Invest in Mutual Funds

The mutual fund industry in India began in 1963 with the establishment of the Unit Trust of India (UTI), which was initiated by the Government of India and the Reserve Bank of India (RBI). The first fund launched by UTI was the Unit Scheme 1964 (US-64), which became immensely popular and attracted millions of investors over the years.

In 1987, the mutual fund industry opened up to public sector banks and institutions. The State Bank of India (SBI) launched its mutual fund, becoming the first non-UTI mutual fund, which expanded access to retail investors. 

1991 saw the economic liberalization schemes and led to the introduction of private sector mutual funds. This period saw increased competition and innovation within the industry, allowing for a broader range of investment options. SEBI was established in 1992 as a regulatory authority for the securities market, including mutual funds, enhancing investor protection and market integrity.

By early 2003, the mutual fund industry had grown to include 33 schemes with a total Assets Under Management (AUM) of approximately ₹1.22 lakh crore, reflecting significant growth since its inception. By 2014, the AUM crossed ₹10 lakh crore signaling a resurgence in investor interest and participation in mutual funds, particularly through Systematic Investment Plans (SIPs).

2020 saw another AUM milestone surpassing ₹30 lakh crore. As of September 2023, the mutual fund industry’s AUM reached approximately ₹46.58 trillion, reflecting over sixfold growth from ₹7.46 trillion in September 2013 and highlighting the industry's robust development over recent years.

Today the industry is a thriving ecosystem with around 44 asset management companies.

Net Asset Value(NAV) represents the market price of one unit of a mutual fund. For example, if the mutual fund has total assets worth ₹10,00,000 and liabilities worth ₹50,000, with 1,00,000 units, the NAV would be (₹10,00,000 - ₹50,000)/1,00,000 = 9.5. This means that each unit of the fund is worth ₹9.5.

The NAV of a mutual fund is a key indicator of the performance of underlying assets in the fund’s portfolio. It can be used to track a fund's growth over time. 

The NAV of all mutual funds changes on a daily basis. It is calculated at the end of each trading day, using the closing market prices of the underlying securities in the fund’s portfolio.

An AMC is a financial institution that manages money invested by individuals, institutions, and businesses through various mutual funds. AMCs pool money from multiple investors to create a common fund, which is then used to purchase securities such as stocks, bonds, money market investments, etc. 

AMCs employ fund managers who make investment decisions on behalf of investors. AMCs also manage all administrative aspects, like regulatory compliance and fund performance analysis. All AMCs in India are regulated by SEBI to ensure they operate within the legal framework and adhere to high standards of transparency and accountability.

A few of the prominent AMCs in order of fund size are SBI Mutual Fund, ICICI Mutual Fund, HDFC Mutual Fund, Axis Mutual Fund, etc. Click here to explore all AMCs in India

The Expense Ratio is the annual fee of a mutual fund that is charged to investors to cover operating expenses. It includes costs such as management fees, administrative fees, and any other operational expenses the AMC incurs to run the fund.

Expense Ratio is calculated as a percentage of total Fund Expense by average Assets under Management of the mutual fund. For example, an expense ratio of 1.5% represents that ₹1.5 will be charged for every ₹100 invested in the fund annually.

A higher expense ratio indicates that more investors' money is being used to cover operational expenses rather than directed toward the fund's investment pool, which can lead to lower returns over time.

There are different methods of calculating the returns of a mutual fund, each suited to different types of investments and time frames. Let's understand these methods:

Absolute Return: This is the simplest method. It is the percentage change in the value of your investment over a specific period. It does not consider the time over which this change occurred. Example: If you invested when the NAV was ₹10 and sold when it was ₹12, your absolute return would be 20%

Compound Annual Growth Rate (CAGR): This is the annualized rate of growth of an investment over a specified period, also considering the amount of time taken. For example, if you invested when the NAV was ₹10 and sold when the NAV was ₹20 after 1.5 years, your CAGR would be 15.43% = (12/10)1/1.5

In reality, investments into mutual funds happen in multiple installments over a period of time. The above two methods do not account for such a scenario. To solve this, we have two more methods: 

Time Weighted Rate of Return (TWRR): This method breaks down the investment period into multiple sub-periods based on when cash inflows and outflows happened. Then calculates the absolute return for each sub-period and aggregates them together for the total investment period return. Note that the size of the cash flow is ignored in this method.

