Professional Investment Management

Mutual funds hire full-time, high-level investment professionals. Funds can afford to do so as they manage large pools of money. The managers have real-time access to crucial market information and are able to execute trades on the largest and most cost-effective scale.


Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security.

Low Cost

A mutual fund let's you participate in a diversified portfolio for as little as Rs.5,000/-, and sometimes less. And with a no-load fund, you pay little or no sales charges to own them.

Convenience and Flexibility

You own just one security rather than many; yet enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers decide what securities to trade, collect the interest payments and see that your dividends on portfolio securities are received and your rights exercised. It also uses the services of a high quality custodian and registrar in order to make sure that your convenience remains at the top of our mind.


In open-ended schemes, you can get your money back promptly at net asset value related prices from the mutual fund itself.


You get regular information on the value of your investment in addition to disclosure on the specific investments made by the mutual fund scheme.

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. It is an entity wherein people / institutions pool small amounts of money into larger amounts for investment and achieve returns with minimum risk, which otherwise is not possible by a common man.

Suppose you want to read a book, which costs Rs.1000/-. However, you do not have Rs.1000/- to spare for that book. The best alternative you can resort to, other than obviously borrowing it from somebody, is to make a group of friends who are interested in reading that same book. Then, the group can contribute some amount each and purchase the book, which you can read it in turn. Thus, you are able to get the benefits out of the book and that too by paying only a part of the price. Moreover, the book would always remain with you unlike the case if you had borrowed it from someone.

This same logic goes into investing in a mutual fund, where small amounts from large investors are pooled together to create a diversified portfolio of assets for "mutual" benefits of all investors.

SEBI being the apex body for Protection of Investor Interests ensures that the Mutual Funds comply with all its Regulations. The Trustees of the Fund are responsible for monitoring its performance and compliance of SEBI Regulations.

For example, if the market value of securities of a mutual fund scheme is Rs 200 lacs and the mutual fund has issued 10 lacs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20

Open-ended funds do not have a fixed maturity whereas close-ended schemes have a stipulated maturity period. In an Open-ended Scheme, the investors can purchase and redeem units anytime. New investors can join this kind of scheme by directly applying to the mutual fund at applicable NAV-related prices, whereas in the case of Close-ended Schemes new investors can either invest at the time of the Initial Issue and thereafter units can be bought or sold from the stock exchange where it is listed. As a result, the number of units in an Open-ended Scheme may keep fluctuating on a daily basis, while this is not the case in Close-ended Schemes.

You need to clearly identify the investment horizon with which you are investing in mutual funds. For instance, if you need your money back only after a year or so, then you can invest in diversified equity schemes since for an horizon of less than this, diversified equity schemes would be too risky and thus are not recommended.

Risk-Return relationship refers to the correlation between the two. The cardinal rule of investments is "Higher the Risk - Higher the Returns". The larger the risks you are willing to take; higher would be the returns that you would earn from the investments.

As a thumb rule, your allocation to high risk-high returns investments should be (100 less your age). For instance, if your age is 30 years, then you should allocate 70% (100-30) of your portfolio to high risk-high returns investments like equity funds, etc. The balance amount could be invested in low risk-low returns investments like debt funds.

By investment objective, following are types of mutual fund schemes:

Growth/Equity Schemes:These schemes invest predominantly in equity stocks. Stock markets are known to be volatile, but in a rising stock market, these investments yield more returns than any other investment.

Debt/income funds:These are funds that invest predominantly in income bearing instruments like bonds, debentures, government securities, commercial paper etc. Income bearing instruments are much less volatile, although they do carry credit risk. The objective of these schemes is to provide a regular and steady income to the investors.

Balanced funds:Such funds invest both in equity shares and income-bearing instruments in the proportion indicated in their offer document. The objective is to provide both growth and income by periodically distributing a part of the income and capital gains they earn.

Liquid Funds:These schemes invest mainly in liquid instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. Liquid Funds are generally very safe. The returns on these schemes may depends upon the short-term interest rates prevailing in the market. These are ideal for investors looking to park their surplus funds for short periods.

Floating Rate Funds:Floating rate funds invest in floating rate securities whose coupon rates are linked to a benchmark rates are aligned to any movements in the market rates. These funds carry low interest rate risks.

