Category: Mutual Funds

Regular vs Direct Mutual Funds: Make The Right Investment Decision
As of December 2023, the Indian Mutual Fund Industry has over 50 lakh crores under management, and if your majority of the investments are in Mutual Funds, then it is high time that you should know the difference between Regular and Direct mutual funds.

What are Mutual Funds

Mutual funds collect money from several investors to invest in a diversified portfolio of stocks, bonds, or other assets. These funds are managed and curated by professional fund managers and hence become suitable for investors who have less time and expertise to manage their portfolios.

When you invest in mutual funds, NAV (Net asset Value) is allotted to you, which reflects the net value of the assets that are chosen by the fund manager to invest your money in. Furthermore, SIPs and lump-sum are different ways through which we can invest in mutual funds.

Benefits of Investing in Mutual Funds
1. Mutual funds help you diversify your capital across asset classes. This spreads your risk and mitigates the impact of losses, if any, in a single holding.
2. Mutual funds are managed by professional fund managers who understand market dynamics. These managers help you reduce the pressure of managing your portfolio.
3. Investing in mutual funds is a hassle-free way to access a diversified portfolio. You do not need to keep an eye on every asset class, such as stocks, bonds, debentures, etc.
4. Investment amounts for mutual funds are low as compared to directly buying stocks or bonds. You can start your investment journey today with an amount as low as INR 500.
5. There’s a vast array of mutual funds available catering to diverse investment goals, risk appetites, and time horizons. You can choose the fund that best aligns with your objective.
Regular Mutual Funds

Every mutual fund scheme offers two ways to invest: Direct Route and Regular route. A regular mutual fund is a type of mutual fund that is sold through intermediaries such as brokers and distributors. Investment in mutual funds through regular mode attracts a higher TER* because of commission involved.

If you’re not familiar with the word TER, it stands for Total Expense Ratio, or say, Expense Ratio. Fund Managers charge an annual fee that is charged to investors basis their total investment and the same can be analysed through TER.

Did you know?

Every mutual fund in India comes under Regulation 52 of the SEBI MF Regulations, in which the maximum TER allowed is 2.5% for the first INR 100 crores of total net assets.

Here are some interesting features to know about regular mutual funds:
- Regular mutual funds carry a high expense ratio, i.e., a larger portion of your investment will be eaten up by fees, thereby reducing your returns.
- The expense ratio is the cost linked with managing and operating a mutual fund. It is expressed as a percentage of the fund’s average net assets and represents the total annual expenses charged to the fund.
- Regular mutual funds are a good investment option for investors who do not have enough time and knowledge to do their research on mutual funds, and are willing to pay a higher expense ratio and seek professional investment advice.
- Regular mutual funds are distributed through multiple channels such as, banks, SEBI-registered financial advisory firms, and brokerage firms.
Direct Mutual Funds

Investing in Direct mutual funds means buying directly from the Asset Management Company (AMC) without the involvement of any intermediaries like brokers or distributors. The investor invests through the website of the AMC, mobile app or offline. Further, there are certain new-age brokers as well which provide the facility of investing in direct plans.

Here are some interesting features to know about direct mutual funds:
- Since there are no distributors involved, direct plans have a low expense ratio.
- The lower expense ratio leads to a higher net asset value (NAV).
- The investor in direct mutual funds has more flexibility as compared to regular ones.
- Direct mutual funds are the best fit for individuals who understand the fundamental concept of mutual funds, prefer a do-it-yourself (DIY) approach, and are willing to do thorough research and analysis.
Regular Mutual Fund vs. Direct Mutual Fund
1. Regular mutual funds are sold through intermediaries such as distributors and brokers, whereas direct mutual funds are bought directly from the asset management companies who manages the fund.
2. Unlike direct mutual funds, regular mutual fund has a high expense ratio because of intermediaries. The regular mutual fund has a lower NAV because the distributor’s commission is deducted from the invested capital whereas direct mutual funds offer a high NAV for the same investment amount because of the low expense ratio.
3. A higher expense ratio leads to lower returns in regular plans as compared to direct plans.
4. Regular mutual fund often comes with professional advice (investment advisor), while direct funds are self-directed and DIYs.
Breakdown of Expenses

The fee structure of direct and regular mutual funds is more or less the same. Let us dive deeper to know the difference.
- Expense Ratio – As discussed above, this covers the fund’s operating costs such as management fees, custodian fees, and administrative expenses and is generally expressed as a percentage of the asset under management. The expense ratio for direct mutual funds is lower, and in the case of regular mutual funds expense ratio is generally higher due to the inclusion of distribution charges.
- Transaction charges – Some of the direct or regular mutual funds may charge a small amount for buying or selling mutual fund units.
How to identify a Mutual fund as Direct or regular?

Suppose you want to invest in a mutual fund scheme but want to avoid seeking professional advice. Then how will you recognize whether the fund you have chosen is direct or regular? We got you covered!
1. The word ‘direct’ will be there in the name of the scheme.
2. The expense ratio of a direct scheme will always be lower than that of a regular scheme.
3. You can also refer to your consolidated account statement. If the plan is direct, no ARN* number will be mentioned in the account statement.
*ARN Number is the AMFI registration number issued to the mutual fund distributors and brokers.

Impact of Expense Ratio on Returns

Let’s understand this with an easy example:
- Initial Investment – INR 1 lakh
- Time Period – 20 years
- Rate of Return – 15%
- Expense Ratio – 2.5% in regular plan and 1.5% in direct plan
After 20 years, your investment:

In Direct Plan– INR 12.58 lakhs

In Regular Plan – INR 10.54 lakhs

That’s a difference of almost INR 2 lakhs, so now you can get an idea of how the difference of just 1% can significantly impact your returns over a long period.

Conclusion

If you are muddled between the two and cannot decide what to choose then Regular mutual funds are the best fit for investors who value professional guidance, are new to the world of investing, and lack financial literacy.

Direct mutual funds can be a match for investors whose primary focus is to maximise the returns and who are cost-conscious. They are experienced investors who are comfortable with independent research and decision-making and are well-versed in managing investments directly.

Eventually, the choice depends on the individual preferences and their financial goals. However, we would suggest seeking professional advice if you are not sure which fund aligns perfectly with your investment objective.

Frequently Asked Questions (FAQs)
1. What is the difference between direct and regular mutual funds?
  Direct mutual funds are bought directly from the AMC, whereas regular funds are bought through intermediaries like brokers and distributors.
2. Which is better: Direct or Regular Mutual funds?
  The answer to this question depends on the individual’s needs and preferences. However, direct funds come with a lower expense ratio and provide better returns than regular mutual funds.
3. Can I change my investment plan from a regular to a direct mutual fund?
  Yes, you can change your investment plan from a regular to a direct plan by contacting the asset management company. However, there are certain things which investors should keep in mind before switching from a regular to a direct plan:The change in investment plan will be treated as a withdrawal, which means if there is any exit load, then you have to incur exit load charges if you redeem your investment before the exit load period. Further, there are tax consequences depending on the type of fund and time horizon.
4. Which one gives higher returns?
  Generally, direct funds have a lower expense ratio as compared to regular funds because there is no intermediary involved in direct mutual funds. Therefore, effectively, direct funds provide better returns than regular funds.
5. How to know the expense ratio of regular and direct plans of the same scheme?
  You can know the expense ratio from the factsheet of mutual funds, which is available on the website of the Asset management company.

January 18, 2024

Decoding Credit Risk Funds In India

Do you know there is a category of mutual funds which specifically invests in junk bonds? If you’re not familiar with the word, Junk bonds, as the name suggests, are low quality bonds which have a high risk of default. But wait, high risk means high returns? Yes! To compensate for the high default risk, these bonds provide greater returns than other highly rated bonds.

