Pocketful

Category: Mutual Funds

  • Long-Term Capital Gain (LTCG) Tax on Mutual Funds

    Long-Term Capital Gain (LTCG) Tax on Mutual Funds

    People invest their hard-earned money in mutual funds to reach their financial objectives. The assets held by mutual funds generally increase in value over time, but this is not a surety. However, investors must pay taxes on the profits these investments have generated. In this blog post, we’ll discuss the idea of taxes on long-term capital gains on mutual funds.

    What is LTCG Tax?

    What is LTCG Tax?

    “Long-Term Capital Gain” (LTCG) is the name of the tax applied to the gains made when selling specific assets after a set amount of time. To put it simply, the government taxes gains earned on an asset known as a long-term capital gain when an investor sells it after holding it for a specific amount of time.

    Features of LTCG tax on Mutual Funds

    Long-term capital gains taxes have the following features:

    1. LTCG is levied when an investor sells an asset after holding it for a certain period.
    2. The rate of tax depends on the asset class.
    3. The government provides certain exemptions if capital gain arises in some asset classes.
    4. This is chargeable under the head Capital Gain of Income Tax Act.

    LTCG on Mutual Funds

    Mutual funds come in various forms according to asset classes, and depending on how long you keep the assets, you may have to pay long-term capital gain tax on them. 

    Equity Mutual Fund

    Mutual funds classified as equity funds invest primarily in equity-related securities; the holding duration determines how these funds are taxed. The gain will be referred to as a long-term capital gain if the holding period exceeds 365 days. Equity mutual funds are suitable for investors willing to assume additional risks in exchange for a higher return.

    Taxation on Equity Mutual Fund

    As per the Income Tax Act, the long-term gains made on equity mutual funds are taxed at 10% over and above 1 lakh. Let us understand this with an example.

    On January 1, 2022, an individual invested INR 1 lakh in an equity-oriented mutual fund. On February 25, 2023, he sold it for INR 2.5 lakh, realizing a gain of INR 1.5 lakh due to bullish market conditions.

    The investor will not pay taxes on the INR 1 lakh, while the remaining INR 50,000 will be subject to 10% tax. The total amount to be paid as taxes is INR 5,000. 

    Debt Mutual Fund

    Mutual funds that invest your money in fixed-income instruments like corporate bonds, government bonds, debentures, etc., are known as debt mutual funds. Debt funds, which offer lower returns than equities mutual funds, are a good option for investors not ready to take on a lot of risk. A mutual fund falls under the category of debt mutual fund if it invests less than 35% in equity.

    Taxation on Debt Mutual Fund

    In the past, gains on debt funds held for longer than three years were regarded as long-term and were subject to indexation. Gains realized on these funds before the three-year time frame are classified as short-term capital gains and are subject to taxation as per the individual’s tax slab rate. However, under the current law, profits on these funds are taxed according to your income tax slab, which varies from 10% to 30% depending on your income tax bracket, regardless of the holding term. 

    If an individual is subject to a 30% tax bracket, invested INR 1 Lakh in a debt-oriented mutual fund on January 1, 2021, and sold it on June 10, 2024, but did so after three years and realized a profit of INR 50,000, he will be liable to pay taxes based on his 30% income tax slab, which means his total tax liability will be approximately INR 15,000.  

    Hybrid Mutual Fund

    The portfolios of hybrid mutual funds are allocated to debt and equity. Like equities and debt funds, the taxation of hybrid funds is contingent upon the holding duration and the portfolio’s asset allocation. 

    Equity-Oriented Hybrid Funds  

    The fund will be classified as an equity-oriented hybrid fund if at least 65% of its total assets are allocated to equities and equity-related securities. The gains from equity-oriented hybrid funds are subject to a 10% tax on profits exceeding one lakh Indian rupees upon sale after one year. 

    Debt-Oriented Hybrid Funds 

    A mutual fund is classified as debt-oriented if it has an equity exposure between 35% and 64%. The gains realized after 36 months will be considered long-term gains and taxed at 20% with indexation benefits.

    For example, if an individual invested INR 1,00,000 in a fund with approximately 60% of its total allocation in debt and the remaining 40% in equity, the fund will be regarded as a debt-oriented hybrid fund. The investor redeemed his investment for INR 1,50,000 and realized a gain of INR 50,000 after four years. 

