Mutual Fund

A mutual fund is an investment gateway for several investors with no prior

knowledge of investing in securities. It is a financial device that acts as an investment
pool from several sources – individuals, associations, etc. – and the money collected
is used to purchase a diverse assortment of securities. These include the likes
of stocks, bonds, treasury bills, etc. The smallest components of this financial device
are called mutual fund units.
What is a Unit in a Mutual Fund?
A mutual fund comprises a diverse set of securities, as mentioned above. Therefore,
one can understand a mutual fund’s unit or share it as a microcosm of that diversity.
One shall note that a mutual fund unit does not represent ownership of any specific
security like stocks or bonds. It denotes a collection of all the elements within a fund
in precisely the proportion in which it has been constructed at large.
It’s a bit complex, so let’s understand it with a hypothetical example:
Fund ABC comprises 10% of stock A, 20% of stock B, 20% of government bonds,
20% of corporate bonds, 5% in stock C, 10% in stock D, 10% in cash derivatives, and
5% in treasury bills. So, a unit of this mutual fund will represent the ownership of all
these securities precisely in this percentage.
Therefore, individuals who hold MF units do not own stocks of a company or any
other security in the complete sense. Instead, their money is committed
proportionately to each security via a fund company. One of its significant advantages
is that investors can yield considerable gains based on the unit count they hold, sans
any copious investment required to command such a diverse portfolio.
Typically, mutual funds are open-ended; so, fund companies issue new units or shares
whenever an investor wants to invest. It is incomplete contrast with a close-ended
fund, where there are only a limited number of mutual fund units. The number of
units one can purchase depends on the amount they invest, which usually starts from
Rs.500.
How does a Mutual Fund Unit Price Work?
A critical part of understanding mutual fund units is to comprehend how those shares
are priced. As mentioned earlier, an MF is a collection of securities, and each unit is
the tiniest representation of that collection.
Similarly, an MF commands a value, which is a combination of all the securities’
values it comprises. Consequently, the price of one unit of a mutual fund will also
represent a part of the total portfolio value.
In other words, one MF unit’s price will be equal to that fund’s net value divided by
the number of outstanding shares.
Note: Outstanding share represents the number of units of a mutual fund.
The per-share value of a portfolio is referred to as Net Asset Value (NAV), sometimes
denoted as Net Asset Value per share (NAVPS). One can understand the total value of
a portfolio as the total value of assets netted against liabilities if any.
Therefore, NAV can be expressed as –
NAV = (Total value of assets – Total value of liabilities) / Number of unit-holders.
Unlike the prices of stocks, the NAV of mutual funds is calculated at the end of each
day.
Let’s build on the above example for better clarification of how MF share prices are
computed. The fund manager of ABC commits Rs.10 lakh in stock A, Rs.20 lakh of
stock B, Rs.20 lakh of corporate bonds, Rs.20 lakh of government bonds, Rs.5 lakh of
stock C, Rs.10 lakh of stock D, Rs.10 lakh of cash derivatives, and Rs.5 lakh of
treasury bills. The MF also carries a liability of Rs.10 lakh.
Therefore, ABC fund’s total value stands at – Rs. (10 + 20 + 20 + 20 + 5 + 10 + 10 +
5 – 10) lakh, or, Rs. 90 lakh.
Now, let’s assume that at the end of 22nd June 2020, the number of unit-holders stood
at 1 lakh. Ergo, NAV of ABC fund is equal to Rs.(90,00,000 / 1,00,000) or Rs.90.
How to Purchase Mutual Fund Units?
In knowing “what are mutual fund units?” one should also know the dynamic behind
purchasing these units. The process is rather simple, where investors choose and
invest in a mutual fund with an asset mix and risk-factor that suits their investment
objectives and risk tolerance via dedicated platforms. However, before doing so, the
dynamic of the NAV calculation should be noted.
As stated earlier, NAV is calculated at the end of each trading day rather than
fluctuating throughout. When an investor decides to invest in an MF, they have to
bear the NAV computed at the end of that day, and not the value listed. That’s
because the listed NAV of an MF is based on the previous day’s computation.
Let’s use the previous example for better understanding. At the end of 22nd June
2020, ABC’s NAV is Rs.90. Mr. Ashok puts in an order of Rs.9000 on 23rd June. By
the listed NAV, Mr. Ashok should be able to procure 100 mutual fund units of ABC.
However, at the end of 23rd June, the price increased to Rs.92. Therefore, if Mr.
Ashok invests Rs.9000, he will be acquiring 97.8 units of ABC fund and not 100.
Therefore, investors who purchase by units might have to shell out a little more than
the listed price when acquiring MF units. Thus, generally, investors go by the
monetary denomination of their investment rather than the number of units.
Difference between Equity Shares and Mutual Fund Units
Some of the primary differences between MF units and equity shares are illustrated in
the table below.

Parameters Equity Shares Mutual Fund Shares

Unit holding An investor has to hold units An investor can hold units represented
pattern represented in whole numbers, in whole numbers or even fractions, like
like 1 unit or 2 units. 97.8 units.

Voting rights It provides voting rights to It does not provide voting rights to
holders. holders.

Price change Price changes throughout a Price changes at the end of each trading
trading day and depends on the day and depends on total asset value
market condition. minus the total cost of maintaining it.

Trading Stock exchanges, third-party Fund companies and third-party

platforms dedicated platforms, and dedicated platforms.
brokers.

