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Category: Mutual Funds

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

    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.

    working of an arbitrage fund

    Taxation in Arbitrage Funds

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

    1. 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.
    2. 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 

    1. 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.
    2. 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.
    3. 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.
    Arbitrage fund benefits

    Risks of Arbitrage Funds

    1. 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.
    2. 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)2023202220212020
    HDFC Arbitrage Retail Gr2.846.764.063.493.64
    Tata Arbitrage Reg Gr2.847.074.043.734.98
    ICICI Prudential Equity Arbitrage Gr2.867.134.193.854.3
    SBI Arbitrage Opportunities Reg Gr2.877.434.613.963.51
    (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)

    1. What are Arbitrage Funds?

      Arbitrage mutual funds are funds that exploit the price difference between markets to generate returns.

    2. 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.

    3. Who should invest in Arbitrage Funds?

      Investors seeking low-risk, steady returns and lower taxes can choose to invest in Arbitrage funds.

    4. 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).

    5. 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.

  • Hybrid Mutual Funds – Definition, Types and Taxation

    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

    Overview of 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

    1. 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.
    2. It is suitable for investors who can take moderate risks while investing in mutual funds.
    3. These funds manage their asset allocation based on market scenarios to take advantage of opportunities and manage risk.
    4. 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

    Types of Mutual Funds

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

    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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:

    1. Returns of the hybrid mutual funds are not guaranteed; they will post returns based on the performance of underlying assets.
    2. Every hybrid fund has its ideal investment horizon. Hence, an investor should account for their investment horizon before making any investment decision.
    3. Choosing an appropriate hybrid fund for your financial goal is an essential factor to be considered.
    4. 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

    Taxation on 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:

    Taxation of Hybrid Mutual Funds

    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)

    1. 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.

    2. 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.

    3. 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.

    4. How are hybrid funds taxed?

      Hybrid funds are taxed based on the portfolio’s debt and equity composition.

    5. 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.

  • Top AMCs in India

    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-

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

    Top AMCs in India

    S. No.Asset Management CompanyAsset Under Management (Crores)
    1.SBI Mutual Fund913,780.06 INR
    2.ICICI Prudential Mutual Fund716,867.52 INR
    3.HDFC Mutual Fund614,665.43 INR
    4.Nippon India Mutual Fund438,276.85 INR
    5.Kotak Mahindra Mutual Fund381,239.57 INR
    (As of 31st March 2024)

    Read Also: Top 5 AMC Stocks in India 2025 – Overview and Insights

    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. 

    ICICI Prudential Mutual Fund

    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. 

    Kotak Mutual Fund

    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)

    1. 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.

    2. What is the full form of AMC in the Mutual Fund Industry?

      The full form of AMC is Asset Management Company.

    3. 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.

    4. Are all the AMCs the same?

      No, AMCs differ based on their investment philosophy, schemes offered, fees and expenses, etc.

    5. Can I invest directly in an AMC without a distributor?

      You can invest directly by visiting the AMC website or their office premises.

  • Active or Passive Mutual Funds: Which Is Better?

    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

    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: What are Mutual Funds?

    Types of Mutual Funds

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

    1. Active Mutual Funds
    2. Passive Mutual Funds

    Active Mutual Funds

    Active Managed 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

    1. Active fund managers can modify their investment portfolio in response to changes in the market dynamics, thereby adjusting risk and maximizing rewards.
    2. An active fund management strategy aims to outperform the benchmark index, which has the potential to generate superior returns.
    3. 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

    1. Active mutual funds charge higher fees than passively managed funds.
    2. These funds carry higher risk as the fund manager’s selection of securities can go wrong.
    3. The passive funds generally match the market’s return, whereas the actively managed funds do not guarantee that they will outperform the benchmark returns.
    4. 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

    Passively Managed 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: What are ETFs?

    Pros of Passive Mutual Funds

    1. Passive funds generally have an expense ratio (fees) than active funds.
    2. 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.
    3. These funds carry lower risk than actively managed funds (sectoral, thematic, etc.) because their portfolios are diversified.
    4. 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

    1. The passive funds have limited potential to outperform the benchmark.
    2. 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.
    3. 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

    ParticularsActive FundsPassive Funds
    Investment ObjectiveIt focuses on outperforming the benchmark.They try to match the performance of indexes.
    Expense RatioIt ranges between 0.50% to 2.50%, depending on the debt and equity.The expense ratio under passive funds cannot exceed 1.25%
    Securities SelectionThe 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.
    ReturnsActive 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.
    RiskActively managed funds carry high risk.Passive funds tend to have lower risk as compared to active funds.