    Purchase value after indexation = Original Amount * ( Current year CII / Purchasing year CII) 

    Here, CII = Cost Inflation Index

    Let the CII in the purchase year be 102 and the CII in the current year be 110

    Purchase value after indexation = INR 1,00,000 * (110/102) = INR 1,07,843

    Total realized gain with indexation benefit = INR 1,50,000 – INR 1,07,843 = INR 42,157

    Tax Payable = 20% * INR 42,157 = INR 8,431 

    Read Also: What is Capital Gains Tax in India?

    Exemptions on Capital Gains

    Exemptions on Capital Gains

    Apart from the INR 1,00,000 exemption on equity mutual funds, an investor can also claim the following exemptions:

    Section 10(38)

    Under this section, the long-term capital gains resulting from the transfer of equity and equity-oriented mutual funds are exempt from taxes if the following conditions are met:

    • Transfer should be after October 1, 2004.
    • It should be a long-term asset.
    • Security transaction taxes are applicable.

    Section 54F

    The section 54F allows investors to save capital gains taxes if the proceeds of the sale of a long-term capital asset are used to buy or construct a residential house in India. The tax exemption can be claimed if:

    • The property must be purchased one year before or two years after the sale of mutual funds.
    • The property must be constructed within three years from the sale of mutual funds.

    Conclusion

    To sum up, an investor must be aware of the taxes applicable to the gains realized by their mutual fund investments. A long-term investment horizon has more tax benefits compared to investing for a short time. However, the investment horizon is determined by the individual’s financial conditions, so you should speak with your investment advisor before making decisions. 

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

    Frequently Asked Questions (FAQs)

    1. In the case of equity mutual funds, how much long-term capital gain is tax-free?

      Up to INR 1,00,000 in long-term capital gains on equity-oriented mutual funds is exempt from taxes. 

    2. Is the amount of tax automatically deducted from the profit?

      No, tax is not subtracted automatically; investors must compute gain and pay tax when they file their income tax return. 

    3. What tax-saving options are available in mutual funds?

      The Equity Linked Savings Scheme (ELSS) is a mutual fund investment that can assist investors save money on taxes by allowing them to claim a maximum deduction of INR 1.5 lakhs under the 80C of the Income Tax Act. 

    4. How to avoid LTCG taxes on mutual funds?

      An investor can avail exemption under Section 10(38) and Section 54F.

    5. How are debt mutual funds taxed in India?

      In India, capital gains from debt mutual funds are included in your income and subject to taxation according to your income tax bracket. 

  • What is TREPS & Why Mutual Funds Invest in it?

    What is TREPS & Why Mutual Funds Invest in it?

    Financial markets today offer a wide variety of financial products to investors. There is a lot of information about financial products, and you may see something new daily. If you’ve ever looked through a mutual fund’s portfolio, you’ve probably noticed that some of your money is invested in “TREPS.” Are you certain about what it is and why practically every mutual fund has a portion allocated to it?

    In this blog, we will explore TREPS, its features, advantages, disadvantages, and the reasons behind mutual funds investing in TREPS.

    What is TREPS?

    TREPS stands for “Tri-Party Repo Dealing System”, which facilitates the borrowing and lending of funds in a Tri-Party Repo arrangement. Tri-party repo is a type of repo contract where a third entity (other than the borrower and lender) acts as an intermediary between the two parties to facilitate services like collateral selection, payment, settlement, custody, and management during the life of the transaction. It serves as a mechanism for managing liquidity, allowing mutual funds to park their excess capital. 

    Why Mutual Fund Invest in TREPS?

    Why Mutual Fund Invest in TREPS

    Mutual funds invest in TREPS for various reasons listed below:

    • Liquidity: It provides mutual fund flexibility to manage the liquidity for daily needs, as it easily converts securities into cash to meet daily redemptions. Quick conversion into cash also allows mutual funds to take advantage of investment opportunities.
    • Safety: TREPS are backed by the government and are considered highly safe.
    • Earnings: It allows the mutual funds to earn a return on the idle cash and helps increase the overall return.
    • Regulatory Requirement: According to regulations, mutual funds must invest a small portion of their assets in liquid securities such as TREPS.
    • Portfolio Diversification: Investment in TREPS provides diversification benefits and reduces exposure to market fluctuations.

    Impact of TREPS on Mutual Fund NAV

    The impact of investing in TREPS on the mutual fund’s NAV depends on various factors, such as current market conditions, current portfolio mix, and the size and duration of investments in TREPS.

