Category: Mutual Funds

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.

Benefits of 15*15*15 Rule of Mutual Fund Investing

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.

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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.

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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

Arbitrage Mutual Funds – What are Arbitrage Funds India | Basics, Taxation & Benefits

Ever notice a great deal on a shirt at one store, only to find it slightly cheaper online? That is a small example of arbitrage.

The arbitrage funds use similar tactics to capture profits from price differences. In this blog, we will learn about arbitrage funds and their performance.

Overview

Arbitrage funds are a type of mutual fund that seeks to profit from price discrepancies between different markets. This is achieved by engaging in the simultaneous purchase and sale of securities in various markets, thereby seizing the price difference as a source of profit. For example, an arbitrage fund might buy a stock in the cash market and sell it simultaneously on the futures market if the futures price is higher than the cash price. This is possible due to the occasional lack of perfect alignment between the futures and cash markets, which results in transient price disparities between the two.

These funds are commonly considered a comparatively low-risk investment due to their minimal dependence on the stock market’s overarching trend.

Example

Let’s understand the workings of an Arbitrage fund with the help of an example.

Suppose a stock is trading at INR 100 in the cash market. In the futures market, the same stock might be priced at INR 105 with delivery in a month. An arbitrage fund can buy the stock in the cash market for INR 100 and simultaneously sell the same stock in the futures market for INR 105 (locking in the contract).

Upon the futures contract expiration after a month’s duration, the fund proceeds to fulfil its obligation by delivering the corresponding stock.

Taxation in Arbitrage Funds

Arbitrage funds are taxed like all other equity funds in India. Below is a breakdown of their taxation implications.

Short-Term Capital Gains (STCG) – if you sell arbitrage fund units within one year of buying, the gains are considered STCG and are taxed at a rate of 15% plus any applicable surcharge or cess.
Long-Term Capital Gains (LTCG) – if you hold your arbitrage fund units for more than one year before selling, the gains are considered LTCG. The taxation for LTCG is as follows: up to INR 1 lakh of LTCG earned in a financial year is exempt from tax. Gains exceeding INR 1 lakh are taxed at a concessional rate of 10% plus surcharge and cess.

Benefits of Arbitrage Funds

Low Risk: These funds are widely considered to be among the less risky investments within the mutual fund category because they capitalize on price variations rather than relying solely on the general direction of the market.
Steady Returns: Arbitrage funds can generate consistent returns, even in highly volatile markets, by effectively capitalizing on short-term price inefficiencies. This can provide a buffer against market fluctuations and offer a relatively more consistent source of income.
Liquidity: These funds are highly liquid, so you can easily buy or sell your units on the exchange, allowing quick access to your invested capital.

Risks of Arbitrage Funds

Low Return: The arbitrage opportunities these funds explore usually involve minor price discrepancies. Despite their consistency, their overall returns may be lower than those of alternative, potentially riskier investments.
High Expense Ratio: The active management style and frequent trading involved in arbitrage funds strategies can lead to higher expense ratios compared to passively managed index funds.

Performance Analysis

Some popular funds’ returns are mentioned below:

Scheme Name	2024 (YTD)	2023	2022	2021	2020
HDFC Arbitrage Retail Gr	2.84	6.76	4.06	3.49	3.64
Tata Arbitrage Reg Gr	2.84	7.07	4.04	3.73	4.98
ICICI Prudential Equity Arbitrage Gr	2.86	7.13	4.19	3.85	4.3
SBI Arbitrage Opportunities Reg Gr	2.87	7.43	4.61	3.96	3.51

(Returns are in % and as of 7th May 2024)

Category Performance

Out of the 27 active schemes, 18 have outperformed the benchmark index. In particular, the SBI Arbitrage Fund has outperformed its peers, yielding 2.87% year-to-date.

The average returns of all schemes on the YTD basis are 2.33%, which is at par with the 2.34% returns by NIFTY 50 Arbitrage. For the year 2023, the average return was 7.34%, while the benchmark index registered a slightly higher figure of 8.11%.

Did you know?

The Nifty 50 Arbitrage Index aims to measure the performance of such arbitrage strategies. The index measures the performance of a portfolio involving investment in equity and equivalent short-position equity futures, short-term debt market investments and cash.

Conclusion

Arbitrage funds offer a unique proposition for investors seeking low-risk, steady returns and low taxes. Their capacity to leverage price disparities between markets possesses the potential to serve as a dependable revenue stream while functioning as a safeguard against market instability. However, they do come with limitations, such as lower overall returns than some investments. Therefore, the decision to opt for this fund should be taken after careful consideration.

Remember that every investment carries some level of risk, and it is important to weigh the benefits against the risks involved. Always consult a financial advisor to align your choices with your financial objectives.

Frequently Asked Questions (FAQs)

What are Arbitrage Funds?
Arbitrage mutual funds are funds that exploit the price difference between markets to generate returns.
Are Arbitrage Funds riskier than other mutual funds?
Arbitrage funds are generally low-risk because they do not rely on overall market direction. However, there is always some inherent risk in any investment.
Who should invest in Arbitrage Funds?
Investors seeking low-risk, steady returns and lower taxes can choose to invest in Arbitrage funds.
How are Arbitrage Funds taxed in India?
Arbitrage funds are taxed like any other equity mutual fund. They are taxed on the basis of Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG).
How do Arbitrage Funds work?
One way Arbitrage funds work is to buy stock in the cash market and simultaneously sell it through a futures contract at a higher price in the futures market, pocketing the profit when the contract matures.

May 31, 2024

Hybrid Mutual Funds – Definition, Types and Taxation

Have you ever been confused about whether to choose an equity fund or a debt fund? If you choose an equity fund, your portfolio will be subject to numerous risks, including market volatility; however, if you select a debt fund, you will only receive a limited return.

Is there a method to choose between the two? Yes! There is one category of mutual funds known as the Hybrid Category of Mutual Funds.

