What are Mutual Funds? - Mutual Fund Beginners Guide

Assets under Management (AUM)	28,247.45 Crores
Expense Ratio	1.76%
Investment Objective	To achieve long term capital appreciation by investing in a diversified portfolio predominantly consisting of equity and equity related securities of Large Cap companies including derivatives.
Net Asset Value (NAV) as on 15th July 2021	Rs. 42.40
Fund Manager	Shreyas Devalkar & Hitesh Das
Asset Management Company (AMC)	Axis AMC

Now, to buy one unit of Axis Bluechip Fund, you will have to pay Rs 42.40 as on 15th July 2021. Remember that this will keep changing as the market fluctuates.

Axis AMC launched Axis Bluechip Fund in 2010. The fund’s objective is to invest in large-cap companies. The fund is managed by Shreyas Devalkar & Hitesh Das. For managing this fund, the AMC charges 1.76%.

Total money collected by the fund (AUM) is Rs 28,247.45 crores. To achieve diversification, the fund manager has divided and invested 94.7% in stocks and 5.4% in others.

The below table shows the shares that Axis Bluechip Fund holds as on 15th July 2021.

The remaining 5.4% is invested in the following:

But what does fund manager do with the collected money?

The collected money is invested in various asset classes depending upon the type of mutual fund scheme:

Equity Mutual Funds:

The pooled money is invested in stocks of various companies. Since its underlying assets i.e. stocks are volatile, equity mutual funds are risky and suitable for aggressive investors.

Equity mutual funds are further divided into large cap funds, mid cap funds and small cap funds.

Large cap equity funds invest in stocks with market capitalisation more than 20,000 crores. These stocks are known as blue chip stocks. They belong to the biggest companies (1st – 100th) as per market capitalisation. Hence large-cap funds are also known as bluechip funds. Large-cap funds invest in market leaders such as Reliance Industries, HDFC Ltd, Infosys etc and hence experience low volatility.

Here’s a list of best large cap mutual funds in 2021.

Note: *Returns as of date 31st July 2021

Midcap mutual funds invest in stocks with market capitalisation between Rs 5,000 crores and Rs 20,000 crores. These are 101st to 250th companies as per market capitalisation. These companies are not yet established and hence midcap mutual funds carry high risk. They are very volatile and suitable for only aggressive investors with long-term horizon.

Here’s a list of best midcap mutual funds in 2021.

Note: *Returns as of date 20th July 2021

Small cap mutual funds invest in stocks with market capitalisation of less than Rs 5,000 crores. These are 251st onwards companies as per market capitalisation. These are mostly start-ups and hence are extremely risky. They experience very high volatility. Only very aggressive investors with 10+years investment horizon should invest in small cap funds.

Here’s a list of best small cap mutual funds in 2021.

Note: *Returns as of date 20th July 2021

Debt Mutual Funds:

Here, the pooled money is invested in fixed income instruments like:

These fixed income instruments can be issued by government or private and public sector companies. Debt funds are safer and less volatile than equity mutual funds. They earn a fixed rate of interest on their corpus and hence are suitable for conservative investors.

• Bonds
• Debentures
• Zero Coupon Bonds
• Commercial Papers (CPs)
• Certificates of Deposits (CDs)
• Non-Convertible Debentures (NCDs)
• Money market instruments like Treasury Bills, CBLO etc.
• Sovereign papers issued by the Government of India

Debt mutual funds can be further subdivided as:

Hybrid Mutual Funds:

Here the pooled money is invested in a mix of stocks, bonds and gold. The main idea is to get capital appreciation from equity portion and stability from debt or gold component. and fixed income instruments. Hybrid mutual funds are perfect for mutual fund beginners. It gives them a good first-time exposure to the stock markets. Depending upon the equity, debt and gold balance, there are seven types of hybrid mutual funds:

Aggressive Hybrid Fund invests 65% - 80% in equity shares and 20% -35% in debt instruments.

Conservative Hybrid Fund invests 75% - 90% in debt and 10% - 25% in equity shares.

Dynamic Asset Allocation Fund changes allocation dynamically as per market valuations. It can invest 100% in equity or 100% in debt.

Multi Asset Allocation Fund invests minimum 10% in each asset class equity, debt and gold.

Balanced Hybrid Fund invests minimum 40% in equity and 60% in debt.

Equity Savings Fund invests in equity stocks, debt and derivative instruments like futures. The fund can invest up to 100% in equity shares.

Arbitrage Funds are a unique type of hybrid fund as they hedge their cash position using futures contract. This means that the fund carries almost no risk.

Here’s a list of best hybrid mutual funds for 2021.

Note: *Returns as of date 20th July 2021

Each mutual fund type has a distinct investment objective and risk profile. Equity mutual funds are very risky. Debt mutual funds are comparatively less risky than equity funds. Hybrid mutual funds carry medium-risk.