    Investing in TREPS offers higher returns than cash, which increases net asset value (NAV).

    On the other hand, a sizable investment in TREPS can result in lower returns in the long run, and thus, NAV reduces.

    Key Players in Mutual Fund TREPS transaction

    The key players involved in mutual fund TREPS transactions are as follows-

    • Sellers: These entities initiate the transaction by selling the securities and agreeing to buy them back later.
    • Buyers: The buyer is a counterparty that purchases securities and earns interest.
    • Tri-Party Agent: These agents provide services such as collateral selection, payment, settlement, custody, and transaction management. They are critical in reducing counterparty risk.
    • Custodian: The custodian stores the securities, ensures their safety, and makes them available at the time of settlement. Its role is usually combined with that of a tri-party agent. 
    • Clearing Corporation: CCIL (Clearing Corporation of India Limited) serves as a clearing house, ensuring that all the executed trades are settled properly and maintaining accounts for all members.
    • Regulatory Bodies: The regulatory bodies such as SEBI (Securities and Exchange Board of India) set guidelines to protect the investor’s interest.

    Read Also: Long-Term Capital Gain (LTCG) Tax on Mutual Funds

    Advantages of TREPS

    TREPS offers the following advantages to its investors:

    1. A mutual fund holds some cash to meet redemption requests. Instead of holding cash, they invest in TREPS as they are highly liquid.
    2. It also allows mutual funds to earn additional income, increasing the overall yield of the portfolio.
    3. Through TREPS, mutual funds can reduce the volatility of a portfolio.
    4. It allows them to manage their cash flows efficiently and act actively on market opportunities.
    5. TREPS is considered a risk-free investment option as the government backs it. 

    Disadvantages of TREPS

    Disadvantages of TREPS are:

    1. Investment in TREPS offers lower returns when compared with other opportunities available in the market.
    2. The involvement of a third party increases the complexity of the transaction, which also increases its cost.
    3. Most mutual funds have investments in TREPS, eventually leading to the concentration of risk.
    4. TREPS are subject to market risk due to changes in interest rates, which can affect the return of mutual funds. 

    Read Also: Shariah-Compliant Mutual Funds: Should You Invest?

    Conclusion

    In conclusion, investing in TREPS offers mutual funds a safe, flexible approach to managing capital and boosting portfolio return while preserving adequate liquidity. They also have a positive impact on the mutual fund NAV in the short term, but a longer investment horizon can result in lower returns and negatively impact the NAV. 

    TREPS are affected by interest rate changes and often offer lower returns than other asset classes. Speak with your investment advisor if you intend to invest in mutual funds. 

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    4What is an Open-Ended Mutual Fund & How to Invest in it?
    5How to Cancel Mutual Fund SIP?

    Frequently Asked Questions (FAQs)

    1. Who do mutual funds put their money in TREPS?

      Mutual funds must place their assets in liquid securities like TREPS to comply with SEBI regulations requiring them to have a certain amount of cash on hand to fulfill investor redemption requests. 

    2. What does TREPS stand for?

      TREPS stands for Tri-Party Repo Dealing System.

    3. Who can participate in TREPS?

      Any institutional investor, including banks, mutual funds, etc., is eligible to invest in TREPS if they meet the regulatory compliance guidelines provided by SEBI and have the required infrastructure.

    4. Is it safe to invest in TREPS?

      Yes, it is safe to invest in TREPS as the government backs the underlying assets.

    5. Does TREPS generate higher returns than traditional savings accounts?

      TREPS investments have the potential to yield larger returns than traditional savings accounts, which is why mutual funds find them attractive.

  • History of Mutual Funds in India

    History of Mutual Funds in India

    The Mutual Fund industry has been growing rapidly for the last 5 years. According to the Association of Mutual Funds in India (AMFI), the assets under management (AUM) have increased by 35% from 39.42 lakh crore in 2023 to 53.4 lakh crore in 2024. This trend can be attributed to the younger generation of India, which wishes to achieve its financial goals through investments in mutual funds.

    But the popularity mutual funds enjoy today wasn’t the case a few decades back. Therefore, in today’s blog, we will discuss the history of mutual funds in India, the future prospects of the mutual fund industry, and their advantages and disadvantages.

    What are Mutual Funds in India?