What is Hybrid Mutual Funds

Hybrid investing involves a combination of asset classes, such as equity and debt. Hybrid funds enable the investor to strike a balance between growth and stability, as exposure to stock allows them to develop wealth. In contrast, exposure to debt reduces the volatility in their portfolio.

A fund’s equity-to-debt ratio varies depending on its aim. Hybrid funds are based on three fundamental philosophies: asset allocation, correlation, and diversification. Asset allocation refers to distributing capital across various asset classes; correlation refers to the relationship between asset movement and return; and diversification refers to having multiple assets in your portfolios.

Hybrid Mutual Funds Features

The portfolio of the hybrid category of mutual funds includes both equity and debt. Therefore, you can take benefit of both asset classes in a single fund.
It is suitable for investors who can take moderate risks while investing in mutual funds.
These funds manage their asset allocation based on market scenarios to take advantage of opportunities and manage risk.
These funds fall between the debt and equity categories of mutual funds. They are less risky than pure equity funds because their portfolios have debt allocations.

Types Of Hybrid Mutual Funds

As per the SEBI guidelines on categorization of mutual fund schemes, there are seven types of hybrid mutual funds:

Aggressive Hybrid Fund – These hybrid funds invest at least 65% and up to 80% in equity assets, with the remaining 35% to 20% invested in debt instruments. Because the equity allocation is higher, the fund has the potential for higher returns; nevertheless, the volatility of the portfolio is lowered by the debt portion. The gain from investing in this fund is taxed according to the equity-oriented system.
Conservative Hybrid Fund—This category of hybrid fund invests 10% to 25% in the equity asset class with the remaining amount, which is around 90% to 75%, invested in debt instruments. Funds in this category provide a lesser but stable return because of the substantial allocation to fixed-income securities.
Balanced Hybrid Fund – As the name suggests, they are in the middle of Aggressive and Conservative Hybrid Funds. These funds invest 40% to 60% in equity and equity related instruments and 40% to 60% in debt instruments.
Multi-Asset Allocation Fund—These funds invest in at least three asset classes, with a minimum of 10% allocated to each asset class, while the remaining 70% of total capital can be invested in any asset class. In general, a multi-asset fund combines equity, debt, and gold as uncorrelated asset classes that assist in diversifying the portfolio.
Dynamic Asset Allocation or Balanced Advantage Fund –As the name implies, these funds can dynamically transform their portfolio from 100% debt to 100% equity based on market conditions. The fund management decides on asset allocation using a financial model that they have constructed. It is suited for investors who want to automate their portfolio’s asset allocation.
Equity Savings Fund – The fund manager of such funds invests capital in stock, debt, and derivatives. They invest 65% to 100% in equity assets and the remaining 0% to 35% in debt instruments. Investing in such funds decreases the risk by investing in derivatives (for hedging), which reduces direct equity exposure, resulting in lower volatility.
Arbitrage Fund – The fund manager in this category uses an arbitrage strategy, which involves buying equities in one market and selling them in the other market at the same time to capture the spread. They generate a profit based on the price difference between the two markets. Because there is no directional call on the company, this fund has lower volatility than equity funds and provides returns similar to debt-oriented funds. This scheme’s portfolio invests 65% to 100% of its assets in equities, with the remainder invested in debt (0% to 35%).

Did you know?

Arbitrage mutual funds offer similar returns to debt mutual funds and are taxed similarly to equity-oriented funds.

Points to consider before investing in Hybrid Mutual Funds

There are a few things that investors should consider before investing in Hybrid Funds:

Returns of the hybrid mutual funds are not guaranteed; they will post returns based on the performance of underlying assets.
Every hybrid fund has its ideal investment horizon. Hence, an investor should account for their investment horizon before making any investment decision.
Choosing an appropriate hybrid fund for your financial goal is an essential factor to be considered.
It is not true that hybrid funds are entirely risk-free. Therefore, investors are required to analyze their risk profile before making any investment.

Taxation Of Hybrid Mutual Funds

As we know, hybrid funds are a blend of equity and debt. Thus, they are taxed based on their portfolio composition.

They can be either equity-focused or debt-focused. If equity-focused (at least 65% in equities), then equity taxation will apply else debt taxation. Further, tax rates are different for STCG and LTCG. Have a look at the below chart:

If you want to learn more about the taxation of mutual funds in India, check out our detailed blog on the same: Mutual Funds Taxation in India

Read Also: Types of Mutual Funds in India

Conclusion

On a concluding note, hybrid funds are the best of both equity and debt and a versatile, balanced investment option for investors.

When investors are unsure between equity and debt funds, they can choose hybrid mutual funds. But before investing in hybrid funds, you must align your financial goals according to your needs, after which you must analyze the fund on qualitative and quantitative parameters.

Along with this, we always suggest discussing this with your financial advisor before investing.

Frequently Asked Questions (FAQs)

How many types of Hybrid mutual funds are there?
There are seven types of hybrid funds: balanced hybrid funds, equity savings funds, arbitrage funds, conservative hybrid funds, aggressive hybrid funds, multi-asset funds, and dynamic asset allocation funds.
Which hybrid fund is suitable for me?
The suitability of a hybrid fund depends upon an individual’s risk tolerance, capacity, investment goal, and horizon.
Is hybrid fund equity or debt?
The portfolio composition of a hybrid fund consists of both equity and debt; the proportion depends upon the category of the hybrid fund.
How are hybrid funds taxed?
Hybrid funds are taxed based on the portfolio’s debt and equity composition.
How does an arbitrage fund work?
Arbitrage funds take advantage of the price difference between the two markets to generate profit. They provide returns similar to debt funds and taxed as equity-oriented funds.

May 31, 2024

Top AMCs in India

We all want to become wealthy, and one of the best ways to increase your wealth is to invest your money systematically in good quality securities. However, choosing the right investment opportunity is a daunting task, and thus, only a few are able to do it effectively in the long run. This is where Asset Management Companies (AMCs) come into the picture.

