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  • Financial Planning

    In finance, investment is putting money into an asset with the expectation of capital appreciation.

  • Mutual Funds

    When it comes to the world of investing, three words come to mind: overwhelming, intimidating, and scary.

  • Time for changes

    Bottoms in the investment world don't end with four-year lows; they end with 10- or 15-year lows.

  • Solution

    The stock market is filled with individuals who know the price of everything, but the value of nothing.

Mutual fund

Why Mutual Fund?
Investing in a mutual fund is like an investment made by a collective. An individual as a single investor is likely to have lesser amount of money at disposal than say, a group of friends put together. Now, lets assume that this group of individuals is a novice in investing and so the group turns over the pooled funds to an expert to make their money work for them. This is what a professional Asset Management Company does for mutual funds. The AMC invests the investor’s money on their behalf into various assets towards a common investment objective.

Mutual Fund is a vehicle that enables a collective group of individuals to:

a.    Pool their investible surplus funds and collectively invest in instruments / assets for a common investment objective.
b.    Optimize the knowledge and experience of a fund manager, a capacity that individually they may not have
c.    Benefit from the economies of scale which size enables and is not available on an individual basis         

Why one should invest in mutual funds?

Reason 1:
They are investments instruments which are capable of giving high returns . An average mutual fund scheme returns easily beats inflation in longer run and a good scheme can give far superior returns.

Reason 2:
Our Mutual Fund industry is one of the best regulated industry in the world. They are governed by the strict guidelines layed down by SEBI(Securities & Exchange Board of India).

Reason 3:
Investments decision of a Mutual Fund is taken by their AMCs and Fund Managers. They are experts who make investments decisions after doing intensive research and analysis of a company & industry. (Individuals generally dont have time and resources to do research hence best option is to let MF manage your investments)

Reason 4:
This industry is highly liquid. Even more liquid than stock markets. Payments are generally made through cheques or in some cases they are directly credited to your bank accounts , If your bank is allowing RTGS & electronic clearing and mutual fund AMC is providing such facility.

Reason 5:
Investments are diversified into many companies & sectors. Which make our investments safer and consistent growth prospects? Diversifying is usually not done by small investors , for such a actions one requires lots of funds.

Reason 6:
Tax treatments- Governments encourage investments in capital markets and has given many tax sops. Under i) 80(c) investments done upto one lakh in specific mutual funds schemes which is called ELSS (Equity Linked Saving Schemes.) are exempt from tax. ii) Any units held for more than one year if redeemed is treated under long term capital gain tax which is zero percent currently i.e. the whole profit is tax free. If one plans to redeem before one year then he has to pay tax of only15% on the profits.

Reason 7:
Mutual Funds are much cheaper compared to direct exposure to capital market since one does not need demat account ,annual charge to maintain account, charges imposed on demat holdings, stamp duty on transaction are not levied .

Now, lets assume that this group of individuals is a novice in investing and so the group turns over the pooled funds to an expert to make their money work for them. This is what a professional Asset Management Company does for mutual funds. The AMC invests the investor’s money on their behalf into various assets towards a common investment objective.

Hence, technically speaking, a mutual fund is an investment vehicle which pools investor’s money and invests the same for and on behalf of investors, into stocks, bonds, money market instruments and other assets. The money is received by the AMC with a promise that it will be invested in a particular manner by a professional manager (commonly known as fund managers). The fund managers are expected to honour this promise. The SEBI and the Board of Trustees ensure that this actually happens.

Typical classification of mutual fund schemes on various basis:


Tenor refers to the time. Mutual funds can be classified on the basis of time as under:

1.Open Ended funds

These funds are available for subscription throughout the year. These funds do not have a fixed maturity. Investors have the flexibility to buy or sell any part of their investment at any time, at the prevailing price (Net Asset Value - NAV) at that time.

2. Close Ended funds

These funds begin with a fixed corpus and operate for a fixed duration. These funds are open for subscription only during a specified period. When the period terminates, investors can redeem their units at the prevailing NAV.

Asset Classes

1. Equity funds

These funds invest in shares. These funds may invest money in growth stocks, momentum stocks, value stocks or income stocks depending on the investment objective of the fund.

2. Debt funds or Income funds

These funds invest money in bonds and money market instruments. These funds may invest into long-term and/or short-term maturity bonds.

3. Hybrid funds

These funds invest in a mix of both equity and debt. In order to retain their equity status for tax purposes, they generally invest at least 65% of their assets in equities and roughly 35% in debt instruments, failing which they will be classified as debt oriented schemes and be taxed accordingly. (Please see our Tax Section on Page 39 for more information.) Monthly Income Plans (MIPs) fall within the category of hybrid funds. MIPs invest up to 25% into equities and the balance into debt.