What is NFO in mutual fund and how to invest in it

A new fund offer (NFO) is a mutual fund scheme made available for investment for
the first time by a mutual fund house or Asset Management Company (AMC). The
aim of launching an NFO is to raise capital from the public to purchase securities
(stocks or debt instruments) and pay for administrative tasks.
In other words, an NFO is a first-time opening of a subscription offer of a mutual fund
scheme. An NFO usually lasts for 10 days and up to 15 days for all schemes except
ELSS and allows investors to buy units of the scheme at face value which can be Rs.
10 per unit or Rs. 100 per unit or Rs. 100 per unit.
Types of New Funds Offer (NFO)
After having attained a grasp of NFOs, let’s take a closer look at their structural
classification. Among the three types of NFO mutual funds – open-ended, close-
ended, and interval plans – which one should you go in for? Let’s help you decide.
Open-ended NFOs
Open-ended funds are for investors who want to invest or redeem units at any point in
time as there is no fixed maturity date. This means investors can buy or sell units at
the scheme's prevailing net asset value (NAV) and get liquidity at any point in time.
They can invest in these schemes either through SIP or lumpsum modes. In short,
open-ended NFOs are ideal for investors seeking flexibility as they can enter or exit
the scheme anytime.
Close-ended NFOs
Close-ended NFOs are launched for a fixed tenure only. Here, investors can buy or
sell units only during the initial offer period. These funds are for those investors who
want to invest for a specific period. For redemption, funds must be listed on the stock
exchange first else investors will get the money at the scheme maturity. Also, close-
ended NFOs do not permit SIP investments. Additionally, closed-ended funds come
with a fixed tenure of around 5-7 years from the investment date.
Interval plans
Interval plans are a mix of open-ended and close-ended schemes. These NFOs allow
investors to transact within a specified timeframe, usually annually or semi-annually.
Thus, with interval plans, investors can purchase and redeem scheme units when the
AMC allows. This is by way of having a Specified Transaction Period where the
investors can either invest in the scheme or redeem from the scheme.
How does an NFO work?
NFOs are launched by mutual fund houses to raise money from investors before the
scheme becomes available for trading. Here's how it works:
The mutual fund house announces a new mutual fund, detailing its objectives and the
assets it will invest in. This marks the start of the NFO period.
During the NFO period, investors can buy fund units at a fixed price, typically starting
from Rs. 10 per unit, which makes it an attractive investment opportunity.
The subscription period for NFOs usually lasts a few weeks. Investors can purchase
fund units at the initial offer price during this time.
Once the subscription period ends, the NFO closes, and further investments cannot be
made at the initial offer price.
After raising the required capital, the fund begins investing in various assets
according to its investment objectives. Investors can then trade NFO fund units on the
open market.
It's important to note that after the NFO period, the price of NFO units can fluctuate
based on the fund's performance.
Benefits of investing in NFOs
Just like other ongoing schemes, the chief advantages of investing in an NFO are low
initial investment and a chance to leverage future performance. Here are some more
benefits:
Accessible
NFO units are offered at a face value and the units are allocated accordingly. These
are accessible to investors who want to start off with a low initial investment. For
example, if you are investing Rs. 10,000, you will be allocated 1,000 units in the NFO
scheme with a face value of Rs. 10 each.
Flexibility
NFOs are handled by expert fund managers who make all fund related decisions.
Thus, investors can be secure in the knowledge that their money is being handled in
the best way possible.Open-ended NFOs
Diversification
NFOs can also help investors diversify their portfolio by including newer strategies.
This way, you can potentially tap into a new avenue of returns, especially if your
current investments are not performing.
Future growth
With effective management, NFOs can help you meet your financial goals by giving
you a chance to capitalise from the fund’s potential growth over time.

What is Mutual Fund Return?

A mutual fund return is the profit or loss derived from investing in a mutual fund
schemes over a specified period. It reflects the change in value of your investment
over time, factoring in elements like market performance, dividends, and interest.

Mutual fund returns are calculated for various timeframes, allowing investors to
assess the investment's success and compare different funds.

This return is a critical metric, reflecting the fund manager's prowess in navigating
markets and how well the fund aligns with your financial goals and risk tolerance.
Understanding mutual fund returns in the context of the Indian market, with its unique
economic dynamics, is crucial for informed investment decisions.
Different Ways of Calculating Mutual Fund Returns
Mutual fund returns can be calculated using several methods, each offering unique
insights into the fund's performance. Understanding these different approaches is
crucial for investors to accurately evaluate their investments. Here are the key
methods used to calculate mutual fund returns:

1. Absolute Returns: This is the simplest method for calculating mutual fund
returns. Absolute returns measure the total return of an investment over a specific
period, regardless of the investment duration. It's calculated as (Current NAV - Initial
NAV) / Initial NAV * 100.

For example, let's say you invest Rs. 10,000 in a mutual fund with a starting NAV of
Rs. 10 per unit (1000 units). After a year, the NAV increases to Rs. 12. Your current
investment value is Rs. 12,000 (1000 units * Rs. 12 NAV).

Absolute Return = ((Rs. 12 - Rs. 10) / Rs. 10) * 100 = 20%

2. Annualized Returns: When investments span over multiple years, annualized

returns are a more appropriate measure. This method converts the total return of an
investment into an average yearly return. It's an effective way to compare the
performance of different investments over the same time frame, providing a clearer
picture of an investment's performance.
It’s calculated as Absolute Return / (Holding Period in Years) * 100.

For instance, consider the previous scenario. You invest in January and sell in June
(holding period of 6 months or 0.5 years).
Annualized Return = (20%) / (0.5 years) * 100 = 40% (Note: This is not the actual
annual return, but an annualized representation of the 6-month gain)

3. IRR (Internal Rate of Return) for SIPs: The Internal Rate of Return (IRR) is
another pivotal method for calculating mutual fund returns, particularly useful for
analyzing a series of cash flows — like those in SIPs, but typically used for lump-sum
investments. IRR helps in determining the annual growth rate that makes the net
present value of all cash flows (both positive and negative) from the investment equal
to zero.

For example, if you make a lump-sum investment in a mutual fund and receive
various amounts in returns over different periods, the IRR would be the rate that
equates the sum of the present values of these returns to your initial investment
amount.

4. Compounded Annual Growth Rate (CAGR): This is a valuable metric for

long-term investments. It reflects the average annual growth rate that would have
resulted in the ending value, assuming returns were compounded each year. It's
calculated as [(Current NAV / Initial NAV) ^ (1/Number of Years)] - 1 * 100.

For example, if you invested Rs. 10,000 in a mutual fund that grows at a steady 10%
annually for 5 years (Current NAV = Rs. 16,105 after 5 years), the CAGR would be:
CAGR = [(Rs. 16,105 / Rs. 10,000) ^ (1/5)] - 1 * 100 = 10.24% (This reflects the
average annual growth that generated the ending value).

5. XIRR (Extended Internal Rate of Return) for SIPs: Systematic Investment

Plans (SIPs) involve regular investments over a period, which makes their return
calculation slightly more complex. This is where the Extended Internal Rate of Return
(XIRR) comes in.
For example, if you invest Rs. 5,000 monthly in an SIP and the value after one year is
Rs. 65,000, the XIRR would be 18.7%, considering Rs. 5,000 investment each
month.

