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Information provided on this newsletter has been independently obtained from sources believed to be reliable. However, such information may include inaccuracies, errors or omissions. and its affiliates, information providers or content providers, shall have no liability to you or third parties for the accuracy, completeness, timeliness or correct sequencing of information available on this newsletter, or for any decision made or action taken by you in reliance upon such information, or for the delay or interruption of such information., its affiliates, information providers and content providers shall have no liability for investment decisions or other actions taken or made by you based on the information provided on this newsletter.
When thinking about investment, an investor has to find and choose from options available in plenty. So, whether one must invest in stocks, bonds, money market securities or go the traditional way by plotting money into fixed deposits, public provident funds, etc. or choose the best mix of two or more. No matter what option you choose for your investments, each has its own pros and cons, but suitability is what matters. Similarly, when one has Mutual Funds as an investment option, the first question that arises is why should I invest in mutual funds? And the answer to it lies in knowing the following:

What are mutual funds?

What is Net Asset Value​ (NAV)?

What are the different types of mutual funds?

What are the benefits of investing in mutual funds?

What are the risks involved?

So, mutual funds are professionally managed pool of investment made by different investors into the diversified selection of securities, in order to achieve a common financial goal. Being well diversified mutual funds keep losses at bay. Since mutual funds need constant vigil of the market and performance of different securities, it is managed by experts called the fund managers.

Once you are aware of what are mutual funds & are clear about its definition, next in line is to know the Net Asset Value (NAV).

The Net Asset Value (NAV) of the Units will be determined daily or as prescribed by the Regulations. The NAV shall be calculated in accordance with the following formula, or such other formula as may be prescribed by SEBI from time to time.

NAV = [Market/Fair Value of Scheme’s Investments + Receivables + Accrued Income + Other Assets - Accrued Expenses - Payables - Other Liabilities] / Number of Units Outstanding

NAV will be computed upto four decimal places.

It is the scheme returns that are indicative of their performance. Investors, hence keep a track of latest NAV to gauge the performance of various securities and funds.

Next in line is to know the different types of mutual funds available for subscription. Now, this can be differentiated on the basis of maturity type and objective type. Starting with the former, there are three types of funds: open-ended funds, closed-ended and interval funds. And those based on investment objectives are equity funds, debt funds, balanced funds​, liquid funds, gilt funds, tax-saving funds​, index funds, and sector-specific funds.

Benefits of investing in mutual funds are many, namely diversification of funds in different sectors and industries, management of your funds by a professional, your funds stay liquid and are available to you anytime unless there is a lock-in period. The transaction cost is low due to economies of scale. Updated information on the performance of funds renders transparency. Since all funds are registered with SEBI, stay assured that all mutual funds are regulated and monitored.

With a bounty of benefits, there are also risks involved and different securities and schemes may get impacted in a given period due to alteration in economic scenario. These can impact the performance of mutual funds. Also, investors might experience lack of control because they can never determine the exact composition of a fund's portfolio at a given time and neither can they influence the fund manager regarding which securities to buy.

Risk Factors:

Standard Risk Factors - Mutual Funds and securities investments are subject to investment risks such as trading volumes, settlement risk, liquidity risk, and default risk including the possible loss of principal and there is no assurance or guarantee that the objectives of the Scheme will be achieved. ​

Scheme Specific Risk Factors - Risks associated with investing in Equities, Bonds, Foreign Securities, Securities Lending, overseas investment, Derivatives like Valuation Risk, Mark to Market Risk, Systematic Risk, Liquidity Risk, Implied Volatility, Interest Rate Risk, Counterparty Risk (Default Risk), System Risk, Risk attached with the use of derivatives. Also Other Scheme Specific Risk factors, Additional Risk Factors, Specific Risk Factors, etc.

Thus, when you question yourself on whether or not to invest in mutual funds, you must evaluate and then park your money into mutual funds.

Systematic Investment Plans (SIPs) are one of the most perplexing investment instruments. While most new investors are wary of them, a lot of seasoned investors to have struggled to get their SIP strategy right. So, before jumping on to understanding how to choose the best SIP, let’s first get some clarity on what SIP really means.

Decoding SIP

systematic investment plan enables you to invest a fixed amount at regular intervals (monthly, quarterly or annually) in mutual funds, which in turn invest in the markets. Being a flexible instrument, SIPs help you build wealth and instill the habit of saving even in the most undisciplined of us. The major benefit of investing in SIPs is the power of compounding. You earn compound interest on your deposits on a monthly basis, thereby, increasing your investment amount significantly over the long run.

Choosing the Best SIP

Choosing the right fund to invest in via a SIP is very critical to earning high returns. Keep in mind the following factors when deciding which SIP to invest in.

