Rajeev and Sanjeev moved to Mumbai as opportunities to earn and spend were higher. Sanjeev looked at the income opportunity and decided to enjoy life. Rajeev, on the other hand, decided to save and invest his earning, in order to survive in the city.
Rajeev was concerned when he learnt about Sanjeev's lifestyle and tried explaining him the benefits of saving young with numbers. Rajeev had started investing at the age of 25. He was investing ₹ 5,000 per month and earned @10% P.a. on his investments. In all, he would invest ₹21 lacs and accumulate a sum of ₹1.70 crores at 60 years of age.
If Sanjeev started investing ₹ 30,000 per month even at the age of 46, his total investment over the years would be ₹ 54 lacs. Earning@10% per year on his investments, he would accumulate less than ₹1.2 crores when he's 60.
Although Sanjeev invested ₹ 54 lacs as against Rajeev's ₹ 21 lacs and both earned at the same rate of return, Rajeev would accumulate a larger sum due to the time he gave to his investments. Starting early started the magic, and the power of compounding did the rest.
To elaborate, we invest in various investment avenues based on our requirements, e.g. For capital growth-we invest in equity shares, for safety of capital and regular income-we buy fixed income products.
The concern for most investors is: how to know which instruments are best for them? one may not have enough abilities, time or interest to conduct the research. To manage investments, one can outsource certain tasks one is unable to do. Anyone can outsource 'managing one's investments' to a professional firm-the Mutual Fund company. Mutual Funds offer various avenues to fulfill different objectives, which investors can choose from based on one's unique situation and objective.
Mutual Fund companies manage all administrative activities including paperwork. They also facilitate accounting and reporting the progress of the investment portfolios through a combination of Net Asset Values (NAVs) and the account statements.
Mutual Fund is a great convenience for those who need to invest their money for future requirements. A team of professionals manages the money and the investors can enjoy the fruits of this expertise without getting involved in the mundane tasks.
The best part about Mutual Funds is that no matter what your financial goal is, you can find an appropriate scheme for it.
So if you have a long term financial goal like planning for your retirement or your child's future education than equity funds could be a choice to consider
If your endeavour is to potentially generate regular income, a fixed income fund could be considered.
You may have suddenly received a windfall of money and are yet to decide where you wish to invest, you can consider a liquid fund. A liquid fund is a good substitute to consider for a savings account or even a current account to park your working capital.
Mutual funds also offer investment options for saving tax. Equity Linked saving Schemes (ELSS) are specifically designed to do the same. Mutual Funds are a one-stop shop for practically all investment needs.
To begin with, it is important to select the right scheme for your investment need. Look at it this way.
How do you decide what mode of transport you should take when you travel? Whether you want to walk it up, take an auto rickshaw, a train or a flight, it all depends on your destination, on your budget and travel time available.
Planning for your financial goals is also uses the same kind of principles.
Different modes of transport for different travel needs-different schemes (or combination of schemes) for different needs.
one may consider liquid funds for very short term needs, income funds for medium term needs and equity funds (or a combination of different funds) for long term needs. Different investors may invest in different schemes of the same asset category depending on the risk that they are willing to take.
Remember, there are solutions available among Mutual Funds for each investor need. It is important to understand one's own unique need to find which solution is appropriate.
"My son is in the 9th grade. I am not sure what his interests are or what stream in education he should pursue. Should he go for Science, Commerce or Arts? Can someone help?" Many parents have such concerns. That is where one may approach an education, or a career, counselor, who has evaluated various options available for youngsters.
An investor seeking help to plan for achievement of financial goals would be in a similar position as the parent in the above case. The investor has access to so much information these days, it is mind-boggling. Getting intimidated or making mistakes are highly possible.
This is when an investment advisor or a Mutual Fund distributor is advisable.
They assess the financial situation of the investor and look at one's fmancial goals. Based on this, he or she would recommend various schemes to invest in. Now it is obvious that such a person would also need to understand a lot about the various Mutual Fund schemes and keep a regular watch both on the investor's situation as well as the various recommended schemes. Such an approach helps the investor achieve the financial goals through investments in Mutual Funds.
