Mr Happy all his life has been saving his money in bank deposit; with lower bank deposit rates Mr happy looks for other investment option and comes across Mutual Funds. Mr Happy decides to meet up with MERA fund advisors for understanding the basic concept of Mutual fund and SIP. The conversation between Mr Happy & MERA fund advisor is as follows.
What is a mutual fund
A mutual fund is a common pool of money in which investors put in their contribution to obtain units. This collective amount is then invested by professional fund managers according to the investment objective of the fund. Each fund based on the asset category could invest in stocks, bonds, money market instruments, gold and other similar assets.
The income earned through these investments and capital appreciation realized by the scheme are shared by the investor in proportion to the number of units owned by them.
Types of Mutual fund
Based on the Structure
1. Open End funds- An open-end fund is a mutual fund scheme that is available for subscription and redemption on every business day throughout the year.
2. Closed End funds- An Closed-end fund is a mutual fund scheme that is available for subscription only during the initial offer period and can be redeemed only on maturity. However the Units of these fund would be listed on a stock exchange after the new fund offer, and investors can buy/sell this units in the stock exchange.
Based on the Management Style
1. Actively Managed funds- Fund managers buy and sell investments, attempting to generate higher returns than the benchmark.
2. Passively Managed funds- Funds managers buy an portfolio that tracks benchmark performance.
Based on the asset class
- Equity funds- Funds that invest in Equity shares are called Equity funds. They carry the principal objective of capital appreciation of the investment over medium to long term investment horizon.
- Balanced Funds- Funds that invest in a mix of Equity shares and debt (fixed income) instruments. They strive to provide both growth and regular income. They are ideal for medium to long term investors willing to take moderate risk.
- Debt Funds- Funds that invest predominantly in rated debt / fixed income securities like corporate bonds, debentures, government securities, commercial papers and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seeking regular and steady income.
- Other funds- All investments other than traditional asset class (Equity & Bond) are categorized as alternative investments. Mutual funds offers funds in which investor can invest in the alternative assets like gold, real estate etc. we categorize these funds into basket of other funds. These funds have different risk/return profile compared to Equity & Debt funds, thus could fit well in a portfolio context.
Advantages of MF (
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Modes of Investment( 
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Myths & Facts about Mutual fund
Conclusion: Mutual funds suitable for all investor
Mutual Fund is a professionally managed investment vehicle offering investment option across different asset class like bonds, equity, gold etc. Mutual fund would be the best option for investors who like to invest in different asset class and lacks investment knowledge (MF offers professional management); lacks time (Fund manager takes care); lacks large capital (MF offers diversification benefit even on a small investment)
Mutual fund is suitable for all kinds of investment. Bond funds are suitable for risk averse investors; while investors with risk appetite can look into equity funds.
“One Size Fits all” approach does not work in mutual fund. Appropriate selection of fund would depend on various factors like market condition, investors risk/return trade off, investment horizon, tax and liquidity consideration etc.
Mutual fund offers product for everyone under every market condition; Mutual funds are one of the best investment option while planning for goals be it long term like retirement planning, Kids educational planning or short tern goals like purchasing house, car etc.
An Equity fund is a mutual fund scheme that invests predominantly in equity stocks.
In the Indian Context, as per current SEBI MF Regulation, an equity mutual fund scheme must invest at least 65% of the scheme’s assets in equity & equity related instrument.
Equity funds are categorised as moderate to high risk, also have a high return potential in the long run. They are ideal for investors in their prime earning stage, looking to build a portfolio that gives them superior returns over the long-term.
Categories of Equity
Equity Fund Taxation
Benefits of investing in Equity funds
Conclusion
Equity Funds are one of the best long term investment options. Equity funds have potential to generate a return in the range of 12-15% CAGR over longer period. There is no long term capital gain tax on Equity funds and hence is tax efficient.
Equity funds could be more volatile in short term and hence investors with short investment horizon should be careful while investing in Equity funds. However Equity funds would be ideal for investors with an investment horizon 3+ years.
Equity funds over longer period have generated higher return than the inflation; Equity funds also are professionally managed, offers diversification benefit, highly liquid. Thus equity fund should be considered as an instrument for wealth creation.
Lot of equity funds are available for investors; however appropriate selection of funds and Quantum of investments becomes paramount. We at MERA Fund advisors could build an appropriate asset allocation based on your investment needs and market conditions.
Balanced Fund
A Balanced fund is a mutual fund scheme that invests in a mix of equities & debt.
