increase your capital.

Types of Solution-Oriented Funds

There are two types of solution-oriented funds which are offered by Asset Management Companies in India. They are as follows –

Retirement Planning Funds
Children’s Gift Funds

So let’s deep dive into the types of solution-oriented funds-

Retirement Planning Fund

The purpose of this fund is to assist the individual in saving money for their retirement corpus. Generally speaking, these funds are locked in for five years, or until the age of retirement, whichever comes first. Your money is invested by the fund manager across a range of asset classes, such as debt and equity. These funds often have two schemes: one that creates wealth and the other that generates income.

Features of Retirement Planning Fund

These funds are suitable if you have a long-term investment horizon.
Retirement funds have a lock-in period of usually 5 years or until the retirement age of the investor, whichever is earlier.
After retirement, investors can choose a systematic withdrawal plan to get a regular income.
These funds are managed by professional fund managers; hence they allocate your assets only after thorough analysis.

Performance of Retirement Funds

Schemes	2024 (YTD)	2023	2022	2021	2020
ABSL Retrmnt The 50s Plus-Debt Reg Gr	2.46	5.11	1.01	1.89	6.45
ICICI Pru Retirement Pure Debt Gr	2.96	6.1	2.79	3	10.17
ABSL Retrmnt The 50s Reg Gr	3.93	9.98	1.47	1.92	7.86
HDFC Retirement Savings Hybrid Debt Reg	5.08	11.16	3.7	8.69	10.44
Nippon India Retirement Income Generation Sch Gr Gr	5.74	10.23	1.93	4.69	10.51
Franklin India Pension Gr	6.24	14.05	3.53	9.72	8.5
Axis Retirement Savings Cons Reg Gr	6.25	13.71	-4.25	12.03	13.74
UTI Retirement Fund – Regular Plan	6.64	16.69	5.28	18.53	12.38

Based on the retirement fund performance shown above, we can conclude that most of the funds have conservative performance overall. A few funds, like the UTI Retirement Fund, Franklin India Pension Fund, and HDFC Retirement Fund, have shown exceptional performance in 2023, while their performance for the 2022 financial year has been lacklustre.

Children’s Gift Fund

This particular mutual fund type allows investors to accumulate funds for their child’s future needs, including marriage, schooling, and other expenses. Usually, these funds are locked in for five years, or until the child reaches the age of majority. Given the rising costs of marriage and education, saving for the child’s future is essential for financial security and stability of the family.

Features of Children’s Gift Fund

The investments are designed to fulfill the financial objectives of the future of the child.
Funds invest in a mix of equity, debt and other instruments to provide you an optimum return.
They have a lock-in of 5 years or till the child reaches the age of maturity.

Performance of Children’s Funds

Schemes	2024 (YTD)	2023	2022	2021	2020
Axis Children’s Gift Fund Lock-in Gr	4.74	13.25	-7.32	26.66	15.5
SBI Magnum Children’s Benefit Savings Gr	5.12	16.95	1.95	18.28	14.82
Tata Young Citizen Gr	5.25	26.74	0.84	33.44	21.28
LIC MF Children’s Gift Fund Gr	5.76	22.14	-0.95	15.5	12.39
UTI Children’s Equity Gr	7.24	23.7	-4.01	32.78	19.33
HDFC Children Gift Fund Investment	8.36	26.88	6.77	26.46	17.47
SBI Magnum Children’s Benefit Gr	11.65	29.83	4.86	77.26	–
ICICI Prudential Child Care Gift	14.08	29.17	2.6	24.77	8.77

Based on the table above, we can conclude that these funds fared extraordinarily well in 2023 and 2021, generating average returns of almost 25%, while in 2022, they recorded average returns of 2.5%.

Advantages of Solution-Oriented Mutual Funds

These funds are considered an important tool for long-term financial planning.
Because solution funds have a five-year lock-in period, they are able to reduce the market’s short-term volatility and provide consistency.
Historically, the funds have yielded a higher return because of their equity investments.
The mutual fund houses professionally manage these funds.