In Mutual Funds, one often hears, 'more the nsk, more the return'. Is there truth in this?
If 'risk' is measured as either, probability of loss of capital or as swings and fluctuations in investment value, then asset classes like equity are undoubtedly the riskiest, and money in a savings bank account or in a government bond is of course least risky.
In the Mutual Fund universe, a liquid fund is least risky and an equity fund is most risky.
So, the only reason to invest in equity would be an expectation of higher reward. However, higher returns come to those who invest in equity after careful study and adopting a patient, long term time horizon. In fact, risk in equity can be mitigated by adopting diversification as well having a longer term time horizon.
Every category of mutual fund schemes have different types of risks-credit risk, interest rate risk, liquidity risk, market/price risk, business risk, event risk, regulatory risk, etc. Your investment advisor and fund manager's expertise, and diversification, can help mitigate them.
Every investment we make involves a risk, only its nature and degree varies. The same applies to Mutual Funds too.
All Mutual Fund schemes do not carry the same risk when it comes to returns on investment.
Equity schemes have the potential to deliver superior returns over the long term that can create wealth. Remember, inflation is a risk, and equities are the best asset class to beat inflation. So, in a sense, there are some risks that are worth taking.
On the other hand, the risk associated with liquid funds is significantly low when compared to equity funds. A liquid fund focuses on the protection of capital by taking lower risk and generating returns in line with the risk taken.
It is also important to remember that the risk on returns is not the only risk you need to consider. There are other risks liquidity risk for instance. Liquidity risk measures the ease in converting your investment into cash. This risk is lowest in Mutual Funds.
In the end, the nature and extent of risk is best understood through proper understanding and evaluation of the scheme and by taking the guidance of a Mutual Fund distributor or an investment advisor.
Every individual investor is unique. Not only with regards to investment objectives but even in approach and view of risk. This is what makes Risk Profiling absolutely crucial before investing.p
A Risk Profiler is essentially a questionnaire that seeks an investor's answers to questions about both "ability" and "willingness".
It is highly recommended that investors contact their Mutual Fund distributor or an investment advisor to complete this task and get to know their Risk Profile.
With so many Mutual Funds schemes in the market, often one may wonder which scheme may be the best. But, understanding the meaning of "best" is more important.
Often, people tend to select the "best" performers of a recent past period schemes that have delivered highest returns in the recent past.
If you watch a movie filmed in the USA in December, you would notice people wearing warm overalls. Someone may really like it and want to have those. However, can you imagine someone wearing woollen clothes around the streets in Mumbai or Chennai?
The same logic applies to Mutual Funds too. There is no such thing as the "best" Mutual Fund it is always about what is appropriate in a given situation and is in line with your investment objective.
For long term goals there are different funds compared to short term needs. There are aggressive funds vastly different from moderate funds or even conservative funds. There are different funds for income generation as compared to wealth accumulation or for liquidity.
So don't search for the best search for the most appropriate.
1)Equity or Growth Funds
· These invest predominantly in equities i.e. shares of companies
· The primary objective is wealth creation or capital appreciation.
· They have the potential to generate higher return and are best for long term investments.
· Examples would be
."Large Cap" funds which invest predominantly in companies that run large established business
."Mid Cap" funds which invest in mid-sized companies.
."Small Cap" funds that invest in small sized companies
."Multi Cap" funds that invest in a mix of large, mid and small sized companies.
."Sector" funds that invest in companies that are related to one type of business. For e.g. Technology funds that invest only in technology companies
."Thematic" funds that invest in a common theme. For e.g. Infrastructure funds that invest in companies that will benefit from the growth in the infra structure segment · Tax-Saving Funds
2)Income or Bond or Fixed Income Funds
· These invest in Fixed Income Securities, like Government Securities or Bonds, Commercial Papers and Debentures, Bank Certificates of Deposits and Money Market instruments like Treasury Bills, Commercial Paper, etc.