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

    Which one should you choose: Active or Passive?

    Which on should you choose?

    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.

    Read Also: Mutual Fund vs PMS: Which is Better?

    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!
    1Mutual Fund vs ETF. Are They Same Or Different?
    2Shariah-Compliant Mutual Funds: Should You Invest?
    3What is Solution Oriented Mutual Funds?
    4Smart Beta Funds: Characteristics, Factors, Benefits, and Limitations
    5Mutual Fund Factsheet: Definition And Importance

    Frequently Asked Questions (FAQs)

    1. 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.

    2. 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.

    3. 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.

    4. 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.

    5. 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.

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

    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 funds 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

    1. The portfolio of these funds consist of securities having maturity up to 6 months.
    2. As compared to longer-duration funds, the ultra-short fund carries a low-interest rate sensitivity.
    3. 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.
    4. 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 Name6 Months (%)1 Year (%)3 Years (%)
    Mirae Asset Ultra Short Duration Reg Growth3.87.385.57
    ICICI Pru Ultra Short-Term Growth3.787.245.56
    Bandhan Ultra Short-Term Reg Growth3.737.215.39
    HDFC Ultra Short-Term Growth3.727.185.44
    SBI Magnum Ultra Short Duration Reg Growth3.717.215.39
    Mahindra Manulife Ultra Short Duration Fund Reg Growth3.637.075.31
    Tata Ultra Short Term Reg Growth3.486.75.01
    DSP Ultra Short Fund Reg Growth3.476.875

    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

    1. Investors can earn a bit more than a savings account by parking their excess funds in a liquid fund.
    2. It is the only fund whose NAV is calculated daily, whether it is Saturday or Sunday.
    3. Although liquid funds post higher returns than savings bank accounts, their returns can fluctuate depending on market and economic conditions.
    4. 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 Name6 Months (%)1 Year (%)3 Years (%)
    HDFC Liquid Growth3.727.245.46
    ICICI Pru Liquid Growth3.737.265.46
    Nippon India Liquid Growth3.717.245.46
    ABSL Liquid Growth3.727.275.51
    Edelweiss Liquid Ret Growth3.687.175.37
    Kotak Liquid Reg Growth3.697.225.44
    Baroda BNP Paribas Liquid Plan Growth3.687.245.52
    White Oak Capital Liquid Reg Growth3.657.135.21

    Liquid Vs Ultra-short Funds

    ParticularsUltra-short FundLiquid Fund
    Average MaturityIt 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.
    ReturnsIt 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.
    LiquidityThese are less liquid than Liquid funds.The liquid funds provide higher liquidity than the ultra-short duration funds.
    Exit LoadIt generally has a nil exit load.Liquid funds have an exit load of up to 7 days.
    RiskIt carries a slightly higher risk than liquid funds.It carries the lowest risk.
    Cut off timingsThe 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.

    Read Also: Debt Mutual Funds: Meaning, Types and Features

    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)

    1. 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.

    2. 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.

    3. Is there any exit load in liquid funds?

      Liquid funds do carry a graded exit load of up to 7 days.

    4. 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.

    5. 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.

  • Debt Mutual Funds: Meaning, Types and Features

    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

    1. Debt funds generally offer lower returns than equity-oriented funds because their portfolios are invested in fixed-income securities.
    2. 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.
    3. 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.

    Read Also: Debt Mutual Funds: Meaning, Types and Features

    Types of Debt Funds

    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

    Risk 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?

    Why 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.

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

    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)

    1. 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.

    2. Can I do SIP in the debt mutual funds?

      Yes, just like equity mutual funds, one can do SIP in debt mutual funds.

    3. 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.

    4. 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.