Balanced fund tries to get the best of both worlds – Growth from equities & Stability from debt portion.Balanced funds are categorised as moderate risk, also has a moderate return potential in the long run. They are ideal for first time equity investors, investors close to retirement or retirees.
Categories of Balanced Fund
Balanced Fund Taxation: Equity Oriented Balanced fund
Balanced Fund Taxation: Debt Oriented Balanced fund
Benefits of investing in balanced funds
Conclusion
Balanced Funds aims at achieving the best of both asset class- capital appreciation from equity component, while stability from the debt component. Balanced funds have potential to generate a return in the range of 8-12% CAGR over medium to long period. There is no long term capital gain tax on Equity oriented balanced funds and hence equity oriented balanced are more tax efficient.
Balanced funds are less volatile than equity funds. Balanced funds would be ideal for medium term investors. Balanced funds are better option for first time equity investor and much advisable for retirees or on the verge of retirees to hold a balanced fund portfolio.
Should you buy balanced fund? Get in touch with MERA fund advisors for knowing does this product suits you and how much exposure you should have to balanced funds
A Debt fund (Bond fund) is a mutual fund scheme that invests in fixed income instruments such as government bond, corporate debt securities & money market instruments.
Debt funds offers stable return, high liquidity, relatively safe and are more tax efficient when compared to an equivalent bank FD, thus can be perceived as great alternative to bank FD. Debt funds are generally categorised as low to moderate risk, are ideal for low risk appetite investors. Debt funds can be invested by investor with Short to long term investment horizon and should be used to stabilize portfolio.
Categories of Debt funds
Benefits of investing in Debt funds
Conclusion
Debt Funds have potential to generate 2-3% higher return than an equivalent bank FD. However compared to Bank FD, Debt fund offers better liquidity, more tax efficient, investment flexibility. Thus debt fund should be viewed as the best alternative to bank FD. Debt funds are less volatile than equity funds. Thus debt funds add stability in the portfolio context. Debt funds would be ideal for short/medium/long term investors provided appropriate funds are selected. Should you buy Debt fund? If you are an young investor with active income, then you should add a small component of debt fund for portfolio stability. It’s ideal for risk averse investor and people closer to retirement or retirees. It’s a great alternative to Bank FD. We at MERA fund advisors would be able to build you an ideal investment portfolio based on your financial needs, feel free to get in touch with us.
What is an SIP?
An SIP (“Systematic Investment Plan”) allows an investor to invest a fixed amount regularly (weekly, monthly, quarterly) in a mutual fund scheme. An SIP is similar to recurring deposit instrument of bank. SIP, by nature provides time diversification benefit.
Benefits of SIP
Case Study: SIP is a wealth creating machine for a long-term investor
Mr Happy approached MERA fund advisors to understand the real benefit of Starting an SIP.
Consider Mr Happy starts a monthly SIP of Rs 10,000 and decides to commit for different time horizon. The total investment of Mr Happy is as shown in the table below.
Assume Mr Happy commits Rs 10,000 monthly SIP for 25 years ; he would be investing in total of Rs 30 Lac (Rs 10,000*12*25).
The Maturity Value for Mr Happy at the end of his tenure at different expected return is as shown in the table below.
Assuming a very realistic long term return of 12% in equity funds , Mr happy’s value would reach Rs 1.87 Crore, thus Mr Happy Gain would be Rs 1.5 Crore.
Albert Einstein once said, "Compound interest is the eighth wonder of the world. He who understands it, earns it... he who does not... pays it."
In SIP the investment value grows exponentially and your total value is a component of
1. Your regular contribution (Ex monthly contribution of Rs 10,000)
2. Return of your investment basket pushes your value up (Ex expected annual return of 12%)
3. Investor committing for longer period would benefit more due to benefit of compounding (Ex investment horizon of 25 years)
So if you want to create wealth through SIP, its simple
- Contribute more monthly
- Try to make your money work for you
- Commit for longer period
Basic nature of SIP makes it an apt tool for achieving long term goals like retirement planning, Kids educational planning, kids marriage planning
Conclusion:
SIP is a great tool to create long term wealth. SIP can be effectively used to meet long term financial goals like retirement, kid’s marriage, kid’s education.
Remember
“Little drops of water make the mighty ocean”
The most important thing while planning for an SIP is determining right Quantity of SIP amount and selection of appropriate investment portfolio depending on individual risk/return, liquidity, tax requirements.
We at MERA fund advisors would be able to help you out in your quest for financial freedom. We can provide you an optimal investment portfolio. Feel free to get in touch with us for a better financial future.