Extended Internal Rate of Return (XIRR): This method accounts for both the timing and size of each cash flow in your investment.

Exit Load is a small fee that some AMCs (Asset Management Companies) charge the investor if they choose to withdraw (or redeem) the investment before a specific time period. 

The purpose of exit load is to discourage investors from withdrawing investments before a certain time frame. Exit load structure varies from fund to fund. It is usually a percentage of the amount being redeemed/sold. For example, if the exit load is 1% and an investor redeems ₹10,000 worth of units, the fund will deduct ₹100 as the exit load.

Selection of a mutual fund should be based on your investment goals and risk profile. The key aspect is your goal's time horizon. If your goal is more than 5 years away you can consider equity mutual funds. If not, you should consider a mix of hybrid or debt mutual funds to lower risk for shorter time periods.

Within the broad categories of equity, debt and hybrid there are sub categories to choose from based on different risk levels. 

Equity Funds are evaluated based on their ability to beat the benchmark (active funds) or on their tracking error (passive funds). For active mutual funds, the ability to consistently beat the benchmark is a very strong indicator of a well managed fund. If this outperformance comes at a reasonable cost (expense ratio), that is even better. Expense ratios should be compared with funds within the same category, for example, a small cap funds expense ratio should NOT be compared with a large cap active mutual fund. 

Passive funds are evaluated on how closely they can mimic the returns of their benchmark. This is measured in terms of their tracking error. Another great way is to plot the rolling returns of the passive fund alongside the benchmark index rolling returns and see their deviation. The lower the better. 

Hybrid funds are suitable for medium term goals. They have a mix of equity and debt securities and should be judged on their performance vs. the benchmark. The debt portfolio composition between government (low risk) vs. corporate debt (higher risk) and its credit rating may be considered when choosing a fund. 

This evaluation is a continuous exercise and investors should periodically monitoring if their funds are still aligned towards their goals and with change market conditions.

The fund manager's role is to make strategic investment decisions to achieve the mutual fund's objectives, balancing risk and potential returns. He is tasked with selecting appropriate securities (stocks, bonds, etc.) based on deep market analysis and research. To oversee the daily trading activities of the mutual fund, ensuring that the portfolio aligns with the fund's goals and adheres to regulations set by the Securities and Exchange Board of India (SEBI).

They are also responsible for monitoring the fund performance and responding to market changes or shifts in economic conditions. They often serve as the face of the mutual fund house, communicating with investors about the funds performance and strategy going forward. 

Active Fund Managers: These managers actively make decisions about buying and selling securities with the goal of outperforming a benchmark index. These are active mutual funds where expense ratios are typically higher than passive mutual funds.

Passive Fund Managers: They typically manage funds that track specific indices and do not frequently change the portfolio composition. Their mandate is NOT to outperform the benchmark but to minimize the tracking error. 

Mutual funds are subject to a variety of risks. Market fluctuations and performance of the underlying holdings can lead to losses. For example, during market downturns like the 2008 financial crisis or the COVID-19 pandemic in 2020, many equity mutual funds experienced significant declines in NAV (Net Asset Value).

Mismatch in investor goals and fund objectives can be another reason for losses. For example, investors who pulled out their investments during the initial market crash in March 2020 may have realized losses that could have been avoided had they stayed invested. Aligning your mutual fund investments with your financial goals and time horizons can help avoid such losses. 

If a fund manager makes poor investment decisions or fails to adapt to changing market conditions, it can lead to underperformance and losses for investors. For example, on April 23, 2020, Franklin Templeton announced the closure of six debt funds due to severe liquidity issues exacerbated by the onset of the COVID-19 pandemic. 