Disadvantages of Solution-Oriented Mutual Funds

Due to their lock-in period, it does not provide you liquidity for up to 5 years of investment.
A portion of the fund is invested in the equity market, hence it carries the risk of the market.
These funds are not designed for the short-term goals of the individual.
Some solution-oriented mutual funds are passively managed by asset management companies hence in that case there is little-to-no chance of outperformance of the benchmark.

Who Should Invest in Solution-Oriented Schemes?

Solution-oriented funds are appropriate for individuals who have a specific financial aim and a well-defined investing purpose. With the aid of these funds, you can build up a corpus for long-term needs like retirement and arrange for a child’s education. However, due to the five-year lock-in period that these funds need, you can only consider them as an investing choice if you have a longer investment horizon.

Conclusion

To sum up, solution-oriented mutual fund schemes give investors a way to achieve long-term objectives. It is regarded as an organized investment vehicle for obtaining financial stability. Additionally, as we always advise, do extensive study before making any investing decisions. Alternatively, speak with a financial professional.

S.NO.	Check Out These Interesting Posts You Might Enjoy!
1	What Is An IPO Mutual Fund? Should You Invest?
2	Mutual Fund Taxation – How Mutual Funds Are Taxed?
3	Is Your Mutual Fund Investment Safe?
4	What is an Open-Ended Mutual Fund & How to Invest in it?
5	How to Cancel Mutual Fund SIP?

Frequently Asked Questions (FAQs)

What is the lock-in period of the solution-oriented fund?
The lock-in period of solution-oriented funds is five years or till the age of retirement/child attains the age of maturity.
Can I do SIP in Solution-Oriented Mutual Funds?
Yes, you can invest through SIP in a solution-oriented mutual fund.
How to invest in solution-oriented mutual funds?
You can invest in solution-oriented mutual funds through an AMC directly, or with the help of mutual fund distributors.
Can I invest in a solution-oriented mutual fund for wealth creation?
Yes, you can create wealth by investing in solution-oriented mutual funds for the long term.
What are two types of solution-oriented mutual funds?
Retirement funds and children’s funds are two types of solution-oriented mutual funds.

June 28, 2024

What is the 151515 Rule of Mutual Fund Investing?

Investing is known around the world as a difficult venture, but if done correctly, it can lead to multifold capital growth. An example of a trick to achieve this is the “15*15*15 rule of mutual fund”. Today, we’ll explain this trick in detail.

What is the 151515 Rule in Mutual Funds?

This principle of mutual funds can help you achieve your dream if you save a particular amount over time. According to this rule, if you invest 15000 per month for a period of 15 years and your investment fetches a return of 15%, you will accumulate 1.01 crores, whereas your total investment will be only 27 lakhs.

Power of Compounding

Compounding is essentially the exponential growth of your investment over a long period. This occurs when the profits earned on investments are reinvested, producing further profits.

Let’s understand the magic of compounding through an example-

Assume that you have invested INR 1,00,000 in mutual fund schemes. You make 12,000 on it in the first year, assuming a return of 12%. Hence, the corpus at the end of the first year becomes INR 1,12,000 instead of INR 1,00,000. Furthermore, assuming a return of 12% in the 2nd year, the corpus would also become INR 1,25,440, earning a return of INR 13,440.

You can now understand that even earning a consistent return every year would lead to higher growth in investment due to the concept of compound interest.

Components of the 151515 Rule in Mutual Funds

There are 3 components of the 15*15*15 rules in mutual funds.

Period – This rule’s primary element is the investment horizon, often known as the time horizon. Since compounding has long-term benefits, it is appropriate for long-term investors.
Return—The 15% annualized return projected under this approach is typically offered in the equity asset class. Over an extended period, several mutual funds have reported similar results.
Investment – Since consistency in investment is a key component of this guideline, the investor must consistently invest 15,000 INR per month without being concerned about market volatility.

Benefits of the 151515 Rule in Mutual Funds

The major advantages of the 15*15*15 rule are as follows-

This investment principle encourages you to optimize the benefits of compounding by emphasizing long-term investing.
The systematic approach to investing aids in the formation of a consistent saving habit in the investor.
Mutual funds are an inexpensive and easily evaluable asset that is accessible to anyone. Thus, allowing high liquidity.