· These are relatively safer investments and are suitable for both Capital Protection and Income Generation.
· Examples would be Liquid, Short Term, Floating Rate, Corporate Debt, Dynamic Bond, Gilt Funds, etc.
3) Hybrid Funds
· These invest in both Equities and Fixed Income, thus offering the best of both, Growth Potential as well as Income Generation.
· Examples would be Aggressive Balanced Funds, Conservative Balanced Funds, Pension Plans, Child Plans and Monthly Income Plans, etc.
As Benjamin Franklin said, "The way to wealth is as plain as the way to market. It depends chiefly on two words, industry and frugality."
Today, modern business and commerce allow us to be wealthy through the ways in which we allocate our money. We can invest your money with those who are on the path to creating wealth. Or, we can be investors in businesses of entrepreneurs, by investing in stocks of various companies. As the entrepreneurs and the managers run their businesses efficiently and profitably, the shareholders get the benefits. In this regard, Mutual Funds are a great way to build wealth. However, we all know that investing in stocks can be risky some companies do not survive for long, some companies' stock prices fluctuate too much, etc.
Several questions rest in a potential investor's mind regarding the ideal amount to invest. People consider Mutual Funds as just another investment avenue. Is it really the case? Is mutual fund just another investment avenue like a fixed deposit, debenture or shares of comapnies?
A Mutual Fund is not an investment avenue, but a vehicle to access various investment avenues.
Think of it this way. When you go to a restaurant you have a choice to order a la carte or buffet/thali or a full meal.
Compare the full thali or the meal with a Mutual Fund, whereas individual items you order are the stocks, bonds, etc. A thali makes the choice easy, saves time and also some money.
The important thing is to start early, even if small and gradually add to your investments as your earnings increase. This gives you better prospects of better returns in long run.
People think that Mutual Funds are elite investments made only for the wealthy. The fact is: one does not need large sum to invest in Mutual Funds, you can start with a sum as low as 500, or 5000 depending on the kind of fund you choose.
Why keep the minimum amounts as low as these?
The economies of scale can be understood easily if we look at travelling by an airplane. The plane would cost a lot of money and, of course, not everybody owns a plane! However, we can afford air travel simply because all the costs are divided among all the passengers using the services at various different points of time.
Similarly, a person may not have enough money to create a diversified portfolio through investment in a very large number of investment avenues, one may not have enough money required to conduct or purchase research on investments. However, the economies of scale allow small investors to get multiple benefits through Mutual Funds. Mutual Funds are thus ideal vehicles for small investors for saving and investing.
One of the most important considerations before choosing an investment avenue is the expected" time horizon", i.e. Time in days, months or years that an investor intends to stay invested.
And why is this so important?
All investments should ideally result from a financial or investment plan. Such plans usually indicate how long it would take for a financial objective to be met. Let's consider an investor who Just made 150 tacs in a real estate transaction. He is looking for a safe avenue to invest, before he takes a final decision on what to do with that money. An ideal scheme in this case would be a Liquid Fund, which is designed to provide liquidity with generally a high probability for capital protection. He can redeem whenever he has made up his mind.
EBI also ensures that all AMCs are supervised by a board of trustees, some of whom, have to necessarily be independent individuals. These trustees ensure one more level of safeguards and compliance.
Regulations and safeguards ensure that it can never ever be misappropriated and diverted, and that, no one will run with your money.
But debt funds are of various types.
Like in banks, you can open a savings account, where you can put and remove money whenever you want. However, it doesn't make sense to keep money idle, tf you are not likely to use it for some time. You may, in such a case, open a fixed deposit-where the money is locked for a certain period allowing you to earn a higher rate of interest. You may also opt for a recurring deposit, wherein you keep investing a fixed amount every month for a pre-defined period of time. All these products help you with different requirements.
Similarly, among Mutual Funds too there are variants available in the debt fund category to fulfill various needs of investors, like-Liquid Funds, Income Funds, Government Securities and Fixed Maturity Plans.
An investor would be advised to select schemes based on one's unique requirements.