  • Equity Mutual Funds: Meaning, Types & Features

    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

    Features of Equity Mutual Funds
    1. Equity mutual funds generally offer higher returns than other types of mutual funds, such as hybrid and debt funds.
    2. Investors can enjoy tax benefits while investing in ELSS funds, which are a part of equity mutual funds.
    3. Equity funds carry higher risk as their portfolios majorly consist of stocks.
    4. Investment in equity mutual funds is suggested for the investors with a longer horizon, preferably >5 years.
    5. 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:

    1. 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.
    2. Mid-Cap—Companies ranked between 101st and 250th are considered Mid-Cap Companies. They are considered riskier than Large-Cap Stocks.
    3. Small-Cap—It refers to the 251st company onwards in terms of market cap. They carry the highest risk.

    Read Also: What is Solution Oriented Mutual Funds?

    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.

    1. 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.
    2. 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.
    3. 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.
    4. Large & Mid Cap Funds—The fund invests a minimum of 35% of its total assets in large-cap and 35% in mid-cap stocks.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. Dividend Yield Funds—A minimum of 65% of this fund’s assets are invested in dividend-yield stocks.
    10. 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

    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:

    1. 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.
    2. 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.

    Read Also: Mutual Fund Factsheet: Definition And Importance

    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)

    1. 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.

    2. 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.

    3. 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.

    4. 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.

    5. What are Contra Mutual Funds?

      Contra mutual funds follow a contrarian investment approach and invest at least 65% in equity & equity-related instruments.

  • What are Small Cap Mutual Funds? Definition, Advantages, and Risks Explained

    What are Small Cap Mutual Funds? Definition, Advantages, and Risks Explained

    Small Cap Funds

    Small-cap companies are on a bull run, and so are small cap mutual funds. Recently, they have been in the limelight just because of their higher returns. The Nifty Small Cap 250 index, which measures the performance of small market-cap companies, gave investors a 64% return last year.

    But what about the risks involved in small-cap funds & will they offer similar returns in the coming future?

    In this blog, we will give you an overview of small-cap mutual funds, the advantages, the risks involved, and answers to the above-mentioned questions.

    Overview of Small Cap Mutual Funds

    Before jumping into the explanation of small-cap funds, check out our blog on mutual funds, where we have simplified the topic: Mutual Funds: Meaning, Types, Features, Benefits and How They Work.

    Based on their market capitalization, companies in India are categorized as Large, Mid and Small-Cap companies. As per SEBI, the definition of Large, Mid and Small-Cap is as follows:

    1. Large Cap: 1st -100th companies in terms of Market Cap.
    2. Mid Cap: 101st – 250th companies in terms of Market Cap.
    3. Small Cap: 251st company onwards in terms of Market Cap.

    So, small-cap mutual funds invest in small companies. As per rules prescribed by SEBI, at least 65% of their investments are in small cap companies. Most of the small cap companies are generally new and expanding aggressively, but they are technically fragile and might lose money in a volatile market.

    Small-cap mutual funds carry high-risk and are volatile in nature. The small-cap companies generally have low market float and have less trading volumes; this makes them vulnerable to adverse events and susceptible to bearish market movements. They have the potential to give higher returns in a bull market. However, they fall at a rapid pace in bearish markets.

    Read Also: Equity Mutual Funds: Meaning, Types & Features

    Pros of Investing in Small-Cap Mutual Funds

    Pros of Small Cap Funds
    • Small-cap companies have the potential to grow rapidly because of their relatively small operating scale. There’s a great saying, “Almost all multi-baggers are small cap companies once.” It allows fund managers of small cap mutual funds to reap the benefit of investing in hidden gems.
    • Small-cap companies have the potential to capitalize on emerging trends, fostering a sense of agility and innovation and helping to enhance the business.
    • Small-cap companies are open to pivoting their strategy and business model. It is advantageous when changing economic and technological scenarios compared to large-cap companies.

    Points to Consider

    So far, we have understood that small-cap mutual funds are considered high-risk in the world of mutual funds. There are a few points that you should consider before investing in small-cap mutual funds:

    • Small-cap mutual funds indeed have a potential to give higher returns, but you should also consider the expense ratio of the fund before investing. As small-cap funds are actively managed, their TER, i.e., Total Expense Ratio, is generally higher than that of other mutual fund categories. Further, choose a direct route rather than regular small-cap funds.
    • When the market starts falling, even the top small-cap mutual funds can see erosion in their returns. Therefore, if you are considering investing in small cap funds, invest for the long-term, preferably >5 years.
    • Investors who are heavily invested in large cap companies and want to diversify their investments can look for small-cap mutual funds.
    • Investment in small-Cap mutual funds is much riskier and more volatile than large-cap funds. Therefore, it is suggested for investors with a high risk appetite.

