What are the 3 Main Types of Mutual Funds?

Mutual Fund Types

Mutual funds are one of the most sought-after investment options in the financial markets. They are generally categorized into 3 basic types, i.e. equity funds, debt funds, hybrid funds. Such distinction is made based on their characteristics- liquidity, assets invested in, nature of securities owned, associated risks, etc.

While equity mutual funds are similar to equity stocks, fixed income mutual funds concentrate on corporate bonds and other securities that earn a regular income, and money market mutual funds deal in securities with high liquidity. Each has its different returns, associated risks, and separate lock-in period. We have tried to explain them in the following points for your better clarity:

1. Equity Funds

As the name suggests, these funds deal with the investment in funds of publicly traded equity shares. They are also credited with generating better returns than term deposits or debt-based funds. However, owing to the high volatility of the capital market, such funds often have higher associated risks than the other two options. Such funds participate in various equity shares of corporates operating in different sectors to minimize the underlying risks. There are various sub-categories of equity funds, some of the popular ones are- growth funds, income funds, and index funds. Each has its investment objectives and characteristics.

2. Debt Funds

The objective of debt funds is to earn a safe and fixed amount of returns on their investments. They invest significantly in fixed-income securities like corporate bonds, government securities, and debentures, etc. These securities invest in secured debt funds which provide a steady fixed income to its investors. By investing in relatively safe avenues, the investor can lower the risk factor in investment. The reward on such securities is pre-stated and fixed. Generally, the return received on such secured funds is often lower than returns received on equity stocks but so is the risk. They are often suitable for people who have a low-risk appetite and want to earn a steady income.

3. Hybrid Funds

Hybrid means ‘anything made by combining two different elements’. Such hybrid mutual funds are a mixture of equity and fixed income mutual funds. These mutual funds create a mixed balance between the number of equity and mutual funds. This not only creates a balanced risk exposure according to the set financial objectives but also provide lucrative returns on the investment. These funds are often tailored according to the pre-determined needs of the investors so that they can reach their individual financial goals.

What are the Taxation rules of Equity Funds?

What are the Taxation rules of Equity Funds

One thing that comes to every investor’s mind apart from the return and related risk is the associated tax compliances. The last time we checked 2 types of taxes were applicable on sale of mutual funds i.e. capital gains (under Income Tax Act) and dividend distribution tax (DDT). 

Capital Gains

If any investor holds a mutual funds unit of the scheme for a period of up to one year, provisions of short-term capital gain (STCG) are applicable on the sales proceeds. The applicable tax rate on such securities is 15%. So, if you have a unit of mutual funds that you sell within a year, you are liable to pay 15% as tax of the capital gain on sale proceeds for that financial year. 

However, if the investor holds the units of the mutual fund scheme for a period exceeding one year, then the capital gains earned by you are called long-term capital gains (LTCG). LTCG above Rs.1 lakh is taxed at 10% without indexation benefits.

Dividend Distribution Tax (DDT)

On mutual funds, dividend distribution tax is applicable at 10%. Dividend distribution tax is applicable on dividend receipts. This amount is taxable in the hands of the corporates. The corporates deduct the dividend distribution tax before giving any dividends to its investors. The investors do not have to pay anything as it has been already deducted. Therefore, there is no need for investors to pay additional dividend distribution tax on dividends received on their investment. 

Conclusion

It could be concluded that on a mutual funds unit held for 1 year or less, the applicable tax rate is 15% on total gain. Whereas, in cases where mutual funds have been held for more than 1 year, a tax rate of 10% is applicable on total gains. Also, dividend distribution tax is applicable at 10% which is automatically deducted from the dividends and paid by the corporates.

What are Difference between ULIP and Mutual Fund

Difference between ULIP and Mutual Fund

This is one of the most commonly asked questions by a potential investor who is often confused by the mix use of these 2 investment instruments. Many financial planners use these terms interchangeably. However, ULIP and Mutual Fund are two separate concepts.  We have explained the meaning of ULIP and Mutual Fund and the difference between them. 

Mutual fund

Mutual fund is an investment plan where your money is managed by a portfolio manager. He puts your money into multiple companies on the basis of your investment objectives and associated risks. For every investment made in mutual fund, certain units of that fund are allocated to the investor. There are multiple types of mutual funds available in the market; each having its investment objectives, liquidity and risks.

Unit Linked Investment Plans (ULIP)

Unit linked investment plans are a hybrid combination of investment and insurance schemes. Herein, a small portion of the monthly premium goes to secure life insurance and the rest is invested just like a mutual fund. 

Difference between ULIP and Mutual Fund

Basis Mutual Funds ULIP
Regulating Authority SEBI IRDAI
Product Type Investment Insurance
Liquidity Highly liquid Less liquid
Potential Returns High returns subject to market risks Low returns as part of it are invested in the insurance 
Lock-in period Only in ELSS 3 to 5 years
Tax benefits ELSS are eligible for deduction under 80C.