Limitation of the 151515 Rule in Mutual Funds

The limitations of the 15*15*15 rule are mentioned below-

Higher Returns – The 15% annualized return is regarded as extremely optimistic, and it is challenging for funds to regularly generate this return over an extended period of time.
Economic Downturn – The returns could decrease if the economy is expanding more slowly or if there are significant market crashes.
Investment – This investment principle assumes that the investor can make consistent investments throughout a 15-year period. However, there are a number of financial circumstances, such as unemployment or unexpected medical expenses, that may prevent an investor from making these kinds of investments.

Important Points to Remember for the 151515 Rule

An investor should take into account a number of factors before following the mutual fund 15:15:15 guideline.

To invest in mutual funds and build a corpus over an extended period of time, one must be aware of their level of risk tolerance.
It is necessary for an investor to confirm that they have the financial means to invest INR 15,000 each month for a duration of 15 years.
When you begin investing, select the best strategy allocation and periodically assess your portfolio to see how well it is going.

Conclusion

Compounding is beneficial if you keep your investment for a long time. Mutual funds have several advantages, including returns that beat inflation and tax advantages, but the compounding effect is much more valuable. The sooner you begin investing and the longer you stay involved, the better the return. The mutual fund industry’s 15*15*15 rule operates in this manner. However, you should assess your risk tolerance by speaking with an investment counselor prior to making any investments.

S.NO.	Check Out These Interesting Posts You Might Enjoy!
1	Active or Passive Mutual Funds: Which Is Better?
2	What are Small Cap Mutual Funds? Definition, Advantages, and Risks Explained
3	Multi-Cap Vs Flexi-Cap Mutual Funds? Which Is Better For You?
4	Arbitrage Mutual Funds – What are Arbitrage Funds India \| Basics, Taxation & Benefits
5	Liquid Funds Vs Ultra Short Fund: Which One Should You Choose?

Frequently Asked Questions (FAQs)

What is the 15*15*15 rule of mutual fund investing?
According to the 15*15*15 rule, if you invest in mutual funds using a monthly SIP of INR 15,000 for 15 years and your investment yields an annualized return of 15%, you will have accumulated INR 1.01 crore.
What is compounding in finance?
In the world of finance, compounding is the process by which returns on an asset are reinvested in the same asset class to produce further returns.
How can I earn 1 crore in 15 years by investing in mutual funds?
By investing just 15,000 INR every month, you can make 1 crore if you earn 15% p.a.
Which category of mutual fund can provide returns of up to 15%?
Investing in the equity category of mutual funds can yield profits of up to 15% annually.
Should I change the fund during the investment tenure of 15 years in the 15*15*15 rule?
A regular review of your portfolio is important to ensure a 15% annualized return such that the corpus of 1 crore can be achieved in 15 years time.

June 14, 2024

Mutual Fund Factsheet: Definition And Importance

Are you considering investing in mutual funds and browsing different websites to get information about a plan? Worry not—we’ve got you covered. A document known as a Mutual Fund Factsheet compiles all the information about a scheme in one convenient location.

Read our blog to see how it can assist you in making informed decisions.

What is Mutual Fund Factsheet

A mutual fund factsheet is a document that asset management companies release every month for all of their mutual funds. It includes all the vital details about a mutual fund scheme, like its goal, fund manager, performance, and portfolio. It is available for investors to download directly from their website.

The Securities Exchange Board of India (SEBI) has mandated that factsheets be issued every month as they convey fund specific information.

