Open-end Funds
- An open-end fund is one that has units available for sale and repurchase at all time
- An investor can buy or redeem units from the fund itself at a price based on the Net Asset Value (NAV) per unit
Close-end Funds
- A close ended fund makes a one-time sale of a fixed number of units. It does not allow investors to buy or redeem units directly from the funds.
- However, to provide liquidity to investors many closed-end funds get themselves listed on stock exchange
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- Generally, when a fund invests in tax-exempt securities, it is called a tax-exempt fund. All of the dividend income received from equity mutual funds is tax-free in the hands of the investors.
- However, funds other than Equity Funds have to pay a distribution tax, before distributing income to investors.
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- Balanced funds invest in a combination of stocks and bonds. A typical mix of 60:40 is allocated to Debt and Equity instruments
- Returns from balanced funds are normally lower than pure equity mutual funds when markets are rising, however if the market declines, the losses are also normally lower
- Balanced funds are best suited for investors who seek a blend of equtiy and debt
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- By diversification. When you invest in one mutual fund, you instantly spread your risk over a number of different companies
- The selection of which securities to buy, the allocation of cash and securities, and the timing of purchases is performed by the fund manager or management team
- These individuals have the resources, time, crucial market information and training to make well informed investment decisions – all of which contribute towards cutting down the risk
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- Equity Linked Saving Schemes of mutual funds offer tax rebate upto rs 1 Lakh under Sec 80 C of the Indian Income Tax Act, 1961
- In addition all dividends from equity schemes are distributed tax free to the investors and hence they donot form a part of the taxable income
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- Funds may be chosen on these criteria – Background & credentials of the sponsor
- The performance track record of the scheme in the long term
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- If you are someone who does not have the time and expertise to analyze and invest in stocks and bonds, mutual funds offer a viable investment alternative
- Mutual funds diversify the risk by investing in a basket of assets (equity, debt etc) rather than putting all the eggs in one basket
- You will have a team of professional fund managers with in-depth research inputs from investment analysts, who will manager your investment
- As an individual you may not have the access to critical information for making investments. Being large institutions, mutual funds have critical information on markets
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- Start investing ASAP - The power of compounding is the single most reason for you to start investing early
- Hold Mutual fund for long term - Historically, world over, and even in India, stocks have outperformed every other asset class over the long run
- Diversify your investments - By diversifying across assets, you can reduce your risk without necessarily having to reduce your returns
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- To protect the investor a comprehensive set of regulations for all mutual funds operating in India was introduced with SEBI Regulations, 1996, ensuring that the investors’ funds are invested in approved securities only>/
- Every mutual fund that intends to sell securities to the public must first file a Statement of Information Document (SID) with the regulators and must give each purchaser a disclosure document which outlines the risk
- The information contained in these documents is intended to allow investors and their financial advisers to make prudent and informed investment decisions
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- The performance of a scheme is reflected in its Net Asset Value (NAV), which is disclosed on a daily basis in case of open-ended schemes and on a weekly basis in case of close-ended schemes
- By law, the NAVs of mutual funds are required to be published in newspapers and are also available on the websites of amfi & mutual fund companies
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- A Systematic Investment Plan a method where an investor contributes a fixed amount every month regularly in any of the schemes offered by a mutual fund
- It is similar to regular saving schemes like a recurring deposit or a monthly deposit. The exception being that your monthly contribution is being invested to buy units of the mutual fund scheme of your choice. You can do this by investing as little as Rs. 500/- per month
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- DIP is an innovative investment facility from L&T Mutual Fund
- Your money is deposited in a liquid fund from where a fixed amount is transferred to the equity fund of your choice on a daily basis
- It is a hassle free facility that makes your money work for you from day one through the liquid fund
- It lets you take advantage of the daily fluctuations in the equity market by way of Rupee Cost Averaging
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- Hassle free investing. Just one cheque is required
- Does not require bank mandate to start this facility
- Here your daily SIP starts from day 7 from the date of investment vis-a-vis normal SIP which requires 1 month to start
- No need to time the market. Provides maximum benefits of Rupee Cost averaging
- Here your money never remains idle
- Ensures disciplined investment
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- It is a myth that one can purchase a fund at a cheaper or expensive rate. A high NAV of Rs.60 in an existing scheme, and an NAV of Rs.10 in a New Fund Offer (NFO) are exactly the same for a new investor
- Two funds with exactly the same portfolio generate the same percentage of return in a given period irrespective of the magnitude of the NAV
- Any time is hence the right time to invest
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- The minimum amount of money required to start a mutual fund investment is quite small. Most of the newly launched equity funds have a minimum investment requirement of Rs 5,000
- However, there are several other existing schemes present in the market where the minimum investment requirement goes to as low a figure as Rs 2,000
- Thus, investors have the choice to kick off their investment with low figures depending upon their convenience
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- Every scheme lists out its investment objectives, so investors should read this before deciding on their investment
- Further, if it is an existing scheme then they also have the chance to look at the existing portfolio of the scheme given in the factsheets so that they know the current holding of the scheme and can have a fair idea about where their money will be invested
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- All mutual fund schemes available in the market do not invest in equities. Thus the performance of all the mutual fund schemes is not linked to just the performance of the equity markets