If you’re new to the mutual fund world, check out our blog: Mutual Funds: Meaning, Types, Features, Benefits and How They Work.

What are credit risk funds?

Credit Risk Funds are a category of debt mutual funds that primarily invest a minimum of 65% only in AA and below-rated corporate bonds.

Did you know?

Credit Risk Funds are earlier known as “Credit Advantage Fund” or “Credit Opportunity Fund”.

How do Credit Risk Funds work?

Fund managers seek out debt funds with credit ratings that generally range from BBB to C since these bonds offer higher interest rates to compensate for the risk of default.

To diversify the risk, the fund manager will invest across multiple bonds of different companies to avoid overexposure in a single issue or company.

Checkout our blog on debt mutual funds: What is Debt Mutual Funds: Invest in the Best Debt Funds in India

Readc Also: Types of Mutual Funds in India

Advantages of Credit Risk Funds

High Yield

Credit risk funds offer investors high yields as compared to other debt funds. This can fascinate investors who wish to seek relatively higher returns.

Diversification

Investors can get exposure to high-yield bonds, although with higher risk. Further, credit risk funds have investments across multiple companies and issues such that exposure to any sector or company is significantly reduced. For risk-seeker investors, this enhances the overall portfolio performance.

Professionally Managed

Credit risk funds are managed by professional fund managers having specialisation in credit risk assessment. Their expertise helps the fund in generating good returns considering the risk profile.

Disadvantages of Credit Risk Funds

Risk of Default

Junk bonds carry a high possibility of default. The lower credit quality of the bonds increases the chance that the issuer may fail to repay the principal amount.

Volatility

Credit risk funds are highly volatile compared to other debt options, i.e., the fund’s net asset value (NAV) changes significantly which may not give positive returns to investors for a short period.

Not Suitable for all Investors

These funds are a fit for investors with a high-risk tolerance and long-term investment horizon.

Management Costs

Credit risk funds need active oversight and analysis. This leads to higher expense ratios and reduces the overall returns. Generally, the expense ratio of credit risk funds is more than other categories of debt mutual funds.

Impact of Interest Rate Changes on Credit Risk Funds

When interest rate rises, the value of existing bonds declines, since bond prices and interest rates share an inverse relationship. However, credit risk funds invest in low-quality bonds that have high coupon rates to compensate for the increased risk of default, i.e., a decline in the value of bonds may be less visible, and the higher coupon rates can still provide good returns even if the interest rates are rising.
Credit risk funds are sensitive to changes in credit spreads. Credit spread is the additional yield that investors demand for holding riskier bonds over safe and secure government bonds.

There is a thing called “Duration” in the bond universe, which is the measure of the sensitivity of price change of a bond for a change in the interest rate. The higher the duration, the more sensitive the bond is to the changes in interest rates. Investors should keep in mind the duration of the credit risk funds before investing as it can significantly impact the performance of funds in a short period.

Risks associated with Credit Risk Funds

Credit Risk

The primary risk that is involved in credit risk funds is “Credit Risk” or the “Risk of Default” by the bond issuers. Bonds with high coupon rates are more exposed to default risk and can lead to a decline in the fund’s value.

Liquidity Risk

Credit risk funds are generally less liquid when compared to other debt funds because these funds hold bonds that are of low credit quality, making it difficult to buy or sell them in the market.

Concentration Risk

Several credit risk funds have concentrated exposure to specific sectors, which can increase the risks if those sectors face any kind of economic downturn or challenge.

Interest Rate Risk

As we discussed above, just like other fixed-income securities, credit risk funds are sensitive to changes in interest rates. When interest rates rise, the prices of existing bonds in the portfolio may fall, leading to potential capital losses.

Credit Risk Funds vs. Other Mutual Funds

Credit risk funds carry high risk and potential of high returns since they invest in lower-rated corporate bonds, whereas the risk and returns of other mutual funds vary depending on the category of investment (equity, debt, balanced, etc.)
Compared to other mutual funds, credit risk funds are more volatile because of sensitivity to changes in credit ratings.
Credit risk funds are less liquid due to low demand than other debt mutual funds like liquid funds, low-duration funds, etc.
Credit risk funds are suitable for investors with high-risk tolerance and long-term investment horizons, and other mutual funds say liquid funds are suitable for a wide range of investors.

Historical Performance of Credit Risk Funds

Credit risk funds generally offer high returns as compared to other categories of debt funds, and annualised returns can range somewhere between 7% to 14% depending on the fund and the market conditions.

As of January 2024, there are more than 15 credit risk funds available in India from different Asset Management Companies. The table below shows the annualized performance of a few credit risk funds that we selected on a random basis:

Funds	1 Year Return (%)	3 Year Return (%)	5 Year Return (%)	7 Year Return (%)
Aditya Birla Sun Life Credit Risk Fund – Direct Plan	7.73	7.64	7.24	7.51
Axis Credit Risk Fund – Direct Plan	7.86	6.56	6.94	7.05
HDFC Credit Risk Debt Fund – Direct Plan	7.35	6.39	7.95	7.56
ICICI Prudential Credit Risk Fund – Direct Plan	8.03	6.86	8.25	8.06

Are Credit risk funds suitable for you?

Investments in credit risk funds expose your portfolio to high risk, and if your main purpose is to preserve your capital (assuming you are a risk-averse investor), then chances are likely that credit risk funds may not align with your financial goals.

However, if you are looking for diversification in your debt portfolio, can stay invested for a longer horizon, and are familiar with the risks involved, you can choose credit risk funds to diversify your portfolio and generate good returns.

But remember to seek advice from a financial advisor. A professional advisor will analyse your investment goals and curate your portfolio accordingly.

Conclusion

Credit risk funds are considered a double-edged sword. They offer high returns but at a cost of high risk. Although, the investor needs to analyse the credit quality of the bonds before investing in any credit risk fund and if in any case, the investors want to exit these funds, they need to assess and monitor the fund’s portfolio regularly.

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

Frequently Asked Questions (FAQs)

What are credit risk funds?
Credit Risk Funds are a category of debt mutual funds that primarily invest a minimum of 65% only in AA and below-rated corporate bonds.
Do credit risk funds offer higher returns as compared to other debt mutual funds?
Yes, they generally offer higher returns as compared to other categories of debt mutual funds such as liquid funds, money market funds, etc.
Credit risk funds are suitable for what kind of investors?
Credit risk funds are suitable for investors with a high-risk tolerance and long-term investment horizon.
Should you seek professional help while investing in credit risk funds?
It is recommended to seek professional advice before investing in Credit risk funds.
Credit Risk Funds are previously known as?
“Credit Opportunity Fund” & “Credit Advantage Fund”.

January 8, 2024

Asset Management Companies (AMC) in India

If you are looking forward to beginning your journey in mutual funds and are not familiar with the term AMC or Asset Management Company, you have come across the right place!

What is AMC?

AMC stands for Asset Management Company. AMCs are financial institutions that manage and invest funds on their client’s behalf through pooled investments such as mutual funds, ETFs or other financial instruments.

AMC employs professionals fund managers, and analysts to make investment decisions. These professionals research and analyse the market conditions to fulfil the fund’s choices and investment needs.

And for all these services, they charge fees for managing the funds. The fees include a management fee, a performance fee and other miscellaneous expenses. The fees are the percentage of the assets under management (AUM) – It is the total value of the investments managed by the AMC.

In India, AMCs are regulated by the Securities & Exchange Board of India (SEBI). Further, AMCs are also passively regulated by the Association of Mutual Funds in India (AMFI).

Now, you must be thinking about how these AMCs operate. AMCs invest the pooled money in professionally managed funds based on the investor’s financial goal, investment horizon and risk appetite. They rebalance these funds on different frequencies, such as quarterly or annually to maintain the desired asset allocation.