While IRR is like XIRR in concept, it is more commonly applied to a series of regular
cash flows, making XIRR a more suitable choice for the irregular cash flows typical
in SIP investments. Understanding both IRR and XIRR is beneficial as it adds depth
to your ability to evaluate different investment scenarios.

Each of these methods offers a unique perspective on mutual fund performance and
understanding them can significantly aid investors in making well-informed decisions
about their mutual fund investments.
How Does a Mutual Fund Calculator Work?
Mutual fund calculators work by simplifying complex financial formulas to estimate
the potential growth of your investment. They consider several factors to provide you
with an idea of your future returns:

• Investment Type: The calculator can handle both lump sum investments (one-
time investment) and SIP (Systematic Investment Plan) contributions.

• Investment Horizon: You'll specify the total duration of your investment, which
factors into the future value calculation.

• Expected Rate of Return: This is your educated guess on the annual percentage
gain your investment will achieve.

The calculator utilizes a specific formula based on your chosen investment type (lump
sum or SIP) to determine the future value. This future value represents the estimated
total amount your investment will be worth at the end of the investment period.

Here's a simplified breakdown of the process:

• Input your Investment Details: You'll enter the investment amount, investment
period, and expected rate of return.

• The Calculator Applies the Formula: Based on your chosen investment type
(lump sum or SIP), a relevant formula is applied to your input values.

• Estimated Future Value is Displayed: The calculator presents the estimated total
value of your investment at the end of the investment horizon.

Examples:

Lump Sum Investment:

Let's say you're considering a lump sum investment of Rs. 1 lakh in a mutual fund for
a 10-year period. You anticipate an annual return of 8%. A mutual fund calculator
would likely use the following future value formula for a lump sum investment:

Future Value (FV) = Present Value (PV) * (1 + r/100)^n

SIP Investment:

Imagine you plan to invest Rs. 1,000 every month via SIP for 10 years, expecting an
8% annual return. The calculator would employ a formula that considers the
compounding effect of regular contributions:

FV = P [(1+i)^n-1] * (1+i)/i

Where:
FV = Future Value (what you want to estimate)
P = SIP investment amount (your monthly Rs. 1,000)
i = Compounded rate of return (monthly equivalent of annual return)
n = Investment duration in months (total months of SIP investment)
How to Use the Shriram AMC Calculator
Our online mutual fund calculator is easy and user-friendly. Here are the steps to use
the Shriram AMC calculator:
• Step 1: Enter the amount you wish to invest per month.
• Step 2: Input the number of years.
• Step 3: Finally enter the expected rate of returns and you will see the estimated
total returns on your investment.
Advantages of Using a Mutual Fund Calculator
Using a mutual fund calculator offers several advantages for investors, making it a
valuable tool for planning and decision-making. Here are the benefits of a mutual
fund calculator:

• Effortless Estimation: Get a reliable idea of your potential returns on mutual fund
investments without any manual calculations.

• Time-Saving Convenience: Access the calculator online anytime, anywhere,

making financial planning on the go a breeze.

• Smarter Investing: Compare different investment strategies (SIP vs. lumpsum)

and adjust variables to see how it impacts your returns, empowering you to make
informed decisions.

• Goal Setting Made Easy: Use the estimated future value to set realistic financial
goals and align your investment plan with your aspirations.

WHO IS A MUTUAL FUND DISTRIBUTOR?

A mutual fund distributor is one who helps in buying and selling of mutual funds in
India for its investors. The mutual fund distributors earn commission by bringing in
investors to the mutual fund scheme. They also advise the investors about the various
schemes of different mutual fund houses. Every mutual fund is registered with SEBI
(Securities and Exchange Board of India) and hence considered to be safe.
Furthermore, the mutual fund distributors help the investors in carrying out
investment transactions. These transactions include investing, switching between
mutual funds or redemption. They also guide the investors periodically on the
performance of their investment.
The mutual fund distributor is also known as a mutual fund agent. The mutual fund
agent needs to track the functioning and performance of mutual fund industries.
Moreover, this type of mutual fund agent needs to conduct qualitative and quantitative
analysis using databases and monitor fund information regularly. Also, they need to
keep an eye on essential developments in the mutual fund industry, markets and the
economy.
Additionally, the mutual fund distributors coordinate and collaborate with mutual
fund houses from time to time. This will help them identify the various investment
options for their investors. Also, this allows them to create a database with fund
recommendations and conclusions.
QUALIFICATIONS OF A MUTUAL FUND DISTRIBUTOR
Any individual above the age of 18 years can act as a mutual fund distributor or agent.
Also, the candidate should qualify for class 12 or class 10 with three years of
diploma.
The minimum requirement to become a mutual fund distributor is the completion of
NISM Series V-A: Mutual Fund Distributors Certification. For any entity or a person
engaged in marketing and selling of mutual funds, SEBI has made it mandatory to
clear the NISM Certification.
Upon passing the NISM Series V-A: Mutual Fund Distributors Certification
Examination’, (National Institute of Securities Markets) NISM will issue an ARN
number which will make the individual eligible to sell mutual fund products. Along
with this, they also receive an Employee Unique Identification Number (EUIN)
registration number. The NISM certification is valid for three years from the date of
examination.
After ARN is received from AMFI, the distributor needs to empanel themselves
with Asset Management Companies (AMC’s), whose products they would like to sell.
To know about the empanelment process, including documentation, the distributors
can visit the AMC websites. Also, the AMC will provide necessary training material,
marketing material and guide the distributors for sales. Finally, they also pass on the
commission for sales to the distributors.
In case the mutual fund distributor is a non-individual, then every sales staff member
of the company shall be ARN holders. Basically, the persons advising investors for
mutual funds investment shall have EUIN.
In case senior citizens wish to become mutual fund distributors or mutual fund
agents, they must attend the CPE program (Continuing Professional Education)
training module. Those who complete the CPE program (Continuing Professional
Education), shall complete the documentation process to apply for ARN as mentioned
above.
Moreover, many insurance agents sell mutual funds after getting ARN from AMFI.
DUTIES AND RESPONSIBILITIES OF A MUTUAL FUND DISTRIBUTOR?
Providing investment advice means addressing the concerns of an investor. A
professional with requisite skills, qualifications and expertise can offer sound
investment advice. Therefore, as an investor, one must consult a certified mutual fund
agent with relevant experience. The following are the roles and responsibilities of a
mutual fund distributor.
Educating the Investor
The mutual fund distributor needs to construct a suitable plan for their investors based
on their financial goals. They need to educate the retail investor on how to achieve
them. It also involves exploring different investment options. Therefore, this helps to
evaluate how each can help or hinder the client’s financial goals.
Evaluating Risk Tolerance
A mutual fund distributor can suggest an investment strategy based on the risk
tolerance level of the investor. For instance, equity mutual funds are riskier than debt
mutual funds. Hence, not every retail investor might consider equity funds each time.
Thus, the distributor must consider the long term and short term financial goals,
investment tenure, age, family status, total expenses and current financial
responsibilities before devising an investment plan.
Analysing Investment Options
Once the investor’s goals and requirements are in place, the mutual fund distributor
analyses the market conditions. Accordingly, they recommend equity mutual
funds, debt mutual funds or money market instruments. The distributors must stay
abreast with the latest financial news and trends to ensure they offer relevant advice.
Devising an Investment Strategy
After analysing the different investment options of the customer, the mutual fund
distributor plans a suitable investment strategy. The strategy involves combining other
investment options to diversify the portfolio to minimise risks and maximise returns.
 For instance, building a portfolio by combining equity mutual funds funds with some
portion of the debt mutual funds.
The investor’s portfolio requires a frequent assessment. The assessment is necessary
because the client’s goals might change. Therefore, the distributor must keep a close
watch on the client’s portfolio and suggest modifications as and when required.
Helping Investors for Portfolio Diversification
Diversification plays a crucial role in spreading the overall risk of the portfolio. As a
distributor, it is essential to stay updated with the current market conditions and new
products being introduced. Also, a lot of research goes into tracking the best
investment options across sectors and markets. Therefore, a mutual fund distributor
plays a significant role in optimising the investor’s portfolio and minimising the
risks.
Investors can also use Scripbox’s mutual fund calculator to calculate their returns
which can help them build an estimate for their financial goals.
Documentation
A critical aspect of a mutual fund distributor is to handle the discreet financial details
of the client. Hence, they need to maintain the record of services they provide. For
example, a record of invoices, details of the services offered and any other
transactions. This documentation is mandatory during the audit of the firm by
regulatory bodies.
Mutual Fund Distributor Commission
A mutual fund distributor’s commission is dependent on multiple factors.
Mutual Fund Trailing Commission
The aim of trailing commissions is to reward the distributors for sourcing investors
from outside of the top 30 cities. The trailing commissions are categorised into