    Mutual funds are pooled investments of many investors that are professionally managed. A professional fund manager uses his/ her expertise to invest those funds in a particular proportion into different asset classes such as equity, debt, commodities, etc. The investment strategy must be consistent with the strategy mentioned in the prospectus.

    Mutual funds are best for those investors who lack the knowledge and time to analyze market trends. However, a particular fee is charged to manage these funds, known as the expense ratio.  

    History of Mutual Fund

    History of Mutual Funds

    The first mutual fund in India was introduced in 1963, with the formation of the Unit Trust of India due to the combined efforts of the Government of India and the Reserve Bank of India. The primary objective of introducing mutual funds in India was to encourage savings and investing habits in the general public to improve economic growth and increase the participation of investors in the economy. UTI is the oldest mutual fund in India and was the only mutual fund until 1993.

    This history of mutual funds could be broadly classified into five major phases:

    First Phase (1964-1987)

    Unit Trust of India was the first mutual fund of India incorporated by an Act of Parliament in 1963 and was under the control of the Reserve Bank of India. UTI launched the first mutual fund scheme called “Unit Scheme 1964” in 1964. In 1978, the Industrial Development Bank of India (IDBI) took over the responsibility of regulating the UTI. Near the end of the first phase, UTI had Rs. 6,700 crores of assets under management (AUM).

    Second phase (1987-1993)

    In this phase, the Government of India permitted the public sector banks, Life Insurance Corporation of India (LIC), and General Insurance Corporation of India (GIC) to launch mutual fund schemes. Some of the prominent mutual funds established in this phase were:

    • SBI Mutual Fund 
    • Canbank Mutual Fund
    • Punjab National Bank Mutual Fund

    LIC and GIC established their first mutual funds in June 1989 and December 1990, respectively. Assets under management for the mutual fund industry were Rs. 47,004 crores near the end of this phase.

    Third phase (1993-2003)

    Before 1993, all the mutual fund corporations were introduced by public sector entities. The scenario changed in 1992 when SEBI was incorporated. After its incorporation, SEBI introduced the first set of SEBI Mutual Fund Regulations that were applicable to all mutual funds except UTI. Kothari Pioneer was the first private-sector mutual fund scheme and was registered in July 1993. Initial regulations were revised and replaced with a more comprehensive set of regulations known as SEBI (Mutual Fund) Regulation in 1996, which is currently applicable. Till 2003, there were 33 MFs with around 1,22,000 crores of assets under management. 

    Fourth Phase (February  2003 – April 2014)

    In February 2003, UTI was split into two parts:

    • Specified Undertaking of the UTI Trust of India (SUUTI) 
    • UTI Mutual Fund

    This phase witnessed consolidation in the mutual fund history and numerous mergers among different private-sector funds. After the financial crisis in 2009, investors lost confidence in the mutual fund industry as most of them entered the markets at their peak. The abolition of the entry load by SEBI and the effects of the global financial crisis resulted in a period of slow growth in the AUM of the mutual fund industry in this phase.

    Fifth Phase (Since May 2014)

    In September 2012, SEBI introduced several measures to boost the penetration of mutual funds (MFs) in India, particularly in tier II and III cities, and align the interests of various stakeholders. These measures helped reverse the negative trends from the global financial crisis. The industry saw significant improvements post-2014, with steady inflows, a rise in assets under management (AUM), and investor folios.

    The AUM crossed ₹10 trillion in May 2014, doubled to ₹20 trillion by August 2017, and reached ₹30 trillion in November 2020. By June 30, 2024, the AUM grew to ₹61.16 trillion. The impressive growth can be attributed to two factors:

    • Progressive measures implemented by the SEBI
    • Support from mutual fund distributors

    Read Also: Who Regulates Mutual Funds in India?

    Future Prospects of Mutual Funds

    Future Prospects of Mutual Funds

    The future of mutual funds in India looks promising due to continued regulatory support and increasing retail participation, especially in smaller cities. The number of investor folios is expected to rise, achieving financial inclusion and investment awareness across the country. 

    Let’s also look at some pros and cons of investing in Mutual Funds.

    Advantages of Investing in Mutual Fund

    Various advantages of investing in mutual funds are:

    • Mutual funds offer diversification benefits as they invest in multiple securities. 
    • The dividend earned from investing in mutual funds can be used for reinvesting. 
    • Mutual funds offer a lump sum and SIP option. 
    • Mutual funds are managed by professional fund managers whose expertise helps the investors to earn substantial returns. 