- There are funds that invest in short term debt instruments or in long term debt instruments like corporate bonds and government securities
- There are also schemes that invest in equity shares along with others that invest in a mix of both equity and debt. The proportion of the equity and debt in the portfolio will also vary for different categories of schemes
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- The scheme’s performance depends upon its exact portfolio. Thus depending on the situation in different markets the funds will perform accordingly
- If the equity market is rising then equity schemes would be performing but at the same time if debt is not doing well then debt oriented schemes could be lagging in terms of returns gains
- All categories of schemes have different risk and return expectations. A possibility of a higher return will also be accompanied by a higher risk, where chances of losses are also high
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- A lower initial amount will mean that you end up having a lower number of units in your name. This, however, will not be reflected in the performance that you experience
- Thus, investors across different investment levels will witness a similar kind of performance of their funds . The only difference is that if one has put in a large absolute amount, the gains or losses will be higher in absolute terms
- In percentage terms, all investors will end up with the same earning in a particular plan
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- A minimum level of investment affects investors because this is the sum that they will have to initially shell out while starting off their investment process
- It does not have that much of a significance because when an investor is looking at an open-ended scheme, then they have the ability to put in further sums of money at a later stage when they have the necessary funds
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- Mutual Funds offer Liquid schemes where the investors will receive their money without any delay
- There are equity-linked savings schemes (ELSS) which are tax saving schemes and hence, will have a lock-in of three years
- Schemes which are open-ended, where investors can redeem and buy new units all throughout the year depending on their convenience, usually do not have any lock-in and investors can transact as they please
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- Except for the scheme where there is a lock-in, investors can withdraw their money in case they require the money
- Investors have full control over their investments and they can take back their money when they feel like it
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- In the case of open-ended schemes, where the mutual fund itself buys back the units from the investors, there is a simple process to be undertaken by the investor
- They have to fill up the withdrawal slip that is given to them by the fund house and submit it to their branch . Depending upon the time at which this is submitted to the fund , the investor will see his units redeemed at the prevailing rate applicable
- Since the fund itself is buying back the units, there is little to worry in terms of there not being enough buyers for the units, when the investors go to sell his units. The money is then returned to the investor
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- There is a risk in an equity oriented mutual fund scheme because the investor could end up with a value that is lower than the cost at which the units of the fund were bought
- This is because the value of equity holdings in the scheme can come down due to a fall in the price of shares. This will result in a fall in the net asset value (NAV)
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- The risk in an equity-oriented scheme has to be seen in conjunction with the return that can be generated
- The potential for high returns is present in such schemes. But this has to be put in perspective with the risk, which is that there can be a fall in the values of the fund , resulting in a loss for the investors in case the markets turn negative
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- There are a wide variety of equity schemes present in the market. They can be classified as diversified equity schemes, index funds , sectoral schemes, etc
- The risk in each of these equity schemes is not the same
- In simple terms, this can be understood by looking at the kind of portfolio that the scheme has. Too much concentration in a particular stock or a particular sector can prove to be a double-edged sword
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- In terms of the portfolio of a particular scheme, if there is a very high holding in a particular stock or a few stocks, then the risk rises because of the fact that the performance of these few stocks determine a large part of the performance of the fund
- This is why many schemes have a diversified portfolio across various sectors where the investment is not only made across a larger number of companies, but, at the same time, care is also taken to see that a particular sector does not have too much importance in the entire portfolio of the fund
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- Sectoral schemes, which invest their funds in shares of a particular sector are considered to be the riskiest because of the concentrated holdings of the schemes
- On the other hand, diversified equity schemes have a comparatively lesser amount of risk involved because of the disbursed nature of holdings
- In addition, there are also index funds where the risk is proportionate to the movement of the index and its movement will be reflected in the fund
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- There have been quite a few launches by mutual funds in recent times, especially in equities. The situation portrayed by fund distributors is that the investors will lose out in case investment is not made during the initial offer period
- Investors, on their part, need to realize that not subscribing to the units during the initial period will not result in a hit in terms of a lost opportunity
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- Equity-oriented schemes are defined as those schemes where the equity holding of the fund in domestic companies is more than 50%
- Here, the tax aspect is very favourable for the investors. If the holding is for a period of more than 12 months, then there is no long capital gains tax to be paid by the investor
- However, there will be a securities transaction tax that will have to be paid. On the other hand, for a holding period of less than 12 months will result in a short-term capital gains and consequently, a tax of 10% for the individual
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- There is no tax on dividends received from debt mutual fund schemes
- However, the capital gains aspect is different. Here, a short-term capital gain will result in an addition to the total income of the individual by the amount of the gain
- This will mean taxation at the applicable rate of tax for the individual. In case there is longterm capital gains tax, then the investor has a choice of selecting the rate of 10% without using the benefit of indexation or 20% after the using the benefits of indexation
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