Understanding the basics of Mutual Fund investments
Today, the world has changed for the better. We have a good deal of information on anything and the Mutual Fund investments are no exception. However, we need to understand the basics of these investments so that we can make informed decisions. This article is an attempt in this direction.
Introduction Mutual Funds are huge investment houses managed by trained professionals. Apart from the regular Fixed Deposits, there is only one avenue that is too good for middle-class people and this avenue is called Mutual Funds. In a Mutual Fund, the investment experts will seek to deploy vast sums of money collected from the public, in various good shares, in the stock market. When the market goes up, the values of these shares also go up and the net profit is given back to the investors.
Mutual Funds are not small entities. They deploy several hundreds of thousands of rupees of common people, who have invested in a particular scheme, in the stock market and they will also need to take care of the downward risk. This is exactly why Mutual Funds are subject to market risks.
In this article, we will discuss a) What is a Balanced Fund b) What is a Liquid Fund c) Analyzing the fundamentals of a company d) What is an index fund e) Understanding the basics of investing in the right Mutual Funds.
What is a Balanced Fund As the name itself implies, a Balanced Fund is one in which a certain portion of the corpus in that particular Fund is invested in fully secure Government securities and the rest is invested in the stock market. The logic of this Strategy is to assure the investors of a good return in the range of ten percent, but with minimum downward risk.
For example, the Balanced Fund from HDFC is now giving a return of around 9% for those who have invested their savings in that Fund. Some two or three years ago, the dividends in the form of returns were not taxable at all. However, the Finance Ministry noticed that this corpus, across many Balanced Funds of so many Mutual Funds, was too huge and the banks were losing their deposits. Hence, the entire lot of dividends is now taxable. The Mutual Fund also deducts what is called a Dividend Distribution tax from the investor's dividend. Since the tax is similar to double taxation, the investors are now eligible to claim tax refunds if their taxable incomes are within the limits of the old Income Rax regime.
However, one can always choose the "Growth" option and in this case, the amount of gains up to one lakh is not taxable at the hands of the investor, after one year. For example, let us imagine that a Senior Citizen had invested a lakh rupees in a Balanced Fund with the ICICI Mutual Fund, on the 8th of Feb 2022. After one year, that is, on the 24th of Feb 2023, his investment in the Balanced Fund has crossed one year and is now quoting at Rs. 136200. This means that if he is ready to sell his investment now, the Rs. 136200 is not taxable. However, the sum total of all his investments should not exceed one lakh rupees in gains up to the 31st of March 2023.
What is a Liquid Fund? A liquid fund is a short-term investment. For example, if there are a couple of hundreds of thousands of rupees in the hands of the investor, in the month of January that particular year and the marriage of his daughter has been planned for May that year, he or she can put that money into a good Liquid Fund with the HDFC Mutual Fund or the ICICI Mutual Fund. The returns are in the region of 8%, and it is much more than 3% or 4% that is normally given for savings bank accounts.
Analyzing the fundamentals of a company The Fund Managers of a particular type of Fund would have invested in some very good stocks. The risky and non-performing stocks are never chosen by those who manage huge funds from the public. The manager who manages a particular Fund is called the Fund Manager and he or she is totally trained in the nuances of the stock market. Furthermore, he or she is also mandated to declare the full details of the stocks in which the investment is made.
However, the job of the Fund Manager is never easy. He would analyze, thoroughly, the fundamentals of the company in which he or she makes investments. This detailed analysis would consider the growth of the products, the markets in which they operate, the quality of Top Management, the integrity and honesty of the company as a responsible corporate citizen, and so on. When everything is good, the value of the stock also goes up, based on the declared results for the particular quarter. For example, since it is a superbly diversified company with the best products and markets, ITC is considered a blue chip stock. ICICI Bank, with its blazing record of growth, is considered a blue chip stock. So is the HDFC Bank stock.
One should learn the fundamentals of any company by looking at the portfolio of investments. One can always decide to exit when the going is not very good, after one year.
What is an Index Fund? An Index Fund is one in which the value of the Fund goes up when the NSE index goes up and it also comes down in value when the index comes down. However, it should be noted that this fund would invest only in the top class blue chip companies like Asian Paints, and hence one can always expect a good return of 13 to 14%, which is a very good rate of return, given the fact that bank deposits still do not cross a maximum of nine percent return, even today.
Understanding the basics of investing in the right Mutual Funds This is a task that is best done only with the help of experts. Mutual Fund advisors who are fully trained in the art of investing would offer very good guidance. If there is any Chartered Accountant in the family, he or she would normally be able to suggest the best possible place to park the money, with complete details of the amount that could be put and the duration and so on. The best option is also the long-term Systematic Investment Plan(SIP). This means that if an investor deposits an amount of Rs.1000 per month, in a good Mutual Fund scheme, he or she would be rewarded with a corpus of around one and a half lakh rupees at the end of the ten-year period, complete with the compounding that happens when the dividends are reinvested in the "Growth Option".
Conclusion It is always fine to learn about every single rupee of our investment and also be rest assured about the safety of such investments. The basics of Mutual Fund investments that have been discussed in some detail in this article, will enable any investor to acquire some knowledge before taking any decision in this regard.