    Taxation Rules

    As mutual funds can be of different types, so is their taxation. However, taxation on all equity mutual funds remains the same, whether it is large, flexi, or small cap. Ignoring taxation can significantly impact your net returns post taxation.

    Capital Gain Tax

    For small cap funds, STCG (short term capital gain) will apply if the holding period is less than one year and LTCG (long term capital gain) if the holding period exceeds one year.

    In the case of LTCG, there is no tax till the income of one lakh; post this limit, a 10% tax is applicable without indexation benefit. In case of STCG in small-cap funds, there is a flat 15% tax on gains without indexation benefit.

    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

    Top Performing Small Cap Funds

    Top Small Cap Funds

    Here are some top-performing small-cap funds based on the performance:

    Fund Name (Direct Plan)3-Year Return (%)5-Year Return (%)Fund Size (INR Cr.)
    Quant Small Cap Fund41.31%  39.28%17,348
    Tata Small Cap Fund34.03%29.02%6,236
    Canara Robecco Small Cap Fund32.11%29.1%9,402
    Edelweiss Small Cap Fund31.63%29.94%  3,134
    Bank of India Small Cap Fund30.95%  32.97%939

    Key Highlights of AMFI Notice

    On 27 February 2023, the Association of Mutual Funds in India (AMFI) sent a notice to All Asset Management Companies (AMCs) in India when the regulator, i.e., SEBI has raised concerns regarding the continuous flow of funds in Mid and small-cap mutual funds. The AMFI has asked fund houses to develop a policy and take appropriate measures to protect investors.

    • AMFI focuses on the ability of the fund house to face redemption pressure and detect whether any funds has liquidity issue or not.
    • All AMCs must disclose the outcomes of the Stress test, volatility, liquidity analysis, valuation, and portfolio turnover concerning mid-cap and small-cap equity schemes.
    • Asset Management Companies will display the stress result within 15 days after the end of each month.
    • AMFI emphasizes investor protection and enhanced transparency within the mutual fund industry.

    Read Also: 10 Best Small Cap Electric Vehicle Stocks

    Conclusion

    In summation, small-cap mutual funds offer the potential for high returns and a great diversification opportunity. However, these funds come with significant risks due to the volatile nature of small-cap companies.

    Investors should carefully consider the risks and other relevant factors such as expense ratio, historical returns, fund manager, etc. before investing in small-cap mutual funds. It is suggested to consult with a financial advisor before investing.

    Frequently Asked Questions

    1. Are small-cap funds risk-free?

      No, small caps are not risk-free, in fact small cap mutual funds carry a higher risk than other category of mutual funds. It is advisable to research before investing in small-cap funds and seek help from your financial advisor.

    2. What is the suitability of small-cap mutual funds?

      Small-cap mutual funds are generally suitable for Investors having a high-risk appetite with a time horizon of at least 5 years.

    3. What is the difference between Small-Cap and Flexi-Cap Mutual funds?

      A small-cap mutual fund invest at least 65% in small cap companies. In contrast, a flexi-cap mutual fund invest at least 65% in equity & equity related instruments, which means flexi cap funds are more flexible as they can invest in large, mid or small cap companies.

    4. What is a Small Cap mutual fund?

      A small-cap mutual fund invest at least 65% in small-cap companies.

    5. Do small-cap funds carry higher taxation?

      No, small-cap funds are taxed in a similar manner to any other equity mutual funds.

  • What is PSU Index? Performance, Comparison, Benefits, and Risks Explained

    What is PSU Index? Performance, Comparison, Benefits, and Risks Explained

    The Indian stock market boasts a diverse range of indices, each catering to specific investor preferences. PSU index is one such index.

    This index tracks the performance of some of India’s most reliable and established PSU companies. The index consists of giants like Coal India, NTPC, and SBI.

    The PSU index is known to hold the capability to generate decent returns as PSU firms come with a sense of security because of government backing.

    In today’s blog, we will be exploring the benefits, risks and performance of the PSU funds.

    PSU Index Background

    Before we dig deeper into the PSU Index, let us have a quick overview of what PSUs are.

