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WHAT IS A MUTUAL FUND?

Mutual fund is a unique investment pooling entity which enables investors to invest in a wide range of securities through a single platform. Mutual Funds are excellent for long-term wealth creation. However, with more and more funds flooding the market, the task of selecting the most suitable scheme gets even more complicated. At Karvy Value, selecting a scheme is a piece of cake. As we guide you through this maze, we make sure that your investments are backed by our quality research. We help you reach your financial goals and boost up your wealth.

What do we offer?

  • Products of 44 AMCs including Equity, Debt and Hybrid funds.
  • Research Reports (Existing funds & NFOs, strategy reports, etc).
  • Customized mutual fund portfolios based on your profile.
  • Portfolio re-balancing (depending on changing market outlook and evolving trends).
  • State-of-the-art Portfolio Tracker

In terms of ease with which investors can enter and exit funds, mutual funds are broadly divided into two classes:

OPEN ENDED

Open-ended funds are open for investors to enter or exit at any time, even after the NFO. Although some unit-holders may exit from the scheme, wholly or partly, the scheme continues operations with the remaining investors. The scheme does not have any kind of time frame in which it is to be closed. The ongoing entry and exit of investors implies that the unit capital in an open-ended fund would keep changing on a regular basis.

Closed ENDED

Close-ended funds have a fixed maturity. Investors can buy units of a close-ended scheme, from the fund, only during its NFO. The fund makes arrangements for the units to be traded, post-NFO in a stock exchange. This is done through a listing of the scheme in a stock exchange. Such listing is compulsory for close-ended schemes. Therefore, after the NFO, investors who want to buy units will have to find a seller for those units in the stock exchange. Similarly, investors who want to sell units will have to find a buyer for those units in the stock exchange. Since post NFO, sale and purchase of units happen to or from counter-party in the stock exchange and not to or from the mutual fund – the unit capital of the scheme remains stable.

INTERVAL

Interval funds combine features of both open-ended and close ended schemes. They are largely close-ended, but become open ended at pre-specified intervals. For instance, an interval scheme might become open-ended between January 1 to 15 and July 1 to 15 each year. The benefit for investors is that, unlike in a purely close-ended scheme, they are not completely dependent on the stock exchange to be able to buy or sell units of the interval fund.

Minimum duration of an interval period in an interval scheme/plan is 15 days. No redemption/repurchase of units is allowed except during the specified transaction period (the period during which both subscription and redemption may be made to and from the scheme). The specified transaction period will be of minimum 2 working days, as per revised SEBI Regulations.

Here are three broad classes from which one can choose to invest, depending upon his/her risk-return profile.

Large Cap

  1. Large cap funds are those which invest in stocks of companies with market capitalization of more than Rs. 15,000 cr.
  2. Investors with a moderate risk appetite can consider suitable allocation towards Large Cap Funds.
  3. Investment horizon should be at least 4-5 years.
  4. One can expect returns between 10% - 12%.
  5. Redemptions made at any point of time after 1 year will be completely tax free.

Mid Cap

  1. Mid cap funds are those which invest in stocks of companies with market capitalization between Rs. 10,000 cr to 15,000 cr.
  2. Investors with moderately aggressive risk appetite can look to invest in Mid Cap Funds. It suits young Investors as they have the appetite & time to handle volatility.
  3. Investment horizon should be at least 6-7 years.
  4. One can expect returns in excess of 13-15%.
  5. Redemptions made at any point of time after 1 year will be completely tax free.

Small Cap

  1. Small cap funds are those which invest in stocks of companies with market capitalization Rs. 10000 cr.
  2. Investors with aggressive risk appetite can look to invest in Small Cap funds. It suits young investors who have the appetite & time to handle volatility.
  3. Investment horizon should be at least 8-10 years.
  4. On can expect returns in excess of 15% over long term.
  5. Redemptions made at any point of time after 1 year will be completely tax free.

Multi Cap

  1. Multi cap Funds are those funds which invest in companies across different market capitalizations.
  2. Investors who wish to have a mix of Large, Mid and Small Cap stocks in the portfolio can look to invest in these type of funds.
  3. Investment horizon should be at least 5 years.
  4. One can expect returns between 12%-14% over long term.
  5. Redemptions made at any point of time after 1 year will be completely tax free.

Sector Funds

  1. Sector funds are those which invest in stocks of those companies which belong to particular sector(s) (Eg. Cement, Pharma, etc).
  2. Investors who have knowledge of the respective sectors can invest in these funds. They carry high risk.
  3. Investment horizon should be at least 5-7 years.
  4. Returns are very volatile and can range anywhere between 10%-20%.
  5. Redemptions made at any point of time after 1 year will be completely tax free.

Divident Yield

  1. Dividend yield funds are those which invest in companies which have a track record of giving regular dividends.
  2. Investors with a low risk appetite can look to invest in these schemes.
  3. Investment horizon should be at least 7-10 years.
  4. One can expect returns anywhere between 8%-10%.
  5. Redemptions made at any point of time after 1 year will be completely tax free.

Global Funds

  1. These funds are those which invest in stocks of the companies registered on a stock exchange of another country. The money would first be converted to local currency and then invested.
  2. Investors who would like to benefit from development in other economies can invest in these schemes. One must analyze the overall economic cycle as well as the fluctuation in exchange rate before investing.
  3. Investment horizon should be at least 7 years or more.
  4. One can expect returns between 10 -15%.
  5. Respective taxation rules apply for equity or debt oriented global funds.