4. Real asset funds

These funds invest in physical assets such as gold, platinum, silver, oil, commodities and real estate. Gold Exchange Traded Funds (ETFs) and Real Estate Investment Trusts (REITs) fall within the category of real asset funds.

Investment Philosophy

1. Diversified Equity Funds

These funds diversify the equity component of their Asset Under Management (AUM), across various sectors. Such funds avoid taking sectoral bets i.e. investing more of their assets towards a particular sector such as oil & gas, construction, metals etc. Thus, they use the diversification strategy to reduce their overall portfolio risk.

2. Sector Funds

These funds are expected to invest predominantly in a specific sector. For instance, a banking fund will invest only in banking stocks. Generally, such funds invest 65% of their total assets in a respective sector.

3. Index Funds

These funds seek to have a position which replicates the index, say BSE Sensex or NSE Nifty. They maintain an investment portfolio that replicates the composition of the chosen index, thus following a passive style of investing.

4. Exchange Traded Funds (ETFs)

These funds are open-ended funds which are traded on the exchange (BSE / NSE). These funds are benchmarked against the stock exchange index. For example, funds traded on the NSE are benchmarked against the Nifty. The Benchmark Nifty BeES is an example of an ETF which links to the stocks in the Nifty. Unlike an index fund where the units are traded at the days NAV, in ETFs (since they are traded on the exchange) the price keeps on changing during the trading hours of the exchange. If you as an investor want to buy or sell ETF units, you can do so by placing orders with your broker, who will in-turn offer a two-way real time quote at all times. The AMC does not offer sale and re-purchase for the units. Today, ETFs are available for pre-specified indices. We also have Gold ETFs. Silver ETFs are not yet available.

5. Fund of Funds (FOF)

These funds invest their money in other funds of the same mutual fund house or other mutual fund houses. They are not allowed to invest in any other FOF and they are not entitled to invest their assets other than in mutual fund schemes/funds, except to such an extent where the fund requires liquidity to meet its redemption requirements, as disclosed in the offer document of the FOF scheme.

6. Fixed Maturity Plan (FMP)

These funds are basically income/debt schemes like Bonds, Debentures and Money market instruments. They give a fixed return over a period of time. FMPs are similar to close ended schemes which are open only for a fixed period of time during the initial offer. However, unlike closed ended schemes where your money is locked for a particular period, FMPs give you an option to exit. Remember though, that this is subject to an exit load as per the funds regulations. FMPs, if listed on the exchange, provide you with an opportunity to liquidate by selling your units at the prevailing price on the exchange. FMPs are launched in the form of series, having different maturity profiles. The maturity period varies from 3 months to one year.

Geographic Regions

1. Country or Region Funds

These funds invest in securities (equity and/or debt) of a specific country or region with an underlying belief that the chosen country or region is expected to deliver superior performance, which in turn will be favourable for the securities of that country. The returns on country fund are affected not only by the performance of the market where they are invested, but also by changes in the currency exchange rates.

2. Offshore Funds

These funds mobilise money from investors for the purpose of investment within as well as outside their home country. so we have seen that funds can be categorised based on tenor, investment philosophy, asset class, or geographic region. Now, lets get down to simplifying some jargon with the help of a few definitions, before getting into understanding the nitty-gritty of investing in mutual funds.


Net Asset Value (NAV)

NAV is the sum total of all the assets of the mutual fund (at market price) less the liabilities (fund manager fees, audit fees, registration fees among others); divide this by the number of units and you get the NAV per unit of the mutual fund.


A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns. A beta of 1 indicates that the securitys price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the securitys price will be more volatile than the market. For example, if a stocks beta is 1.2, its theoretically 20% more volatile than the market..

 A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a funds alpha. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%

Compounded Annual Growth Rate (CAGR)

What Does Compound Annual Growth Rate - CAGR Mean?

The year-over-year growth rate of an investment over a specified period of time.

The compound annual growth rate is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered.

This can be written as follows:

 Absolute Returns

These are the simple returns, i.e. the returns that an asset achieves, from the day of its purchase to the day of its sale, regardless of how much time has elapsed in between. This measure looks at the appreciation or depreciation that an asset - usually a stock or a mutual fund - achieves over the given period of time. Mathematically it is calculated as under:

Ending Value - Beginning Value x 100

Beginning Value

Generally returns for a period less than 1 year are expressed in an absolute form.