Key Elements of a Factsheet

The key elements of a factsheet can be divided into various categories –

Fund Details – The section dedicated to fund details includes the fund’s name and type—equity, debt, hybrid, etc.—as well as its inception date and main goals, such as growth or dividends.
Performance – This section provides a thorough study of the fund’s performance from its creation to the present day, spanning a period of one day to ten years. Additionally, it compares the results with the applicable benchmark index. You can also find the graphical representation of the performance.
Portfolio Composition – This statement outlines the fund manager’s investment breakdown by asset class, which includes stock, debt, and other investments made with your funds. The portfolio’s top holdings as well as the sector allocation are available here.
Fees and Expenses – It includes a list of the different fees and expenses that asset management firms charge. This is referred to as the “Expense Ratio,” and it is calculated as a percentage of the asset value of the fund.
Risk Factor – A fund’s risk and volatility are measured using a variety of metrics such as standard deviation, beta, and alpha. These calculations can be used to understand the risk factor.
Fund Manager Details – The factsheet also includes information about the fund manager overseeing your deposits, including their name, qualifications, and experience. The factsheet also discusses the fund management technique and style.
Investment Amount – The fund fact sheet provides information on the fund’s investments, including the minimum amount an investor can put in a systematic investment plan (SIP ), lump sum, dividend and capital gain distribution data, and the total assets managed by the fund.
Disclosures – The fact sheet is required to include several disclosures, including the ones that state that past performance does not guarantee future results.
Contact Details – The sheet also includes the head office address and contact information for asset management organizations.
Investment Style – The sheet also includes a grid that illustrates the fund’s investment style according to its category. For instance, the large-cap fund’s investment style displays a mix of large-cap growth-oriented equities.
Riskometer – Asset management firms are required by SEBI to display the fund’s riskometer on their factsheets. An investor can determine whether a fund is appropriate for their risk tolerance by using the riskometer.

Read Also: Types of Mutual Funds in India

Importance of Factsheet

The factsheet carries several important pieces of data that an investor must look at before making their investment decision. The investor can use the information to determine the fund’s suitability based on their risk tolerance and investment objectives. Some such uses are mentioned below:

An investor can examine the fund’s performance and compare it to their benchmark return by reading the factsheet.
Fund factsheets can be used to comprehend different risk indicators, such as beta, standard deviation, and sharpe ratio.
An investor can determine the risk of the fund by using additional qualitative metrics, such as the fund’s riskometer.
Exit load and expense ratio of the fund can be compared with competitors using data provided in factsheets.
The fund factsheet also includes fund management approaches and an objective so that investors can determine the fund’s purpose and match it to their investment goals.

Should an Investor read the Fact Sheet?

No matter how much knowledge an investor has about mutual funds, investing before examining vital information can prove fatal. The factsheet is written in a style that is easy for a layperson to comprehend. A thorough comprehension of the investment product you are about to invest your hard-earned money in is vital.

Conclusion

In summary, a factsheet is a crucial tool that investors may use to thoroughly understand a fund and make an informed selection. The factsheet lets you analyze the performance of the fund manager by comparing the fund’s returns with those of their peers using the information given. However, before making any investing decisions, you should analyse all the points thoroughly or consult your investment advisor.

Frequently Asked Questions (FAQs)

What is the purpose of a factsheet issued by Asset Management Companies?
The purpose of the factsheets is to give investors information about the funds that asset management businesses offer, including portfolio composition and fund performance.
What is the frequency of factsheets issued by the AMCs?
The factsheets are issued every month.
How can I use the information about the fund manager given in the factsheet before making any investment decision?
Before choosing a fund to invest in, we can research the fund manager’s qualifications, experience, and track record.
What does a mutual fund factsheet tell you about?
The mutual fund fact sheet provides an overview of the fund, including information on holdings, historical performance, and investing objectives.
Where can I find the factsheet of a mutual fund scheme?
Visit the asset management company’s website and navigate to the download section. From there, you can download the factsheet for any mutual fund scheme.

June 12, 2024

XIRR Vs CAGR: Investment Return Metrics

We all know that we should choose securities that generate the highest return. But have you wondered which return should we consider while evaluating securities?

This blog will delve deeper into two of the most popular methods to evaluate returns.

What is CAGR?

CAGR stands for the Compounded Annual Growth Rate. It measures an investment’s annual growth rate over time and is often used to measure and compare investments’ past performance or to project their expected future returns. It calculates the constant average growth rate over a period of time for a long-term investment.

The compound annual growth rate isn’t a true rate of return. It describes the growth rate at which an investment has grown, assuming that the growth rate is the same every year and that the profits are reinvested at the end of each year. In reality, this kind of performance is unlikely because the growth rate depends upon multiple outside market factors. However, the CAGR can be used to smooth returns so that they may be more easily understood compared to alternative methods.