    Disadvantages of Investing in Mutual Fund

    The disadvantages of investing in mutual funds are:

    • Many mutual funds have a high expense ratio, which reduces returns.
    • Mutual fund returns are not guaranteed. 
    • Mutual funds may also impose a lock-in period, which reduces liquidity. 
    • There is no connection between past performance and future performance of mutual fund schemes. 

    Read Also: A Comprehensive Guide on Mutual Fund Analysis: Quantitative and Qualitative Factors Explained

    Conclusion

    Mutual funds have proved to be a good investment opportunity for investors. They have consistently contributed to the nation’s growth and have also increased the number of participants in the financial markets. Mutual funds have made professional expertise accessible to the general public.

    Affordability is one of the major criteria behind the success of mutual funds as SIP provides investors with advantages such as Rupee cost averaging, power of compounding, flexibility, etc. However, it is always advised to consult a financial advisor before investing.

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    Frequently Asked Questions

    1. When did private-sector mutual funds begin operations in India?

      Private sector mutual funds began operations in India in 1993.

    2. How did the introduction of Systematic Investment Plans (SIPs) influence the mutual fund industry in India?

      The introduction of Systematic Investment Plans (SIPs) made it easier for individuals to invest small amounts regularly. It increases retail participation and promotes disciplined investing.

    3. What role did technological advancements play in the growth of mutual funds in India?

      Technological advancements, such as online trading platforms and mobile apps, have made it more convenient for investors to access and manage their mutual fund investments, contributing to the industry’s growth.

    4. When did foreign mutual fund companies enter the Indian market?

      Foreign mutual fund companies started entering the Indian market in 1993, following economic reforms and liberalization policies.

    5. Why are index funds popular in India?

      Index funds are popular in India as they offer investors a low-cost option to earn returns comparable to the returns of a market index.

  • How to Cancel Mutual Fund SIP?

    How to Cancel Mutual Fund SIP?

    Mutual fund investors often face strategic decisions, such as whether one should stop SIP temporarily or permanently. While much is said about initiating SIP investment and its benefits, the halting of SIP is rarely discussed. 

    In this blog, we will discuss the process of cancellation of SIP using online and offline modes, as well as the temporary vs. permanent cancellation of SIP,  and understand the reasons behind cancelling SIP.

    How to Cancel SIPs Online?

    To cancel your mutual fund SIP (Systematic Investment Plan) online, you can follow several methods depending on how you initially set up the SIP:

    1. Through the AMC (Asset Management Company) Website 

    • Step 1: Visit the official website of the AMC managing your mutual fund.
    • Step 2: Log in using your credentials, such as your folio number and bank account details.
    • Step 3: Navigate to the section where your ongoing SIPs are listed and select the SIP you wish to cancel.
    • Step 4: Click on the “Cancel SIP” option and confirm your request. The cancellation process usually takes about 21 days to complete​.

    2. Using Online Distributor Platforms 

    • Step 1: Log into the respective platform.
    • Step 2: Locate the SIP you want to cancel under the mutual funds section.
    • Step 3: Select the “Cancel SIP” option and confirm the cancellation​.

    3. Through an Agent: If an agent facilitated your SIP, contact them to request the cancellation. The agent will process the request with the AMC on your behalf.

    How to Cancel SIPs Offline?

    The below steps show how to cancel a mutual fund SIP offline, according to many popular websites.

    How to Cancel SIPs Offline

    Step 1. Reach out to AMC or RTA:

    • Go to the nearest Asset Management Company branch office managing your mutual fund or the Registrar and Transfer Agent office.
    • Ask for a SIP cancellation form from the office.

    Step 2. Fill Out the SIP Cancellation Form:

    • Fill in the form with the requisite information, viz., folio number, mutual fund scheme name, bank account used for the said mutual fund, SIP amount, and the date you wish to end the SIP payments​. Kindly ensure that all details are correct.

    Step 3. Submit the Form:

    • Submit the form to the AMC branch or RTA office. The cancellation process takes approximately 14 to 21 days, though some fund houses fast-track it​​.

    Step 4. Verify with Your Bank:

    • It’s also important to inform the bank to stop the automatic debit instructions relating to the SIP.

    Step 5. Get Confirmation:

    • Once the cancellation request is processed, AMC or RTA will send a confirmation regarding the SIP cancellation. 