In this article, we will provide you with information about the top 5 asset management companies in India.

Asset Management Company (AMC)

Asset management companies are financial institutions that invest pooled funds from clients in various securities and assets. These companies often have a team of professional managers who implement various investment strategies to increase the fund’s value and, accordingly, the investors’ wealth.

Functions of AMCs

The primary functions of AMCs are as follows-

AMCs make investment decisions on behalf of their clients.
AMC fund managers distribute investor funds among different asset classes based on the market circumstances and objectives of the fund.
AMCs conduct in-depth research analysis of market trends and specific securities.
AMCs maintain regulatory compliance with SEBI guidelines.
AMCs regularly update the performance of funds for the clients.

Top AMCs in India

S. No.	Asset Management Company	Asset Under Management (Crores)
1.	SBI Mutual Fund	913,780.06 INR
2.	ICICI Prudential Mutual Fund	716,867.52 INR
3.	HDFC Mutual Fund	614,665.43 INR
4.	Nippon India Mutual Fund	438,276.85 INR
5.	Kotak Mahindra Mutual Fund	381,239.57 INR

(As of 31st March 2024)

SBI Mutual Fund

The Indian Trust Act of 1882 created the SBI Mutual Fund Asset Management Company in 1987. The fund’s sponsor, the State Bank of India, founded the AMC. Mumbai is currently home to the AMC’s corporate office.

2011 saw SBI and AMUNDI (France) signing an agreement to form a joint venture. SBI owned about 62.34% of the shares, while AMUNDI Asset Management Company owned 36.64%. In 2018, the company underwent a digital transformation and now provides various mutual fund products to meet the needs of different customer segments.

ICICI Prudential Mutual Fund

Established in 1993, this AMC is a joint venture between Prudential Plc, a financial services business in the UK, and ICICI Bank Ltd., one of India’s largest private sector banks. It started with just 6 employees and now employs over 3000 people throughout India. The company’s first scheme, the ICICI Prudential Income Plan, was introduced in 1998 and largely focused on investing in debt and money market assets to provide stable returns.

The business is renowned for emphasizing risk management and cutting-edge products. There are more than 99 lakh investors in the organisation. It provides more than 126 schemes dispersed throughout several mutual fund types.

HDFC Mutual Fund

Since 2000, HDFC Mutual Fund, a product of the collaboration between Housing Development Finance Corporation and Standard Life Investments, has become a leader in India’s asset management scene. Headquartered in the UK, their success is driven by a comprehensive offering of equity, debt, and hybrid investment options, including funds of funds and ETFs.

This caters to diverse investor goals and risk tolerance. Additionally, HDFC Mutual Fund prioritizes a streamlined investment process, maintains strong administrative practices, and boasts a vast distribution network, making investing accessible and secure for a wide audience in India. This commitment to effective tools and a secure environment has cemented their position as a top Asset Management Company.

Nippon India Mutual Fund

Nippon India Mutual Fund, previously Reliance Mutual Fund, entered the financial landscape in 1995 as part of the Anil Dhirubhai Ambani Group. By 2008, it had become India’s largest mutual fund house based on Assets Under Management (AUM), showcasing its impressive growth trajectory. Then, in 2017, a well-known Japanese life insurance company purchased a sizeable portion of Reliance Mutual Fund; as of 2019, they own roughly 72.86% of the business. Reliance Mutual Fund was then renamed as Nippon India Mutual Fund.

Kotak Mutual Fund

Founded in 1998 with a mission to cater to investors with varying risk tolerances, Kotak Mahindra Mutual Fund has grown from a small player to a top AMC in India. Their success hinges on a diverse offering of mutual funds across equities, debt, and hybrid categories, including innovative options like fund of funds and ETFs. This commitment to investor choice is further reinforced by their focus on consistent outperformance against benchmarks.

With Kotak 30, the firm introduced its first equity program to deliver long-term capital appreciation for investors. There are currently over 8.1 million investors in the company. Across all mutual fund categories, the AMC provides a wide range of plans. Its extensive network comprises over 50,000 wholesalers. For the convenience of investors, it launched a mobile application and an internet platform in 2013.

New AMCs

Due to the mutual fund industry’s rapid growth, new players are joining the market. Some of the new AMCs have been listed below:

White Oak Mutual Fund – Focus on long-term value investing.
Bajaj Finserv Mutual Fund – Focus on new products in both equity and debt markets with the trust of Bajaj Finserv.
Helios Mutual Fund – Focus on specialised investment activities in equity markets.
Zerodha – Focus on launching passively managed funds.

Conclusion

The top 5 AMCs significantly impact the rapidly evolving Indian mutual fund market by facilitating economic development. They provide a variety of schemes for a range of asset classes. However, it must be known that the rank of an AMC does not guarantee its performance. Therefore, before making any investing decisions, individuals are urged to consult with their investment advisor.

Frequently Asked Questions (FAQs)

Which is the largest AMC in India based on AUM?
SBI Mutual Fund manages an AUM of 913,780.06 Crore INR and is considered the largest AMC based on AUM.
What is the full form of AMC in the Mutual Fund Industry?
The full form of AMC is Asset Management Company.
How does an AMC work?
AMC pools funds from various investors with common investment objectives. The fund is then deployed in various asset classes by the fund managers appointed by the asset management companies. In exchange, AMCs charge a small fee from the investors.
Are all the AMCs the same?
No, AMCs differ based on their investment philosophy, schemes offered, fees and expenses, etc.
Can I invest directly in an AMC without a distributor?
You can invest directly by visiting the AMC website or their office premises.

May 31, 2024

Active or Passive Mutual Funds: Which Is Better?