1. Investment Objective:
 Before you even start investing in a fund, it is important to know what you are investing for. You need to ask yourself two questions. 1) Are you investing for the short term or the long term? And, 2) what is your risk appetite? Your investment horizon and risk profile will help determine which type of fund will suit you. For instance, if you are a risk-averse investor and want consistent returns, without a tear-jerk reaction, debt funds might be more your thing. However, if you are in for the long haul and are comfortable with market volatility, equity funds should be your investment avenue.

2. Fund type:
 As mutual funds are of various types, it’s important to know which type is suitable for your risk appetite. Let’s take a quick look at the types of mutual funds:

A. Asset-based mutual funds
i.Equity Funds – These funds are further categorized into various types: large-cap, diversified, mid & small cap, sector and index funds.
ii.Debt Funds – These funds can be further classified based on investment tenure: money market, income, and fixed maturity funds.
iii.Balanced Funds – These funds are a blend of equity and debt funds and present the best of both worlds to an investor. They counter equity fund’s risk profile by simultaneously investing in debt instruments to ensure steady returns to the investor.

B. Structure-based mutual funds
i. Open-ended – An investor can enter or exit these funds at any time, without restriction.
ii. Close-ended – These funds are open for investment for a specific time during the scheme’s launch. Once the new fund offer (NFO) closes, no further investments can be made.

3. Historical Performance & Returns:
Carefully study funds before investing in them. Compare funds on the basis of performance over a 3 to a 5-year term. A comparison of historical performance will tell you how strong or weak a fund is and whether it can withstand market volatility. Avoid funds that perform strongly when the market is high but collapses as soon as the market also falls. When studying these trends, avoid a myopic view and look at the fund’s performance over the long term, say 5 years and 10 years.

4. Fund House:
 A fund is as good as its fund house. The decisions are taken by the fund house shape a fund’s return-yielding capacity and growth. If the fund house does not take the right calls, we investors will end up losing our money. Before investing, read about the fund house and the fund scheme you intend to invest in. Get a copy of the scheme information document and key information document to get such details as the fund house’s investment approach, a number of schemes offered, funds/products designed with investors in mind, and more. Answers to these questions will empower you to decide which fund house will be able to help you reach your investment goals.

5. Expense ratio:
 If your research has boiled down to funds that are similar in nature, you can choose among them on the basis of the expense ratio. This ratio comprises management fee and administrative costs and is essentially a fund’s annual fee. Schemes that have higher assets under management usually have lower expense ratios, making them a go-to option. A difference of 0.5% in expense ratios of two funds may seem negligible but should not be taken lightly. Consider Fund A with an expense ratio of 1.5% and Fund B with 1%. Now, for these two funds to give same returns, Fund A will have to outperform Fund B every single year. While this may seem doable, in the long term, maintaining this performance will be difficult. Simply put, a high expense ratio will pull down a fund’s performance.

6. Entry or exit load:
 Earlier, investing in funds invite a small fee in the form of entry load. However, Securities and Exchange Board of India (SEBI) has stopped funds from levying an entry load. So, now, the only time you pay is when you are leaving a fund (also known as redeeming a fund) which is called an exit load, before the exit load period. The fee varies with the scheme, investment tenure and amount. For example, if you redeem your fund whose value has grown to Rs 100 at an exit load of 2%, you will only get Rs 98. Exit loads too are regulated by SEBI and all the fund houses have to follow the directives.

1.      Mutual funds are risky, I will lose my money
No doubt, mutual funds, especially equity funds, move with the market forces and can, therefore, be risky. But long-term equity fund data shows that the risks are evened out over the long term. In fact, over a 15-year period, chances of negative returns in the stock market are nil. That means you cannot lose money if you stay invested that long. And to top it, equity funds have delivered inflation-beating returns over the long term.

2.      Mutual funds will give too much exposure to equity markets
 Mutual funds, for most people, mean investing in equity markets. This is not true. Mutual funds offer exposure to a wide range of low-risk to medium- risk debt instruments too. They offer exposure to gold without holding them physically and even allow you to explore evolved international markets such as the U.S. Mutual funds also offer a combination of equity and debt, the equity part is either very low or reasonably high, depending on what risk you can assume. A well-diversified basket provides sufficient exposure to various asset classes using a single product called mutual fund.

  3.      Mutual funds cannot give steady returns like deposits
Yes, mutual funds cannot guarantee you returns or provide a fixed outflow of interest income like deposits. But let’s get this one straight. What is the objective behind saving for retirement?

It is to build a decent corpus until you retire. A healthy corpus can then be invested in reasonably safe investment avenues, to generate some monthly or annual income for you, to substitute the loss of salary/business income, once you retire.

This being the objective, going for regular interest payout options do not help the purpose of building wealth because chances are that you will not diligently reinvest.

Even if the option is cumulative, you run a reinvestment risk because you may end up with lower rates (when you renew your investments after they mature) than what you received earlier. Your EPF, with varying interest rate every year, assumes this risk.