Long Term-

Equity Funds: Tax Free

Debt Funds: 10% or 20%

Deduction under 80C
Charges  Low- 1% to 2.5% No upper limits
Portfolio Disclosure Mandatory Disclosure No such requirement

Regulating Authority and Product Type

Mutual funds are an investment product and are regulated by the Securities Exchange Board of India (SEBI). The Unit linked investment plan is essentially an insurance plan with additional investment option. 

Liquidity and Lock-in Periods

Multiple mutual funds options are available in the markets viz. equity, debt, growth, index, hybrid, etc. Most of the mutual funds are highly liquid as compared to less liquid ULIPs, as ULIPs are meant for a relatively long time. Usually, only ELSS mutual funds have a lock-in period, rest all mutual funds can be redeemed easily almost anytime. 

Potential Risks & Returns  

ULIPs are less prone to market risks are they are insurance instruments. Mutual funds are comparatively riskier as they invest directly into the market which is highly market. This volatility is also the reason why mutual funds give a higher return than ULIPs. ULIPs offer a safer but lower return as a chunk of it is invested in insurance policies. 

Portfolio Disclosure 

As per the rules of SEBI, the companies have to maintain a strict disclosure of transactions and such other information. SEBI has directed all fund managers to send the portfolio statement via email to its unit holders every month. Such rules and regulations help to ensure transparency and accountability. On the other hand, there is no such regulation for ULIPs.

Tax Benefits & Charges

The charges associated with mutual funds are as low as 1% to 2.5% which is far lesser than that of ULIPs. Charges on ULIPs have been reported to be as high as 18% and there are no such upper limits. ULIPs are eligible for deduction under section 80C. The ELLS category of mutual funds is eligible for deduction 80C. Mutual funds options other than ELSS do not have deduction under section 80C but they provide additional tax benefits such as returns on mutual fund up to a certain limit is exempt. Also, as per general reports LTCG on such mutual funds attracts much lesser tax. 

How its Benefits of Investing in Mutual Fund Online

Investing in Mutual Fund Online

Investment in mutual fund online is gaining popularity as the easiest ways of investing. Such investment could be done by accessing our Website or downloading the VSRK mobile application.

Benefit of investing in mutual funds online

There are various benefits of investing in mutual fund online. We have mentioned some of them as following-

  • Online Registration and E-KYC

The customers can register online through filing the necessary information and submitting the required documents viz. PAN card and Aadhar card. Such information is sent to the backend for verification. Once the information is verified you are ready to invest.     

  • Option to Invest in Small Amounts

Investing in mutual fund online gives you the option of investing in various securities in small amount. You have the option to start your SIPs with just rupees 500 per month. By keeping out a small portion of your salary aside you would be able to accumulate a wealth over a long time.

  • Ease of convenience 

Investment in mutual funds online is one of the simplest and the easiest form of investment. in this you just need to have the access to the website or mobile application of your AMC. You can access your portfolio information, current stock rates and various other information just through one click.  

  • Liquidity 

One of the most important benefit of online investment in mutual funds is the liquidity. the investors have the option to redeem the unit at any point of time. However, mutual funds do have factors like pre exit penalty and exit load we should be taken into consideration before redemption. 

  • Security of funds 

All the mutual fund related transaction come under the scope of SEBI. SEBI is a government regulated organization regulates AMCs to maintain transparency and accountability of transactions. Its aim is to safeguard the investors and solve their grievances. Further, SEBI makes it compulsory for all mutual funds to disclose their portfolios every month.

8 Best Reasons to Continue Your SIP

Reasons to Continue Your SIP

In these abysmal times of ongoing pandemic and unstable market dynamics, the markets have been highly affected due to the investor consternation and fall in demand. It is said that around 59 lakh SIPs have been stopped, however, it has been observed that at the time when many SIPs have been either stopped or paused there has been additional inflow made by some investors cushioning the SIPs inflow. We would like to suggest some reasons you should consider before deciding whether you should continue your investment in SIPs or not.

Lower Valuation
One of the prime causes leading to the discontinuation of SIPs is the fall in the values of your investment. Before going more into this let’s briefly talk about the nature of the bearish phase that the country is going through at the moment. The important characteristic of the bearish phase is that it is temporary and after the end of such phase there is always a bullish market where the overall market is highly satisfying. This means that currently, the stocks are available at lower prices than what they were at a month ago. Such circumstances could be seen as a chance to invest in more units at lower costs.

Constant Benefits from Power of Compounding
Known as the 8th wonder of the world, Compounding is one of the major reasons to continue investing irrespective of the market volatility. By making regular investments and reinvestment of the returns generated on such investment, the power of compounding helps the investors in making contented returns.