 T-30 Cities: The commission in the top 30 cities across India is subject to a standard
commission rate. No additional benefits or bonuses for sourcing clients from these
cities. The commissions are in the range of 0.1% to 2% depending on the fund house
and the type of mutual fund.
 B-30 Cities: Below 30 cities are cities that don’t fall under the top 30 list. Sourcing
clients from B-30 cities will give the distributor an additional incentive. Extra
incentives can be on every investment made during the first year in addition to the
regular commission. Along with the standard commission rate between 0.1% to 2%,
the distributor earns a special commission on each investment.

Know Your Distributor (KYD) Guidelines

To curb financial frauds played on investors by mutual fund distributors or their
employees, AMFI has initiated specific penal actions. These actions include
suspension for ARN holders, advising all AMC to suspend the payment of a
commission, trail commission, incentives, etc. To control this fraud, SEBI (Securities
and Exchange Board of India) has advised AMFI to tighten the procedure for
distributor registration. Therefore, the current registration procedure for mutual fund
distributors which is more stringent is known as Know Your Distributor (KYD). The
KYD process involves obtaining relevant documents and validation of such
documents, personal verification and biometrics.
AMFI has commenced the KYD process for the mutual fund distributors with effect
from September 1, 2010. The KYD (Know Your Distributor) is very similar to that
of KYC (Know Your Customer) for investors. It requires distributors to submit
identity proof, address proof, PAN and bank account details with evidence
mandatorily. Furthermore, it has also introduced biometrics as a part of the KYD
process.
The prescribed form for KYD is available under the ‘Distributor Related Forms’ Tab
on the AMFI also. Also, update forms such as change of address, contact details, bank
details, etc., are available under this tab.
AMFI has decided to use the services of CAMS for the KYD process, including
biometrics. They can carry out this process through their centres referred to as
“CAMS POS”. This would help to have better control of the movement of documents
and data. Therefore, a mutual fund distributor/agent is required to apply for KYD.
Also, simultaneously the need to submit the application for registration of ARN.
What is the Difference Between Mutual Fund Distributor and Investment Advisor?
Differentiating between a mutual fund distributor and an investment advisor is quite
tricky as they both assist in making investment decisions. Both entities are enrolled
and managed by different regulatory bodies. The mutual fund distributor is controlled
by AMFI (The Associations of Mutual Funds in India). At the same time, the
investment advisors are controlled by SEBI (Securities and Exchange Board of India).
 However, the following are the differences between a mutual fund distributor and
investment advisor.
Meaning
Mutual fund distributor is an individual or entity that helps investors to buy and sell
mutual funds. They earn income in the form of commission from mutual funds
investment. They should understand the investor’s situation, risk tolerance levels and
financial goals to suggest a suitable plan for them.
An investment advisor is an individual or entity that gives financing or investment
advice. They also manage security analysis for investors. They earn income as a fixed
fee or a percentage of commission from the investor’s portfolio. Investment advisors
are also known as financial advisors. They can enrol themselves as Registered
Investment Advisors (RIA). They evaluate investor’s assets, liabilities, income and
total expenses to advise a suitable investment plan.
Commissions
Mutual fund distributors earn commissions from buying and selling of mutual funds.
Here, the AMC pays commissions to them. To avoid mis-selling, SEBI has directed
AMC’s to pay only trail commissions. Also, up fronting of trail commissions has been
eliminated.
Investment advisors usually charge a fixed fee from their clients. Sometimes, they
also charge a fixed percentage of the client’s portfolio.
Depositary Duty
The mutual fund distributor sometimes gives investment advice for which they earn
commissions.
Investment advisors are committed to giving investors honest advice as they are
bound by depositary duty.
Examination and Certification
Mutual fund distributor needs to have a valid certification of NISM Series V-A:
Mutual Fund Distributors Certification Examination.
Investment advisors need to clear two levels of National Institute of Securities
Markets NISM examination.

