MUTUAL FUND PATHSHALA

Types of Mutual Funds

Based on your goals and your investment horizon, Mutual Funds give you the option to invest your money across various asset classes like equity, debt and gold. This allows you to diversify your investments and strive to reduce your portfolio risk.

The different types of Mutual Funds are as follows -

Funds that invest in equity shares are called equity funds. They carry the principal objective of capital appreciation of the investment over a medium to long-term investment horizon. Equity Funds are high risk funds and their returns are linked to the stock markets. They are best suited for investors who are seeking long term growth. There are different types of equity funds such as Diversified funds, Sector specific funds and Index based funds.

These funds provide you the benefit of diversification by investing in companies spread across sectors and market capitalisation. They are generally meant for investors who seek exposure across the market and do not want to be restricted to any particular sector.

These funds invest primarily in equity shares of companies in a particular business sector or industry. While these funds may give higher returns, they are riskier as compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time.

These funds invest in the same pattern as popular stock market indices like CNX Nifty Index and S&P BSE Sensex. The value of the index fund varies in proportion to the benchmark index. NAV of such schemes rise and fall in accordance with the rise and fall in the index. This would vary as compared with the benchmark owing to a factor known as “tracking error”.

These funds offer tax benefits to investors under the Income Tax Act, 2961. Opportunities provided under this scheme are in the form of tax rebates under section 80 C of the Income Tax Act, 1961. They are best suited for long investors seeking tax rebate and looking for long term growth.

These Funds 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. They are less risky when compared with equity funds.

These funds invest in highly liquid money market instruments and provide easy liquidity. The period of investment in these funds could be as short as a day. They are ideal for Corporates, institutional investors and business houses who invest their funds for very short periods.

These funds invest in Central and State Government securities and are best suited for the medium to long-term investors who are averse to risk. Government securities have no default risk.

These funds invest both in equity shares and debt (fixed income) instruments and strive to provide both growth and regular income. They are ideal for medium- to long-term investors willing to take moderate risks.

What are Debt Mutual Funds?

There are different types of Mutual Funds that invest in various securities, depending on their investment strategy. Debt Mutual Funds mainly invest in a mix of debt or fixed income securities such as Treasury Bills, Government Securities, Corporate Bonds, Money Market instruments and other debt securities of different time horizons. Generally, debt securities have a fixed maturity date & pay a fixed rate of interest. The returns of a debt mutual fund comprises of - Interest income Capital appreciation / depreciation in the value of the security due to changes in market dynamics Debt securities are also assigned a 'credit rating', which helps assess the ability of the issuer of the securities / bonds to pay back their debt, over a certain period of time. These ratings are issued by independent rating organisations such as CARE, CRISIL, FITCH, Brickwork and ICRA. Ratings are one amongst various criteria used by Fund houses to evaluate the credit worthiness of issuers of fixed income securities. There is a wide range of fixed income or Debt Mutual Funds available to suit the needs of different investors, based on their: Investment horizon Ability to bear risk