There are different equity funds catenng to various needs of investors. The broad objective of all is to generate appreciation over long periods. To understand it better let us look at the contingent we send to the Olympic Games. There is a large group of players, and then there are teams for various sports. One of the major events at the olympic Games is the "track and field" event. We send a group for these events, as well. Within that, there are some races- right from a 100-meter sprint to long distance races, including marathon. Though, the whole contingent has gone to compete in the Olympic Games, there would be different players with different strengths.
It is the same with Mutual Funds. If all the Mutual Fund schemes are equivalent to the entire Olympic Contingent , equity funds may be similar to a group within, which participates in, various track and field events. As we saw, there are various sub-categories even within track and field, similarly, there are different schemes within equity funds.
Mutual Fund schemes investing in a single asset category are like specialist bowlers or batsmen. Whereas certain other schemes, known as hybrid funds, invest in more than one asset categories, e.g. some invest in equity and debt both. Some may also invest in gold apart from equity and debt.
In cricket, we see batting all-rounders as well as bowling all-rounders depending on the skill they are better at. Similarly, there are Mutual Fund schemes that invest heavily in one asset category as compared to another.
The oldest category, the balanced fund category, invests in equity and debt. The allocation to equity is normally higher (over 65%) and the rest is in debt. The other popular category known as MIP or the monthly income plan endeavours to provide monthly (or regular) income to investors. However, there is no guarantee of regular income. These schemes invest predominantly in debt securities so that regular income can be generated. A small portion is invested in equity to enhance returns over the years. Another variation of the hybrid scheme invests in equity, debt and gold, to take advantage of three different asset classes in one portfolio. An investor has an option of buying different equity or debt or gold fund schemes to create a hybrid portfolio or alternately buy a hybrid fund.
Variety is the spice of life. At the same time, you do not seek variety just for the sake of it. Some variety is required simply because the situation demands it. So when you eat food, you've got to maintain balance. Food serves certain basic needs of the body-they offer vital nutrients. You need energy, you need stamina, you need strength, you need good eye sight-you get these from the vital nutrients-the fats, carbs, proteins, vitamins, etc. That food provides. At the same time, no single food items provides everything and hence you need varieties of food items in your daily meals.
In a similar manner, there are different Mutual Fund schemes for different purposes-to fulfill different needs of different investors.
Let us look at the basic requirements out of investments. An investor mainly needs a combination of four things: (1) safety of capital, (2) regular income, (3) liquidity, (4) growth of capital invested. There are Mutual Fund schemes available to serve these needs. Look at the table on the left to know more.
After its launch in 1964, Mutual Funds have grown to manage assets over 17.37 lakh crores (as on Jan 31,2017).
This impressive growth is because of a strong Indian economy, better regulation, entry of reputed Indian and Foreign Asset Managers, and increasing acceptance of Mutual Funds as a preferred asset class amongst Indian investors.
It is interesting to note that the average investment in every individual retail investor account is 68,086, indicating the acceptance of this asset class by the growing Indian middle class.
India today has 42 Asset Management Companies (AMC) that help increase awareness and aid in spreading the message of Mutual Funds and financial planning to an increasingly aspirational country.
Nearly 4000 crores is invested every month by way of Systematic Investment Plans, another indicator of the trust and popularity of Mutual Funds in India.
The Top 15 cities of India have 83% of total Mutual Fund Assets. The industry is making serious efforts to broaden the awareness and acceptance of Mutual Funds in smaller cities and towns of India. (All data provided by Association of Mutual Funds of India).
The Global Assets Under Management (AUM) of open-end Mutual Fund schemes exceeded US$37.1 trillion, across 100,494 schemes as on Dec 31,2015. While developed markets have the maximum AUM, developing or emerging markets are beginning to break out. The US had over $17.7 trillion in AUM, while Europe had $12.7 trillion. Asia Pacific countries had $4.7 trillion, of which Australia, China and Japan accounted for $1.52 Trillion, $1.26 Trillion and $1.33 Trillion respectively. Brazil, had over $743 Billion in Mutual Fund Assets. India had Assets of $168 Billion, thus showing the low penetration of Mutual Funds in India, while highlighting the tremendous unrealised potential in India.