Mathematical formula

CAGR = (EV / BV)^(1 / N) – 1

where: EV = Ending value, BV = Beginning value, and N = Number of years

Calculation

Divide the value of an investment at the end of the period by its value at the beginning of that period.
Raise the result to an exponent of one divided by the number of years.
Subtract one from the subsequent result.
Multiply by 100 to convert the answer into a percentage.

CAGR Limitations

It smooths the growth rate, so it does not give a true picture as it ignores volatility and implies that the growth during that time was steady.
It doesn’t account for the inflow and outflow of the funds from the portfolio over the period of time.
It ignores volatility and is hence not useful in forecasting growth rates during unstable times.
It is not relevant for early growth ventures as they are naturally volatile.

Can CAGR be improved?

The major limitation of CAGR is that it calculates a smoothed rate of return over time, ignoring volatility. To improve these limitations, investors can use a risk-adjusted CAGR. A simple method for calculating a risk-adjusted CAGR is to multiply the CAGR by one minus the investment’s standard deviation [standard deviation measures total risk, which is the sum of systematic (market-specific) and unsystematic risk (investment-specific)].

If the standard deviation is zero, the risk-adjusted CAGR is unaffected. If the standard deviation is larger, the risk-adjusted CAGR will be lower.

What is XIRR?

XIRR, or Extended Internal Rate of Return, is a method to calculate the annualized return on investment with irregular Cash flows. It considers all cash inflows and outflows, along with the dates on which they occur, to calculate the annual rate of return. XIRR considers the timing and amount of each cash flow, making it a more accurate method for investments with irregular cash flows. It is more flexible than CAGR as different time horizons and different cash flows can be easily accounted for here.

XIRR calculation is tricky, but any financial XIRR calculator or spreadsheet can do this instantly. XIRR solves for the rate of return that makes the NPV (Net Present Value) of all cash flows equal to zero.

What is the difference between CAGR & XIRR

CAGR	XIRR
Simple rate of return based on Beginning and Ending Value.	More complicated and takes into account both investment outlay and cash flows.
Suitable for calculating returns of one-time investment.	Suitable for calculating returns of investments with irregular cash flows.
Doesn’t consider the timing of cash flows.	Consider the timing of cash flows.
Computes the average annual growth rate.	Computes the Internal Rate of Return (IRR).
Simple to calculate but less accurate.	More complex to calculate but more accurate.

Suitable Metric to Calculate Mutual Fund Returns

If you invest a lump sum amount without a regular series of investments, then one can use the CAGR as the timing of the investment, and periodic cash flows won’t be an issue. But when you choose to invest through SIPs, regular outlays/payments on a particular date, then using CAGR is not an appropriate way to calculate the return, as it ignores the timing of investments and considers only the first and last values. So, in such cases, one can use XIRR to calculate the actual return for your SIP investments.

Therefore, if it’s an open-ended fund with irregular cash flows (in the form of SIPs), then XIRR is the preferred method. If it is a close-ended fund where the fund has a constant growth rate and accepts lump sum cash outlays only, then CAGR is the preferred method.

Conclusion

Both methods are used to calculate returns, and both have pros and cons. Therefore, according to the time horizon and cash inflow/outflow plan, one should decide which method to use.

Absolute return is best for short-term investments, but CAGR is best for longer-term investments with fixed cash outlays. However, XIRR is the most useful in cases of multiple cash flows (SIPs) as it considers the timing of each cash flow while calculating an annualized return.

S.NO.	Check Out These Interesting Posts You Might Enjoy!
1	NHPC vs NTPC
2	Swiggy Vs Zomato
3	Mahindra & Mahindra vs Tata Motors
4	Tata Power Vs Adani Power
5	Tata Steel vs. JSW Steel

Frequently Asked Questions (FAQs)

What is CAGR?
Compound Annual Growth Rate, or CAGR, is the annual growth of your investments over a specific period of time. In other words, it measures how much you have earned on your investments per year during a given interval.
What is XIRR?
XIRR, or Extended Internal Rate of Return, is the annualized return on investment while considering irregular cash flows.
Which calculation method is better, CAGR or XIRR?
XIRR is better than CAGR as it is more flexible and can calculate the returns on investments with multiple cash flows at different times, while CAGR can only calculate the returns for a single cash inflow and outflow.
Which method should one use to calculate mutual fund returns?
The answer depends on the type of investment. For lump sum investments, CAGR is a good enough measure of returns. However, for investments with irregular cash flows, such as SIPs, XIRR is a better measure of returns.
Can CAGR be negative?
Yes. A negative CAGR indicates losses over time rather than gains.