 NISM-Series-X-A: Investment Adviser -Level 1

 NISM-Series-X-B: Investment Adviser -Level 2
 Advising and Distributing
Mutual fund distributors can both advise and distribute mutual funds. In other words,
they guide the investor about investing in mutual funds.
Investment advisors can advise investors to invest in mutual funds. However, they
cannot act as a distributor. This means that they can recommend, but it is the
investor’s choice whether to invest or not. Hence, a distributor ensures that the
investor invests in mutual funds.
Direct/Regular Plan
Mutual fund distributors generally suggest regular plans as this helps them to earn
commissions.
Investment advisors suggest mutual fund schemes where the investor can opt to invest
in a direct plan or regular plan. Usually, they advise clients to invest in direct plans
because direct plans have more economical expense ratios than regular plans.
Gathering Relevant Information
Mutual fund distributors also gather information from investors to advice. However,
they do not collect detailed information. They understand the investor’s risk tolerance
levels and financial goals to suggest a suitable investment plan.
Investment advisors concentrate on all financial information related to the client. For
instance, they gather information about the client’s income, total expenses, assets,
liabilities, tax status, short term and long term goals, etc. Based on this information,
the investment advisor creates a financial plan for the client. Also, the investment
advisor is expected to offer unbiased advice that fits the client’s necessities.
Therefore, mutual fund distributors, as well as investment advisors both, are an
essential source for right investment decisions in mutual funds.
Points to Consider Before Choosing a Distributor
The following are the points to consider while choosing a mutual fund agent.

 Firstly, one must check the experience of the mutual fund advisors. Also, one should
look for a distributor who has been in the financial market for a couple of years.
 Secondly, one should also ask for referrals from the mutual fund distributor. They
can share the contact details of some investors with whom they worked. This helps
the investors understand their experience on the advice and the services offered by the
agent.
 One of the significant roles of a mutual fund distributor is to explain to the investor
about the underlying asset classes in the mutual fund schemes. Also, helping the
investor to combine their investments to achieve their financial goals. Therefore,
looking for a mutual fund distributor who is willing to give an overall view of the
investor’s portfolio.
 When it comes to investing, one must spend time on choosing the mutual fund
advisors. Only when the investor is fully satisfied, they should go ahead with the
agent. Thus, selecting a mutual fund agent shall not be done under pressure.
 Lastly, one has to be sure that the mutual fund distributor is accountable for any
suggestion they provide. They must comply with AMFI and SEBI requirements. Also,
they must adhere to the Code of Conduct as laid down by the regulatory body. In
short, working with a competent mutual fund agent can make a difference in the
investment journey.

FACTORS FOR SELECTING A MUTUAL FUND CATEGORY

1) Investment Objective

Investment objective refers to an investor’s financial goal which he/she aims to

accomplish with the mutual fund investment. The investment objective can be any
short-term or long-term financial aspiration of the investor – buying a house/car,
financing children’s higher education, going on a vacation, retirement, etc.

2) Time Horizon

Time horizon refers to the time period for which an investor wishes to keep his/her
money invested in a mutual fund scheme. It can be either as short as 1 day or as long
as more than 5 years. Different fund categories work best for different time horizons.
This is because some funds invest in shorter dated debt and others invest in longer
dated debt. Equity funds should ideally be chosen if the investment horizon is more
than 5 years.

The market can be highly volatile in the short term but tends to provide higher
earnings growth over time. The below is a ready reckoner of fund categories for
different time horizons:

Time Horizon Mutual Fund

1 day – 3 months Liquid Funds

 3 months – 1 year Ultra Short-duration Funds

1 year – 3 years Short-duration funds

3 years – 5 years Hybrid/Balanced Funds

More than 5 years Equity Fund

3) Risk tolerance

Risk tolerance refers to the amount of risk an investor is willing to take with his/her
invested money. SEBI in 2015 made it mandatory for all mutual fund houses to
display a riskometer which consists of 5 levels of risk associated with the invested
principal amount. The 5 risk levels are – low, moderately low, moderate, moderately
high, and high. The table below gives you the fund categories that are most suitable to
different risk levels and time horizons.

Time Horizon/Risk Low Risk Medium Risk High Risk

Short Duration (up to 3 Liquid Funds, Ultra Short-duration

Arbitrage Funds
years) Short-duration Funds Funds

Medium Duration (3 Balanced Equity Hybrid

Short-duration Funds
years – 5 years) Advantage Funds Funds

Long Duration (5 years Mid Cap Funds,

Large Cap Funds Multicap Funds
and above) Small Cap Funds

FACTORS FOR CHOOSING BEST MUTUAL FUND SCHEME

After selecting the mutual fund category on the basis of investment objective, time
horizon and risk tolerance, choose a mutual fund scheme within that category on the
basis of the following factors:

1) Performance Against Benchmark

A benchmark index of a mutual fund scheme is a standard against which its

performance and stock allocation are compared. The benchmark index guide the
investment philosophy of the scheme. Thus, the asset allocation of a benchmark index
should match the investment objective of the scheme. For instance, the benchmark
index of a large cap mutual fund should be an index of large cap stocks and the
benchmark of a mutual fund focussed on banking stocks should be a banking index.
SEBI has also mandated that mutual funds use the Total Returns Index (TRI) variant
of indices as their benchmarks. TRIs are built on the assumption that dividends are
reinvested in mutual funds as and when they are declared. In other words, the account
for the fact that companies declare and pay out dividends. This makes them better
benchmarks than ordinary Price Indices (PI).

2) Performance Against Category

Another factor which is equally important to assess while selecting a mutual fund
scheme is its performance in comparison to its active peer group. This helps in getting
a holistic understanding of the fund’s performance. This comparison should only be
among the same type of mutual fund schemes. For instance, a large cap equity mutual
fund can only be compared with other large cap mutual funds and not against mid cap
funds or debt funds.

3) Consistency of Performance

A good mutual fund is one which is able to generate good returns for its investors
consistently over a period of time and not just whirlwind returns. The fund should be
capable of providing consistent returns in both bullish and bearish periods of the stock
market.

4) Fund Manager’s Experience

Another important factor to be considered while selecting a mutual fund is the

performance of its fund manager and how long he/she has been at its helm. For this,
an investor should look at the fund manager’s experience with the fund in question
and with other funds currently managed or managed in the past by him/her.