Floating rate funds are of two types:

Short-Term Floating Rate Fund:These funds invest in floating rate securities that are linked to shorter-term benchmarks like the overnight inter-bank or the call market rates, etc.

Long-Term Floating Rate Fund: These funds invest in floating rate securities that are linked to longer-term benchmarks like the 1-year Reuters rate, etc and such funds are suitable for investment with a longer horizon.

Gilt Funds:These schemes invest mainly in central and state government issued securities, commonly known as Government Securities. Gilt Funds, do not carry any credit risk as investments in Government papers have sovereign rating. However, such funds carry interest rate risk since the returns from government securities depends upon the interest rate scenarios.

Equity linked saving schemes (ELSS):These are growth schemes with a mandatory 3-year lock- in period on investments. Investments made up to Rs. 1 lac in these schemes would be eligible for tax deductions under Section 80C of the Income Tax Act.

Specialty Schemes:These schemes cater to the investment objectives not covered by the other schemes

Index Schemes:Index schemes replicate the performance of the stock Index such as BSE SENSEX or NSE Nifty.

Sector Schemes:Sector schemes are specialty mutual funds that invest in stocks that fall into a certain sector of the economy. Here the portfolio is dispersed or spread across the stocks of a particular sector.

There are certain things you must keep in mind to help you choose the scheme:

Investment philosophy - The investment objective of the scheme must match with your own objective. Thus if you are looking at capital appreciation over a long period of time, then you should consider a diversified equity scheme rather than a money market scheme.

History of the scheme - The scheme you are considering investments in should have a good track record and a considerable period of existence to prove its merit.

Fund Size - A scheme with a higher corpus tends to be more stable than a low corpus one and hence the former should be preferred for investments. But this should not be taken as a rule.

Costs involved - Most of the mutual fund schemes carry some loads and charges to cover their expenses. Such costs could be in the form of Entry/Exit loads that are charged to you when you invest or redeem from the scheme respectively. Schemes also charges expense ratios, which reduce your returns from the scheme. Schemes with lower expense ratios and entry/exit loads should be preferred. However, this should not be the primary basis of selecting a scheme for investments.

Portfolio Turnover - Portfolio Turnover means the number of times the fund manager churns the portfolio. Generally, the portfolio turnover is higher in an equity fund than a debt or a money market fund. A scheme with a very high portfolio turnover should not be preferred since it translates into higher costs through brokerage and other transaction costs.

Performance against Appropriate Benchmarks - The performance of the scheme must be compared with appropriate benchmarks to verify whether the scheme has been performing well in the past. For instance in the case of Equity schemes the performance should be compared with the Sensex/ Nifty; in case of Income Schemes performance should be compared with 5 year AAA bonds and so on.

Point-to-Point Returns: represent the average percentage growth in NAV of a scheme over several past periods. Returns are computed by comparing the NAV at the beginning and the end of the period. For example, the NAV of a scheme is Rs 10.0000 today, and was Rs 9.5500 one month ago, then the one-month trailing returns today will be computed as (10.00 - 9.55) * 100 / 9.55 = 4.71%. To annualise this, we will multiply by number of months in a year, that is, 4.71 * 12 = 56.52% annualised returns. Similarly, point-to-point returns can be calculated for any period required by the investor.

Rolling Returns: Calculate returns on a rolling basis for a given time period; a type of moving average which better reflects the volatility in returns

Standard Deviation:measures the volatility in returns of a particular scheme; the higher the standard deviation, the greater the risk component

Rupee-cost averaging through Systematic investment plans Securities markets can be volatile; some markets can be more volatile than others. As a smart investor, you should make sure that you buy more investments while the prices are low, and avoid paying inflated prices when the markets are at the peak. However, predicting the time of lows and peaks of a market is next to impossible.

Hence, the concept of Rupee Cost Averaging comes into play. An investor who invests a fixed sum of money at periodic intervals, regardless of market movements or trends, ends up buying fewer securities when prices are high and more securities when prices are low. Using this strategy, you can reduce the Average Cost per unit, and in the long run, build a portfolio that will yield added returns.

Please note, however, that this strategy does not work when prices are on a permanent downslide. Hence, this strategy does not make sense while investing in individual stocks. But for portfolios comprising securities across companies, sectors, issuers or maturities, Rupee Cost Averaging Strategy usually gives good results. With regular investments, you can thus effectively use market fluctuations to your advantage.

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