June 5, 2024

Category: Mutual Funds

Why Invest in Mutual Funds?

How to Invest in Mutual Funds?

Modes of Investment in Mutual Funds

Online Mutual Fund Investment

Offline Mutual Fund Investment

Points to Consider Before Investing in Mutual Funds

Conclusion

Frequently Asked Questions (FAQs)

Can I make a cash investment in a mutual fund?

What is the minimum investment amount required in a mutual fund?

Is it safe to invest in mutual funds online?

Can I invest in mutual funds using both offline and online modes?

Are there any additional charges when investing online in mutual funds?

Overview of Mutual Fund

Types of Mutual Funds in India

Types of Mutual Funds Based on Asset Class

Types of Mutual Funds Based on Organization Structure

Types of Mutual Funds Based on Investment Objectives

Types of Mutual Funds Based on Risk

Conclusion

Frequently Asked Questions (FAQs)

What are hybrid mutual funds?

Which type of mutual fund is considered the safest among all available options?

Which type of mutual fund gives the highest return?

What is the NAV of a mutual fund?

Do mutual funds offer tax benefits?

Overview Shariah-Compliant Mutual Funds

What is Shariah Law?

Features of Shariah-compliant Mutual Funds

Shariah Indices of Shariah-Compliant Mutual Funds

Shariah-compliant BSE Indices:

Shariah-compliant NSE Indices:

Shariah-compliant Funds in India

Tata Ethical Fund

Nippon India ETF Shariah Bees

Taurus Ethical Fund

Tax Implications of Shariah-Compliant Mutual Funds

Key Points to Consider

Benefits of Shariah-Compliant Funds

Risks involved in Shariah Compliant Funds

Conclusion

Frequently Asked Questions (FAQs)

What is a Sharia-compliant mutual fund?

Why should I invest in Sharia-compliant funds?

What lead to the evolution of Shariah-compliant mutual funds?

What is TASIS?

What is Shariah law?

What is a Systematic Investment Plan (SIP)?

What is a Lump Sum Investment?

Evaluation Metrics of SIP and Lump Sum

Scenario Analysis of SIP and Lump Sum

Bear Market Scenario

Bull Market Scenario

Advantages and Disadvantages of SIP and Lump Sum

SIP

Lump Sum

Suitability for Investors of SIP and Lump Sum

SIP Suitability

Lump Sum Suitability

Conclusion

Frequently Asked Questions (FAQs)

What key differences do SIP and lump sum investments for mutual funds have?

How does rupee-cost averaging help investors with their SIP?

What are the techniques for calculating historical returns of mutual funds, and which one is best for SIP as opposed to lump sum investments?

Who should invest in an SIP, and who should do a lump sum investment?

Can I stop or change the amount of my sip after starting it? How does this feature help you?

Types of Fees Charged by Mutual Fund

Calculation of Total Expense Ratio

SEBI Guidelines on Mutual Fund Charges

Impact of Expense Ratio

Conclusion

Frequently Asked Questions (FAQs)

What are the charges associated with the mutual fund investments?

What is the exit load?

Is there any restriction on fees charged by mutual fund companies?

Do investors pay fees to start investing in a mutual fund?

Do I need to pay transaction charges every time I invest in a mutual fund?

What is NFO (New Fund Offer)?

Features of NFO

What is the 151515 Rule in Mutual Funds?

Components of the 151515 Rule in Mutual Funds

Benefits of the 151515 Rule in Mutual Funds

Limitation of the 151515 Rule in Mutual Funds

Important Points to Remember for the 151515 Rule

**What is the 151515 rule of mutual fund investing?**

**Should I change the fund during the investment tenure of 15 years in the 151515 rule?**