Must Knows

All about mutual funds

[] Mentioned are everything about mutual funds, how to choose best mutual funds and benefits of mutual funds.

What are mutual funds?

To acquire assets like stocks and bonds, an asset management company (AMC) aggregates money from various individuals and firms to establish a mutual fund. Fund managers are employed by the AMCs to oversee the pooled investments.

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In a nutshell, mutual funds pool the money of several participants to invest in bonds, equities, and other comparable products.

Investors in mutual funds are allotted fund units based on the amount of money they invest. Only at the current net asset value may investors buy or sell fund units. A mutual fund’s net asset value (NAV) changes daily in response to the volatility of the underlying holdings.

Mutual funds are strictly controlled by the Securities and Exchange Board of India (SEBI) and, therefore, may be regarded as a risk-free investing choice. 

Which individuals should invest in the best mutual funds?

You may attain your financial objectives by investing in mutual funds. Be sure your goals align with those of the fund you’re considering.

Investing via a systematic investment plan (SIP) eliminated the need to come up with a large payment. Thus, you may begin your financial adventure with a minimal investment. SIPs let deposit as little as Rs 100 per month in mutual funds.

Each investing choice has some level of risk. No investment, including deposits, is completely risk-free. Depending on the underlying assets, the overall risk of mutual funds differs from one kind to another. Investment in mutual funds is thus only recommended when the investor is ready to accept the risks associated with it.

How to choose the best mutual funds in India?

These are some of the factors to keep in mind while picking the best mutual funds to invest in 2022 are the same as best mutual funds to invest in 2021:

  • Perform due diligence on the fund

An exceptional track record of increased returns over the previous three to five years is indicative of a top-performing fund that might have surpassed their objective and their peer group’s performance. Analyse the past performance of the fund throughout many business cycles. Ensure the fund’s effectiveness while the market is down, particularly. Market changes have little impact on the effectiveness of a high-performing fund. However, remember that previous success does not guarantee future results.

  • Analyse financial ratios

Before deciding whether a fund is the best performer in its category, it is critical to evaluate profitability statements, including alpha and beta. 

Risk and return are inextricably linked. The term “returns” refers to the increase in the total value of an investment. Risk is described as the uncertainty surrounding an investment, namely the chance of obtaining no or negative returns owing to a variety of factors.

The information provided by Sharpe and Alpha ratios is critical. The Sharpe ratio measures the fund’s ability to outperform the market with each additional unit of risk taken. Because of this, funds with a greater Sharpe ratio are deemed superior to those with a lesser Sharpe ratio in terms of performance. The fund manager’s alpha reveals the extra returns they have earned above the benchmark. Higher Alpha funds are seen to be superior.

  • Examine the expense ratio

When selecting a mutual fund, it’s critical to consider the expense ratio, which the fund companies charge to handle your investment and is taken from the investor’s expected returns. A larger expenditure ratio affects investors’ take-home earnings. The Securities and Exchange Board of India has imposed a cap on the fees that fund firms may charge.

A fund’s expense ratio should be in line with the returns it provides. By often rearranging the portfolio’s assets, fund managers incur greater transaction fees, which raises your investment cost (expense ratio). Verify that the expense ratio is consistent and that acceptable charges are incurred as part of the expense ratio. With equal asset allocation and prior performance, you may opt to invest in the lower cost ratio fund.

  • Investment Motive

Mutual funds are designed to achieve a certain goal. It is the responsibility of the investor to determine whether or not their aims are aligned with the objectives of the mutual fund scheme in which they want to participate.

  • The Fund’s History

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Mutual funds that have been around for a long time are considered solid investments. A mutual fund’s performance over a long time is also considered while evaluating it, particularly when the market is in a downturn. For a new fund, this information will not be accessible. Investing decisions should be based on a fund’s performance during the previous five years.

  • Fund manager’s performance

The performance of a mutual fund relies heavily on the skills of its manager. To earn money, fund managers must rely on their competence in managing the funds of their clients. It would be beneficial for a fund manager to identify successful investment possibilities. 

The benefits of investing in the best mutual funds

  • Money management that is proficient

There is a better probability of making a profit with mutual funds since they are supervised by a fund manager. Fund managers are supported by an in-house staff of analysts and professionals who conduct a study and then choose the best-performing products for the fund’s portfolio.

  • Regular investment options that allow you to invest modest sums on a regular basis

The SIP approach is one of the most important benefits of investing in mutual funds since it allows you to spread out your contributions over time. As little as Rs 100 a month may be invested via a SIP. This eliminates the need to save up a large chunk of money before beginning your investing career.

  • Diversification

It’s a good idea to invest in mutual funds to diversify your portfolio. Every mutual fund makes investments in various assets, giving investors the advantage of accessibility to a diverse portfolio of investments.

  • Can be redeemed whenever you like

The vast majority of mutual fund plans are open-ended, giving complete flexibility regarding when the redeem your mutual fund units can be redeemed. This guarantees that investors get the benefits of flexibility and hassle-free withdrawals, regardless of the market conditions.

