Why Mutual Funds?

By Author: Vamsi Krishna
Total Articles: 27
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Portfolio diversification that is ideal for new & experienced investors

Mutual funds are ideal for new investors as a professional puts together a diversified portfolio for all participants in the fund. It is a professionally-managed investment vehicle that pools the savings of many investors in securities like stocks, bonds, short-term money market instruments and commodities such as precious metals. Mutual funds offer innovatively packaged solutions and convenience that an individual trading directly in the market may not enjoy.

Pooled resources enable you to take advantage of economies of scale (benefit of larger volumes) and purchase securities at a lower transaction cost. More importantly, you can invest relatively small amounts while having the advantage of finance professionals and portfolio diversification at your disposal.

Diversification: Provide you the opportunity to invest small sums in varied investment schemes. Diversification will spread your portfolio across sectors and industries to reduce the overall risk.

Professional Management: Managed by professionals ...
... and is therefore an ideal investment option for those who do not have the time or know-how about investing in the markets.

Low Transaction Cost: Economies of scale (benefit of larger volumes) means you pay lower transaction costs compared to an individual who enters the market directly.

Liquidity: Liquid in nature and easy-to-sell.

Transparency: Provides you with updated information pertaining to the markets and schemes through factsheets, offer documents and annual reports.

Flexibility: Provides you the convenience and flexibility to invest across a wide range of schemes. Most open-ended schemes also offer the option of systematic investment and withdrawal (at regular intervals).

Strict Regulation: Well regulated by the Securities and Exchange Board of India (SEBI). All funds are registered with SEBI and complete transparency is enforced.

Tax Benefits: Equity Linked Savings Schemes (ELSS) qualifies under Section 80C of the Income Tax Act (up to Rs. 1 Lakh) for tax deductions. Besides this, all interest or dividend income from the investments in Mutual Funds are exempted from tax.

Why Edelweiss?

Edelweiss is dedicated to building long term relationships with clients and empowering them to gain from market opportunities. We offer a unique online trading experience across exchanges and market segments through an intuitive platform - www.edelweiss.in. We offer rich information on mutual funds, stocks, commodities and other asset classes. We provide services backed by research and strategies - customized to our client's investment horizon and trading patterns. The retail broking services are also available from nearly 300 offices across the country and this unique, intuitive and hassle-free online broking portal.

Instant order and trade confirmation: The advanced trading platform allows you to trade, track and monitor all your investments. You can get insights on different MF categories and how they fare from a risk-return perspective. Compare the performance of up to five schemes at a time and analyze them in a single view.

Online tracking: Access to a smart portfolio tracking tool that enables you to monitor your investment portfolio. It helps you examine your investments 24x7 and makes information simple to understand and faster to act upon.

Multiple choices: Provides you the biggest range of mutual fund schemes - with over 1300 schemes from 25 reputed AMCs (Asset Management Companies) to choose from.

Faster Analysis…Better Decisions: Offers you in-depth MF schemes analysis across assets classes. You can do a quick analysis using the information available or simply rely on our recommendations besides comparing schemes across categories and buying with a single click.

Product Features

High Quality Research: Our research team selects funds using various qualitative and quantitative techniques. The analysis of each fund is done by taking into consideration the fund manager, fund house, relative returns, volatility of the fund and many other factors. This enables you to get a broader view on mutual funds as well as detailed scheme-level information.

MF Systematic Investment Plan (SIP): We offer you mutual fund related products such as Edelsteps, which helps in creating wealth by investing a fixed sum of money at a fixed period of time (generally on a monthly or quarterly basis) in Mutual Funds at the prevailing Net Asset Value(NAV) through Mutual Fund Service System (MFSS) SIP.

Portfolio Reconstruction: If you have a mutual fund portfolio and would like to make changes in it but do not know how, refer your portfolio to our research team for suggestions; they will help to realign it to best suit your profile. It is like a health check-up of your portfolio.

Related products: Our comprehensive and structured advisory process takes a holistic look at your financial status, your personal requirements and goals to recommend plans and solutions to help you manage your finances. This also includes evaluation of your portfolio and advice on restructuring the portfolio in line with your long-term financial goals.

FAQ s

What is a Mutual Fund?