Funds that focus on specific sectors (e.g., technology, defense, healthcare) can be particularly vulnerable to downturns in those sectors. For example, if a sector experiences regulatory challenges or economic downturns, sector-focused funds may suffer greater losses compared to more diversified funds.

When an urgent need for cash arises - 41% investors end up selling their mutual funds or some end up taking a personal loan at interest rates as high as 35%! 

But there’s a simpler solution, Insta Plus - that let’s you leverage your Mutual Funds to meet immediate cash needs, while your mutual fund investments continue to grow while pledged. 

Imagine this - you have mutual funds worth ₹10 Lakh and need ₹1 Lakh for an immediate expense, like buying new furniture. Instead of selling your mutual funds and disrupting their growth, you can pledge them with INsta Plus on INDmoney and borrow ₹1 Lakh at a low interest rate of 10.5%. Your monthly payment will only be ₹875 in interest, with no need to pay off the principal until the end of the term. 

You can borrow between ₹25,000 and ₹2 Crore, depending on the value of your pledged mutual funds. Credit limits are typically 45% of equity funds and 75% of debt funds. Insta Plus is available to both new-to-credit users and those with established credit histories(Credit score of 650 and above). The entire loan application process is 100% digital, with funds disbursed in under an hour—much faster than redeeming mutual funds, which takes 2-3 working days.
 

When you invest in Mutual Funds via INDmoney, you are not charged any fee for account opening, tracking or to switch from regular to direct commission funds which can help you save up to 1.5% on commissions charged by regular mutual funds. 
 

Considering the charges that you may have to pay on your Mutual fund investment outside of INDmoney, then the same include:

- Expense Ratio or the fund management fee/commission charged by the AMC to manage the fund on your behalf. 
- Stamp Duty(STT) levied by the government as 0.005% for purchase of the mutual fund and on equity-oriented mutual funds (sale) STT is applicable as 0.001% for redemption.
- Taxation charges include Short Term Capital Gains Tax  taxed at 20% for funds held for less than a year and Long Term Capital Gains Tax charged as 12.5% on gains greater than ₹1.25 lakh annually for funds held for more than 1 year.
- Exit loads or the fee charged by the mutual fund houses if units are sold within a certain period from the date of investment.
- Dividends are taxable as per your income tax slab. 

You can refer to the complete pricing details for Mutual Funds here to make a confident investment decision.
 

Yes, you can easily invest in mutual funds under your minor child’s name in India. Investing in your child’s name gives them a head start on wealth accumulation and the benefit of compounding. Mutual Funds like ELSS can also help you save tax under Section 80C.

To get started, you will be required to set up a Mutual Fund account in your child’s name. This account must be operated by the parent/guardian. 

Talking about the documents required, you will need your PAN card, Aadhaar and KYC verified. For your child - you will be required to show the birth certificate/passport or verify age and relationship with the guardian. The investments can be made as lump sums or through a Systematic Investment Plan (SIP).

Additionally, take into account the following guidelines:

• Only the guardian can operate the minor’s account until the child turns 18.
• Upon turning 18, the minor must complete KYC requirements, and the account will be transferred to their name.
• Earnings are clubbed with the guardian’s income unless the minor earns separately through other investments.
• Certain investment options like SIP pause and overdraft against investments may not be available in minor accounts.

The performance of one mutual fund over another can vary significantly due to its returns, risk levels, overall outcomes and other factors including:

1. Fund Objectives: Each mutual fund has a specific objective. Growth-focused funds often invest in equities, which can yield higher returns over time, while income-focused funds might prioritize bonds or dividend-paying stocks, offering steady but lower returns.

2.  Investment Strategy: A fund's strategy, such as active vs. passive management, also impacts its performance. Actively managed funds depend on the fund manager’s expertise to outperform the market, whereas passively managed funds simply mirror an index.