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

    Temporary vs Permanent Cancellation of SIP

    Investors can make a decision regarding temporary vs permanent cancellation of SIP using the following table:

    Temporary Cancellation Permanent Cancellation
    A temporary cancellation of a SIP would offer the investor the facility to pause contributions towards a scheme. Most of the AMCs or mutual fund platforms have the facility to pause the SIPs for 1 to 6 months. No deductions will be made from the investor’s account during this period. The SIP automatically starts again at the end of the pause period without any additional instructions from the investor’s end. A temporary cancellation of an SIP would offer the investor the facility to pause contributions towards a scheme. Most of the AMCs or mutual fund platforms have the facility to pause the SIPs for 1 to 6 months. No deductions will be made from the investor’s account during this period. The SIP automatically starts again at the end of the pause period without any additional instructions from the investor’s end. 

    Pause SIP vs Stop SIP

    An investor can choose to pause vs stop SIP based on the information given in the following table:

    Pause SIPStop SIP
    The decision to pause SIP is appropriate for short-term financial disturbances. It keeps the investments consistent and saves one from the hassle of restarting the SIPs later. This is ideal if the investor expects his or her financial condition to stabilize soon.The decision to stop SIP is ideal if the fund’s underperformance continues, the investor’s goals are met, or there are significant changes in the fund’s management or strategy. It is a permanent solution, often accompanied by switching to another investment or fund.

    Reasons for Canceling SIP

    Reasons for Canceling SIP

    There could be various reasons to cancel an initiated Systematic Investment Plan:

    • Achievement of financial goals: An investor may be near his financial goals, such as buying a house or funding education. Now, the investor wants to realize the profits and move to safer investments so that accumulated wealth is not affected by market volatility.
    • Changes in mutual fund’s fundamental attributes: There could be a situation where the mutual fund changes its investment strategy, asset allocation, or management. If such changes do not align with your risk tolerance or investment goals, you should cancel your SIP and look for alternatives.
    • Consistent underperformance: If a mutual fund is underperforming its benchmark and peers for a considerably long period, say three years, then there must be something wrong with the management or investment strategy of the fund. Under such circumstances, cancellation of the SIP and funding better performers may be appropriate.
    • Mutual fund portfolio rebalancing: Investors try to build a diversified portfolio of mutual funds that invest in different asset classes. Over time, some mutual funds outperform others and exceed their target allocation. The rebalancing process could involve reducing exposure to some mutual funds to go back to the target allocation, possibly leading to the cancellation of the SIPs.
    • Financial emergency: Unforeseen financial disasters, such as the loss of a job or a medical emergency, may cause one to stop SIPs as money is required elsewhere. In such cases, liquidity for immediate needs may be prioritized over long-term investments.

    Read Also: SIP in Stocks vs SIP in Mutual funds?

    Conclusion

    Whether to pause or stop an SIP fully depends on the financial status and investment objectives of an individual. Pausing can be done in case of short-term disruption to finances, and it also has the added advantage that the investor will not have to re-activate it afresh. Permanent cancellation may have to be done in cases of prolonged underperformance or if the goal is met. Cancelling of SIP can be done conveniently online through the AMC portals/distributor platforms or offline through the offices of AMCs/RTAs. However, you must consult a financial advisor before making any investment decision.

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    3Equity Mutual Funds: Meaning, Types & Features
    4What Is An IPO Mutual Fund? Should You Invest?
    5Who Regulates Mutual Funds in India?

    Frequently Asked Questions (FAQs)

    1. What happens if I miss a SIP installment?

      Missing a SIP installment may not significantly impact long-term returns. However, regular investing is recommended to benefit from rupee cost averaging.

    2. Are there any charges for cancelling a SIP?

      Most AMCs do not charge for cancelling a SIP. However, check with your specific AMC or distributor for any applicable fees or conditions.

    3. Can I restart my SIP after pausing it?

      Yes, when you pause a SIP, it automatically restarts after the pause period ends without requiring additional steps from your end.

    4. What could be the ideal tenure to continue a SIP?

      It is always advisable to invest in SIPs for the long term, for at least five years or more, to ride through market cycles for potentially higher returns.

    5. Can I switch SIP from one mutual fund to another?

      Yes, one can switch from one mutual fund scheme to another within the same AMC or even across AMCs, subject to conditions and charges.

  • How to Invest in 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:

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

    How to Invest in Mutual Funds?