There are two kinds of people in this world: those who are content to let life take them by the reins and those willing to take charge and make decisions for themselves. The same holds for the investing world. There are two investment styles: Active and Passive. In active, investors actively manage their portfolios, whereas, in passive, they try to replicate index performance. In other words, there is less turnover, or say, less buying and selling activity.

Continue reading the blog to learn the differences between active and passive investment strategies!

Mutual Funds

Mutual funds are a class of investment vehicle that combines the money of multiple investors with similar investing aims or objectives. The pooled money is invested in various asset types, including equities, bonds, etc., by fund managers.

If you want to learn more about the mutual funds, check out our blog on the same: W hat are Mutual Funds?

Types of Mutual Funds

Based on investment style, there are two kinds of mutual funds:

Active Mutual Funds
Passive Mutual Funds

Active Mutual Funds

In these mutual funds, the fund management and their research team actively select the securities and asset classes in which investments will be made. The fund manager aims to outperform the benchmark, a yardstick for evaluating a fund’s performance. The fund managers base their decisions on several variables, including the state of the economy, the market, the performance of the firm, and the industry.

Pros of Active Mutual Funds

Active fund managers can modify their investment portfolio in response to changes in the market dynamics, thereby adjusting risk and maximizing rewards.
An active fund management strategy aims to outperform the benchmark index, which has the potential to generate superior returns.
Under active fund management, fund managers deploy various strategies related to risk management, such as tactical asset allocation and hedging, which help investors minimize their risk during the market downturn. The fund manager and their research team thoroughly investigate the securities before making any investing decisions.

Cons of Active Mutual Funds

Active mutual funds charge higher fees than passively managed funds.
These funds carry higher risk as the fund manager’s selection of securities can go wrong.
The passive funds generally match the market’s return, whereas the actively managed funds do not guarantee that they will outperform the benchmark returns.
Active fund managers change their portfolios very frequently according to the market dynamics; hence, the portfolio of active funds carries a higher turnover rate and can be more volatile.

Passive Mutual Funds

Passive funds or Index Funds track the index or benchmark and try replicating its performance. These funds generally provide returns equal to the benchmark return, and investors will get the net return after deducting the expenses charged by the asset management companies. Passive funds hold securities in proportion to the index they track. There are also passively managed Exchange Traded Funds (ETFs), which track the performance of various indices. You can check out our blog on the ETFs: W hat are ETFs?

Pros of Passive Mutual Funds

Passive funds generally have an expense ratio (fees) than active funds.
Passive funds aim to replicate the performance of a specific index, so investors do not need to worry about whether their fund will outperform the benchmark.
These funds carry lower risk than actively managed funds (sectoral, thematic, etc.) because their portfolios are diversified.
As they aim to mirror the performance of the benchmark, passive funds provide consistent returns. They are also easy to understand, so they are suitable for new investors as well.

Cons of Passive Mutual Funds

The passive funds have limited potential to outperform the benchmark.
Because the passive fund portfolio is restricted to a certain index, it cannot select investments with a higher potential for return. In other words, Index funds’ returns are usually determined by the returns offered by the underlying; they are unable to take advantage of other market possibilities.
Although index funds strive to accurately mimic the performance of the benchmark, several factors may prevent them from doing so, including fund expenditures, transaction costs, and slippage. Investors can check the tracking error of passive funds before investing.

Active vs Passive Mutual Funds

Particulars	Active Funds	Passive Funds
Investment Objective	It focuses on outperforming the benchmark.	They try to match the performance of indexes.
Expense Ratio	It ranges between 0.50% to 2.50%, depending on the debt and equity.	The expense ratio under passive funds cannot exceed 1.25%
Securities Selection	The fund manager has the right to select the securities according to the market dynamics, investment objectives, etc.	There is no such requirement as it simply tracks the index.
Returns	Active funds generally have the potential to provide returns on the higher side.	The returns of passive funds are similar to the index they are tracking.
Risk	Actively managed funds carry high risk.	Passive funds tend to have lower risk as compared to active funds.

Which one should you choose: Active or Passive?

The decision between active and passive funds is influenced by a number of factors, such as investing objectives, risk tolerance, and expected returns. Active mutual funds may be an option for investors who are willing to take on additional risk in exchange for a higher return and can afford to bear higher expenses. Passive funds, on the other hand, are better suited for investors who prefer lower risk, are satisfied with the returns posted by the indices, and do not want to pay higher fees to manage their investments.

Conclusion

On a concluding note, there are benefits and drawbacks to both passive and active fund investing. While more conservative investors are encouraged to invest in passive funds, active fund investing delivers higher rewards at a higher risk. Another alternative that can give you maximum return, minimal risk, and diversification is to combine the two types of funds. That being said, before making any investing decisions, it is advisable to speak with your investment advisor and consider your risk tolerance.

S.NO.	Check Out These Interesting Posts You Might Enjoy!
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3	What is Solution Oriented Mutual Funds?
4	Smart Beta Funds: Characteristics, Factors, Benefits, and Limitations
5	Mutual Fund Factsheet: Definition And Importance

Frequently Asked Questions (FAQs)

Are actively managed funds worth the risk?
If you are willing to take risks and have a longer investment horizon, you can consider investing in actively managed funds, as they have the potential to offer higher returns than the benchmark.
How do passive funds work?
Passive funds invest in a particular index by replicating the securities in those indices and aim to post returns similar to the benchmark; they generally do not outperform the benchmark in which they invest.
What are the drawbacks of investing in active mutual funds?
Active mutual funds generally have a higher expense ratio than passively managed funds. If the fund manager is not able to perform, then the risk of the active fund underperforming its benchmark is always there.
What factors should an investor consider before selecting active or passive mutual funds?
Investors should consider their investment goal, risk tolerance, expense ratio, tracking error, and investment horizon before selecting active or passive mutual funds.
Do passive funds carry lower taxation than active funds?
No, all the equity mutual funds, whether active or passive, carry the same taxation in India. If you want to learn more, you can check out our detailed blog on Taxation of mutual funds.