A Mutual Fund is a corporate body registered with the Securities and Exchange Board of India (SEBI) that pools up the money from individual/corporate investors and invests the same on behalf of the investors/unit holders in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. In other words, a mutual fund allows you to indirectly take a position in a basket of assets.

Mutual funds are considered one of the best investment options in comparison to others investment vehicles. They are very cost efficient and easy to invest in. By pooling money together in a mutual fund, you can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. The biggest advantage of mutual funds is diversification by minimizing risk and maximizing returns.

Since mutual fund schemes invest only in stock markets, are they suitable for a small investor like me?

Mutual funds are meant only for a small investor like you. The prime reason is that successful investments in stock markets require careful analysis of scripts, which is not possible for a small investor. Mutual funds are usually fully equipped to carry out a thorough analysis and can provide superior returns.

What is the difference between open-ended and close-ended schemes?

In an open-ended mutual fund, there are no limits on the total size of the corpus. You are permitted to enter and exit the open-ended mutual fund at any point of time at a price that is linked to the net asset value (NAV). In a closed-ended fund, the total size of the corpus is limited by the size of the initial offer.

New investors can join an open-ended scheme at any time at applicable NAV-related prices by directly applying to the mutual fund while that is not the case in close-ended schemes where you can invest only during the new fund offer period.

What are the different types of mutual funds?

Equity funds invest a maximum part of their corpus into equities holdings; Debt funds invest in debt papers issued by Government, private companies, banks and financial institutions; and Balanced funds invest in a mix of both equity and debt funds. Furthermore, mutual funds can be broadly classified on the basis of investment parameters pre-defined in the objectives of the fund. You can align your investment needs with the fund’s objective and invest accordingly.

What are the different types of plans that mutual funds offer?

There are 3 broad categories:

Dividend plan entails a regular payment of dividend to the investors.

Re-investment plan wherein dividends are reinvested in the scheme itself.

Growth plan wherein no dividends are declared and the investor only gains through capital appreciation in the NAV of the fund.

How are mutual funds different from portfolio management schemes?

In mutual funds, the investments of different investors are pooled to form a common investible corpus and the gain or loss during a given period is same for all investors while in case of a portfolio management scheme, the investments of a particular investor remains identifiable and are applicable only to him.

What is Net Asset Value (NAV) and how is it calculated?

The NAV on a particular date reflects the realizable value that the investor will get for each unit that he holds on that date. It is calculated by deducting all liabilities (except unit capital) of the fund from the realizable value of all assets and dividing by number of units outstanding.

Can I get a fixed monthly income by investing in mutual fund units?

Yes, there are a number of mutual fund schemes that give you a fixed monthly income. You can also get monthly income by making a single investment in an open-ended scheme and redeeming a fixed value of units at regular intervals.

Are there tax benefits for investing in mutual funds?

In case of certain specific Equity Linked Saving Schemes (ELSS), tax benefits are available under Section 80C of the Income Tax Act within the overall exemption limit of Rs. 100,000. There is no capital gains tax applicable if you hold units in an equity scheme where investment in equity is more than 50% by the Mutual Fund for more than 12 months.

Are investments in mutual fund units safe?

Mutual fund investments are not totally risk-free. In fact, investing in mutual funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced. However, different funds have different risk profiles stated in the objective. Funds that are categorized as low risk generally invest in debt which is less risky than equity.

What are the parameters on which a Mutual Fund scheme should be evaluated?

Performance indicators like total returns given by the fund on different schemes, the returns on competing funds, the objective of the fund and the promoter’s image are some of the key factors to be considered while taking an investment decision regarding mutual funds.

What is a Systematic Investment Plan (SIP) and how does it operate?

A systematic investment plan is one where an investor contributes a fixed amount every month. The units are credited to his account at the prevailing NAV. Currently many funds offer this facility.

What are the benefits of s Systematic Investment Plan?

Investing via SIP offers two major benefits to an investor: It avoids lump sum investment at one point of time; and in a scenario of falling prices, it reduces your overall cost of acquisition by a process of rupee-cost averaging. This means that at lower prices you end up getting more units for the same investment.

Author Bio

Ritish Kumar is a finance enthusiast and a keen observer of the Indian share market. In this series of articles, he talks about investing in stock market and staying profitable. Mutual funds, mutual fund schemes,Mutual fund investments