Equity funds, by way of being invested in markets all the time (and taking cash positions only if warranted), do not carry such reinvestment risk.

Rules for retirement investing using mutual fundsindi
The first rule to follow in mutual fund investing, when you invest for retirement, is to hold reasonable exposure to equities in the early years and gradually reduce them by moving them to debt funds and other traditional saving options such as tax-free bonds and deposits.

The shifting process, if you have been investing for at least 15-20 years, can start even 5 years ahead of your retirement.

Most people burn their fingers simply because they take high exposure to equities just a few years ahead of retiring and expect equities to generate high returns in a short time. A down market, in such instances, can even wipe the capital.

The second rule is to rebalance your mutual fund portfolio, preferably every year. This involves bringing your portfolio to the original asset allocation if the equity, debt, gold proportion in your portfolio moves out of kilter (note that this can be done in a click with FundsIndia’s Retirement Solutions).

The third rule is that your retirement portfolio can do without any theme or fancied sector funds to pep your portfolio. If you do wish to take such exposure, limit it to 10% and ensure you exit the theme at least a few years ahead of your retirement. The last thing a retirement portfolio needs is volatility from cyclical funds.

The fourth ruleis that your retirement kitty should be a basket – EPF, PPF, mutual funds (equity and debt; with gold being optional) and other traditional debt options such as deposits.

The fifth rule is that if you have some exposure to mutual funds post retirement, don’t depend on them to declare dividends if you need monthly income, use the systematic withdrawal plan (SWP) option to create your own annuity plan. SWPs are also very tax efficient, as they enjoy capital gains indexation benefit in the case of debt funds held over a year (equity funds are exempt from capital gains tax).

The most important factor in investment is the time period. You should know when and what kind of research has to be done before investing. As the idiom goes - haste makes waste - it's is better to do your homework before the taxman comes knocking at your door so that you do not end up making hasty investment decisions. 

While it is important to have adequate knowledge about the various tax-saving provisions under the Income Tax Act, it is also critical to learn about the major tax saving instruments that let you benefit from these provisions. 

Section 80C: 
One of the most important sections for tax saving is the Section 80/C of the Indian Income Tax Act. The total limit under this section is Rs 1.50 lakh from the financial year 2014-15 / Assessment Year 2015-16 onwards. Before FY 2014-15 the limit was Rs 1 lakh. One should plan to utilize this section to the fullest by investing in some of the instruments shown alongside. Do consider the factors such as your financial needs and goals, your risk appetite, etc. before making your tax saving investment choices. 

Equity Linked Savings Scheme (ELSS): 
There are some mutual fund (MF) schemes specially created for offering you tax savings, and these are called Equity Linked Savings Scheme, or ELSS. The investments that you make in ELSS are eligible for deduction under Sec 80C. It also provides an opportunity for long term capital appreciation. An ELSS fund manager invests in a diversified portfolio, predominantly consisting of equity and equity related instruments that carry high-risk and have the potential to deliver high-returns.  Since it is an equity fund, the returns from this scheme are market determined. 

Top five features of ELSS Funds 

1. Tax-saving 
2. Three-year lock-in period 
3. Can be held even after the completion of three years 
4. Offers dividend as well as growth options 
5. Tax Saving instrument 

Tax Treatment 
The returns from an ELSS fund are tax free in your hands. The long term capital gains from an ELSS are tax free as well. This is because no tax is levied on equities that are held for more than a year. Since an ELSS falls under section 80C, you can claim up to Rs 1.50 lakh from your investment as a deduction from your gross total income. 

Why prefer ELSS over other tax saving schemes 
* Shorter lock-in period: An ELSS has a lock-in period of only three years as compared to other tax saving instruments such as Tax Saving Fixed Deposit which has a lock-in period of five years and an NCS which has a lock-in for six years. 
* Long-term capital gains: Since an ELSS fund invests in equities, and is dynamically managed by a professional fund manager; it has the potential to provide long-term capital gains compared to other passively managed asset classes. 
* SIP: Systematic Investment Plan (SIP) is an investment vehicle offered by mutual funds to investors, allowing them to invest using small periodically amounts instead of lump sums. One can plan effectively and invest in ELSS through the SIP (Systematic Investments Plans) route. 

Please do not reply back to this mail. This is sent from an unattended mail box. Please mark all your queries / responses to
Information provided on this newsletter has been independently obtained from sources believed to be reliable. However, such information may include inaccuracies, errors or omissions. and its affiliates, information providers or content providers, shall have no liability to you or third parties for the accuracy, completeness, timeliness or correct sequencing of information available on this newsletter, or for any decision made or action taken by you in reliance upon such information, or for the delay or interruption of such information., its affiliates, information providers and content providers shall have no liability for investment decisions or other actions taken or made by you based on the information provided on this newsletter.