Once the objective of the fund is decided, the fund manager then picks top companies for investment. This step is very critical. Proper stock selection is the backbone of a fund’s performance.

For example: In case of equity mutual funds, the fund manager will select top stocks for investment. These stocks can be large cap stocks, mid cap stocks, small cap stocks etc.

Once the segment is decided, the fund manager then divides the collected amount into smaller portions and invests across stocks or debt instruments. The process of dividing the investment amount and investing smaller portions in various stocks is known as ‘Diversification’. Diversification helps in reducing overall portfolio risk.

Let us see how diversification works in mutual funds.

Suppose you wanted to invest ₹ 100. You have two options -

• Invest the entire ₹ 100 in one company.
• Invest ₹ 10 in 10 different companies.

There are more than 4,500 stocks in the market. What are the chances that you will end up selecting the best stock? It’s 1 in 4,500 or next to impossible.

But if you select 10 stocks, then there is a slightly higher chance that some of them might be best stocks.

To help improve their chances, fund managers invest in many stocks. So that even if one stock performs poorly, good performance of the remaining stocks can help them average the gains or losses.

So, diversification not only helps in spreading the risk, it also ensures that you maximise your profits.

Why Does the Value of Mutual Funds Change?

The NAV of equity mutual funds fluctuate when your fund manager buys and sells the underlying shares on the stock exchange.

There is a direct relationship between stock prices and the fund's NAV.

• If share prices increase - your funds NAV will increase.
• If share prices decrease - your funds NAV will decrease.

Are Mutual Funds Safe?

Every investor looks for safety while investing. Afterall, we are investing our hard-earned money. In this regard, mutual funds are quite misunderstood. Just because they have ‘fund’ in their name, people compare them with chit funds.

But you will be surprised to know that mutual funds are highly secured. In India, mutual funds are regulated by the Securities and Exchange Board of India (SEBI). Additionally, the Association of Mutual Funds in India (AMFI) also regulates and monitors the mutual fund industry.

SEBI’s aim is to safeguard the interest of common investors. So, in terms of your money vanishing overnight, be rest assured that this will never happen. Unit Trust of India (UTI) is the first mutual fund launched in India in 1963. In the last 58 years, no mutual fund company has vanished with investors’ money.

So, mutual funds are highly secured.

What are the Advantages of Mutual Funds? - Why Should you Invest in Mutual Funds?

Mutual Funds are the perfect investment option for investors with little knowledge or experience of the stock markets. The main advantages of mutual funds are:

1. 

   Professionally Managed: The biggest advantage of mutual funds is that they are professionally managed by expert fund managers. These managers have dedicated research teams which discover lucrative investment opportunities.

   Fund managers take investment decisions on behalf of investors. In return, they charge fund management fees. This fee is adjusted against the fund’s NAV. The aim of the fund manager is to beat the fund’s benchmark and generate superior returns for unitholders.

2. 

   Diversification: Mutual funds divide and invest the pooled amount into various companies. By doing this, they reduce their overall risk while increasing their profit possibilities. Diversification helps investors participate in the growth of multiple companies with a single fund.

3. 
   Highly Liquid: Liquidity refers to how quickly you can sell an investment for cash.
   
   Bases on liquidity, mutual funds are of two types -
   

   • Open ended funds
   • Close ended funds

   Open ended funds can be bought and sold anytime. Close-ended funds can be bought only during a specific time period. Fixed Maturity Plan (FMP) is a close ended fund.

   Open ended mutual funds are highly liquid. You can sell your units within 1 day of investment also. But in such cases, exit load and taxation is applicable. More on this later.

   Majority of mutual fund schemes do not have a compulsory lock-in period (except Equity linked savings schemes, ELSS and FMP).

   High liquidity ensures that you can redeem your mutual fund units anytime in case of any emergencies.
4. 

   Convenient: Mutual Funds are highly convenient. Investors can invest the entire capital at one go known as lumpsum investing. Or they can invest small amounts every month, known as Systematic Investment Plan (SIP).

   Lumpsum investing is more suited to investors who can time the market. Whereas SIP is perfect for retail investors. SIP helps in creating investment discipline as a fixed amount is automatically deducted every month on a pre decided date.

5. 
   Affordable: One of the biggest advantages of mutual funds is that they are very affordable. You can start investing in mutual funds with as little as ₹ 500 per month via SIP. In case of lumpsum investing, the minimum investment amount varies between ₹ 1,000 - ₹ 5,000.
6. 
   High Variety: There are more than 29 different types of mutual funds in India. There are distinct mutual fund schemes to match various types of risk profiles and investment objectives.
   