    PSUs stand for Public Sector Undertakings that are owned and operated by the government of India, either at the central or state level. PSUs play a major role in the Indian economy, contributing to multiple sectors and can be established through various means such as nationalisation, special enactments, mergers, and acquisitions.

    Types of PSUs

    • CPSEs (Central Public Sector Enterprises) – Companies where the direct holding of the Central Government or other CPSEs is 51% or more
    • PSBs (Public Sector Banks) – Banks where the direct holding of the Central/State Government or other PSBs is 51% or more
    • SLPEs (State Level Public Enterprises) – Companies where the direct holding of the State Government or other SLPEs is 51% or more

    Public sector enterprise offers a wide range of products which include steel, heavy machinery, fertilisers, drugs and pharmaceuticals, petrochemicals, textiles, cement etc.

    PSU companies types

    Overview

    The PSU Index was launched on February 1, 1999, and tracks the performance of the Public Sector Undertakings (PSUs) listed on the Bombay Stock Exchange (BSE) in India. It measures the combined performance of some of the companies classified as PSUs by the BSE and serves as a benchmark for funds and portfolios focusing on PSUs.

    The S&P BSE PSU is calculated using the float-adjusted, market-cap-weighted methodology. PSUs are recognised for their dividend payouts and offer a source of regular income for investors. Additionally, the PSU Index can be a relevant investment option for investors seeking exposure to the Indian public sector.

    Did You Know?

    The first disinvestment by way of public offer took place in 1995-96. Since then, Rs. 2,90,489.62 crore has been raised through PSU disinvestments from capital markets.

    Top 10 Constituents

    State Bank of India, NTPC, Power Grid Corp, Coal India, Bharat Electronics, Indian Oil Corp, Power Finance Corp, Bharat Petroleum Corp, and Hindustan Aeronautics Ltd.

    S&P BSE PSU vs. S&P BSE 500

    The table below shows a comparison between the annualised returns of S&P BSE PSU and S&P BSE 500.

    202320222021
    S&P BSE PSU61.48%28.3%47.95%
    S&P BSE 50026.55%4.77%31.63%

    While S&P BSE PSU has demonstrated an unexpected return of 61% and 47% during the shorter periods of one year and three years, respectively, S&P BSE 500 has stayed somewhat consistent over the longer term. This indicates that thematic investing brings a lot of risk due to lack of diversification. 

    Read Also: List Of Best PSU Stocks in India

    Categories

    PSU Funds can be categorized into two main types, Equity PSU Funds and Debt PSU Funds,

    Equity PSU Funds primarily invest in the equity shares of PSUs and debt PSU Funds invest in the bonds issued by the PSU.

    Equity PSU Funds

    Fund Name2023202220212020
    SBI PSU Fund Reg Gr54.0329.0132.41-9.98
    Invesco India PSU Equity Gr54.4820.5431.056.07
    ABSL PSU Equity Reg Gr59.2828.5537.1–
    NIFTY 100 TRI21.244.9426.4516.08

    The table above showcases some of the top-performing Equity PSU Funds and their returns relative to the benchmark, Nifty 100.

    Inferences that can be drawn from the above data are as follows,

    PSU funds have been on a roll for a past few years due to several factors and PSU stocks witnessed a significant surge in the year 2023 which lead to exceptional returns for these funds. Funds like Aditya Birla Sunlife PSU and SBI PSU Equity funds delivered blockbuster returns of more than 50% 

    While 2023 stands out, PSU funds have not offered consistently higher returns every year. The performance of these funds can vary depending on the market conditions and the specific PSU stocks they hold. 

    Debt PSU Funds

    Fund Name2023202220212020
    Axis Banking & PSU Debt Reg Gr6.533.753.399.59
    Tata Banking & PSU Debt Reg Gr6.62.93.4210.75
    ABSL Banking & PSU Debt Reg Gr6.863.653.5910.91
    Franklin India Banking & PSU Debt Gr6.843.273.699.13
    SBI Banking & PSU Fund Reg Gr6.562.872.5810.47
    Kotak Banking and PSU Debt Gr6.773.63.9110.51
    Nippon India Banking & PSU Debt Gr 6.83.173.8610.93

    The table above shows the returns of multiple debt PSU Funds over the past few years.