Essence of long-term growth
The markets have always been volatile and subject to uneven fluctuations, however, one thing that has always been static in this environment is the immense potential for wealth creation. It is said that in the past 40 years irrespective of multiple recessions and downfall of the economy at various situations the investors have gained an overall 16% compounded annual returns in S&P BSE Sensex since its inception.

Lack of Re-Investment Alternatives
If one decides to withdraw the funds there should be an alternative for the use for such finds otherwise the main objective of investing it in the first place won’t be accomplished. If the sole reason was the factor of fall in markets it is advisable to consult your professional fund manager before making any rash decisions. 

Opportunity to earn more
As discussed earlier the bearish phases do not sustain for long, which allows you to buy some good stocks at currently low market prices but apart from this there is an additional chance of averaging out the total cost of portfolio. It is highly possible that due to high market prices you might have overpaid for your holdings and now could be a good time to make up for the additional costs incurred.

Difference Between Regular Vs Direct Plans in Mutual Fund ?

Difference-Between-Regular-vs-Direct-Schemes-in-Mutual-Fund

Mutual fund is an investment fund where multiple investors pool their money to purchase securities. Such funds are managed by a highly trained professional commonly known as a fund manager or portfolio manager. Due to factors like benefit of diversification and comparatively stable returns, mutual funds have become one of the most looked after investment options. 

When you opt for mutual funds you can invest through 2 schemes i.e. through regular or direct schemes. Let’s briefly talk about both the schemes. Direct investment plan is where an investor can directly invest into the company’s plans, generally through its website. Regular investment plan is where you buy the same securities through an advisor. 

What is the Difference Between Regular and Direct Schemes?  

In direct schemes the expense ratio is low as no brokerage is paid to any adviser resulting in comparatively high returns as compared to the indirect schemes.  However, the major problem with these schemes is the lack of professional advice. Here, it is very common for people to make wrong decision and lose all the hard-earned money. 

The investor, himself, has to do market research and analysis. In making any investment decision there are a lot factors to be kept in mind such as the market outlook, investment objective, rate of inflation, periodical readjustment of portfolio, etc. These require a lot of time & labor and require special knowledge of the financial markets which a common investor may not possess.

In indirect schemes, a brokerage is paid to the adviser. So, the expense ratio is high making the returns lower than returns on direct plan. But, it shall be noted that such brokerage is generally very less compared to the reduction in risk which is the main goal of any financial advisor.

However, the main merit of such indirect scheme is the presence of a professional adviser. Any investment decision made by the investor is guided by the professional supervision of a financial planner hired by the investor. 

Such financial planner is usually a person who has high expertise in financial analysis and planning. He uses his knowledge into finding the best alternative for meeting the client’s requirement and fulfilling the ultimate financial objective. Therefore, here the risk of losing investment or non-achievement of investment objective is low as compared to direct schemes.

Which Plan is Better For You?

Each plan has its own merits and demerits. It is clear that direct plan has more benefits to it. However, the associated risk of uninformed investment is also very high. One wrong decision could lead to loss of all your money. Hence, it could be concluded that only those with good knowledge of financial markets shall primarily use direct plans. A person with lack of such knowledge and expertise is advised to invest in indirect schemes and use the help of a professional adviser.

What are the Advantages and Disadvantages of Liquid Funds

Disadvantages of Liquid Funds

Liquid funds are one of the many types of mutual funds available in the market. They invest in short‐term assets such as treasury bills, government securities, repos, certificates of deposit, or commercial paper. They are debt funds which enable companies to raise money for a Period of up to 91 days. These are highly secured and short term funds usually suitable for putting money aside for emergencies as there is almost zero risk involved with such securities. 

Advantages of Liquid Funds

Liquid funds are perfect for financial specialists who need to park their money for a short period of time. The aim of these liquid mutual funds is to provide higher returns while offering a similar level of security for the money invested. Here are some of the advantages of Liquid Funds :-

  • Low Risk: Liquid funds invest only in highly secured government funds. So the associated risk is minimal. Along with this they are known to provide stable returns to its investors in the form of interest as they are debt instruments.  
  • High liquidity: Liquid funds are short term funds with short redemption periods and low chances of defaults in payments. The redemption cycle is generally of one day or less. Hence, such funds provide high liquidity.
  • Quick Redemption: The investor has a flexibility of holding onto the securities till he wants before the maturity, which means that he can exit the investment as and when he deems fit. However, if he exits the scheme within 7 days, a small exit load is charged for redemption of his investment.
  • Low cost: The expense ratio associated with such securities is generally below 1%.This low‐cost structure allows them to maximize the effective return to the investor.
  • Higher Returns During inflationary Markets: Liquid funds are also suitable for times of inflation. In such economic situations of high inflation, RBI offers a high-interest rate to control the overall market liquidity. This helps to gain good returns on the liquid funds.