AMCs distribute these funds through various channels including banks, online platforms, NBFCs, distribution houses, agents, etc. The revenue of an AMC primarily comes from the fees it charges from the investors.

Indian Mutual Fund Industry Analysis

Assets Under Management (AUM) of the Indian Mutual Fund Industry stood at INR 49.05 lakh crores as of 30 November 2023.

The AUM of the Indian Mutual Fund Industry has grown from ₹8.90 trillion as of 30 November 2013 to ₹49.05 trillion as of November 30, 2023, more than a 5-fold increase in 10 years.

The proportionate share of equity-oriented schemes is 54.9% and for debt-oriented schemes it is 18.5% of the industry’s assets. Individual investors hold a relatively higher share of industry’s assets, i.e., 59.2% in November 2023.

Institutional investors account for 40.8% of the assets, of which corporates are 95%. The rest are Indian and foreign institutions.

From the above data, we can interpret that AMCs have experienced steady growth over the years, reflecting investors’ participation in the mutual fund industry. Rise in disposable incomes and increasing financial awareness are key factors leading to the growth of the mutual fund industry in India.

Emerging Trends in the Indian Mutual Fund Industry

We all understand the financial landscape of India, which is continuously evolving and AMCs are launching new schemes every year. In the calendar year 2023, AMCs in India launched 198 New Fund Offers (NFOs).

Some of the key emerging trends in the mutual Fund industry are:

Fintech and Robo-advisors are playing an important role in managing investments. Robo-advisors use algorithms to provide automated suggestions on your investments are continuously gaining attention.
Investors these days generally look for investment opportunities that align with their values. Thematic and Overseas funds play a major role by providing sector-focused and global investments opportunities respectively.
ESG investing or environmental, social and governance factors are crucial for new-generation investors. AMCs that curate ESG-friendly funds are attracting ample inflows.
Direct investment platforms are gaining traction because of their low expense ratio and easy registration process.

Broadly, there are two types of mutual funds – direct funds and regular funds. Their expense ratio is the primary distinction between them. Regular mutual funds are chosen by investors who prefer investing with financial advisors, whereas Direct mutual funds are meant for those investors who make their own investment decisions.

Top Asset Management Companies of India

As of December 2023, there are 44 registered Asset Management Companies in India. The top 5 AMCs in India are:

1. SBI Asset Management Company

SBI mutual fund is a leading AMC in India. It was established in the year 1987 and has 36 years of experience in the fund management. It is a joint venture between the State Bank of India and Amundi Asset Management company. State Bank of India currently holds a 63% stake in the SBI mutual fund, and Amundi Asset Management company holds a 37% stake through a wholly owned subsidiary.

SBI currently manages 306 open-ended and 215 close-ended funds with an AUM of INR 828,152 crores as of September 2023.

2. ICICI Prudential Asset Management Company

ICICI is another major player in the Indian Mutual Fund Industry. It was established in 1998 and is a joint venture between ICICI Bank and Prudential Plc, a leading Pan-Asia & Africa-focused group that provides health protection and saving solutions.

ICICI AMC manages 436 open-ended and 17 close-ended funds with an AUM of INR 594,204 crores.

3. HDFC Asset Management Company

Established in the year 2000, HDFC is also a major player in the mutual fund industry with a strong track record and robust product portfolio.

HDFC AMC is a joint venture between HDFC Limited & ABRDN Investment Management Limited (formerly known as Standard Life Investments Limited).

HDFC AMC manages 277 open-ended and 57 close-ended funds with an AUM of INR 518,132 crores.

4. Kotak Asset Management Company

Kotak AMC is the wholly owned subsidiary of Kotak Mahindra Bank Ltd., which started operations in the year 1998 and holds a large investor base of over 8.1 million.

It currently manages 237 open-ended and 34 close-ended funds with an AUM of INR 330,703 crores.

5. Nippon Asset Management Company

Nippon India Mutual Fund (NIMF) is one of the fastest-growing mutual funds in India and was established in the year 1995. NIMF was previously known as Reliance Mutual Fund.

Nippon currently manages 441 open-ended and 24 close-ended funds with an AUM of INR 329,831 crores.

Read Also: Top AMCs in India

Conclusion

To wrap it up, there are 44 registered AMCs in India offering a diverse world of mutual funds. Remember, even though the Indian asset management industry is poised for consistent growth in the coming years, always conduct thorough research and analysis before starting your investment journey and consult with financial advisors.

Also, if you are a keen investor and want to update yourself on the taxation of different mutual funds in India, checkout our blog: Decoding Mutual Funds Taxation In India

Frequently Asked Questions (FAQs)

What is the full form of AMC?
Asset Management Company.
Does AMC charge fees from investors?
Yes.
Who regulates AMCs?
Securities & Exchange Board of India.
How many registered AMCs are there in India?
As of December 2023, there are 44 registered AMCs.
What is Assets Under Management (AUM)?
It is the total value of the investments managed by the AMC.

December 29, 2023

Mutual Fund Taxation – How Mutual Funds Are Taxed?

Mutual funds are pooled investments that aim to provide capital growth to investors in the long term. They are classified according to asset class, financial goals, and structure. There’s an entire universe of mutual funds.

As mutual funds can be of different types, so is their taxation. Now, you must be guessing, that is okay, but why should I care? Taxation on mutual funds varies due to various factors. Ignoring this can significantly impact your net returns post taxation. In this blog, we will learn how taxation impacts your returns on mutual funds investment.

In India, after the budget of 2023 and finance bill, the benefit of indexation is no longer available on debt mutual funds. Hold on; things will be clarified by the end of the blog.

Taxation rules are defined based on certain factors:

Type of Fund: Equity-oriented or Debt-oriented.
Type of Plan: Growth or IDCW (Income distribution cum capital withdrawal).
Holding Period: Short term capital gain tax or Long term capital gain tax.

Earnings from Mutual Funds Investment

There are two ways you can earn from investing in mutual funds:

Capital Gains: When you sell an asset at a price higher than initial buying price, you earn capital gains. In case of mutual funds, allotment is done based on NAV.

For example – You bought ten units of mutual funds having NAV of 100. Your total buying was 10*100 = INR 1,000. Now, after some time, you sold these ten units at 120. So, you earned 20*10= INR 200, i.e., capital gains.
Dividends: Mutual funds invest money in several companies, and when mutual funds receive dividends from those companies, the fund manager adjusts this dividend in two ways:
Growth Option: In this, the fund manager will re-invest the dividend received in the portfolio, and you won’t get any pay check.
IDCW: Income distribution cum capital withdrawal, the Fund manager will transfer the dividend received to you and will not re-invest the money.

Taxation

Now, for taxation purposes, both capital gains and dividends are taxed separately, we will uncover them one by one. Let’s start with dividends then we will move to capital gains tax.

Dividends Taxation

As discussed above, in the case of dividends, there are two options available to the investors:

Growth: In case of growth, all your returns are classified as capital gains tax. So, no need to worry about separate taxation on dividends.

IDCW: In this method, you will receive the dividends directly in your account. In India, dividends are taxed at your tax slab. For example, you fall in a 30% tax slab and receive dividends worth INR 50,000 in a year. So, out of total dividends, 30% of 50,000, i.e., INR 15,000 will go to the tax authorities.

IDCW is only suggested to investors looking for a regular source of income. However, the growth option is more tax-efficient and ideal for long-term investors.

Capital Gains Taxation

For capital gains, mutual funds are broadly classified as Equity-oriented or debt-oriented. After the fiscal budget of 2023, there are three categories of taxation: Equity, Debt and Debt with indexation benefit. The exposure of a mutual fund’s equity component determines which category the fund is in. Have a look at the table below:

So, funds investing more than 65% in equity and equity-related instruments, are taxed as per Equity taxation. Fun Fact: Arbitrage funds come under equity taxation.