5) AMC Track Record

An Asset Management Company (AMC), also known as fund house, is the company
which manages a mutual fund scheme. For example, HDFC Mutual Fund is the name
of the AMC which manages schemes like HDFC Equity, HDFC Top 100 or HDFC
Small Cap Fund. Many decisions are made at AMC level by the Chief Investment
Officer (CIO) of the AMC. A poorly selected stock is often present in several
schemes owned by an AMC, because the selection has been made at AMC level.
Thus, it is important to check the track record of an AMC while selecting a mutual
fund scheme.

Taxation on Mutual Funds - An Overview

Knowing how your mutual fund returns will be taxed is crucial if you are investing in
mutual funds or plan to do so. Mutual Fund gains and profits are taxable, just like
those from the majority of the other asset classes you invest in. Understanding
the tax on Mutual Funds rules before investing will be beneficial because taxes are
difficult to avoid.

You can plan your investments to reduce your overall tax expense by becoming
knowledgeable about the taxation of Mutual Funds. In some circumstances, you can
also take advantage of tax deductions. So, while investing in it, stay informed of the
tax on Mutual Funds regulations.

Variables Determining the Taxation for Mutual Funds

The principles of Mutual Fund taxation are much simpler to understand when they are
further broken down into smaller pieces.

So, let us start by taking a look at the four variables that affect the tax liability of
Mutual Funds:

1) Types of Funds

Mutual Funds are divided into various groups for tax purposes like Equity-Oriented
Mutual Funds, Debt-Oriented Mutual Funds, and so on.

2) Capital Gains

When you sell a capital asset for more money than it costs to purchase, you make a
profit, known as a Capital Gain.

3) Dividend
A dividend is a portion of accumulated profits that the Mutual Fund house distributes
to the scheme's investors; investors do not need to sell their assets to receive a
dividend.

4) Holding Period

The tax you will pay on your capital gains depends on the Holding Period. Therefore,
less tax will be due if your Holding Period is longer. Because India's income tax laws
encourage longer holding times, keeping your investment longer lowers your tax
burden.

How Do Mutual Funds Generate Profits?

Mutual Fund investing allows investors to profit from either Capital Gains or
Dividend Income. Let us define them and examine their differences in more detail.

Profit from selling an asset for more than its cost is known as a Capital Gain.
However, it is crucial to remember that Capital Gains are only realized upon
redeeming the Mutual Fund units. As a result, the Capital Gains Tax on Mutual Funds
only becomes due at redemption. Therefore, the tax on Mutual Funds redemption
must be paid when the upcoming fiscal year's income tax returns are submitted.

Another way for investors in Mutual Funds to receive income from a fund is through
Dividends. Based on its accumulated distributable surplus, the Mutual Fund declares
Dividends.

When paid to investors, Dividends are distributed at the fund's discretion and
immediately subject to taxation. Therefore, when investors receive a Dividend from
their Mutual Funds, they must pay tax on it. The following section contains
information on the previous and current Mutual Fund dividend tax regulations.

- Taxation of Dividends Provided by Mutual Funds

The Finance Act of 2020 made a change that eliminated the Dividend Distribution
Tax. Investors were exempt from paying taxes on dividend income from Mutual
Funds.

The fund houses that announced dividends deducted dividend distribution tax (DDT)
before paying them to the Mutual Fund investors. The investor must pay taxes on the
entire dividend income according to the income tax bracket under the heading
"Income from Other Sources."

The Mutual Fund scheme's dividend is also subject to TDS (tax deducted at source).
The AMC is now required to deduct 10% TDS under Section 194K from the dividend
that the Mutual Fund distributes to its investors when the rules have changed if the
total dividend paid to an investor during a financial year exceeds ₹5,000. You can
claim the 10% TDS that the AMC has already taken out when you pay your taxes and
only pay the remaining amount.

- Taxation of Capital Gains Provided by Mutual Funds

The holding period and type of Mutual Funds affect the tax rate on capital gains for
Mutual Funds. The holding period is the time an investor holds units of a mutual fund.
Put simply, the holding period is the time between the date of buying and selling
Mutual Funds units.

The following categories apply to capital gains realized on the sale of Mutual Fund
units-

STCG LTCG

Fund Categories Pre-Budget Post-Budget Pre-Budget 2024 Pos

2024 2024

Indian Equity Funds/ETFs & Equity- 15% (if held 20% (if held 10% (on gains 12.5
oriented hybrids for less than 1 for less than 1 above Rs 1 lakh if abo
 year) year) held for over 1 held
year)

Debt funds/ETF & debt-oriented Slab rate Slab rate Slab rate Slab
hybrids*

All FOFs (that hold less than 65% in Slab rate Slab rate if Slab rate 12.5
debt)/International/gold held for less ove
funds/ETFs** than 2 years

Certain presumptions have been made due to a few grey areas.

*Investments made before April 1, 2023, will attract a 12.5% tax if sold after 2 years.
**New rule applies from April 1, 2025. Redemptions made before will be taxed at your slab rate.

- Taxation of Capital Gains Provided by Equity Funds

Mutual Funds classified as equity funds have an equity exposure of at least 65%. As
previously stated, when you redeem your equity fund units within a holding period of
one year, you realize short-term capital gains.

When you sell your equity fund units after holding them for at least a year, you realize
long-term capital gains. These capital gains are tax-free, up to Rs 1.25 lakh per year.

Any long-term capital gains over this threshold are subject to a 12.5% LTCG tax, with
no benefit of indexation.

- Taxation of Capital Gains Provided by Debt Funds

Debt mutual funds have entirely different taxation. If a debt investment is sold within
3 years, it will be deemed as STCG. This STCG will be added to the income of the
investor and would be liable to be taxed according to the tax slab under which the
investor falls.
If debt investments have a holding period of more than 3 years, they will be termed
LTCG. They will attract an LTCG tax as per the individual's tax slab rate with no
indexation benefits.

Note: Indexation applies to only LTCG that's earned on non-equity-oriented mutual

funds.

Another important thing to note is that the fund manager will levy an STT of 0.001%
if you plan to sell your equity fund units. STT does not apply to the sale of units in
debt funds.