    How to Invest in Mutual Funds

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

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

    Read Also: What is the 15*15*15 Rule of Mutual Fund Investing?

    Modes of Investment in Mutual Funds

    There are two modes of investment in Mutual Funds:

    1. Online Mode
    2. 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: 

    1. Visit the website of an asset management company, registered investment advisor, or mutual fund distributor and download the e-KYC form.
    2. 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. 
    3. In-person verification (IPV) is performed via video conferencing using a webcam at a prearranged time.
    4. After completing the procedures mentioned above, you can choose a mutual fund scheme according to your risk tolerance and investing goal. 
    5. 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: 

    1. 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.
    2. Fill out a KYC form and submit self-attested copies of identity proof, PAN card, address proof, and a passport-sized photograph.
    3. In-person verification (IPV) is done by submitting the original copies of the documents mentioned above.
    4. 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. 
    5. 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. 
    6. 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

    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.  

    Read Also: What is an Open-Ended Mutual Fund & How to Invest in it?

    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.

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    6Best Sip Apps in India for Investment

    Frequently Asked Questions (FAQs)

    1. 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. 

    2. 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.

    3. 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. 

    4. 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.

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

      No, there are no additional charges levied while investing through online mode.

  • Types of Mutual Funds in India

    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. 

    Read Also: Mutual Fund Factsheet: Definition And Importance

    Types of Mutual Funds Based on Organization Structure

    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. 

    Read Also: What is the 15*15*15 Rule of Mutual Fund Investing?

    Types of Mutual Funds Based on Risk

    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.

    Read Also: SIP in Stocks vs SIP in Mutual funds?

    Plan your finances with ease using our advanced Financial calculators.

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    Frequently Asked Questions (FAQs)

    1. 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. 

    2. 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.

    3. Which type of mutual fund gives the highest return?

      Equity mutual funds often generate the highest return of all the mutual fund types.

    4. 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. 

    5. Do mutual funds offer tax benefits?

      Tax-saving mutual funds offer tax benefits under Section 80C.

  • Shariah-Compliant Mutual Funds: Should You Invest?

    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?

    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

    1. These mutual funds invest only in companies that follow Islamic law. They prefer investing in companies with lower debt levels and ethical business practices.
    2. 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.
    3. 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.
    4. 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.
    5. Transactions with excessive uncertainty or speculation are not permitted. This includes derivatives and speculative trading.
    6. 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

    Shariah Indices

    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 NameWeight (%)
    Tata Consultancy Services Ltd.20.54
    Hindustan Unilever Ltd.15.21
    Sun Pharmaceutical Industries Ltd8.51
    HCL Technologies Ltd.6.45
    Asian Paints Ltd.5.73
    UltraTech Cement Ltd5.31
    Coal India Ltd.4.68
    Oil & Natural Gas Corporation Ltd.4.58
    Nestle India Ltd.4.22

    Read Also: How to Check Mutual Fund Status with Folio Number?

    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

    Tax Implications 

    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:

    1. Companies involved in activities prohibited by the Shariah law are excluded. For example, alcohol, tobacco, gambling, etc. are prohibited. 
    2. The law discourages excessive debt financing. Hence, the company’s debt should be limited in relation to its equity.
    3. 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.
    4. Shariah law mandates that compliant funds must emphasize ethical business practices and social responsibility alongside financial performance.

    Benefits of Shariah-Compliant Funds

    1. 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. 
    2. With a major focus on lower debt levels, Shariah-compliant mutual funds can offer long-term growth to investors.
    3. The screening process assures investors that their money is being managed according to Islamic principles.

    Risks involved in Shariah Compliant Funds

    Risks involved in Shariah Compliant Funds
    1. These funds have fewer companies to invest in than traditional funds because the screening process eventually limits diversification and exposure to high-growth sectors.
    2. A smaller investment universe can lead to overall lower returns if the excluded sectors perform better than the overall market.
    3. 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.

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    5How to Cancel Mutual Fund SIP?

    Frequently Asked Questions (FAQs)

    1. 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.

    2. 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.

    3. 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.

    4. 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.

    5. 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.

  • SIP vs Lump Sum: Which is Better?

    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. 

    Read Also: PNB Vs Bank of Baroda: Which is Better?