Now, coming to the holding period. Your holding period also affects taxation. The holding period is different for all three categories. Check the table below:

As you can observe, for equity-oriented funds, STCG will apply if the holding period is less than a year and LTCG if the holding period exceeds one year. In case of less than 35% exposure in equity, neither STCG nor LTCG will apply. Your gains are taxed at your income tax slab rate.

There are hybrid funds in the market, these are the combination of equity and debt funds. They can be either equity-focused or debt-focused. If equity-focused (at least 65% in equity), then equity taxation will apply else debt taxation.

Now again, tax rates are different for STCG and LTCG. At this point, you must be scratching your head; so many rules. Don’t worry, we have created a cheat sheet for you. Have a look at the chart below:

Note that, in the case of LTCG in equity, 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 equity, there is flat 15% tax on gains without indexation benefit.

Indexation benefit on debt funds – In this, your buying value will be inflation-adjusted so that your taxable income is reduced. Longer the holding period, higher the benefit of indexation.

Now, which has the lowest taxation? Generally, there is no straight answer. It will depend on the type of mutual fund you are invested in and your holding period. However, between debt and debt with indexation, latter is the clear winner.

Conclusion

We have covered all the aspects of mutual funds taxation in India. In summation, it broadly depends on the type of mutual fund you invest in and your holding period.

Equity-oriented mutual funds are tax efficient but carry higher risk, and in case of debt-oriented funds, your slab rate will impact your tax majorly. If you fall in “no-tax” bracket, then small gains in a short holding period will carry no tax. Further, the longer your holding period, the more tax-efficient you will be.

Based on this, one can analyses their portfolio and plan their entry and exit. For example, you have an unrealized profit of INR 80,000 in an equity mutual fund and want to take out this profit. Here, a better approach would be to analyses your holding period and act accordingly. If you have been invested for 11 months, then probably waiting for one more month is ideal, where LTCG will apply on your 80,000 gains. Do remember that in case of equity, no tax is there till one lakh.

Frequently Asked Questions (FAQs)

What are slab rates in taxation?
These are brackets based on the age and income of an individual; each bracket will carry different taxation.
Do I need to pay any tax if my realized profit is INR 95,000 from selling an equity mutual fund after 14 months?
No, in this case, LTCG will apply, and in equity LTCG, no tax is there till one lakh.
What is IDCW?
IDCW (Income Distribution Cum Capital Withdrawal) means dividends received from mutual funds will be transferred to you.
What is Indexation benefit?
Your buying value will be inflation-adjusted so that your taxable income is reduced.
For long term investing, which is better, growth plan or IDCW?
For the long-term, a growth plan is preferred.

December 14, 2023

What Is An IPO Mutual Fund? Should You Invest?

Recently, there have been a lot of new IPOs in Indian markets that have given stellar listing gains to investors. However, the better the potential IPO, the lesser the chances of getting an allotment for Retail Investors. Don’t worry; we will be discussing how you can invest in an Initial Public Offering (IPOs) via the mutual fund route.

Thematic funds are similar to sectoral funds, which fall under equity mutual funds category and are professionally managed by a fund manager. Their strategy involves investing in a particular theme, e.g., IPO theme, Digital and tech theme, etc.

There is one such mutual fund in the industry that will enable you to invest in quality IPOs without worrying about allotment status. We are referring to “Edelweiss Recently Listed IPO Mutual Fund”. It is a thematic fund that will assist you in investing in quality IPOs that have either recently been listed or are going to be listed on the exchanges.

Edelweiss converted its “Maiden-Opportunities Fund”, a close-ended scheme launched in February 2018, to the “Recently listed IPO Fund, an open-ended scheme” open to new investments since June 2021.

As per Edelweiss, the following is the strategy of the fund:

1. The fund will invest in the recent 100 IPOs to capture listing and post-listing gains.

2. The fund will invest in new-age businesses that are getting listed in the Indian market.

3. The fund will invest in companies across sectors with a bias towards small and mid-caps that promise growth.

4. The fund will not invest in weak businesses that can be highly impacted by market shocks.

Characteristics of the Fund:

As of December 2023:

1. More than 72,000 people have invested in this mutual fund.

2. Its expense ratio is 0.92% and has an exit load of 2% if redeemed within six months.

3. Since inception, the fund has given an app. annualized return of 15%.

4. Only such thematic mutual fund available in the industry.

5. The fund’s asset under management (AUM) is INR 943 crs.

Positives if you invest in such thematic mutual funds:

Get access to a large number of IPOs with minimal investment amounts without the headache of research and analysis.
You don’t have to worry about the non-allotment of IPOs, as such funds place bids via the QIB route (Qualified Institutional Buyers).
High growth potential as the fund will invest in new-age businesses with a bias towards small and mid-caps.

Negatives if you invest in such thematic mutual funds:

IPO-themed funds are relatively new in the industry, with a minimal track record. Further, there is only one IPO-themed fund in the industry as of December 2023, so comparing its characteristics and returns can be challenging.
Thematic funds have a narrowly defined investment focus, which provides less freedom to the fund manager to invest in profitable companies.
The fund’s AUM may get smaller if the quality of new IPOs declines.
Thematic funds are not suitable for short-term horizons. These funds may have negative or poor returns during the bear market or in the short term.
Thematic funds substantially carry more risks than other categories of mutual funds, as news and events related to a particular sector can impact the entire sector.

Conclusion

We have discussed one of the thematic funds, the IPO theme. Thematic funds are equity mutual funds that invest in a particular theme. As we discussed above, the IPO theme is relatively new, and the only fund available in the industry as of now is the “Edelweiss Recently Listed IPO Fund”. Assessing the long-term prospects of such funds can be challenging. Further, thematic funds generally carry a higher risk than other categories of mutual funds because of their concentrated approach and smaller investment universe.

The optimal asset allocation approach is to choose mutual funds after consulting with a financial advisor and assessing your investment horizon and risk appetite. Investments in thematic mutual funds shouldn’t constitute a significant portion of your portfolio.

Frequently Asked Questions (FAQs)

What are some examples of thematic funds?
Digital and AI theme, IPO theme, Clean energy theme, etc.
What is the risk profile of thematic funds?
Thematic funds carry a very high level of risk.
How many IPO-themed mutual funds are available in the industry?
As of December 2023, only one fund invests in the IPO theme.
What are the Sectoral Funds?
Both are almost similar; thematic funds focus on themes such as IPO, Digital India, etc., while sectoral funds focus on a particular sector such as Healthcare, FMCG, Financials, etc.
What is QIB?
QIB stands for Qualified Institutional Buyers. These are institutional buyers with expertise in capital markets. Example: Mutual Funds, Alternative Investment Funds, Endowment Funds, etc.

December 11, 2023

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

You are a well-versed investor and recently stumbled upon multi-cap and flexi-cap mutual funds and asked yourself, what exactly is the difference. We will unfold your question in today’s blog.

Firstly, if you are new to the world of mutual funds, check out our blog: Mutual Funds: Meaning, Types, Features, Benefits and How They Work.

Mutual funds are classified according to asset class, financial goals, and structure. Multi-cap and Flexi-cap are both similar to other equity mutual funds, which are pooled investments, and they aim to provide capital growth to investors in the long term. Both funds fall under the umbrella of active mutual funds.

Multi-Cap Funds

Multi-cap funds are active equity mutual funds that invest in large-cap, mid-cap, and small-cap stocks. As per the latest circular released by SEBI, at least 75% of the investments made by multi-cap mutual funds are in equity and equity-related instruments. The investments should be made in the following manner:

Investments in large-cap companies: at least 25% of the total assets.
Investments in mid-cap companies: at least 25% of the total assets.
Investments in small-cap companies: at least 25% of the total assets.