3. Asset Allocation and Diversification: The mix of asset classes (equities, debt, cash, etc.) in a fund's portfolio heavily influences performance. Proper diversification across sectors and industries can reduce risk and improve stability, whereas concentrated portfolios may yield higher returns but come with increased risk.

4. Fund Manager’s Expertise: A skilled fund manager with a solid track record of navigating market cycles and making timely investment decisions can significantly impact a fund’s performance.

5. Expense Ratio and Costs: Mutual funds charge fees like the expense ratio, which includes management and administrative fees. Funds with lower expense ratios pass more returns to investors. Over time, even a small difference in expenses can lead to substantial variation in performance.

6. Market Conditions: External factors like economic growth, interest rates, inflation, and geopolitical events influence mutual fund performance. For example, equity funds tend to perform better in growing economies, while debt funds may outperform during times of high interest rates.

7. Sector and Stock Selection: Individual stock selection plays a critical role; funds that identify and invest in winning stocks will naturally outperform those that don’t. Additionally, funds with exposure to high-performing sectors (e.g., technology or healthcare during an economic boom) may perform better.

8. Tax Efficiency: Funds that efficiently manage tax implications (e.g., long-term capital gains vs. short-term) can result in higher net returns for investors.

9. Investor Behavior: The inflow and outflow of funds (redemptions) can impact the liquidity and performance of a mutual fund. Funds experiencing heavy redemptions may need to sell assets at unfavorable prices, affecting returns.

Investors should evaluate funds based on their objectives, risk tolerance, and investment horizon while considering key performance indicators like expense ratio, consistency, and past returns. Diversification and regular review of your mutual fund portfolio can also help optimize performance over time.
 

Yes, you can. Joint accounts for mutual fund investments are commonly used by couples, parents, business partners for shared financial goals, as they offer flexibility and convenience. Joint accounts allow investments in various types of mutual funds - including equity, debt, hybrid, and ELSS funds. 

In a joint mutual fund account - all  account holders must sign off on any transactions, including investments, redemptions, or modifications. All joint holders must submit their PAN cards, Aadhaar cards, and complete their Know Your Customer (KYC) formalities. While any one holder can operate the account independently, upon the death of one holder - the account automatically transfers to the surviving holder(s). 

Do note that joint holding does not provide additional tax benefits and one must remember to appoint a nominee for the account to ensure seamless transfer of assets. Additionally, if a joint holder wishes to exit, a fresh account may need to be created, or joint consent is required for modifications.
 

A New Fund Offering (NFO) is like the grand opening of a mutual fund. When an asset management company (AMC) launches a new mutual fund, they offer it to the public at a fixed price, typically ₹10 per unit. This process allows the AMC to raise money to start investing according to the fund's strategy. Think of it as similar to a company’s IPO (Initial Public Offering), where shares are introduced to the stock market for the first time. Investors often consider NFOs if the fund's theme or strategy aligns with their goals. For example, a new fund might focus on environmental sustainability, global markets, or a niche sector. However, it’s essential to research the fund’s objectives and potential before investing.
 

ETFs (Exchange-Traded Funds) and mutual funds might seem similar because both pool money from investors to create a diversified portfolio. However, they have some key differences. ETFs are traded on stock exchanges, just like individual stocks. You can buy or sell them at any time during market hours at a price that fluctuates throughout the day. On the other hand, mutual funds are bought or sold directly through the fund company, and the price is based on the Net Asset Value (NAV), which is calculated at the end of the day.

Another difference lies in management and cost. ETFs are usually passively managed, meaning they aim to match the performance of an index like the Nifty 50 or S&P 500. Mutual funds can be actively managed, where fund managers decide which stocks to buy or sell to outperform the market, but this often makes mutual funds more expensive. Finally, ETFs are more tax-efficient because of how they are structured, while mutual funds may trigger more taxes due to frequent buying and selling of securities within the fund.
 

