Pocketful

Category: Mutual Funds

  • SIP vs Lump Sum: Which is Better?

    SIP vs Lump Sum: Which is Better?

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

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

    What is a Systematic Investment Plan (SIP)?

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

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

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

    What is a Lump Sum Investment?

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

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

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

    Evaluation Metrics of SIP and Lump Sum

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

    • Absolute Return: This is the most basic method of calculating historical returns. It doesn’t consider the total period for which the money was invested. The formula for calculating absolute return is as follows:
    • CAGR (Compound Annual Growth Rate): Think of CAGR as the yearly growth of an investor’s capital. The assumption here is that all annual profits are put back into the invested funds. This rate is not the simple average of the returns earned each year. Rather, this rate is compounded annually, and it smoothes out fluctuations and provides a consistent growth rate, which is useful for comparing different fund’s returns.

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

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

    Scenario Analysis of SIP and Lump Sum

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

    Bear Market Scenario

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

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

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

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

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

    XIRR = -0.08725 = – 8.73 %

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

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

    Purchase Price = ₹ 251.25

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

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

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

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

    Bull Market Scenario

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

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

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

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

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

    XIRR = 0.1031 = 10.31%

    Lump sum

    The calculations for the lump sum investment are as follows:

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

    Purchase Price = ₹ 22.93

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

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

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

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

    Advantages and Disadvantages of SIP and Lump Sum

    SIP

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

    Lump Sum

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

    Suitability for Investors of SIP and Lump Sum

    SIP Suitability

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

    Lump Sum Suitability

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

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    Conclusion

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

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

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    5HDFC Bank vs Axis Bank: Which is Better?

    Frequently Asked Questions (FAQs)

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

      SIP has regular small payments, while a lump sum is one big payment. SIP offers rupee cost averaging and flexibility, whereas a well-timed lump sum can give high returns.

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

      Rupee cost averaging lowers the impact of market volatility by spreading the investments over time. Investors get more units when prices are low and fewer units when prices are high.

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

      CAGR is suitable for lump sum, while XIRR is ideal for SIP because it considers multiple transactions.

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

      Salaried individuals and beginners should prefer a Systematic Investment Plan (SIP) as they have a regular monthly income. At the same time, those with irregular income or skills in doing market analysis should consider lump sum investments.

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

      Yes, SIP contributions can be stopped, restarted or changed. This feature helps individuals adapt to changing financial circumstances.

  • Mutual Fund Fees & Charges in India 2024

    Mutual Fund Fees & Charges in India 2024

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

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

    Types of Fees Charged by Mutual Fund

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

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

    Calculation of Total Expense Ratio

    Calculation of Total Expense Ratio

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

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

    Let us understand this with an example.

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

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

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

    Read Also: Types of Mutual Funds in India

    SEBI Guidelines on Mutual Fund Charges

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

    Asset Under Management (Crores)Equity-oriented mutual funds (Max. TER)Other mutual funds (Excluding FoFs, ETFs and index funds) (Max. TER)
    Up to 5002.25%2.00%
    500- 7502.00%1.75%
    750- 20001.75%1.50%
    2000- 50001.60%1.35%
    5000- 10,0001.50%1.25%
    10,000- 50,000TER decreases by 0.05% for every increase of 5000 crore in AUMTER decreases by 0.05% for every increase of 5000 crore in AUM
    > 50,0001.05%0.80%

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

    Impact of Expense Ratio

    Impact of expense ratio

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

    Read Also: History of Mutual Funds in India

    Conclusion 

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

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    Frequently Asked Questions (FAQs)

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

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

    2. What is the exit load?

      Mutual fund firms impose this fee to prevent investors from making early withdrawals. It is based on the investor’s holding term; for instance, 1% is charged as an exit load if the withdrawal is made within a year after the investment.

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

      Yes, official norms specify a threshold that no asset management business may charge fees above, as provided by the mutual fund regulatory body SEBI.

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

      No, there aren’t any costs to start investing in mutual funds. In the past, AMCs levied a fee known as an entry load, but SEBI eliminated that fee in 2009.

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

      If you are investing or withdrawing more than INR 10,000, the regulation allows mutual funds to charge INR 100 for existing investors and INR 150 for new investors as transaction charges.

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

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

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

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

    What is NFO (New Fund Offer)?

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

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

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

    Features of NFO

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

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

    Types of NFOs

    Types of NFOs

    There are various types of NFOs-

    1. Based on Structure

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

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

    2. Based on Asset Classes

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

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

    Did you know?

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

    Advantages of Investing in NFO

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

    Disadvantages of Investing in NFO

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

    Key points before investing in NFOs

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

    How to invest in NFO

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

    What happens after the NFO period

    What happens after the NFO period

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

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

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

    Conclusion

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

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

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    Frequently Asked Questions (FAQs)

    1. Is NFO good for investment?

      Investors with a high tolerance for risk can invest in NFOs; or investors can wait for a while to assess the fund’s performance, compare it to other funds in the same category, and then decide whether to invest.

    2. Can I withdraw my money during the NFO period?

      No, withdrawals are not permitted during the NFO open period. However, investors can sell their investment once allotment is done.

    3. What are the risks involved while investing in NFO?

      Investing in New Fund Offerings (NFOs) entails various risks due to their lack of performance history.

    4. How can I invest in NFOs?

      There are multiple options to invest in NFOs. One can visit the AMC website and use their online platform or can apply via stock brokers as well.

    5. Is NFO better than existing mutual funds?

      Since NFOs do not have an established track record of performance, it is challenging to compare them to existing mutual funds.