The advantage of multi-cap funds is that your capital is invested in all three caps (at least 25%), with mid and small caps being more volatile than large caps, which can yield an ample return in the long run. However, keep in mind that there is no guarantee that multi-cap funds will outperform other mutual fund classes; in fact, multi-cap funds can be more volatile in the short run.

Flexi-Cap Funds

The Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI) have launched a number of initiatives in India to raise public awareness and confidence in the financial sector.

SEBI introduced this category of mutual funds in November 2020 after receiving recommendations from the Mutual Fund Advisory Committee (MFAC). As per the circular released by SEBI, it is an open-ended, dynamic equity scheme investing across large-cap, mid-cap, and small-cap stocks.

In the flexi-cap fund, at least 65% of the investments should be invested in equity and equity-related instruments. However, as compared to multi-cap funds, there is no minimum criterion to invest this 65% across large, small, or mid-cap stocks. The advantage of flexi-cap funds is that fund managers have more investment flexibility to invest money across large, mid, and small caps.

Let’s look at the below comparison. We have selected one mutual fund from each category:

Parag Parikh Flexi Cap Fund
Nippon India Multi Cap Fund

Source: Valueresearch

As you can observe, the Parag Parikh flexi-cap fund has more investment in large-cap funds than the Nippon India multi-cap fund. Further, the Parag Parikh flexi-cap fund has only a 1% investment in small-cap stocks. Flexi-cap funds provide more flexibility for investments as compared to multi-cap funds, as there is no regulatory requirement for flexi-cap funds.

Choosing Between Multi-Cap and Flexi-Cap:

Particulars	Flexi-cap fund	Multi-cap fund
Equity Exposure	At-least 65% investment in equity and equity-related instruments	At-least 75% investment in equity and equity-related instruments
Asset Allocation	Fund managers have flexibility in asset allocation	At-least 25% in each of the cap: large, mid and small
Risk	Very High	Very high
Volatility	Low as compared to multi-cap	High as compared to flexi-cap
Tax	Subject to both STCG and LTCG	Subject to both STCG and LTCG

Conclusion

We have discussed the similarities and differences between flexi-cap and multi-cap mutual funds. Both are equity mutual funds and provide diversification to your mutual fund portfolio. However, the key difference in both is the equity exposure and the asset allocation. The minimum percentage of equity and equity-related instruments that flexi-cap funds and multi-cap funds can invest in is 65% and 75%, respectively. Further, multi-cap funds must invest at least 25% in each class: large, mid, and small-cap, whereas flexi-cap funds have greater flexibility.

The best mutual fund strategy is to select mutual funds based on your risk appetite and time horizon after consulting with your financial advisor.

Frequently Asked Questions (FAQs)

Are multi-cap and flexi-cap active or passive funds?
Both multi-cap and flexi-cap are active mutual funds means they are actively managed by a professional fund manager.
Can flexi-cap funds invest in debt securities?
Yes, as long as a fund has at least 65% of its investments in equity.
What is the risk profile of flexi-cap and multi-cap funds?
The risk profile for both funds is very high, as both are equity mutual funds.
Are multi-cap funds more volatile than flexi-cap funds?
In general, the answer is yes, because multi-cap funds must invest at least 25% in small-cap and mid-cap funds due to regulatory requirements, whereas no such requirement for flexi-cap funds.
When did flexi-cap funds launch?
In November 2020, SEBI introduced flexi-cap funds.

December 11, 2023

SIP in Stocks vs SIP in Mutual funds?

Which can be a better choice?

To choose between SIP in stocks and SIP in mutual funds, first we need to understand the fundamentals of mutual funds, stocks, and SIP. Check out this blog to get answers to all your questions.

What is a Mutual Fund?

It’s a pooled investment fund overseen by a professional fund manager. It gathers funds from investors who want to invest in the stock market. Depending on the type of mutual fund, these collected funds are then diversified into various asset classes. Mutual funds can differ from, open-ended to close-ended, and from actively managed funds to passively managed funds. Every mutual fund unit is allotted NAV, which is net asset value. It is the combined value of all the asset classes that you hold in your portfolio.

What are Stocks?

A stock, also known as equity or share, represents a part of ownership that an individual holds in a corporate or government company. Investing in stocks carries a level of higher risk because the value of a stock can be influenced by various factors, including the company’s financial performance, economic conditions, and market sentiment. However, stocks have historically offered higher returns compared to other investment options.

What is SIP?

SIP stands for Systematic Investment Plan. It is an investment method in mutual funds and stocks where you invest a fixed amount of money at regular intervals. SIP can be done for an amount as small as INR 500. SIPs are long-term investment strategies that help you compound your money over the years.

Having discussed the basics of mutual funds, stocks, and SIP, let us go through what SIP in mutual funds and SIP in stocks looks like.

SIP in Stocks

SIP in stocks involves regular investment in a specific stock at pre-determined intervals. Stock SIP can be used for averaging your shares, thereby reducing their purchase price. The concept of stock is more or less similar to SIP in mutual funds, which we shall discuss later in this blog.

Below are some key facts an investor should know before choosing stock SIPs.

SIP in stocks will give you direct exposure to individual stocks that can help you generate better returns, but as you know, reward and risk go hand in hand. This SIP method is susceptible to market fluctuations, which can significantly impact returns.
SIP in stocks will give you more freedom as you are solely responsible for selecting your allocation. However, selecting specific stocks involves in-depth research and analysis of companies as well as the overall trend of the market, which can be challenging and stressful at times.
Stock SIPs involve regular monitoring of the stocks and can be a tough task.
Diversification of the portfolio becomes difficult when using SIPs in stocks because it can be difficult to maintain multiple SIPs and stay current on research and new developments.

Stock SIPs can be a good option for investors who are well-versed in market fluctuations. However, for most of the investors, it is suggested to do SIP in mutual funds.

SIP in Mutual Funds

Mutual fund SIP involves regular investment of a fixed amount into a mutual fund. This method indirectly invests in multiple stocks and other instruments; therefore, it allows investors to allocate capital as per their risk profile. There are a plethora of mutual funds available in the industry, ranging from equity based to debt based. Check out our blog on mutual funds to learn more!

Below are some key points that an investor should remember before choosing SIPs in mutual funds:

Mutual funds offer diversification and carry less risk as compared to stock, as mentioned earlier, and reduce the impact of poor performance of a single security.
Investors can start their financial journey with mutual fund SIPs from as low as INR 100, which makes it accessible to people of all income groups in a country like India, but keep in mind that mutual fund investments are always subject to market risk.
Mutual fund SIPs allow disciplined and regular investing. You do not need to monitor and analyze your portfolio on a daily basis.
There are two ways to transact SIPs:
- You can manually pay the amount via UPI, Net banking, etc., at intervals.
- You can set-up an auto mandate authorizing your bank to automatically deduct a specified amount from your bank account at every interval.
Similar to stock SIP, investors can enjoy the benefits of rupee cost averaging in mutual funds SIP. With this, the NAV of the mutual fund unit will be allotted at lower prices.
Investors can choose SIPs based on their risk profile and financial goals, such as equity funds for capital appreciation, debt funds for stability, or hybrid funds for a balanced approach. However, before choosing any scheme, be aware of the expense ratio and other fees associated with mutual funds.

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

SIP in stocks vs. SIP in mutual Fund

Let’s explore the table of differences below for a better understanding:

Basis	SIP in Stocks	SIP in Mutual Fund
Risk	High – Market expertise is required	Risk is comparatively lower as it is managed by a fund manager.
Research Requirement	High	Low to none
Management	Self-directed	Professionally managed
Ownership	Direct ownership in your de-mat account	Indirect ownership as shares are purchased by mutual funds and its units are allocated to you
Charges	Only transaction related expenses are incurred. Click here to learn more.	It includes several charges: expense ratio (covers admin-related expenses and fund manager fees), exit load, redemption fees, etc.