It is essential to remember that debt funds no longer have the benefit of LTCG. The
capital gains that arise from such funds will be liable to be taxed according to the tax
slab rate under which an investor falls in.

- Taxation of Capital Gains Provided by Hybrid Funds

Whether a Hybrid Fund is equity-focused or debt-focused determines how the Mutual

Fund taxes it. All other hybrid funds are debt-focused, while those with equity
exposure over 65% are considered equity-focused schemes.

Depending on their equity exposure, hybrid funds may or may not be subject to the
same tax regulations as Equity or Debt Funds.

- Securities Transaction Tax or STT

The Securities Transaction Tax is separate from the Capital Gains and Dividend
Taxes. When you buy or sell Mutual Fund units of an Equity Fund or a Hybrid
Equity-Oriented Fund, the government (Ministry of Finance) will assess an STT of
0.001%. On the other hand, the sale of Debt Fund units is exempt from STT.

WHAT IS DEBT FUND?

A debt fund is a mutual fund scheme that invests in fixed income instruments, such as
Corporate and Government Bonds, corporate debt securities, and money market
instruments etc. that offer capital appreciation. Debt funds are also referred to as
Income Funds or Bond Funds.

WHO SHOULD INVEST IN A DEBT FUND?

Debt funds are ideal for investors who want regular income, but are risk-averse. Debt
funds are less volatile and, hence, are less risky than equity funds. If you have been
saving in traditional fixed income products like Term Deposits, and looking for steady
returns with low volatility, debt mutual funds could be a better option, as they help
you achieve your financial goals in a more tax efficient manner and therefore earn
better returns.

HOW DEBT FUNDS WORK?

Debt funds invest in either listed or unlisted debt instruments, such as Corporate and
Government Bonds at a certain price and later sell them at a margin. The difference
between the cost and sale price accounts for the appreciation or depreciation in the
fund’s net asset value (NAV). Debt funds also receive periodic interest from the
underlying debt instruments in which they invest. In terms of return, debt funds that
earn regular interest from the fixed income instruments during the fund’s tenure are
similar to bank fixed deposits that earn interest. This interest income gets added to a
debt fund on a daily basis. If the interest payment is received, say, once every year, it
is divided by 365 and the debt fund’s NAV goes up daily by this small amount. Thus,
a debt scheme’s NAV also depends on the interest rates of its underlying assets and
also on any upgrade or downgrade in the credit rating of its holdings.

Market prices of debt securities change with movements in interest rates. Let’s
assume, your debt fund owns a security that yields 10 % interest. If the interest rate in
the economy falls, new instruments issued in the market would offer this lower rate.
To match this lower rate, there would be an increase in the prices your fund’s
underlying instruments as they have a higher coupon (interest) rate. As a result of the
increase in the debt instrument’s value, your fund’s NAV, too, would increase.

WHY INVEST IN DEBT MUTUAL FUNDS?

A few major advantages of investing in debt funds are low cost structure, stable
returns, high liquidity and reasonablesafety. Debt funds also score on post-tax return.
Dividends from debt funds are exempt from tax in the hands of investors.The mutual
fund, however, has to pay a Dividend Distribution Tax, which is currently 28.325 per
cent in case of individuals or Hindu undivided families. While long-term capital gains
from debt funds are taxed at 10 per cent without indexation and 20 per cent with
indexation, short-term capital gains taxes are levied according to the income-tax
bracket one belongs to.

Thus, debt funds can be a good alternative to investors for achieving their financial
goals if they do not intend to bear risk involved in equity investments.

Growth Option vs. Dividend Option

As mentioned above, dividend from mutual funds is tax free in the hands of the
investors, but the same is subject to Dividend Distribution Tax (currently 28.325 %),
which indirectly decreases the net returns. Hence, dividend payment or dividend
reinvestment option gives better post-tax returns, to those who are in the highest tax
bracket. However, for those in lower tax slabs, growth option could be more tax-
efficient. In short, one should choose the appropriate option depending on the tax
bracket.

WHO SHOULD INVEST IN DEBT MUTUAL FUNDS?

There’s no fixed rule as to who should invest in debt funds. It depends on the
requirement of investors. Different types of investors invest in different types of debt
funds. For instance, if someone wants to park his emergency funds, he can go for
liquid funds.

As a thumb rule, 3-6 month’s household expenses can be one’s emergency fund
depending on the age. Roughly the amount that gives you the confidence to combat
emergencies in your household should be enough. Anything more can actually affect
your investment portfolio. Those in their 20s and 30s might need more, so garner
funds for about six months’ expenses, whereas those nearing retirement might not
need much as they would have built up their reserves. The amount you save for an
emergency depends ultimately on what makes you comfortable.

If you are the risk-averse type, then you might prefer a large fund of, say, a year’s
salary. If, however, you are the living on-the-edge type, then six months’ salary might
suffice.

For those planning to buy a home after 2-3 years, investing in a combination of both
long- and short-term debt funds might be a good idea. Also, a debt fund can be used
in the overall portfolio for diversification across asset classes. Debt Funds can also be
used for portfolio de-risking when you are nearing your financial goals.

WHAT IS AVERAGE MATURITY AND HOW IS IT USEFUL?

Debt funds invest in a number of debt instruments, all of them having a varying
maturity. That’s where the average maturity comes handy. As the name suggests, it
basically indicates the average maturity of all the securities in a portfolio, giving you
the freedom to compare.

Average maturity thus gives you a quick glimpse into the sensitivity of the bond to
interest rates. Funds with higher average maturities tend to be more volatile in the
short term since their objective is to deliver higher returns over the long term. Simply
put, a fund with an average maturity of 5 years is definitely more volatile in the short
term than a fund with an average maturity of say 9 months. That’s because in the
shorter term there is reasonable surety on the receipt of the coupon income.

So matching your investment horizon with the average maturity is always a good idea.
But remember, an average maturity of say 4 years doesn’t necessarily mean that you
have to hold it for 4 years. But it definitely indicates is that you can expect to get
optimal returns, given the interest rate environment, over 4 years.

Exit load isan effective mechanism that prompts investors to stay invested through the
desired holding period. This ensures that investors, who move in and out of the fund
and take away accrued gains during momentary positive market movements, do not
short-change diligent investors who stay invested for the entire course.

WHY IS IT ESSENTIAL TO MATCH THE INVESTMENT HORIZON WITH

THAT OF THE SCHEME?