  • What is Solution Oriented Mutual Funds?

    What is Solution Oriented Mutual Funds?

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

    Solution Oriented Mutual Fund

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

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

    Types of Solution-Oriented Funds

    Types of Solution-Oriented Funds

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

    1. Retirement Planning Funds
    2. Children’s Gift Funds

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

    Retirement Planning Fund

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

    Features of Retirement Planning Fund

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

    Performance of Retirement Funds

    Schemes2024 (YTD)2023202220212020
    ABSL Retrmnt The 50s Plus-Debt Reg Gr2.465.111.011.896.45
    ICICI Pru Retirement Pure Debt Gr2.966.12.79310.17
    ABSL Retrmnt The 50s Reg Gr3.939.981.471.927.86
    HDFC Retirement Savings Hybrid Debt Reg5.0811.163.78.6910.44
    Nippon India Retirement Income Generation Sch Gr Gr5.7410.231.934.6910.51
    Franklin India Pension Gr6.2414.053.539.728.5
    Axis Retirement Savings Cons Reg Gr6.2513.71-4.2512.0313.74
    UTI Retirement Fund – Regular Plan6.6416.695.2818.5312.38

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

    Children’s Gift Fund

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

    Features of Children’s Gift Fund

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

    Performance of Children’s Funds 

    Schemes2024 (YTD)2023202220212020
    Axis Children’s Gift Fund Lock-in Gr4.7413.25-7.3226.6615.5
    SBI Magnum Children’s Benefit Savings Gr5.1216.951.9518.2814.82
    Tata Young Citizen Gr5.2526.740.8433.4421.28
    LIC MF Children’s Gift Fund Gr5.7622.14-0.9515.512.39
    UTI Children’s Equity Gr7.2423.7-4.0132.7819.33
    HDFC Children Gift Fund Investment8.3626.886.7726.4617.47
    SBI Magnum Children’s Benefit Gr11.6529.834.8677.26–
    ICICI Prudential Child Care Gift14.0829.172.624.778.77

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

    Read Also: Mutual Fund Fees & Charges in India 2024

    Advantages of Solution-Oriented Mutual Funds

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

    Disadvantages of Solution-Oriented Mutual Funds

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

    Who Should Invest in Solution-Oriented Schemes?

    Who Should Invest in Solution-Oriented Schemes?

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

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

    Conclusion

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

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    Frequently Asked Questions (FAQs)

    1. What is the lock-in period of the solution-oriented fund?

      The lock-in period of solution-oriented funds is five years or till the age of retirement/child attains the age of maturity.

    2. Can I do SIP in Solution-Oriented Mutual Funds?

      Yes, you can invest through SIP in a solution-oriented mutual fund.

    3. How to invest in solution-oriented mutual funds?

      You can invest in solution-oriented mutual funds through an AMC directly, or with the help of mutual fund distributors.

    4. Can I invest in a solution-oriented mutual fund for wealth creation?

      Yes, you can create wealth by investing in solution-oriented mutual funds for the long term.

    5. What are two types of solution-oriented mutual funds?

      Retirement funds and children’s funds are two types of solution-oriented mutual funds.

  • What is the 15*15*15 Rule of Mutual Fund Investing?

    What is the 15*15*15 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 15*15*15 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.

    Power of Compounding

    Read Also: Smart Beta Funds: Characteristics, Factors, Benefits, and Limitations

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

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

    1. 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.
    2. 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.
    3. 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 15*15*15 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 15*15*15 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 15*15*15 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. 

    Read Also: Decoding Credit Risk Funds In India

    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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    4Arbitrage Mutual Funds – What are Arbitrage Funds India | Basics, Taxation & Benefits
    5Liquid Funds Vs Ultra Short Fund: Which One Should You Choose?

    Frequently Asked Questions (FAQs)

    1. 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. 

    2. 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. 

    3. 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.

    4. 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. 

    5. 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. 

  • Mutual Fund Factsheet: Definition And Importance

    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

    Key Elements of Factsheet

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

    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. Disclosures – The fact sheet is required to include several disclosures, including the ones that state that past performance does not guarantee future results.
    9. Contact Details – The sheet also includes the head office address and contact information for asset management organizations.
    10. 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.
    11. 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

    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:

    1. An investor can examine the fund’s performance and compare it to their benchmark return by reading the factsheet.
    2. Fund factsheets can be used to comprehend different risk indicators, such as beta, standard deviation, and sharpe ratio.
    3. An investor can determine the risk of the fund by using additional qualitative metrics, such as the fund’s riskometer.
    4. Exit load and expense ratio of the fund can be compared with competitors using data provided in factsheets.
    5. 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?

    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)

    1. 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.

    2. What is the frequency of factsheets issued by the AMCs?

      The factsheets are issued every month.

    3. 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.

    4. 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.

    5. 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.


  • XIRR Vs CAGR: Investment Return Metrics

    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

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

    CAGR Limitations

    1. 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.
    2. It doesn’t account for the inflow and outflow of the funds from the portfolio over the period of time.
    3. It ignores volatility and is hence not useful in forecasting growth rates during unstable times.
    4. 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.

    CAGR

    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

    CAGRXIRR
    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.

    Read Also: ITC vs HUL: Comparison of India’s FMCG Giants

    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. 

    XIRR vs CAGR

    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)

    1. 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.

    2. What is XIRR?

      XIRR, or Extended Internal Rate of Return, is the annualized return on investment while considering irregular cash flows.

    3. 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. 

    4. 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.

    5. Can CAGR be negative? 

      Yes. A negative CAGR indicates losses over time rather than gains.

  • 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.

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