Different types of Debt Mutual Funds

There are different types of Debt Mutual Funds that invest in various fixed income securities of different time horizons. Some of the debt based & blended category products (which have both debt and equity allocation) are as follows - Liquid Funds / Money Market Funds These funds invest in highly liquid money market instruments and provide easy liquidity. The period of investment in these funds could be as short as a day. They aim to earn money market rates and could serve as an alternative to corporate and individual investors, for parking their surplus cash for short periods. Returns on these funds tend to fluctuate less when compared with other funds. Ultra Short Term Funds Earlier known as Liquid Plus Funds, they invest in very short term debt securities with a small portion in longer term debt securities. Most ultra short term funds do not invest in securities with a residual maturity of more than 1 year. Also referred to as Cash or Treasury Management Funds, Ultra Short Term Funds are preferred by investors who are willing to marginally increase their risk with an aim to earn commensurate returns. Investors who have short term surplus for a time period of approximately 1 to 9 months should consider these funds. Floating Rate Funds These funds primarily invest in floating rate debt securities, where the interest paid changes in line with the changing interest rate scenario in the debt markets. The periodic interest rate of the securities held by these products is reset with reference to a market benchmark. This makes these funds suitable for investments when interest rates in the markets are increasing. Short Term & Medium Term Income Funds These funds invest predominantly in debt securities with a maturity of upto 3 years in comparison to a Regular Income Fund. These funds tend to have a average maturity that is longer than Liquid and Ultra Short Term Funds but shorter than pure Income Funds. These funds tend to perform when short term interest rates are high and could potentially benefit from capital gains as liquidity comes back to the market and interest rates go down. These funds are suitable for conservative investors who have low to moderate risk taking appetite and an investment horizon of 9 to 12 months. Income Funds, Gilt Funds and other dynamically managed debt funds These funds comprise of investments made in a basket of debt instruments of various maturities & issuers. These funds are suitable for investors who willing to take a relatively higher risk as compared to corporate bond funds,and have longer investment horizon. These funds tend to work when entry and exit are timed properly; investors can consider entering these funds when interest rates have moved up significantly to benefit from higher accrual and when the outlook is that interest rates would decrease. As interest rates go down, investors can potentially benefit from capital gains as well. A few types of dynamically managed debt funds are mentioned below - Income funds invest in corporate bonds, government bonds and money market instruments. However,they are highly vulnerable to the changes in interest rates and are suitable for investors who have a long term investment horizon and higher risk taking ability. Entry and exit from these funds needs to be timed appropriately. The correct time to invest in these funds is when the market view is that interest rates have touched their peak and are poised to reduce. Gilt Funds invest in government securities of medium and long term maturities issued by central and state governments. These funds do not have the risk of default since the issuer of the instruments is the government. Net Asset Values (NAVs) of the schemes fluctuate due to change in interest rates and other economic factors. These funds have a high degree of interest rate risk, depending on their maturity profile. The higher the maturity profile of the instrument, higher the interest rate risk. Dynamic Bond Funds invest in debt securities of different maturity profiles. These funds are actively managed and the portfolio varies dynamically according to the interest rate view of the fund managers. These funds Invest across all classes of debt and money market instruments with no cap or floor on maturity, duration or instrument type concentration. Corporate Bond Funds These funds invest predominantly in corporate bonds and debentures of varying maturities that offer relatively higher interest, and are exposed to higher volatility and credit risk. They seek to provide regular income and growth and are suitable for investors with a moderate risk appetite with a medium to long term investment horizon. Close Ended Debt Funds Fixed Maturity Plans (FMPs) are closed ended Debt Mutual Funds that invest in debt instruments with a specific date of maturity that is less than or equal to the maturity date of the scheme. Securities are redeemed on or before maturity and proceeds are paid to the investors. FMPs are similar to passive debt funds, where the portfolio manager buys and holds the debt securities for the entire duration of the product. FMPs are a good option for conservative investors, as they do not carry any interest rate risk provided the investor stays invested until the maturity of the product. They are also a tax efficient investment option. Hybrid Funds They bridge the gap between equity and debt schemes by investing in a mix of equity and debt securities. This adds a considerable amount of risk to the product and will suit investors looking for commensurate returns with higher levels of risk than regular debt funds. Monthly Income Plans (MIPs) strive to offer the benefit of diversification across asset classes by investing a proportion of the portfolio in debt securities (70% to 95%) with a smaller allocation in equity securities (5 % to 30 %). As the correlation between prices of equity and debt is low, this product endeavors to give an investor returns that are relatively higher than debt market returns. MIPs can be classified as debt oriented hybrids that seek to - generate income from the debt securities maximise the benefits of long term growth from equity securities aim for periodic distribution of dividends However, an important point to be noted is that monthly income is not assured and it is subject to the availability of distributable surplus in the fund. Capital Protection Oriented Funds are closed ended funds that are hybrid in nature; they allocate money to debt and equity securities. The allocation to debt securities is done in such a way that at the end of the term of the product, the value of debt investment is equal to the original investment in the fund. The equity portion aims to add to the returns of the product at maturity. These funds are oriented towards protection of capital and do not offer guaranteed returns. Say, for example, AAA bonds are quoting at interest rate of 10% p.a. for a 5 year term. This means that at the end of 5 years, the investment of Rs. 100 in such bonds would be worth Rs. 161.05, assuming reinvestment of the interest. On the other hand, if one invests Rs. 62.09 in such bonds, the value of the bonds at the end of 5 years would be Rs. 100. In such a case, the allocation between equity and debt would be 38 : 62 respectively. So, if the equity value reduces to zero, the investor gets back the original amount invested. The asset allocation is a function of prevailing interest rates on high quality (AAA rated) bonds. It is mandatory for the fund to be rated by at least one rating agency in order to be called a capital protection oriented fund. Debt securities held in the portfolio must be of highest rating. Multiple Yield Funds are close ended income funds that aim to optimize income from debt securities and potential growth from equity. They aim to limit the downside by investing in rated debt instruments of reputed issuers. Through a limited equity exposure, they aim to provide capital appreciation by investing in shares of companies without any sector or market capitalization bias. This exposure will help to participate in the growth of these companies thus seeking to provide the portfolio with an element of potential long term capital appreciation.

Benefits of investing in Debt Mutual Funds

The various benefits of investing in Debt Mutual Funds are listed below - Your investments are not affected by equity market volatility Debt Mutual Funds invest in a range of interest bearing instruments such as Treasury Bills, Government Securities, Corporate Bonds, Money Market Instruments and other debt securities. Add stability to your investment portfolio As Debt Mutual Funds mainly invest in debt securities, they are relatively more stable than equity investments. They can also lend stability to your equity portfolio by reducing the risk associated with your complete investment portfolio. Freedom to withdraw your money when required All open ended mutual funds give you the freedom to withdraw your money as and when required, although your investments may be subject to an exit load. Close ended mutual funds have a defined maturity date. Such funds are listed and can be traded on the stock exchange. You can aim for better post tax returns Earnings from debt instruments can come in two forms: Dividend or interest payments Capital gains based on the difference between the purchase price and the sale price of the debt security Tax on dividend / interest income : Dividend distribution Tax (DDT) is broken up into the following Dividend for individual v/s non-individual investors and Dividend from liquid v/s non-liquid funds

How to choose a Debt Mutual Fund

Ask yourself the following questions Before deciding in which Debt mutual fund product to invest, it's important that you answer the following questions - What is my investment objective? What is my investment horizon? How much risk am I willing to take? Understand the Market Environment Keep in mind that you must also consider various market factors such as - Would interest rates rise in the near term? How are the interest rates likely to move over the next few years? As you may not be able to answer these questions yourself, you should seek advice from your distributor or keep yourself abreast with information available on the Market Reports section on our website. Assess you current Asset Allocation It is also important for you to consider your overall asset allocation, the ratio of equity to debt in your complete investment portfolio, while deciding where to invest. Maintaining a good balance between equity and debt investments is essential to provide stability and the potential for growth in the long run. Identify the Type of fund that suits your needs Depending on how you answer the questions above, you could seek assistance from your distributor to select an appropriate fund to match your needs. Click on the link below to understand what points you need to consider before investing in a Debt Mutual Fund.

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