Why we like MUTUAL FUND?

  • Tax – angel = no TDS = Long Term Capital Gain tax favourability
  • Flexibility = Easily stop “SIP” = start as low as “500” = any time INCREASE “SIP” amount = can monitor and transact ONLINE
  • Cost is low as compare to Other Products = 2.5% MAX
  • Convenience  = Press a button to “SELL” / submit form  – T+2 MONEY is directly credited to Account
  • Safety – Duration is key = Be cautious otherwise one can lose capital – reduce risk with help of various facilities like “SIP/STP” = RISK is involved in almost all schemes

Concept behind of Mutual Fund?

It’s very simple. We celebrate HOLI/GaneshChaturthi in such manner. That time, some group of person will take all management responsibility and collect money from nearby homes. All people give money . Because it reduces cost, saves time and resources. Similarly, MUTUAL fund collects money from various investors and allot then UNIT based on ownership. Benefits are

  • Professional Management
  • Transparency - every month Portfolio disclosed
  • Liquidity – within T+1/2 money credited to Bank account directly
  • Low Cost
  • Flexibility – Onetime Investment / STP / SIP / SWP
  • Diversification – buy 40-60 stocks with as low as 5,000
  • Tax Benefit
  • Highly Regulated

Flow Chart of Mutual Fund

Valuation = NAV * Units

Returns are generated based on options opt by Investor. There are three options.

  1. Growth Option – NAV will increase, units will remain same
  2. Dividend Option – Payout – Dividend is paid out, accordingly NAV will reduce; units will remain same
  3. Dividend Option – Reinvest – Declared dividend used to buy more units; NAV reduces but units increases

Growth and Dividend Reinvest option should yield same return. But it is better to opt for “Growth” option because dividend might be taxed in new Tax code and secondly SEBI has changed dividend declaration rule.

What is NAV

  • Net Asset Value (NAV) is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.
  • NAV per unit is declared each working day.
  • NAV = (Assets – Liabilities) / (Total outstanding Units)

Mis-concept about NAV

Lower NAV Scheme is cheap than higher NAV scheme. But if one understand the Formula to compute NAV, NAV just reflects the gain Scheme has delivered since launch and how the fund manager has manage the fund. NAV should be used to gauge the performance of the scheme, not to compare with NAV of other scheme.

Ways to Invest in Mutual Fund Scheme

There are 4 ways to invest.

  1. Lump Sum – means investor has 1,00,000 in bank account and invest 1,00,000 by issuing single cheque or may be divide (2/3/4 parts not more) the same amount and issue more than one cheque.
  2. SIP – Systematic Investment Plan – means same investor wants to invest 1,00,000. But doesn’t have money yet in the bank account. But every month he can invest say 5,000. Opt for SIP and each month 5,000 will be invested from Bank account through ECS for next 20 (1,00,000 / 5,000 ) months. Needs to write single cheque only once and give permission for ECS
  3. STP – Systematic Transfer Plan – means say investor already has say 10,00,000 in banks account and don’t want to invest in Lump Sum. Then he can invest 10,00,000 in Ultra Short Term Plan and can start shifting say 10,000 each month/week to target Equity/Balanced Scheme. Needs to write single cheque along with STP request.
  4. DTP – Dividend Transafer Plan /CATP – capital Appreciation Trasfer Plan — means all dividend issue will be transferred to chosen scheme. CATP investor decides % appreciation. Say 5%. When investment generates such return that time automatically 5% fund will be transferred to chosen scheme. Normally used for profit booking.

Ways to withdraw money from Mutual Fund Scheme

There are 3 ways.

  1. Redemption – give request with amount / units and money will be withdrawn and credited to bank Account
  2. SWP – Systematic Withdrawal Plan – based in request monthly/quarterly amount will be withdrawn and  credited to bank Account till scheme has enough fund. Used to generate cash-flow.
  3. Dividend – One can opt for Dividend Payout option. Schemes try to declare regular dividend (no compulsion to declare dividend but to maintain good image they do declare). There are certain schemes which declare weekly dividend also.

TYPEs of Mutual Fund Scheme (Based on Tax Authority)

  • Equity Oriented Scheme (min 65% invested in Shares)
  • Liquid or Money Market Scheme (invest in max 3 month papers or lend money for MAX 3 months)
  • Debt Oriented Scheme (rest all fall here)

Type of Mutual Fund Scheme ( Based on General practice)

  • Large-cap Equity Fund – invest in top 100 shares
  • Large-cap and Mid-cap Fund – invest in top 200 shares
  • Mid Cap fund fund – invest in 101 – 300 shares
  • Small / Micro Cap Fund – invest in 201- onwards
  • Diversified Fund – any shares
  • Dividend Yield Fund – Invest in shares having higher Dividend Yield (Dividend/Price)
  • Sector Fund – respective Sector companies shares (Banks, FMCG, Pharma, Logistics)
  • Theme Fund – Infrastructure, Services, Manufacturing, Consumption
  • Balanced Fund – 65-75% in Shares (Any) and rest in Debt Papers (Lend Money, any duration)

 

  • Monthly Income Plan – MIP – 10/30% in Shares (Any) and rest in Debt Papers (Lend Money, any duration)
  • Income Fund – lend money for more than 3 years normally
  • Short Term Fund – lend money for less than 3 years normally
  • Ultra Short Term Fund – lend money to less than 1 year normally
  • Gilt Fund – only in Govt of India Securities [Short Term - less than 10 year; Long Term - more than 10 year]

 

  • Liquid / Money Market Fund – lend money not more than 3 months

 

  • FMP – Fixed Maturity Plan – Various duration 1/3/6/12/24/36 months – locked for same duration - lend money according to duration

 

  • ETF – Exchange Traded Fund – buy/sell from Stock exchange only – NIFTY/SENSEX/GOLD/PSU-Bank/Bank etc.

 

  • FoF – Fund of Fund – Invest in existing Mutual Fund Scheme in India/Overseas
  • Gold Savings Fund – Fund of Fund – invest only in Gold ETF

 

  • Invest in Shares + Debt (lend Money) + Gold ETF (ex. Axis Triple Advantage, Fidelity Children marriage etc)
  • Invest in Shares + Gold ETF (ex. Sundaram Equity PLUS)