May 28, 2024

Liquid Funds Vs Ultra Short Fund: Which One Should You Choose?

Looking for alternatives to park your short-term money beyond savings accounts and short-term bank FDs? If you haven’t explored Liquid funds and Ultra-short duration funds yet, you’re missing out on some excellent opportunities.

This blog post explores the universe of these two investment vehicles, outlining their unique characteristics, returns to assist you in selecting the best option for your financial needs.

Debt Mutual Funds – Overview

A debt fund is a mutual fund that invests primarily in fixed-income securities such as corporate bonds, government bonds, treasury bills, etc. The debt funds generate gains via interest income from underlying debt securities and appreciation of the same in the secondary market.

Generally speaking, they are less risky and volatile than equity fun ds since the fixed-income instruments in their portfolio provide predictable returns and less volatility.

Nonetheless, interest rate volatility, liquidity risk, and the credit risk of the underlying bonds are usually the risks connected with debt funds. As per the SEBI, based on the securities’ maturity length, mutual funds in the debt category comprise 16 subcategories.

If you want to explore all of them, check out our blog on Debt categorization of mutual funds: Debt Mutual Funds

Ultra-short Fund

It is a type of debt mutual fund that invests in debt instruments with maturities ranging from three to six months, such as money market instruments or fixed-income securities.

The fund has minimal risk and a lot of liquidity. Securities of ultra-short funds have low volatility because of their short maturity. Investors wishing to invest in the debt category of mutual funds for a six-month term might choose ultrashort funds.

Read Also: Types of Mutual Funds in India

Features of Ultra-short duration fund

The portfolio of these funds consist of securities having maturity up to 6 months.
As compared to longer-duration funds, the ultra-short fund carries a low-interest rate sensitivity.
The fund generally provides low returns as compared to debt funds with higher maturity, but the risk involved in this fund is also on the lower side. Further, returns of ultra-short funds generally hover around returns of fixed deposits of scheduled commercial banks.
Due to the short duration of the portfolio, the fund aims to maintain a high level of liquidity, which makes it easy for investors to enter and exit this fund without any exit load.

Performance of Ultra-short Funds

Let’s have a look at the performance of some of the top ultra-short funds (annualized return):

Scheme Name	6 Months (%)	1 Year (%)	3 Years (%)
Mirae Asset Ultra Short Duration Reg Growth	3.8	7.38	5.57
ICICI Pru Ultra Short-Term Growth	3.78	7.24	5.56
Bandhan Ultra Short-Term Reg Growth	3.73	7.21	5.39
HDFC Ultra Short-Term Growth	3.72	7.18	5.44
SBI Magnum Ultra Short Duration Reg Growth	3.71	7.21	5.39
Mahindra Manulife Ultra Short Duration Fund Reg Growth	3.63	7.07	5.31
Tata Ultra Short Term Reg Growth	3.48	6.7	5.01
DSP Ultra Short Fund Reg Growth	3.47	6.87	5

Liquid Fund

A “liquid fund” is an open-ended debt mutual fund that invests in debt instruments having maturities of less than 91 days. The portfolio consists of high-credit-grade fixed-income securities.

Liquid funds are regarded as the lowest-risk debt mutual funds. They offer a slightly higher return than a savings bank account.

Features of Liquid Fund

Investors can earn a bit more than a savings account by parking their excess funds in a liquid fund.
It is the only fund whose NAV is calculated daily, whether it is Saturday or Sunday.
Although liquid funds post higher returns than savings bank accounts, their returns can fluctuate depending on market and economic conditions.
Liquid funds prioritize safety and liquidity, so their returns are lower as compared to other debt funds.

Performance of Liquid Funds

Let’s have a look at the performance of some of the top liquid funds (annualized return):

Scheme Name	6 Months (%)	1 Year (%)	3 Years (%)
HDFC Liquid Growth	3.72	7.24	5.46
ICICI Pru Liquid Growth	3.73	7.26	5.46
Nippon India Liquid Growth	3.71	7.24	5.46
ABSL Liquid Growth	3.72	7.27	5.51
Edelweiss Liquid Ret Growth	3.68	7.17	5.37
Kotak Liquid Reg Growth	3.69	7.22	5.44
Baroda BNP Paribas Liquid Plan Growth	3.68	7.24	5.52
White Oak Capital Liquid Reg Growth	3.65	7.13	5.21

Liquid Vs Ultra-short Funds

Particulars	Ultra-short Fund	Liquid Fund
Average Maturity	It invests in debt securities with a maturity from 3 to 6 months.	It invests in debt securities that have a maturity of up to 91 days.
Returns	It provides slightly higher returns than the liquid fund.	The returns of liquid funds are on the lower side as compared to ultra-short duration funds.
Liquidity	These are less liquid than Liquid funds.	The liquid funds provide higher liquidity than the ultra-short duration funds.
Exit Load	It generally has a nil exit load.	Liquid funds have an exit load of up to 7 days.
Risk	It carries a slightly higher risk than liquid funds.	It carries the lowest risk.
Cut off timings	The cut-off timing for purchasing liquid funds is 1:30 p.m., while the time for redemption is 3 p.m.	The cut-off time for purchase and redemption of liquid funds is 3 p.m.

Conclusion

In summation, while ultrashort funds carry a more significant risk than liquid funds, they also offer marginally higher returns. Liquid funds offer high liquidity and safety and are attractive to investors who are looking for alternatives to the savings accounts. Investors with short to intermediate investment horizons and moderate risk tolerance may find ultra-short-term funds appealing.

However, before investing in debt funds, you must weigh all the risks involved and consult with your financial advisor.