  • Properly governed

The SEBI and the RBI regulate all mutual fund firms. The Association of Mutual Funds in India (AMFI), an industry self-regulatory body, monitors fund programmes. 

  • Tax-efficient

Save taxes by investing in tax-saving mutual funds or equity-linked savings schemes (ELSS) under Section 80C of the Income Tax Act of 1961. These mutual funds allow a standard deduction of up to Rs 1,50,000 per year, which may result in tax savings of up to Rs 46,800 per year.

Investing in the best mutual funds comes with some risks

Since they invest primarily in the stock shares of firms with a wide range of market capitalizations, equity funds are the riskiest investments. Market fluctuations have a significant impact on these funds. Risks that come with equity funds include the following:

  • Risks of the market

When the market underperforms, it creates market risk, leading to losses. The market’s fluctuations are influenced by a variety of variables. Natural catastrophes, virus epidemics, political upheaval, etc. are a few examples of risks.

  • Concentration risk

It’s never a good idea to put all your money into one firm. When a sector does well, holding all of your assets in one area might be advantageous, but if anything goes wrong, your losses would be exacerbated.

  • Risk of interest rates

It refers to the likelihood of the interest rate changing over time. The return on investment given by underlying securities is directly affected by changes in the interest rate.

  • Risk of liquidity

Having a difficult time selling an investment at a loss is referred to as “liquidity risk.” This often occurs when a fund manager cannot locate purchasers for their investments.

  • Credit risk

The term “credit risk” refers to the likelihood that the underwriter of the security may not be capable of paying the interest that’s been committed when the securities were issued. You may get a sense of a company’s creditworthiness by examining the ratings offered by several credit rating companies.

Taxation of best mutual funds

All mutual fund dividends are included in your total income and taxed according to your income tax bracket. Different mutual fund investments and holding periods have different rates of capital gains taxes.

  • Taxation of equity funds

It is possible to make short-term financial gains by selling a portion of your stock fund holdings within one year of their acquisition date. The 15% tax rate on these profits applies to everyone. After a year of owning your equity fund units, you are entitled to long-term capital gains. Tax exemption is granted on long-term capital gains  (LTCG) of up to Rs 1 lakh each year. Any LTCG beyond Rs 1 lakh per year is taxed at a fixed rate of 10%, with no indexation advantage.

  • Taxation of debt funds

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Short-term capital gains are those realised on the sale of debt fund units after a three-year holding period. Taxes are levied on these gains based on your income tax bracket. After a three-year holding period, you may sell your debt fund units and realise long-term capital gains. Taxes are imposed at a fixed rate of 20% after adjusting for inflation.

  • Taxation of balanced funds

A balanced fund’s equity exposure determines how much of a gain is taxed when sold. To be taxed as an equity fund, a balanced fund’s equity allocation must be more than 65%. Unless otherwise stated, the rules for debt fund taxes apply. 

Mutual fund investment options

The best way to achieve your financial objectives is to put your money into the appropriate fund. Here are the best mutual funds to choose from:

  • SIP mutual funds

Systematic investment plans (SIPs) enable investors to make modest, regular investments. Using SIP, investors have the flexibility to choose the frequency and amount of their investments. You can check out the top 10 mutual funds for sip to invest in 2021/2022 for better understanding.

  • Equity mutual funds

Stocks and other equity instruments are the primary focus of equity mutual funds. These mutual funds tend to create the best returns of any mutual fund today.

  • Small-cap mutual funds

Small-cap mutual funds are a subcategory of equity funds that invest primarily in the equity shares of small-cap firms.

  • Large-cap mutual funds

Investments made in large-capitalization mutual funds tend to be concentrated on the equity shares of publicly traded corporations. The whims of the market have little effect on these businesses.

  • Multi-cap mutual funds

Multi-cap mutual funds that invest in equities in a wide range of publicly traded firms. It is the finest method to spread your portfolio by investing in multi-capitalization funds.

  • Tax saving mutual funds

These are tax-advantaged investments that fall within an “equity-linked savings plan” or “ELSS” under the Income Tax Act of 1961. To get a tax break of up to Rs 1,50,000 a year, investors should engage in these funds.

  • Mid-cap mutual funds

This category refers to a kind of equity fund that invests in stocks of mid-sized firms with a market capitalization between Rs 500 crore and Rs 10,000 crore.

  • Liquid funds

Treasury bills and other high-rated debt instruments are common investments for liquid funds. Idle funds may be put into these instead of ordinary savings bank accounts.

  • Debt mutual funds

For those looking for a steady stream of dividends from their mutual fund investments, debt mutual funds are a good option.

  • Short-term mutual funds

Risk-averse investors might choose short-term mutual funds. There is a 15-day-to-91-day maturity range for these investments.

  • Income funds

Investing in high dividend-paying equities is the primary focus of income funds. Bonds, debentures, and preferred stock are the most common investments they make.

  • Balanced mutual funds

Equity and debt instruments are part of a balanced or hybrid fund’s portfolio. Diversifying one’s portfolio via the use of these funds is highly recommended.

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Category: Must Knows

Debora Berti

Università degli Studi di Firenze, IT

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