    Year-wise returns of debt PSU funds are likely to be less volatile when compared to equity PSU funds. They show a gradual increase over time, with some fluctuations. 

    Over the past three years, the average return for the Banking and PSU Debt Funds hover around 5.5%. However, specific fund performance can vary. 

    Therefore, debt PSU funds are suitable for investors seeking relatively stable returns with lower risk and want regular income through coupon payments.

    Should I Invest in PSU Funds?

    Investing in PSU funds is a personal decision that should be taken after considering all of the risks. Hence, the benefits and risks stated below might help you in making an informed decision.

    Benefits of Investing in PSU Funds

    1. PSU Funds primarily offer capital preservation and regular income with moderate growth potential.
    2. These funds are considered low-risk compared to other investment options since they invest in PSUs. This provides a degree of safety and security to your investment.
    3. Many consider investing in PSUs because of government backing to the companies. 

    Risks of Investing in PSU Funds

    1. PSUs are backed by the government, which makes them susceptible to government policies and decisions. These policies can impact their performance, profitability and growth prospects and expose investors to uncertain risks.
    2. The government uses OFS to divest its stake in PSUs. This increased supply of shares can put downward pressure on the prices, leading to losses for investors.
    3. While some PSUs perform well, others might struggle with bureaucratic inefficiencies and slower growth compared to private companies. This can hinder the overall performance of the PSU index.
    4. The PSU index is concentrated in specific sectors like energy, banking etc. This lack of diversification across different sectors can expose investors to greater risk.
    PSU Index Benefits

    Read Also: Why Are PSU Stocks Falling? Key Insights and Considerations

    Conclusion

    Investors need to keep in mind that though short-term returns of PSU funds have outperformed the Sensex, the risk of investing in PSU funds still exists. Therefore, it is important to perform your own analysis before investing in PSU Funds.

    Frequently Asked Questions (FAQs)

    1. What is the PSU Index?

      Think of the PSU Index as a shopping cart filled with public sector undertakings of the country.

    2. Are there any downsides in investing in PSU Index Funds?

      Investment is not risk-free and the PSU index might not be as high-flying as some other options. Also, these companies are sensitive to interest rate changes by the government and thus affect their stock returns.

    3. How can I invest in the PSU Index?

      You cannot invest directly in the PSU Index. However, you can invest through PSU mutual funds and individual PSU stocks.

    4. What are the benefits of investing in PSU funds?

      PSU funds offer a lot of benefits to the investors such as regular income and low-risk.

    5. Do all PSU funds give dividends?

      While several PSU funds offer consistent dividends, many don’t. 

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

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

    The Bandhan Asset Management Company is launching a new mutual fund offering in the debt category, the “Bandhan Long Duration Fund.” Let us begin by analyzing the New Fund Offer (NFO). 

    Debt Fund

    A debt fund is a mutual fund that predominantly invests in fixed-income securities such as government bonds, corporate bonds, debentures, treasury bills, etc. These are suitable for investors who are risk averse and want stable and consistent returns in their portfolio.

    Long Duration Fund

    This category of debt fund primarily invests in fixed-term securities with longer maturity, i.e., from 7 years to 20 years or more.

    Benefits of Bond Investing

    1.  The country’s current account deficit is decreasing, creating a stable interest rate environment and lowering the need to issue bonds to cover the deficit. 

    2.  The government aims for a 4.5% fiscal deficit by FY 26, which suggests that there will be a decrease in the bond supply, which will be beneficial for the market.

    3.  The country’s Core inflation remains below 4% as the government is effectively managing the food supply chain.

    4.  An extra 23–25 billion in foreign investment is anticipated to enter the Indian bond market due to India’s inclusion in global indices.

    5.  As global inflation eases, reduction in the rate of interest is expected.

    Bandhan AMC

    It was first founded as IDFC AMC in 2000, and by 2020, it was one of India’s top 10 AMCs in terms of AUM. In 2023, IDFC AMC was acquired by a group of institutions led by Bandhan Financial Holdings Limited. Bandhan ended up controlling 60% of the AMC, and thus rebranded it as Bandhan AMC. 

    The stakeholders include Chrys Capital (20%) and Singapore’s sovereign wealth fund, GIC (20%). 