The data suggests that Mutual Funds are very popular in developed nations and are rapidly creating acceptance in fast growing emerging markets. Aiding the growth is increase in GDP as well as establishment of effective regulatory structures to manage the growth.
(All data and figures: International Investment Funds Association from Investment Company Institute Year Book 2016)
Once an investor has decided to invest in Mutual Funds, he has to make a decision of which scheme to invest in Fixed Income, Equity or Balanced and which Asset Management Company (AMC) to invest with? Firstly, discuss freely with your advisor what your objective is, what time period you're comfortable with, and what your risk appetite is. Decisions on which fund to invest in would be made based on this information.
1) If you have a long term objective say, retirement planning, and are willing to assume some risk, then an Equity or Balanced Fund would be ideal.
2) If you have a very short term objective say, money to be kept aside for a couple of months; a Liquid Fund would be ideal.
3) If the idea is to generate regular income, then a Monthly Income Plan or an Income Fund would be recommended.
After deciding on the type of fund to invest in, a decision on the specific scheme from an AMC would have to be made. These decisions are usually made after ascertaining the AMC's track record, suitability of scheme, portfolio details, etc. Scheme Factsheets and Key Information Memorandum are two documents that every investor needs to peruse before investing. If one needs detailed information then one should look at Scheme Information Document. All of these are easily accessible at every Mutual Funds.
An investment in an open end scheme can be redeemed at any time. Unless it is an investment in an Equity Linked Savings Scheme (ELSS), wherein there is a lock-in of 3 years from date of investment, there are no restrictions on investment redemption.
Investors need to keep in mind any applicable exit load on their investment. Exit loads are charges deducted at the time of redemption, only if applicable, AMCs usually impose an exit load to deter short term or speculative investors from entering a scheme. Closed end schemes do not offer this, as all units are automatically redeemed on the date of maturity. However, units of closed end schemes are listed at a recognised stock exchange, and investors can sell their units to others only through the exchange. Mutual funds are one of the most liquid investment avenues in India, and are an ideal asset class for every financial plan.
The SID has information like:
1)All Fundamental Attributes like Investment objective and Policies, Asset Allocation Pattern, Fees and Liquidity Provisions.
2)Fund Management Team details
3)All Risk Factors in the scheme as well as risk mitigation mechanisms.
4)Scheme details like load, plans and options, past performance, benchmark.
5)General Unitholder information.
6)other details like list of AMC branches, Investor Service Centres, official Points of Acceptance.
The SAI has information like:
1)The constitution of the Mutual Fund-Sponsors, Asset Management Company and Trustees.
2)All information on key personnel of the AMC and associates such as Registrars, Custodians, Bankers, Auditors and Legal Counsel.
3)All Financial and Legal issues.
The concise version of SID is the KIM, that is attached with the application form. As the name suggests, it contains all the Key Information that an investor must know before investing in the scheme. The KIM must be made available with every application for
While most Indian Mutual Funds invest only in India, there are quite a few schemes that invest in overseas securities.
All Mutual Fund schemes need to get Securities and Exchange Board of India (SEBI) approval before offering units to investors in India. SEBI gives an approval after scrutinising the Scheme Information Document (SID), which clearly spells out the scheme's investment objectives, type of securities to be invested in, countries and regions, and risks umque to each secunty.
There are in fact two ways for a scheme to get such exposure to foreign securities. Schemes may either buy such securities listed or traded in overseas exchanges, or they may invest in other overseas Mutual Fund schemes that have such securities in their portfolio after obtaining separate SEBI approval for investment in foreign securities. Either way, the scheme has foreign flavour in the portfolio.
Even after investment in overseas securities, Indian Mutual Funds have to provide daily Net Asset Values, ensure portfolio disclosure, provide liquidity, etc. In short they have to comply with all SEBI regulations. Such schemes should have a dedicated separate fund manager for the investments in foreign securities component only.