Mutual funds are a financial instrument which pools money from different people and invests them in different financial securities like shares, bonds etc. Mutual Funds are professionally managed investment schemes, usually run by an Asset Management Company (AMC), wherein each investor owns units of the fund in proportion to his investments. Mutual Funds can be open ended or close ended.
All the mutual funds in India are registered with SEBI. (Securities and Exchange Board of India). As an investor, you can buy mutual fund ‘units’ in a scheme, which basically represent your share of holdings in that particular scheme. These units can be purchased or redeemed at the fund’s current net asset value (NAV). The NAVs of a mutual fund scheme keep fluctuating on a daily basis, based on the fund’s holdings in the equity and debt instruments and, therefore each investor participates proportionally in the gain or loss of the scheme.
Investors can buy units of open ended schemes of mutual funds at any time and can also sell units at any time, though some schemes, like equity linked savings schemes, have a lock in period of 3 years (as they offer tax exemption under Section 80C) during which the units are locked-in and thus cannot be redeemed. The Close ended schemes are open for subscription only for a limited period of time, during the new fund offer (NFO) period. These schemes have fixed tenure and the investors can redeem only on the maturity of the scheme. Upon maturity, depending on the scheme terms, the units are automatically redeemed or in some cases, the AMC can provide an option to investors to switch to a different scheme.
Types of Mutual Funds
On the basis of the nature of underlying securities in which the mutual funds invest, it can be classified into the following categories.
Equity Mutual Funds: These mutual fund schemes invest primarily in equity and equity related securities. While some equity funds may invest towards a particular market cap segments (e.g. large cap, midcap or small cap etc.), the others may invest in diversified sectors and across different market cap segments. There also are mutual funds which invest in a particular sector or theme, like banking, infrastructure, pharma or media etc.
Equity Linked Savings Schemes (ELSS) are another category of equity funds which qualify for tax exemption under Section 80C of Income Tax Act 1961. Equity funds are volatile but they can give superior returns in the long term. Investors should have a long term investment horizon for equity funds.
Debt Mutual Funds: These mutual fund schemes invest in debt and money market securities issued by the Government, corporates or banks. Debt funds may have different maturity profiles. Debt funds investing in money market securities can have various maturity profiles.
a. Money market mutual funds like liquid funds and ultra-short term debt funds invest in securities with residual maturity of less than or equal to 91 days. These funds are suitable for very short term investment needs.
b. Short term debt funds invest in securities that mature in 2 – 3 years. These funds are suitable for short term investment needs of 2 to 3 years.
c. Long term debt funds invest in securities that mature in 3 to 20 years. These funds are suitable for long term investment needs of 3 years or more.
Hybrid Mutual Funds: These mutual fund schemes invest in both, equity and debt securities. These funds can either be equity oriented (equity allocation of 65% or more) or debt oriented (debt allocation of 50% or more). Equity oriented hybrid funds are also called balanced funds and have moderate to moderately high risks, while debt oriented hybrid funds, also known as MIPs have a lower risk.
Index Funds: These schemes invest in a basket of stocks that reflects the composition of an Index, like the Sensex or Nifty or Sector index like banking or pharma. Index Funds do not aim to beat a benchmark index as they simply track the index. The expense ratios of index funds are lower than that of actively managed equity funds.
Fund of funds: These mutual fund schemes invest in other mutual fund schemes and ETFs, depending on the scheme investment objective.
Mutual Fund Calculator
If you Google mutual fund Calculator, a host of website links will pop up and you will see various types of calculators like Mutual Fund performance return calculator, Lump sum return calculator, Mutual Fund SIP Calculator and target return calculator etc. What do these calculators do? Let us explore some of these –
Mutual Fund Performance Calculator – This mutual fund calculator is the most popular and available on most of the research and advisory websites. This calculator compares the scheme performance of a particular category over different time horizon like – 6 months, 1 year, 3 years, 5 years, 10 years and since inception. This helps investor know which are the good schemes in a category based on historical returns and also how the schemes have performed vis-à-vis its peers and category returns. This is a very simple, easy to understand and most commonly used calculator.
Lump sum calculator – This mutual fund calculator helps you to know what is the current value of your lump sum investment in a mutual fund scheme. For example – you have invested in a scheme 5 years back and you want to know the value of your investment as on today, this calculator can help. You just have to select the scheme name and date of investment.
Mutual Fund SIP Calculator – With growing awareness about mutual funds, this is the most searched mutual fund calculator on the web. SIP calculator helps you know the SIP returns on your investment. For example – You have been investing Rs 5,000 per month for last 6 years in a scheme and you want to know the current value of your SIP investments vis-à-vis your investment amount and the percentage return that the scheme is generating over these years.
SIP Calculator also helps you know how your scheme is doing compared to the peer group and category average returns. This helps investor know if they should continue with the existing schemes.
Target return calculator – This calculator helps you discover the amount you need to invest every month in order to reach a particular financial goal after a period of time-based on an assumed rate of return. For example – You want to accumulate Rs 10 Crores assuming 12% return from your equity mutual fund investments for your retirement which is 25 years away from now. You can save only in monthly installments. If you input the above on a mutual fund calculator, it will show that you need to invest Rs 55,800 per month for next 25 years in order to achieve your goal of 10 Crores after 25 years.
Whether it is planning your retirement or your kid’s higher education corpus after a long period of time, mutual fund calculator helps you know the exact amount you need to invest every month through mutual fund SIPs based on an assumed rate of return. You must explore a mutual fund calculator before investing in mutual funds or also in case you are already a mutual fund investor but want to know the return of your schemes that you have invested in.