ELSS

  1. These funds are generally large cap funds with some exposure towards mid & small cap stocks. However, they offer an exclusive tax benefit u/s 80C.
  2. Investors looking to save tax on their income and expect capital appreciation for long term are best suited for this category.
  3. Since these funds invest in equities like any other equity funds, it is advisable to invest with a time frame of at least 7-8 years in mind.
  4. One can expect returns between 12-15%.
  5. Each investment is locked in for 3 years and the units sold later would be completely tax free.

Index

  1. These funds generally track an index and invest exactly as per the weightage of stocks in the index.
  2. Investors who do not want to take much risk but like to get exposure to equities.
  3. Investors who have a time frame of 7-8 years in mind.
  4. One can expect returns between 8-10%.
  5. Redemptions made at any point of time after 1 year will be completely tax free.

FMP

  1. These are closed ended debt funds where the investment portfolio is closely aligned to the maturity of the scheme.
  2. Investors with less risk appetite can invest in this type of funds. They should be ready to stay invested for some time.
  3. Generally, these funds are closed ended for 3 years.
  4. One can expect returns anywhere between 7-9%.
  5. Redemptions made before 3 years are added to income and taxed according to individual slab rates. Redemptions made after 3 years will get the benefit of indexation and would have to pay 20% capital gains tax.

GILT

  1. These are debt funds which invest in govt. securities and treasury bills which do not hold credit risk.
  2. Any investor wanting to invest for long term and those seeking safety of capital can invest in these types of fund.
  3. Investment horizon should be between 5 to 7 years.
  4. One can expect returns between 7-9%.
  5. Redemptions made before 3 years are added to income and taxed according to individual slab rates. Redemptions made after 3 years will get the benefit of indexation and would have to pay 20% capital gains tax.

Liquid Funds

  1. They are debt funds which invest in securities having very low maturity periods, typically 30-60 days.
  2. Investors looking to create emergency funds can look to invest in these.
  3. Investment tenure can be between 6-12 months; however, the tenure depends on the liquidity requirement of the investor.
  4. One can expect returns between 7-9%.
  5. Redemptions made before 3 years are added to income and taxed according to individual slab rates. Redemptions made after 3 years will get the benefit of indexation and would have to pay 20% capital gains tax.

Income Funds

  1. These are debt funds which invest in Certificates of deposit, bonds and other money market instruments. They usually have maturity period of more than 180 days and less than that of gilt funds.
  2. Any investor having short to medium term goals and who wishes to invest some percentage of his portfolio into debt can invest in these funds.
  3. The investment horizon can be between 2 to 5 years.
  4. One can expect returns between 7-9%.
  5. Redemptions made before 3 years are added to income and taxed according to individual slab rates. Redemptions made after 3 years will get the benefit of indexation and would have to pay 20% capital gains tax.

MIPs

  1. These are debt oriented hybrid funds which invest 75% of corpus in debt instruments and 15-20% in equities and rest in money market instruments.
  2. Investors looking to invest majorly in debt funds but also gain the benefit of capital appreciation through equities can look to invest in MIPs.
  3. Investment horizon should be between 5 to 7 years.
  4. One can expect returns between 8-10%.
  5. Redemptions made before 3 years are added to income and taxed according to individual slab rates. Redemptions made after 3 years will get the benefit of indexation and would have to pay 20% capital gains tax.

Capital Protection Oriented

  1. These are debt oriented hybrid funds which invest 75-80% of corpus in debt instruments and rest in equities.
  2. Investors primarily looking for capital protection with some benefit of capital appreciation can invest in these schemes.
  3. Investment horizon should be between 5 to 10 years.
  4. Can expect return between 7-9%.
  5. Investment sold before 3 years are added to income and taxed according to slab rate. Investment sold after 3 years will get the benefit of indexation and pay 20% tax on the remaining amount.

Arbitrage Funds

  1. This category of funds leverages price difference between cash and derivative markets to generate returns.
  2. Investors looking for short term tax efficient instruments can invest in these schemes.
  3. Investment horizon can be 1-3 years.
  4. One can expect returns between 7-10%.
  5. When it comes to taxation, arbitrage funds are treated and taxed in the same way as an equity scheme. Redemptions after 1 year become tax free.

Balanced Funds

  1. These funds invest in a mix of debt and equity instruments.
  2. Investors who do not like to take 100% exposure to equities can look to invest in these funds.
  3. Investment horizon should be atleast 5 years.
  4. One can expect returns between 10-15%, depending on whether they are debt oriented or equity oriented.
  5. Redemptions made before 3 years are added to income and taxed according to slab rate and those made after 3 years will get the benefit of indexation and need to pay 20% capital gains tax.

ETFs

  1. Gold ETFs are alternative investments to physical gold. Units are allotted according to the current price of the bullion.
  2. Investors who wish to buy physical gold for future can alternatively invest in gold ETF as the value in terms of money would be same with added benefits of safety and reduced costs.
  3. Investment horizon depends on the requirement of the investor. Broadly it should be 5 – 10 years.
  4. Over the long term, one can expect about 5 – 10%.
  5. When it comes to taxation, gold ETFs held for more than 3 years are taxed at 20% with indexation. If held for less than 3 years, proceeds are added to the income of the individual and taxed according to the slab rate.

FoFs

  1. They do not have their own portfolio as they invest in portfolio of other mutual funds.
  2. Investors who wish to buy physical gold for future can alternatively invest in gold FoFs as the value in terms of money would be same with added benefit of safety against physical gold.
  3. Investment horizon depends on the requirement of the investor. Broadly it should be 5 – 10 years.
  4. Over the long term, one can expect about 5 – 10%.
  5. Investments held for more than 3 years are taxed @20% after providing indexation benefit, if investments are held for less than 3 years then profits are added to the income and then taxed according to the tax slab.


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