Frequently Asked Questions (FAQs)

Is there a lock-in period for ultra-short funds?
Ultra-short funds invest in debt securities having a Macaulay duration of 3 to 6 months. The lock-in period depends on the fund to fund. Generally, there is no lock-in period in ultra-short funds as there is adequate liquidity because of the short duration of investments.
What is the duration of the ultra-short funds?
The ultra-short duration funds invest in debt securities, the maturity duration of which ranges from 3 months to 6 months.
Is there any exit load in liquid funds?
Liquid funds do carry a graded exit load of up to 7 days.
Can I lose money in liquid funds?
As liquid funds invest only in short-term debt securities, ranging up to 91 days, they do not respond much when interest rates change in the market, so they do not have significant capital gains or losses.
Do liquid funds provide guaranteed returns?
Liquid funds do not provide guaranteed returns; however, due to the nature of their portfolio, their returns are generally stable.

May 20, 2024

Debt Mutual Funds: Meaning, Types and Features

Want to park your money for the short term, or are you looking for relatively safe investment options other than equities? In most cases, investors look for bank FDs or savings accounts, but there are different investment options known as Debt Mutual Funds that can provide relatively higher returns than bank savings accounts and fixed deposits.

In this blog, we will learn about debt funds and their different types.

Overview – Debt Mutual Funds

Debt Mutual funds primarily invest in fixed-income assets such as treasury bills, bonds, government securities, and other debt instruments. All of these investments have a predetermined maturity date and coupon that an investor will receive upon maturity. These funds are professionally managed by asset management firms and are ideal for investors seeking a consistent return.

Debt funds provide diversification across a variety of debt instruments, assisting investors in risk management. If you want to learn more about debt mutual funds, check out our blog on the same: What are Debt Mutual Funds?

Features of a Debt Mutual Fund

Debt funds generally offer lower returns than equity-oriented funds because their portfolios are invested in fixed-income securities.
It diversifies your investment into numerous debt instruments, allowing you to obtain a consistent return, which is why they are popular among low-risk investors.
Most debt mutual funds have high liquidity and no exit load, allowing investors to withdraw their cash at any moment, depending on the current net asset value.

Types of Debt Funds

As per the Association of Mutual Funds in India (AMFI), there are 16 types of debt funds that cater to the needs of investors; let’s explore each one of them:

Liquid Funds—These funds invest in money market securities with a maximum maturity of 91 days. They could be a good alternative to a savings bank account.
Overnight Funds – The securities of overnight funds have a maturity of one day. These are regarded as the safest type of debt fund because credit and interest rate risk are minimal in such funds.
Ultrashort Duration Fund—This fund invests in money market instruments, with a Macaulay duration ranging from 3 to 6 months.
Short Duration Fund—This fund invests in debt instruments with maturities of 1 to 3 years. It generally earns higher returns than money market funds.
Money Market Funds – The portfolio of money market funds is invested into debt securities having maturity of up to 1 year.
Low Duration Funds- These funds invest in Debt & Money Market instruments with Macaulay duration ranging from 6 months to 12 months.
Medium Duration Fund – The medium duration fund invests in the maturity of debt securities, which ranges from 3 to 4 years.
Medium to Long Duration Fund—The portfolio of a medium to long duration fund holds securities maturing from 4 to 7 years.
Long Duration Fund – It invests in debt securities having a maturity of more than seven years.
Corporate Bonds Fund – This fund invests at least 80% of its total assets in AA+ or higher-rated corporate bonds. These bonds offer higher returns than government securities but also carry higher risk.
Banking & PSU Debt Fund – This fund’s portfolio consists of debt securities issued by public sector undertakings (PSUs) and banks, which constitute about 80% of its total portfolio.
Gilt Fund—It invests a minimum of 80% of its investible corpus in government securities across varying maturities. These funds have a very low credit risk; however, they carry interest rate risk.
Gilt Fund (10 Year) – These funds are similar to Gilt funds; the only difference is that they invest a minimum of 80% of corpus in government securities with a Macaulay duration of 10 years.
Dynamic Bond Fund – These funds don’t have any restrictions on the security type or maturity profile for the investment. They change their portfolio according to the market dynamics.
Floater Funds – This fund invests at least 65% of its total assets into floating-rate instruments (including fixed-rate instruments converted to floating-rate exposures using swaps/ derivatives). These funds carry less mark-to-market risk because the coupon of these floating-rate bonds is reset periodically based on the market rates.
Credit Risk Fund—This fund invests a minimum of 65% of its total assets into corporate bonds with a rating below AA. It tries to generate high yields compared to corporate bond funds. However, this fund carries high default risk, so investors in credit risk funds need to be cautious.

Read Also: Types of Mutual Funds in India

Risks in Debt Mutual Fund

Primarily, the credit risk and interest rate risk are two different types of risk associated with investing in debt mutual funds.

Credit Risk

Credit risk arises when the borrower fails to repay the principal and interest. An investor can analyze the bond ratings issued by credit rating organizations before investing. Generally, debt securities issued by the Government carry lower credit risk as compared to securities issued by Corporations.

Interest Rate Risk

There is an inverse relationship between Bond prices and interest rates. When interest rates fall, bond prices rise, and when interest rates rise, bond prices fall. It is because when interest rate rises, new bonds are issued at a higher interest rate, causing the value of existing bonds to fall, which negatively impacts the performance.

Taxation of Debt Fund

We have discussed multiple categories of Debt Mutual funds above. Taxation of debt mutual funds depends on the equity component of a fund, investment horizon, and individual tax slab.

The income tax regulations governing capital gains generated by debt mutual funds have recently changed (removal of indexation benefit).

If any debt mutual fund has less than 35% of the investments in equity, then gains from that will be taxed as per the income tax slab without any indexation benefit. Further, there will be no STCG and LTCG in this case..