Deciding between a Systematic Investment Plan (SIP) and a one-time payment depends on your financial situation and market conditions. SIP is a method where you invest a fixed amount at regular intervals, like every month. This approach helps you spread out your investments over time, reducing the risk of market fluctuations. For example, if the market goes down, your SIP automatically buys more units at lower prices, averaging out the cost in the long run. SIPs are ideal for people with a steady income or those who want to stay disciplined with their investments.

A one-time payment, or lump-sum investment, involves putting in a large amount all at once. This can be beneficial when markets are on the rise because your entire investment benefits from the upward trend. However, it carries more risk since poor timing could mean losses if the market declines right after your investment. SIPs are generally safer for beginners, while lump-sum investments may suit experienced investors who are confident about market trends.
 

When you redeem your mutual fund investments, the money isn’t transferred to your bank account instantly. The time it takes depends on the type of fund. For equity mutual funds, you usually receive the proceeds within three business days (known as T+3), where “T” stands for the transaction day. Debt mutual funds, on the other hand, are processed faster, typically within two business days (T+2). These timelines can be slightly delayed if your transaction coincides with weekends or holidays. Once processed, the money is directly credited to the bank account linked to your mutual fund investment.
 

Yes, HUFs can invest in Mutual Funds. HUF or Hindu Undivided Family is a legal entity, including lineal descendants of a common ancestor who can have their own PAN Card and Bank Account to make investments. 

The head male member of a HUF is called a Karta. A Karta can make and manage these investments under his name. The Karta of a HUF is supposed to fill out the non-individual KYC form and submit the following documents:

• PAN Card
• Bank Account Statement
• Deed of Declaration of HUF

Once KYC is complete, the Karta can apply for Mutual Funds provided he explicitly states that he is making that investment on behalf of the Hindu Undivided Family.

Taxation on your mutual fund earnings depend on a multitude of factors. From the category of fund you’ve invested in to the tenure that you’ve held that fund for, there are more than one factor that comes into play when determining your taxes. Let’s understand them in detail:

• Capital Gain: Capital Gain is the profit you make by selling your mutual funds more than at what you bought it for.
• Equity or Debt: Equity mutual funds (65% investments are in Stocks), Debt holdings (65% investments are in Debt instruments) and Hybrid Mutual Funds have different tax liabilities.
• Holding Period: India’s Income Tax Regulations impose a lower tax liability if you hold your investments for a longer period and more tax if you sell your holdings within a short duration from your purchase
   

Let’s discuss the tax implications when you hold equity and debt mutual funds:

Tax implication for equity mutual funds: Any gain from an equity mutual fund is considered a Short Term Capital Gain (STCG) if sold within 12 months and Long Term Capital Gain (LTCG) if sold after 12 months. 

Taxation on your equity mutual funds vary in 2 different situations:

1. If you sold before July 23, 2024: For STCG your tax liability is 15% and for LTCG your tax liability is 10%.
2. If you sold after July 23, 2024: If you realize a Short-term Capital Gain you are liable to pay a 20% tax on your gains. If you hold your equity funds for a year and realize a Long-term Capital Gain you are liable to pay a 12.5% tax on your gains.

Tax implication for debt mutual funds: Two factors come into play, when you calculate taxation for debt mutual funds.
1. If you invested before April 1,  2023
2. If you invested after April 1, 2023

Scenario 1: If you invested before April 1, 2023 - In this case also your tax liability can be divided into two categories:
(i) If you sell before 23rd July, 2024 your long-term capital gain (more than 36 months)  is taxed at 20% with indexation benefit. Short-term capital gains in this case are taxed at your slab rate.
(i) If you sell after 23rd July, 2024, your long-term capital (more than 24 months) is taxed at 12.50% with indexation benefit. Short-term capital gains in this case are taxed at your slab rate.

Scenario 2: If you invested after April 1, 2023 - Your debt mutual funds are taxed at your income slab rate irrespective of it’s holding period.