Disadvantage of Liquid Funds

The advantages discussed, now it’s time to focus on the disadvantages of Liquid Funds.

  • Exit load : Although there is no lock-in period, a small financial charge known as exit load is applicable if the user exits the investment within a specified period. This is a charge applicable where the investor exits the schemes within 7 days. However, it shall be noted that such charges are often very low.
  • Low returns : The prime disadvantage of investing into a liquid fund is that they provide a comparatively low rate of returns as compared to high return investment options. So, if you invest in liquid funds you forego the high returns which high-return funds may provide you.

Are liquid funds suitable for you?

Liquid funds are highly-secured debt instruments which provide flexibility in terms of exit option and quick redemption of investment. Along with this it provides the investor a stable income. Such income is generally low as compared to other securities. However, such returns are risk free with almost no chances of defaults. Therefore, we could conclude that if you are an investor with low risk appetite or want to generate a stable income for a short period you can opt or liquid funds. Such funds can also be opted when the market is unstable or in times of inflation. 

What is Systematic Investment Plan (SIP) ?

Systematic Investment Plan

A mutual fund is one of the most popular modes of investment opt by investors desirous of making good returns on the same. There are generally only 2 ways to invest in a mutual funds scheme- Lump sum investment and Systematic Investment Plan.

Lump-sum investment refers to the investment of a good sum of money once into the scheme. It is suitable for times when you have a free load of cash in hand with you. However, the availability of a comparatively huge sum of money is not very common and this is the reason why many potential investors were unable to make investments. 

Systematic Investment Plan (SIP) was brought as a mean of making a systematic and regular investment. This requires the investors to invest a fixed amount of funds at stated intervals, regularly. This has dealt with the inability of huge sums and allows the common man a chance to invest. 

The return from the mutual funds depends on the market value of the securities present in the portfolio represented by the Net Asset Value (NAV) of the mutual fund scheme. Hence, the NAV keeps fluctuating on a daily basis, which is more prominent under equity mutual funds.

How Do Mutual Funds Work?

How Do Mutual Funds Work?

Mutual funds are one of the most popular financial instruments in town. Mutual fund is a collection of funds pooled in by investors and managed by a portfolio manager. Such funds are invested into various schemes in accordance to the earlier set objectives.

While the above information is generally available on all the online sites, the actual working of such funds isn’t told with much clarity and we ought to clear all your doubts on the actual working of mutual funds. So, let’s start. 

As mentioned earlier mutual funds are a pool of resources instead of being a single resource which means there are multiple investors who have put money in a fund. Each person who has invested their money into the fund gain ownership over a part of the fund, known as a unit. We can also say that the entire fund is subdivided into multiple parts known as units. So, when a person wants to invest in a fund he has to buy these units. 

Such mutual funds are of many types like equity funds, debt funds, hybrid funds, income funds, growth funds, index funds etc. Each fund has its own objectives, risk & reward. Different investment bankers offer different schemes. You may select the one which favors your objectives the most.

When you select the scheme you want to invest into, you have to buy the units. Once you buy the units, the investment bankers allocate the money to that fund. Generally, under the umbrella of a mutual fund there are many companies under it. They are known as sub-holdings.

Let’s understand this more clearly with an example of an equity mutual fund. Normally such mutual funds allocate around 70% of the total corpus in equity, 18% in debt and 12% in other securities. Within such umbrella of securities, there are a large number of companies. 

The investment of money into a various types of securities a dividend supported by fixed returns. Also, within such types of securities, example- equity, there are a lot of companies existing in various sectors such as banking, refineries, housing finance and construction, etc. This helps the corpus through the benefit of diversification so that if any of these sectors under performs there is a low impact on the overall value of investment.

What are Mutual Funds?

What are Mutual Funds?

Mutual fund is an investment fund where multiple investors pool their money to purchase securities. Such funds are managed by a highly trained professional commonly known as a fund manager or portfolio manager. This individual invests this corpus of funds into different securities such as stocks, debentures, bonds, gold, etc. as per the objective of the fund and with the aim of reaping profits out of such investment.

Let’s understand this more clearly with an example of a mutual fund known as Hybrid Equity Fund. Normally, all invest such mutual funds around 70% of the total corpus in equity, 18% in debt and 12% in other securities. Within such umbrella of securities, there are a large number of companies.

The investment of money into a various types of securities a dividend supported by fixed returns. Also, within such types of securities, example- equity, there are a lot of companies existing in various sectors such as banking, refineries, housing finance and construction, etc. This helps the corpus through the benefit of diversification so that if any of these sectors under performs there is a low impact on the overall value of investment.