Conclusion

SIP in mutual funds offers a disciplined way of investing, and people who wish to stay committed to the markets for the long term can choose this route. However, it is suggested to only those investors who are aware of the market technicalities and are willing to research companies. It requires active involvement as compared to mutual fund SIPs.

In summation, before starting your SIPs, carefully assess your financial goals and risk appetite. It is advised that you speak with a financial advisor to receive individualized portfolio support.

Further, click here to explore all the different investment options!

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5	Bank of Baroda Vs Canara Bank: Which is Better?

Frequently Answered Questions (FAQs)

What is the full form of SIP?
SIP stands for Systematic Investment Plan.
Which is better? Stock SIP or Mutual fund SIP?
It depends on individual financial goals and preferences.
How many stocks can you choose when doing Stock SIP?
You can start SIP in as many stocks as you want. However, in a well diversified portfolio, atleast 30 stocks are suggested.
Does SIP in stocks has higher risk than SIP in Mutual Funds?
Yes. SIP in stocks is comparatively riskier.
What is the minimum amount of SIP required to invest in Mutual Funds?
SIP in a mutual fund starts from as low as INR 100.

December 4, 2023

Mutual Fund vs ETF. Are They Same Or Different?

Mutual Funds and Exchange Trade Funds (ETFs) are both pooled investments that take money from multiple investors and then invest in several instruments: Equity, Bonds, Commodities, etc. However, there are a few differences between them. Let’s find out those differences!

What are Mutual Funds?

Mutual funds collect money from numerous investors to invest in a diversified portfolio of stocks, bonds, or other assets. These funds are managed and curated by professional fund managers and hence become suitable for investors who have less time and expertise to manage their portfolios. When you invest in mutual funds, NAV (Net asset value) is allotted to you which reflects the net value of the assets that the fund manager chooses to invest your money.

Mutual funds in India are established in the form of a trust under the Indian Trust Act of 1882, in accordance with SEBI (Mutual Funds) Regulations, 1996.

Mutual funds are considered ideal for investors who do not have sufficient knowledge of investing in stock markets and wish to start their financial journey with a small amount since these funds offer investors a wide variety of investment options like shares, bonds, debentures, real estate, and money market instruments.

Check out our blog on Mutual Funds!

Types of Mutual Funds

1. On the basis of organizational structure

Open-ended funds

These funds issue shares and redeem existing shares on a daily basis. The NAV of the underlying assets determines the price of this fund.

Closed-ended Funds

These funds have a fixed number of shares that are issued only once and then are traded on the exchange until maturity. Close-ended funds have a fixed maturity date.

Interval Funds

These funds are a mixture of open-ended and closed-ended funds that allow investors to purchase & redeem their shares at certain intervals. The transaction period in interval funds has to be a minimum of 2 days, and there should be at least a 15-day gap between the two transaction periods.

2. On the basis of portfolio management

Active Funds

An active fund is a fund where the fund manager manages the portfolio, i.e., he decides what needs to be sold, bought, and held in the portfolio.

Passive Funds

Passive funds, also known as index funds, are investment funds that are designed to replicate the performance of a specific index. They keep track of the benchmark returns.

3. On the basis of asset class

Equity funds

These funds invest primarily in stocks or equities and come with higher volatility. For example, large-cap funds, mid-cap funds, and small-cap funds.

Debt Funds

These funds invest in fixed-income securities such as government bonds and carry lower risk when compared to regular equity funds.

Check out our blog on Debt Mutual Funds

Hybrid funds

In these funds, the capital of the investor is allocated both in equity and debt funds and the fund manager tries to create a balance between risk and return.

Advantages of investing in Mutual fund

Investing in mutual funds comes with certain risks and advantages. Below are some key advantages that mutual funds offer:

Mutual funds offer investors a diversified portfolio of different asset classes – Large cap, Small Cap, Flexi Cap, etc.
Active Mutual funds are professionally managed funds with skills and expertise.
Mutual funds are an affordable way to start an investment journey because the initial investment amount is relatively low.
Liquidity – The lock-in period is generally low to none in Mutual funds.
Tax benefits are also available to the investors investing in ELSS funds.

Risk of Investing in Mutual Funds

Mutual funds are subject to market risks, and returns are not guaranteed.
The value of your investments may fluctuate depending upon the market movements.
Market-related risk: The inability of a mutual fund to sell securities held in the portfolio could result in potential losses to the scheme.
Changes in interest rates and economic conditions can significantly affect the prices of securities held by Mutual Funds.

What is ETF?

ETF stands for Exchange-traded funds. It is a type of investment option similar to Mutual Funds. ETFs invest in a basket of securities such as stocks, bonds, and other assets. Unlike mutual funds, ETFs are traded on stock exchanges just like any individual stock, and an investor can buy or sell them during market hours at certain prices. These funds track indices such as CNX NIFTY. ETFs generally carry a low expense ratio because of lower administrative costs. (Read more about expense ratios in our blog Asset Under Management).

To trade in ETFs, a de-mat account is required, and usual brokerage charges and STT would apply. When investing in ETFs, dividends from a stock that is in the ETF basket are also reinvested.

ETF shares are created or redeemed through a unique in-kind process. Authorized participants or Market Makers (typically large institutional investors) can exchange a basket of securities for ETF shares or vice versa, helping to keep the ETF’s market price close to its Net Asset Value (NAV).

Merits of investing in ETFs

ETFs offer diversification because they invest in a basket of securities. Investors can customize their portfolios as per their choice.
ETFs usually carry a lower expense ratio than mutual funds.
ETFs are tax-efficient. They are designed and structured to minimize capital gains distributions so that your tax liability is reduced to an extent.
ETFs can be easily bought and sold.

Demerits of investing in ETFs

ETFs may have tracking error which is the difference between the ETFs performance and the performance of the underlying asset. Various factors such as expense ratio, brokerage, and liquidity of the underlying securities can cause this.
ETFs offer less diversification as compared to Mutual Funds.
ETFs with low trading volume can be more volatile because of high bid-ask spreads, which is the difference between the price at which you can buy an ETF and the price at which you can sell it.

Pro Tip: Always check the NAV of the ETFs before investing because ETFs generally trade at a premium.

Read Also: Types of Mutual Funds in India

Mutual fund vs. ETF: Which one is right for you?

Confused! Explore this table to have a better understanding.

Basis	Mutual Funds	ETFs
Structure	Managed by investment firms and are priced once per day at the NAV	ETFs are tracked by index sector or asset class.
Trading	Bought and sold through the fund company	Traded on stock exchanges just like any other individual stock.
Management	Mutual Funds can either be actively managed or passively managed.	Most of the ETFs are passively managed, but there are actively managed ETFs as well.
Fees	Mutual funds carry management fees, sales loads, and expense ratios	ETFs do not carry any sales load, but you need to pay STT, brokerage, and expense ratios while trading in ETFs.

Conclusion

To wrap it up, ETFs and Mutual Funds are both pooled investments. Eventually, the choice between a mutual fund and an ETF depends on the preferences of the investor, his investment strategy, and risk tolerance. Some investors may prefer the ease of trading and lower costs associated with ETFs, while others may value the professional management and simplicity of mutual funds.

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4	Gold ETF vs Gold Mutual Fund: Differences and Similarities
5	ETF vs Index Fund: Key Differences You Must Know

Frequently Answered Questions (FAQs)

Which mutual fund offers investors with tax benefits?
ELSS (Equity Linked Savings Scheme) funds provide investors with tax benefits under Section 80 (C) of the Income Tax Act.
What does ETF stand for?
ETF stands for Exchange Traded Funds.
Are ETF and mutual Funds the same?
ETFs are traded like individual stocks, and mutual funds can be bought and sold through fund houses.
ETFs are actively managed or passively managed?
Most of the ETFs are passively managed, but there are actively managed ETFs as well.
Where do money-market funds invest?
Money market funds invest in highly liquid instruments like T-bills and commercial papers.