    Bandhan Long Duration Fund NFO

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

    Bandhan Long Duration Fund

    Bandhan Asset Management Company is coming up with a new fund offering named “Bandhan Long Duration Fund” which will open for subscription on 5th March 2024 and close on 18th March 2024.

    Investment Objective

    The company intends to diversify its portfolio into debt and money market securities in such a manner that the Macaulay duration of the fund is greater than 7 years. Thus, it intends to generate an optimum return over the long run.

    Key Points

    Date of Issue5th March 2024
    Closing Date18th March 2024
    CategoryDebt
    Sub-categoryLong Duration
    PlanRegular and Direct
    OptionsGrowth and Income Distribution Cum Capital Withdrawal (IDCW)
    Minimum Purchase AmountINR 1000
    Exit Load0%
    BenchmarkNifty Long Duration Debt Index A-III.

    Fund Manager

    Mr. Gautam Kaul, the senior fund manager of this fund, would supervise the fixed-income fund. Having managed over 27000 crores of assets using both active and passive techniques, he has a solid grasp of the fixed income securities market. 

    He worked for Edelweiss Asset Management Company before joining Bandhan Mutual Fund and received his MBA and B.Com. degrees from the University of Pune, where he focused on accounting and finance. 

    Benefits and Risks 

    Similar to any other NFO, the Bandhan Long Duration Fund NFO also holds its definite set of advantages and risks. Below mentioned are some of the key advantages and risks involved. 

    Benefits 

    1.  High-quality debt instruments with the lowest credit risk will be the fund’s primary investment focus. Thus making it suitable for risk-averse investors. 

    2.  Fund management will investigate opportunities in bonds issued by governments and corporations with maturities longer than seven years. Hence, long-term investors would benefit from this fund. 

    3.  The fund manager of the Bandhan Long Duration Fund has managed fixed-income assets for over 20 years. Hence, the investors would benefit greatly from the manager’s extensive work experience.  

    Risks

    1.  The fund needs to maintain a minimum duration of 7 years which will limit its flexibility in case of any adverse situation.

    2.  Putting money into a long-term debt fund will yield smaller returns. You won’t have the chance to earn larger gains if the stock market experiences a bull run. 

    Risks of Bandhan Long Duration NFO

    Suitability

    1.  Investors who are looking for higher returns in debt funds.

    2.  Investors who are looking for consistent returns.

    3.  Investors who want to reduce the risk associated with reinvestment by maturing their portfolio. 

    4.  Retired investors who can’t take on the risk associated with equities need a systematic withdrawal strategy to provide them with a steady income.

    Did you know? 

    After April 1, 2023, debt funds will no longer enjoy indexation benefits and thus will be taxed at applicable slab rates. 

    Read Also: Bandhan Bank Case Study: Business Model, Financial Statement, SWOT Analysis

    Conclusion

    In summary, long-term debt funds are a solid option for investors who want a consistent return without taking on too much risk and are wary of market fluctuations. After carefully assessing the risk involved, one can invest in this fund based on their investing horizon and risk tolerance.  

    S.NO.Check Out These Interesting Posts You Might Enjoy!
    1NFO Alert: PGIM India Large & Mid Cap Fund
    2What Is An IPO Mutual Fund? Should You Invest?
    3What is PSU Index? Performance, Comparison, Benefits, and Risks Explained
    4Top AMCs in India
    5The Rise of ESG Funds: Overview, Growth, Pros, Cons, and Suitability

    Frequently Asked Questions (FAQs)

    1. What is the Long Duration Fund’s tenure?

      The tenure of a long-duration fund is more than 7 years (Macaulay Duration).

    2. Who is the fund manager of Bandhan Long Duration Fund?

      The fund manager of the Bandhan Long Duration Fund will be Mr. Gautam Kaul. He has managed debt funds for the past 20 years. 

    3. Was Bandhan AMC named IDFC AMC before?

      In 2023 Bandhan purchased IDFC AMC; as a result, it is now referred to as Bandhan Mutual Fund.

    4. When does Bandhan’s long-duration fund NFO close?

      The NFO’s subscription period will end on March 18, 2024.

    5. Is it possible to use SIP to invest in Bandhan’s long-duration fund?

      You may invest with a SIP of INR 1000 in the Bandhan long-term fund.

    Disclaimer: The securities, funds, and strategies mentioned in this blog are purely for informational purposes and are not recommendations.

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