   • High-risk investors: Mid cap funds, small cap funds, credit risk funds etc.
   • Medium-risk investors: Multi cap fund, hybrid funds, dynamic bond funds etc.
   • Low-risk investors: large cap funds, liquid funds, money market funds etc.

What are the Different Types of Mutual Funds In India?

As mentioned earlier, there are more than 29 different types of mutual funds in India. These 29 types of mutual funds can be categorised into 3 broad types:

• 
  Equity Mutual Funds: Equity mutual funds invest in ‘stocks’ of companies. These companies can be large cap, midcap or small cap. Equity mutual funds can be actively managed or passively managed.
• 
  Debt Mutual Funds: Debt mutual funds invest in securities issued by private and public companies as well as the government. Debt mutual funds can be close-ended like FMPs or open-ended.
• 

  Hybrid Mutual Funds: Hybrid mutual funds invest in both stocks and debt instruments. The mix of equity and debt can change as per the scheme’s investment objectives. Aggressive hybrid funds invest 80% in stocks. Conservative hybrid funds invest more than 65% in debt instruments.

The below chart shows the various types of mutual funds in India. We will discuss these types of mutual funds in later sections.

What are the Different Options In Mutual Funds?

Another reason why mutual funds are popular is because they offer both growth and regular income.

There are two types of options in mutual funds:

• 
  Growth Option
• 
  Dividend Option

Growth Option: In the growth option, you do not get regular income. Instead, all the profits are reinvested back in the fund itself.

For example: Imagine you invested ₹ 100 on 1st April 2020. On 1st December 2020, the market value of your investment is ₹ 150. The ₹ 50 profit is your ‘capital appreciation’. This Rs 50 is not paid out to you. Instead it remains in the fund itself.

Growth option is perfect for long term mutual fund investors. Mutual fund beginners should select growth option to earn higher capital appreciation.

Dividend Option: In the dividend option profits are paid to you at regular intervals. The intervals can be weekly, monthly, quarterly or yearly.

In the above example, if you selected the dividend option then the profit (₹ 50) will be given to you as per your selected frequency. Dividend option is perfect for senior citizens or retirees who need regular income.

How are Mutual Funds Taxed?

Mutual funds are taxed as per the assets that they invest in. Mutual fund taxation is of two types:

• Equity Taxation: Equity funds and aggressive hybrid funds follow equity taxation. The holding period for equity taxation is 12 months (1 year).
  • If you redeem before 12 months, your gains or profits are called short term capital gains (STCG). STCG tax on mutual funds is 15%.
  • If you redeem after 12 months, your gains are known as long term capital gains (LTCG). LTCG tax on mutual funds is 10% above Rs 1 Lakh.
• Debt Taxation: Debt funds, liquid funds and conservative hybrid funds follow debt taxation. The holding period for debt taxation is 36 months (3 years)
  • If you redeem before 3 years, your STCG will be added to your income and taxed as per income tax slab.
  • If you redeem after 3 years, your LTCG tax will be 20% with indexation.

Here is a snapshot of how equity and debt mutual funds are taxed. We will discuss mutual fund taxation in detail in later sections.

Now let’s finally understand how to invest in mutual funds. You can invest in best mutual funds in less than 15 minutes with RankMF. Follow the below steps to invest in the best mutual funds for 2021.

Use you Samco Demat account credentials to login to RankMF. If you don’t have a Samco Demat account yet then open a FREE Demat account in less than 15 minutes!

When you open a Samco Demat account you get FREE access to RankMF, KyaTrade and StockNote.

Know your Client (KYC) is mandatory while investing in mutual funds. If your KYC is not yet done, don’t worry. With RankMF, you can complete your KYC in less than 5 minutes…100% online.

Shortlist the funds you want to invest in.

Register SIP or make lumpsum investments in your favourite mutual fund and you’re done!

Why Should you Invest In Mutual Funds?

• Did you know that about ₹ 79 million of the mutual fund industry’s AUM is held with retail investors?
• Or that the average AUM of mutual fund schemes has grown 3 times in the last 5 years?!

Yes, the above facts prove that mutual funds are the preferred investment option for retail investors.

Mutual funds are perfect for retail investors who do not have the time or resources to study the market. They are professionally managed and generate superior returns than other investment options.

The below charts show the performance of different types of mutual fund categories over a 10 year period.

10 Year Performance of Equity Funds

10-Years Performance of Debt Funds

10-Years Performance of Hybrid Funds

So, there you go. You get superior returns, expert management and affordability all packed into 1 box - The mutual fund box.

We encourage you to explore mutual funds, their types and how they help you grow wealth by opening a FREE RankMF account.

RankMF is India’s best mutual fund investment and research platform. You can explore the best mutual funds in India in under 5 minutes by opening a FREE RankMF account now.