November 30, 2023

What is Asset Under Management (AUM) in Mutual Funds

Before learning about AUM, let us know a little about AMCs.

AMC stands for Asset Management Company and manages and operates the mutual funds. It pools money from retail and institutional investors and invests that fund in a diversified portfolio of stocks, bonds, and other financial instruments. AMCs have dedicated research teams and fund managers who make decisions on the allocation of assets and portfolio management. AMCs earn fees for managing mutual funds, a percentage of the fund’s AUM.

What is AUM?

AUM stands for asset under management. AUM in mutual funds refers to the total market value of all the assets a mutual fund manages on behalf of its customers. It is an essential metric in the financial markets. A larger AUM generally implies a larger fund with more investors. The respective mutual fund scheme AUMs can be found in the monthly fact sheet of the AMCs on their website or online mutual fund research platforms.

Indian Mutual Funds Industry

Before getting into the Indian mutual funds industry, let us know about the history of mutual funds. To make India financially stable, strong, and independent and encourage saving and investment, the first mutual fund was established in 1963, Unit Trust of India, by a combined initiative of the Government and the Reserve Bank of India by an act of Parliament. The mutual funds industry has grown significantly over the years. Unit Scheme 1964 was the first scheme that UTI launched.

In 1993, the first set of SEBI Mutual Fund Regulations existed for all mutual funds except UTI. The former Kothari Pioneer (now merged with Franklin Templeton Mutual Fund) was the first private-sector mutual fund registered in July 1993.

With the entry of private sector funds in 1993, a new age began in the Indian MF industry, giving Indian investors a wider and better choice of Mutual fund products.

The MF Industry’s AUM has grown from ₹ 22.24 trillion as of October 31, 2018, to ₹46.72 trillion as of October 31, 2023, more than a 2-fold increase in 5 years (source- AMFI website). The Indian Mutual Funds industry has witnessed robust growth over the years. The sector provides investors with different mutual fund categories like equity, debt, and hybrid funds catering to their risk profiles and preferences. Not only this, the mutual fund industry in India has also undergone a digital transformation.

Calculation of AUM

AUM in mutual funds is calculated by adding up the market value of all the securities, cash, and other assets mutual funds hold.

The formula for the same is listed below

AUM= Market Value of Securities + Cash & Cash equivalents + Other Assets

For example, a mutual fund holds the following

The market value of securities = Rs. 50 Crore

Cash & Cash equivalents = Rs. 7 Crore

Other Assets = Rs. 3 Crore

Therefore, AUM = Rs. 50 Cr. + Rs. 7 Cr. + Rs. 3 Cr. amounts to Rs. 60 Crore.

It’s important to note that the actual calculation may involve more detailed considerations, especially in a real-world scenario where the portfolio may consist of various types of securities, derivatives, and other financial instruments. Moreover, the market values of securities can fluctuate, affecting the AUM over time.

Remember that the total value of AUM keeps changing depending on the performance of the assets.

Significance of AUM in different Mutual Funds Categories

Larger AUM in equity funds, whether large or mid-cap, reflects a broader investor base and better scale of operations. However, a larger AUM while investing in small-cap companies can pose challenges. Therefore, small caps do not concentrate much on AUM.
Smaller AUM in sectoral and thematic funds may indicate a more focused approach to investment since these funds often focus on specific sectors and themes.
In the case of hybrid funds, a mixture of equity and debt, a larger AUM can provide better diversification benefits.
Fixed-income funds like bonds also need a larger AUM for better diversification.

Factors affecting AUM

Performance of the Market

When markets are performing and in a rising phase, investors are more likely to invest, resulting in increased inflows and higher AUM for investment companies. In falling markets, investors redeem the funds, resulting in a decline in AUM.

Fees & Expenses

The expenses charged by asset management companies can influence AUM. Lower fees can make the funds more eye-catching to investors.

Advertisement & Distribution of Funds

Effective marketing and distribution policies are vital in attracting new investors and growing a firm’s investor base. Successful marketing campaigns and a strong distribution network can help the MF house generate inflows and increase AUM.

Economic Conditions

The global economic environment can also affect AUM. When a country is economically stable and in its growth phase, more investments will occur, leading to higher inflows.

Past performance

The historical show of a company plays a vital role in determining AUM. Funds generating consistent positive returns will eventually attract new investors.

For this, first, we need to understand what is the expense ratio. The expense ratio is defined as the annual cost of managing and operating mutual funds. AMCs charge these expenses and are a percentage of AUM., for example, management fees, administrative expenses, and Distribution expenses. Formula for calculating Expense Ratio = (Total Fund Expenses / AUM) *100. Therefore, there is an inverse relationship between AUM and the expense ratio.

As AUM increases, the overall percentage of expenses relative to assets decreases. Keep in mind that AUM influences the calculation of the expense ratio and plays a vital role in structuring the overall cost of the fund and

Conclusion

To wrap it up, AUM is an important metric for investors when it comes to selecting mutual funds. It can only provide insight about the AMC but cannot be the sole factor when making investment decisions also, a higher AUM does not signify better returns and performance by the mutual funds. The significance of AUM can fluctuate across different fund categories.

Read Also: History of Mutual Funds in India

Frequently Answered Questions (FAQs)

What is AUM?
AUM stands for asset under management and is the total market value of all the assets that a mutual fund manages on behalf of its customers
What is the formula for calculating AUM?
The formula for calculating AUM isAUM= Market Value of Securities + Cash & Cash equivalents + Other Assets
How is the expense ratio and AUM related?
Expense ratio and AUM share an inverse relationship, i.e., an increase in AUM decreases the expense ratio.
Who manages the mutual fund?
Asset Management companies manage mutual funds.
When was the first mutual fund in India established?
1^st mutual fund in India was established in the year 1963.

November 25, 2023

What is Debt Mutual Funds: Invest in the Best Debt Funds in India

What are Debt Mutual Funds?

Debt mutual fund is a category of mutual fund that invests in fixed-income instruments such as Corporate and Government bonds, commercial papers, treasury bills, state development bonds, etc. (T-bills are short-term debt instruments or money market instruments that the government of India issues. These are generally given for 91 days, 182 days, or 364 days. They are provided to fulfill the short-term financial needs of the government).

The primary objective of debt mutual funds is to generate income for investors through interest payments while preserving the capital invested. Debt mutual funds allocate their holdings across various debt instruments to diversify the risk. This helps the fund manager reduce the impact of poor performance by any single security.

Debt funds invest in listed or unlisted securities, including corporate and government bonds. The NAV of the fund is calculated as the difference between the buy price and the sell price. Debt funds also receive regular interest from the underlying debt, which is added daily.

A debt fund’s NAV also depends on the interest rate. Debt mutual funds are open-ended funds, which means investors can buy or sell fund units on any business day at the fund’s net asset value (NAV). When considering debt mutual funds, it’s essential to assess your investment goals, risk tolerance, and time horizon and select funds that align with your financial objectives.

Who should invest in Debt Funds?

Debt Funds are suggested for individuals who prefer capital preservation to higher returns because debt funds provide investors with consistent returns and are less volatile. Investors who want a regular income but are risk-averse i.e., refrain from taking risks with their investments.

How to invest in Debt funds

You can invest in direct debt funds through Asset Management Companies (AMCs), and in the case of regular debt funds, you need to contact mutual funds distributors (MFDs).

Types of Debt Mutual Funds

These categories of debt funds cater to different investor preferences and financial goals.