However, if a debt mutual fund has 35 – 65% in equity or equity-oriented securities, then STCG or LTCG will apply:

Short-Term Capital Gain Tax (STCG): If you remain invested in a debt mutual fund for less than three years and have a capital gain, you will be taxed based on your income tax bracket, without any indexation benefit.
Long-Term Capital Gain Tax (LTCG): If you sell your investment after three years, it will be categorized as long-term capital gain and taxed at a rate of 20% with an indexation benefit.

If you’re curious to learn more about the taxation of mutual funds in India, check out our detailed blog on the same: Mutual Funds Taxation in India

Who should invest in Debt Mutual Funds?

Debt funds are a suitable for investors who want to meet short-term financial goals and are looking for Bank FD alternatives, because they are less volatile than equity mutual funds and provide stable returns. They are also an alternative for investors seeking a higher return than traditional fixed-income products and ready to accept a moderate amount of risk.

Did you know?

Bank FDs are insured to the extent of INR 5 lakhs by the Deposit Insurance and Credit Guarantee Corporation (DICGC). There is no such protection in debt mutual funds.

Conclusion

There is a wide selection of debt mutual funds available in the market, and choosing one can be challenging for an investor because each category has its own set of features, risks, and returns. As a result, investors should assess their risk profile and align their investment objectives properly before making any investment in debt mutual funds. Furthermore, it is always recommended that investors seek advice from financial advisors before making investing decisions.

Frequently Asked Questions (FAQs)

How do debt mutual funds differ from Bank FDs?
In bank FDs, the rate of interest offered by banks at the time of investment depends on the tenure of the FD and prevailing interest rates. Meanwhile, in debt funds, the fund managers use their expertise to invest in different papers or bonds according to the scheme objective, which can lead to variation in returns generated per year.However, both the debt mutual funds and FDs carry risks, such as credit risk and interest rate risk.
Can I do SIP in the debt mutual funds?
Yes, just like equity mutual funds, one can do SIP in debt mutual funds.
How does a debt mutual fund work?
A debt fund invests in fixed-income securities such as corporate bonds, government bonds, treasury bills, etc. It earns coupon income from these investments and also benefits from the price appreciation of the debt securities.
How are debt funds taxed?
The taxation of debt funds depends on multiple parameters such as equity component, duration of holding, income tax slab, etc.

May 17, 2024

Equity Mutual Funds: Meaning, Types & Features

Have you ever been concerned about how to prepare for your long-term financial goals, such as purchasing a home, planning a child’s marriage, schooling, and so on, but yet to discover the appropriate investment product that will provide inflation-beating returns?

Then someone told you to invest in an equity mutual fund, but you don’t understand what exactly an equity mutual fund is.

In this blog, we’ll discuss the equity categories of mutual funds in detail.

Equity Mutual Fund

Firstly, if you’re new to the mutual fund’s world, then check out our blog on the same: What are Mutual Funds?

Coming to the equity category of mutual funds, the fund manager primarily invests in the equity market. Equity mutual funds generally offer better long-term returns than other categories of mutual funds, but they can be volatile in the short run and carry higher risk.

The fund management and their research team invest the funds in a variety of companies from different sectors or market capitalizations depending on the type of equity mutual fund.

Features of Equity Mutual Funds

Equity mutual funds generally offer higher returns than other types of mutual funds, such as hybrid and debt funds.
Investors can enjoy tax benefits while investing in ELSS funds, which are a part of equity mutual funds.
Equity funds carry higher risk as their portfolios majorly consist of stocks.
Investment in equity mutual funds is suggested for the investors with a longer horizon, preferably >5 years.
Equity funds tend to have higher expense ratios than other categories of mutual funds.

Types of Equity Mutual Funds

Before jumping into the types of equity funds, let’s first understand the Large, Mid and Small Cap Companies.

There is a concept called Market capitalization, which refers to the total valuation of a company’s outstanding shares. It is calculated by multiplying the total number of outstanding shares by the current share price.

As per our market regulator, i.e., the SEBI, based on the market capitalization, stocks are classified into Large, Mid and Small-Cap:

Large-Cap – It refers to the top 100 listed companies on the basis of market capitalization. They are also known as Blue Chip companies and considered less riskier than Mid and Small-Cap companies.
Mid-Cap—Companies ranked between 101st and 250th are considered Mid-Cap Companies. They are considered riskier than Large-Cap Stocks.
Small-Cap—It refers to the 251st company onwards in terms of market cap. They carry the highest risk.

Categories of Equity Mutual Funds

There are various types of mutual equity funds, and investors can choose among them based on their investment objectives and risk profile.

Large-Cap Funds— A large cap mutual fund manager invests a minimum of 80% of their total assets into large-cap stocks (the top 100 stocks based on market capitalization). These funds are less volatile because large-cap companies are considered more stable than large and small-cap.
Mid-Cap Funds—A minimum of 65% of total assets are invested in Mid-cap stocks. These stocks have the potential to grow at a higher rate than large-cap stocks, but are also more volatile. Hence, they are suitable for investors who can take a moderate amount of risk on their capital.
Small-Cap Funds—These funds invest a minimum of 65% of their total assets in the stocks of small-cap companies. They have the potential to generate higher returns, but they also carry the highest amount of risk. This fund is suitable for risk-taking investors with a longer investment horizon.
Large & Mid Cap Funds—The fund invests a minimum of 35% of its total assets in large-cap and 35% in mid-cap stocks.
Flexi-Cap Funds—Flexi-cap funds can invest a minimum of 65% of their total assets into equity and equity-related instruments across market capitalization. It gives more flexibility to the fund managers as there are no restrictions regarding the investment based on market capitalization.
Multi–Cap Funds—The Multi-cap funds invest at least 75% of their portfolio in equity and related instruments and a minimum of 25% of their total assets in large, mid, and small-cap stocks. It offers less flexibility to the fund manager as compared to the Flexi-cap funds.
Focused Funds—This category of equity mutual fund invests a minimum of 65% of its total assets in equity-related instruments. Further, investing in more than 30 stocks at a particular time is not allowed.
Sectoral/Thematic Funds—These funds are required to invest a minimum of 80% of their total assets in a particular theme or sector, such as Banking, FMCG, Infra, Healthcare, etc.
Dividend Yield Funds—A minimum of 65% of this fund’s assets are invested in dividend-yield stocks.
ELSS Funds—In an ELSS fund, the fund manager invests 80% of the total funds into equity and equity-related instruments without any restriction of market capitalization. This is the only equity mutual fund category that comes with a lock-in period of three years, as it offers a deduction of up to INR 1,50,000 under section 80C of the Income Tax Act.