    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: 

    DateNAV (in INR)InvestmentUnits Allotted
    01-Jan-21₹ 251.25₹ 10,00039.80
    01-Apr-21₹ 246.08₹ 10,00040.64
    01-Jul-21₹ 223.17₹ 10,00044.81
    01-Oct-21₹ 193.41₹ 10,00051.70
    02-Jan-22₹ 197.30₹ 10,00050.68
    03-Apr-22₹ 189.46₹ 10,00052.78
    01-Jul-22₹ 177.41₹ 10,00056.37
    01-Oct-22₹ 171.56₹ 10,00058.29
    01-Jan-23₹ 161.91₹ 10,00061.76
    01-Apr-23₹ 164.99₹ 10,00060.61
    01-Jul-23₹ 154.81₹ 10,00064.59
    01-Oct-23₹ 150.45₹ 10,00066.47
    Total₹ 1,20,000648.5

    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:

    DateNAV (in INR)InvestmentUnits allotted
    01-Jan-21₹ 251.25₹ 1,20,000477.62

    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:

    DateNAV (in INR)InvestmentUnits allotted
    01-Jan-21₹ 22.93₹ 10,000436.16
    01-Apr-21₹ 26.39₹ 10,000378.92
    01-Jul-21₹ 26.59₹ 10,000376.03
    01-Oct-21₹ 27.64₹ 10,000361.79
    02-Jan-22₹ 32.66₹ 10,000306.18
    03-Apr-22₹ 36.08₹ 10,000277.17
    01-Jul-22₹ 37.58₹ 10,000266.12
    01-Oct-22₹ 29.17₹ 10,000342.86
    01-Jan-23₹ 31.40₹ 10,000318.45
    01-Apr-23₹ 34.13₹ 10,000292.99
    01-Jul-23₹ 35.15₹ 10,000284.47
    01-Oct-23₹ 37.65₹ 10,000265.59
    Total₹ 1,20,0003906.73

    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:

    DateNAV (in INR)InvestmentUnits allotted
    01-Jan-21₹ 22.93₹ 1,20,0005233.32

    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

    AdvantagesDisadvantages
    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

    AdvantagesDisadvantages
    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.

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    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.

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    5HDFC Bank vs Axis Bank: Which is Better?

    Frequently Asked Questions (FAQs)

    1. 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.

    2. 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.

    3. 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.

    4. 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.

    5. 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.

  • Mutual Fund Fees & Charges in India 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-

    1. 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). 
    2. 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. 
    3. 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. 
    4. 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

    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 5002.25%2.00%
    500- 7502.00%1.75%
    750- 20001.75%1.50%
    2000- 50001.60%1.35%
    5000- 10,0001.50%1.25%
    10,000- 50,000TER decreases by 0.05% for every increase of 5000 crore in AUMTER decreases by 0.05% for every increase of 5000 crore in AUM
    > 50,0001.05%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

    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!
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    4What are Small Cap Mutual Funds?
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    Frequently Asked Questions (FAQs)

    1. What are the charges associated with the mutual fund investments?

      Exit load, transaction charges, and expense ratio are the costs related to mutual funds.

    2. 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.

    3. 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.

    4. 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.

    5. 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.

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

    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

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

    Read Also: NFO Alert: PGIM India Large & Mid Cap Fund

    Types of NFOs

    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

    1. NFOs allow you to invest in emerging sectors or new themes of the economy such as green energy, AI, ESG, etc.
    2. Certain NFOs provide an excellent opportunity for diversification in the investment portfolio.
    3. 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.
    4. 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

    1. Since NFOs lack a track record, it can be challenging for investors to compare the performance of the schemes.
    2. In NFOs, there is no assurance that the fund manager will perform well.
    3. Most of the thematic NFOs generally have a higher expense ratio as compared to existing funds.
    4. 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

    Key points before investing in NFOs
    1. AMC Reputation: It’s crucial to consider the reputation of the Asset Management Company; an established fund house typically offers greater security and stability.
    2. 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.
    3. 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.
    4. Flexibility: One must check if the fund is open-ended or close-ended, as close-ended funds do not provide liquidity.
    5. 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

    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.

    Read Also: Bandhan Long Duration Fund NFO: Objective, Benefits, Risks, and Suitability Explained

    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.

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    4What is TREPS & Why Mutual Funds Invest in it?
    5Debt Mutual Funds: Meaning, Types and Features

    Frequently Asked Questions (FAQs)

    1. 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.

    2. 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.

    3. 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.

    4. 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.

    5. 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.

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