1. Liquid Funds

Liquid funds invest in very short-term debt instruments like T-bills, Certificates of deposits, and commercial paper and have a maturity of 91 days to generate optimum returns. Liquid fund invests in highly liquid money market instruments and debt securities. The best liquid funds to invest in India are ABSL Liquid Fund, Mahindra Manulife Liquid, PGIM India Liquid, SBI Liquid Fund, and Nippon Liquid Fund.

2. Short-term Funds

These funds invest in money and debt market instruments and government securities. The investment duration of these funds is longer than that of Liquid Funds. The best Short-term funds to invest in India are ICICI Prudential ST, UTI SD, HDFC ST Debt, Sundaram SD, and ABSL SD.

3. Credit Risk Funds

These funds invest in lower-rated corporate bonds and debt instruments to earn higher returns. The best Credit Rating Funds in India to invest in are DSP Credit Risk, Baroda BNP Paribas Credit Risk, Nippon India Credit Risk, and ABSL Credit Risk.

4. Fixed Maturity Plans (FMPs)

FMPs are close-ended mutual fund schemes, and the maturity dates in FMPs are decided beforehand. They invest in debt instruments with a specific date of maturity. FMPs are issued for a period ranging from 30 days to 60 months, and units of FMPs are listed on the stock exchange.

5. Floating Rate Funds (FRFs)

FRFs invest in instruments that offer a floating interest rate on your investments in bonds, government securities, and debentures. The best-floating Rate Funds to invest In India are ABSL Floating Rate, Franklin Ind Floating Rate, and HDFC Floating Rate.

6. Gilt Funds

Gilt in Gilt funds stands for government securities. This fund invests your capital in government securities issued by central and state governments. This fund offers you low credit risk and moderate returns. The best Gilt Funds to invest in India are ICICI Pru Gilt Fund, SBI Magnum Gilt Fund, DSP Govt. Securities Gilt Fund, and Kotak Gilt Investment.

7. Dynamic Bond Funds

These funds invest in debt securities with different maturity periods and actively manage the fund’s interest rate risk. Returns vary based on market conditions. Above mentioned are some of the types of debt mutual funds. There are various other types, which we shall discuss later. The best Dynamic Bond funds to invest in India are ABSL Dynamic Bond Fund, ICICI All Seasons Bond Dir, HDFC Dynamic Debt, and 360 ONE Dynamic Bond.

8. Monthly Income Plans (MIPs)

MIPs are hybrid schemes that invest in a mixture of debt and equity. However, the allocation in equity is about 15-20% only. These funds offer regular income in the form of dividend payouts. However, you don’t need to receive dividend payments because it is at the discretion of the AMCs and depends on the surplus left from realized gains.

Taxation of Debt in India

Tax in debt is divided into two parts.

Short-term gain and long-term gain where the short-term duration is less than three years as per your income tax slab, and for long-term, it is more than three years at the rate of 20% with indexation benefit. (Indexation- means adjusting your purchase cost based on inflation). Now let us go through the advantages and disadvantages of investing in debt funds before jumping to any conclusion as to why to choose debt funds.

Advantages of Investing in Debt Funds

1. Stability & Safety

Debt Funds invest in fixed-income securities, which are stable and safe compared to other investment options like stocks.

2. Regular Income

Debt securities like MIPs and FMPs help the investor receive regular income through interest payments.

3. Diversification

With the help of debt funds, investors’ exposure to risk is reduced because debt funds generally have less exposure to equities, reducing the portfolio’s overall risk.

4. Tax Efficiency

If you want an escape from taxes, debt funds can be a solution because these funds carry more tax efficiency than any other traditional investment option like FDs and post office schemes. FMPs can offer investors tax advantages because of indexation benefits.

5. Liquidity

Debt funds are generally more liquid than FDs. Investors can buy or sell these funds on any business day, providing liquidity when needed, and these funds do not have any lock-in period. However, they do carry minimal exit load in some funds.

Conclusion

Debt mutual funds play a vital role in an investor’s portfolio by providing a range of fixed-income investment options. These funds offer stability, regular income, and diversification by investing in various debt instruments. The choice of debt funds depends upon factors like risk appetite, investment horizon, and financial goals. But it would help if you remember that debt funds are not entirely risk-free. Investors should consider consulting a financial advisor for personalized advice.

Frequently Answered Questions (FAQs)

What are debt mutual Funds?
Debt mutual fund is a category of mutual fund that invests in fixed-income instruments such as Corporate and Government bonds.
What are the different types of debt funds?
Different types of debt mutual funds include short-term funds, Fixed maturity period funds, gilt funds, credit risk funds, etc.
What is the taxation rate on long-term capital gains in debt mutual funds?
The tax rate on debt mutual funds for the long-term is more than 3 years at 20% with an indexation benefit.
What are T-bills?
T-bills are treasury bills that the Government of India issues to meet short-term financial needs.
What is the complete form of MIPs?
MIP stands for monthly income plan.

November 24, 2023

Category: Mutual Funds

What are Mutual Funds

Benefits of Investing in Mutual Funds

Regular Mutual Funds

Direct Mutual Funds

Regular Mutual Fund vs. Direct Mutual Fund

Breakdown of Expenses

How to identify a Mutual fund as Direct or regular?

Impact of Expense Ratio on Returns

Conclusion

Frequently Asked Questions (FAQs)

What is the difference between direct and regular mutual funds?

Which is better: Direct or Regular Mutual funds?

Can I change my investment plan from a regular to a direct mutual fund?

Which one gives higher returns?

How to know the expense ratio of regular and direct plans of the same scheme?

What are credit risk funds?

How do Credit Risk Funds work?

Advantages of Credit Risk Funds

Disadvantages of Credit Risk Funds

Impact of Interest Rate Changes on Credit Risk Funds

Risks associated with Credit Risk Funds

Credit Risk

Liquidity Risk

Concentration Risk

Interest Rate Risk

Credit Risk Funds vs. Other Mutual Funds

Historical Performance of Credit Risk Funds

Are Credit risk funds suitable for you?

Conclusion

Frequently Asked Questions (FAQs)

What are credit risk funds?

Do credit risk funds offer higher returns as compared to other debt mutual funds?

Credit risk funds are suitable for what kind of investors?

Should you seek professional help while investing in credit risk funds?

Credit Risk Funds are previously known as?

What is AMC?

Indian Mutual Fund Industry Analysis

Emerging Trends in the Indian Mutual Fund Industry

Top Asset Management Companies of India

1. SBI Asset Management Company

2. ICICI Prudential Asset Management Company

3. HDFC Asset Management Company

4. Kotak Asset Management Company

5. Nippon Asset Management Company

Conclusion

Frequently Asked Questions (FAQs)

What is the full form of AMC?

Does AMC charge fees from investors?

Who regulates AMCs?

How many registered AMCs are there in India?

What is Assets Under Management (AUM)?

Earnings from Mutual Funds Investment

Taxation

Dividends Taxation

Capital Gains Taxation

Conclusion

Frequently Asked Questions (FAQs)

What are slab rates in taxation?

Do I need to pay any tax if my realized profit is INR 95,000 from selling an equity mutual fund after 14 months?

What is IDCW?

What is Indexation benefit?

For long term investing, which is better, growth plan or IDCW?

Characteristics of the Fund:

Positives if you invest in such thematic mutual funds:

Negatives if you invest in such thematic mutual funds:

Conclusion

Frequently Asked Questions (FAQs)

What are some examples of thematic funds?

What is the risk profile of thematic funds?

How many IPO-themed mutual funds are available in the industry?

What are the Sectoral Funds?

What is QIB?

Multi-Cap Funds

Flexi-Cap Funds

Choosing Between Multi-Cap and Flexi-Cap:

Conclusion

Frequently Asked Questions (FAQs)

Are multi-cap and flexi-cap active or passive funds?

Can flexi-cap funds invest in debt securities?