Taxes on Equity Mutual Funds

We have discussed multiple categories of Equity Mutual funds above. However, taxation on almost all equity mutual funds remains the same, whether it is large, flexi, small cap, etc. Ignoring taxation can significantly impact your net returns post taxation.

The capital gains tax on the profit earned by investing in equity mutual funds is divided into two different categories:

Short Term Capital Gains Tax (STCG)— If the investment is held for less than 12 months or 365 days, the capital gain generated will be taxed at a rate of 15% without any indexation benefit.
Long Term Capital Gains Tax (LTCG) — If the investment is sold after 12 months or 365 days, the capital gain generated will be taxed at a rate of 10% over and above INR 1 lakh.

If you are curious to learn more about the taxation of Mutual Funds in India, check out our blog: Decoding Mutual Funds Taxation in India .

Conclusion

Investment in equity mutual funds can be a good option for long-term wealth creation. It can help you achieve your long-term financial goals and beat fixed-return investment plans.

Further, one can start investing in equity mutual funds with as little as INR 100, and ELSS funds provides a tax benefit of INR 1,50,000 under Section 80C while providing equity returns.

Still, the investor must be well-versed in the various categories of equity mutual funds, as each fund has unique characteristics, risks, and rewards.

It is advisable to consult with your investment advisor, who can help you choose an equity mutual fund that aligns with your investment horizon and financial goals.

Frequently Asked Questions (FAQs)

I have a low-risk appetite and a short-term horizon. Can I invest in an equity mutual fund?
It is suggested not to invest in equity mutual funds as these funds carry higher risk and are more volatile in the short run. Further, consulting with your financial advisor before investing in any fund is advisable.
Is there any mutual fund which provides tax benefits?
Yes, the ELSS (Equity Linked Savings Scheme) is a category of equity mutual fund that provides tax benefits of up to INR 1,50,000 under section 80C, but it comes with a three-year lock-in period.
What is the meaning of direct investing in stocks?
When an investor directly purchases the stocks of any company, it is known as direct investing in stocks.
What are sectoral mutual funds?
Sectoral funds invest 80% of their total assets into the stocks of a particular sector, such as IT, FMCG, or Pharma. These funds carry higher risk because their portfolios are exposed to a specific sector; hence, if any downfall in the sector occurs, the portfolio can show a negative return.
What are Contra Mutual Funds?
Contra mutual funds follow a contrarian investment approach and invest at least 65% in equity & equity-related instruments.

April 30, 2024

Category: Mutual Funds

What is the 15*15*15 Rule in Mutual Funds?

Power of Compounding

Components of the 15*15*15 Rule in Mutual Funds

Benefits of the 15*15*15 Rule in Mutual Funds

Limitation of the 15*15*15 Rule in Mutual Funds

Important Points to Remember for the 15*15*15 Rule

Conclusion

Frequently Asked Questions (FAQs)

What is the 15*15*15 rule of mutual fund investing?

What is compounding in finance?

How can I earn 1 crore in 15 years by investing in mutual funds?

Which category of mutual fund can provide returns of up to 15%?

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

What is Mutual Fund Factsheet

Key Elements of a Factsheet

Importance of Factsheet

Should an Investor read the Fact Sheet?

Conclusion

Frequently Asked Questions (FAQs)

What is the purpose of a factsheet issued by Asset Management Companies?

What is the frequency of factsheets issued by the AMCs?

How can I use the information about the fund manager given in the factsheet before making any investment decision?

What does a mutual fund factsheet tell you about?

Where can I find the factsheet of a mutual fund scheme?

What is CAGR?

Mathematical formula

Calculation

CAGR Limitations

Can CAGR be improved?

What is XIRR?

What is the difference between CAGR & XIRR

Suitable Metric to Calculate Mutual Fund Returns

Conclusion

Frequently Asked Questions (FAQs)

What is CAGR?

What is XIRR?

Which calculation method is better, CAGR or XIRR?

Which method should one use to calculate mutual fund returns?

Can CAGR be negative?

Overview

Example

Taxation in Arbitrage Funds

Benefits of Arbitrage Funds

Risks of Arbitrage Funds

Performance Analysis

Category Performance

Did you know?

Conclusion

Frequently Asked Questions (FAQs)

What are Arbitrage Funds?

Are Arbitrage Funds riskier than other mutual funds?

Who should invest in Arbitrage Funds?

How are Arbitrage Funds taxed in India?

How do Arbitrage Funds work?

What is Hybrid Mutual Funds

Hybrid Mutual Funds Features

Types Of Hybrid Mutual Funds

Did you know?

Points to consider before investing in Hybrid Mutual Funds

Taxation Of Hybrid Mutual Funds

Conclusion

Frequently Asked Questions (FAQs)

How many types of Hybrid mutual funds are there?

Which hybrid fund is suitable for me?

Is hybrid fund equity or debt?

How are hybrid funds taxed?

How does an arbitrage fund work?

Asset Management Company (AMC)

Functions of AMCs

Top AMCs in India

SBI Mutual Fund

ICICI Prudential Mutual Fund

HDFC Mutual Fund

Nippon India Mutual Fund

Kotak Mutual Fund

New AMCs

Conclusion

Frequently Asked Questions (FAQs)

Which is the largest AMC in India based on AUM?

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?**