USING DEBT FUNDS FOR STP AND SWP

Debt funds also allow you to take advantage of investing in equity market along with
growth on your principal amount through Systematic Transfer Plan (STP). With an
STP, you can transfer amounts in parts/tranches from one mutual fund scheme to
another, within the same fund house at regular intervals. Such a transfer averages the
cost of purchase,mitigating some market-related risks. Typically, an investor first
parks his funds in a liquid or a floating-rate debt fund and then transfers them via STP
to the scheme (usually equity or balanced) of his choice at regular intervals.

Systematic withdrawal plan (SWP) is a payment option in a mutual fund that lets you
redeem units worth a pre-specified amount at a specific intervals (monthly, quarterly,
half-yearly or annually). This is suitable for the investors who desire periodic income.

USING DEBT FUNDS FOR SPECIFIC GOALS

Choosing funds for children’s education
When it comes to taking the mutual fund route for your children’s future, the basic
rules of the game are essentially the same as that for any long-term goal. But here,
merely investing will not work. You need to be cautious about the risk management
of your corpus, especially when your child is close to going for his higher studies.
Along with investing, making the money available at a time when your child needs it
is equally important. So, here debt funds play a vital role. With time on your side,
investing in equity has many ad vantages. But you need to keep a close eye on the
market once you are less than three years away from your goal. One needs to de-risk
the portfolio when you are nearing your targets to ensure that the gains you have
earned are not wiped out. In other words, as you near your target, start shifting from
equity to debt so as to secure your gains.

When moving away from high-risk options, you could choose to move into liquid and
short-term debt funds or slightly riskier funds in the debt space, such as bond and gilt
funds, depending on the interest rate scenario prevailing at that time. For instance, if
the interest rates are falling, short- to long-term bond and gilt funds would bode well.
But if interest rates remain flat or move upwards, stick to liquid funds; they are safer
than the rest of the debt schemes, if not the safest of all financial instruments, and they
would still earn you more than your savings bank account.

The ideal way to build an adequate corpus for your child’s future is to go step by step
– through Systematic Investment Plan or SIP. The sooner you start, the better. Of
course, you also need to stop along the way occasionally to make sure things are
going as planned. The closer you get to your investment goal, the more careful you
need to be that you are not taking a wrong turn.

Role of debt fund in retirement portfolio.

As you age, lighten your equity funds holdings marginally; the aggressive investor
should cut equity in his portfolio from 80 per cent to 70 per cent, and the conservative
investor from 60 per cent to 40 per cent. With about 15 years away from retirement,
you should start playing steady and balance your exposure to debt and equity. For
instance, the conservative investor may choose a 10-20 per cent higher debt
allocation. On the debt side, you may look at floating-rate funds and fixed maturity
plans. Balanced funds are another option for the semi-aggressive investor to strike a
debt-equity mix.

Strategy - Follow the life stage approach to investing while saving through mutual
funds for retirement needs. As you age, keep balancing the allocation between equity
and debt.

With around 10 years away from your retirement, your priority should be to ensure
the safety of your accumulated wealth. Plan out the de-risking strategy and wait for an
opportune time to migrate your money from volatile equity to safer debt. By the time
you are 1-2 years away from retirement, a large portion should have been moved
away from equity into debt funds.

Acquiring a house
Investing in mutual funds not just helps in creation of wealth but also helps in creating
assets. They play an important role in helping one build the biggest asset of life—a
home of your own.

Paying the equated monthly instalments (EMIs) has come reasonably within the reach
for most families, especially when both partners work. However, accumulating a big
lump sum to pay the down payment on the house remains the biggest obstacle. This is
where mutual fund schemes come in handy. All those who live on rent constantly
wonder why they should be throwing their hard-earned money out as expenses, when
they could use it to buy a house and create an asset. That is more so now, when
property prices have, perhaps, settled down and when home loans are easily available
as housing finance companies are offering easy loans to customers. If you are
contemplating buying a house in 2-3 years, mutual fund schemes can help you
accumulate the money, especially the down payment for the loan.

Generating funds from friends, relatives or pawning gold might not be the best ways
to arrange the money. Plan early to avoid depending on such sources as far as
possible. If you feel that your personal circumstances are right for buying a home,
start by creating a savings plan for your down payment. Get an idea of the purchase
price and the EMI payments that you can afford. Estimate what you’ll need for
margin money, which is usually 20 per cent of the home price. Thereafter, calculate
how much you must save every month.

Where to invest
If the time horizon is less than a year or just a year away, it is better to stash funds in a
money-market or liquid fund. The volatility in these funds is the least as exposure to
equities is non-existent. The idea is to preserve the capital and not take undue risks
with the savings. Choose at least two or three debt funds for diversification and start
saving through the systematic investment plan (SIP) process. Ideally, keep the
portfolio tilted towards debt even if you are taking a bit of risk.

Strategise your moves.

Remember, even debt funds suffer from interest rate risk. So, ensure that you shift to
less volatile debt funds, such as short-term debt funds, at least two years before
reaching your goal. With just one year away from your goal, shift your savings
completely into a liquid fund. Your small savings every month might not cramp your
household budget, but they will still create a lump sum big enough to meet your down
payment needs for a home.

DIFFERENT TYPES OF SCHEMES IN THE DEBT FUND CATEGORY

There are various types of schemes in the debt fund category, which are classified on
the basis of the type of instruments they invest in and the tenure of the instruments in
the portfolio, as explained below:

Liquid & Money Market Funds

Savings bank deposits have been the retail investors’ preferred investment option to
park surplus cash. Most investors regard these as the only avenue while some believe
parking surplus cash elsewhere can erode their capital and does not provide liquidity.
CRISIL’s recent study draws attention to a more attractive option – Liquid Fund /
Money Market Mutual Funds. The analysis underlines that surplus cash invested in
money market mutual funds earns high post-tax returns with a reasonable degree of
safety of the principal invested and liquidity.

Liquid Funds, as the name suggests, invest predominantly in highly liquid money
market instruments and debt securities very short tenure and hence provide high
liquidity. They invest in very short-term instruments such as Treasury Bills (T-bills),
Commercial Paper (CP), Certificates Of Deposit (CD) and Collateralized Lending &
Borrowing Obligations (CBLO) that have residual maturities of up to 91 days to
generate optimal returns while maintaining safety and high liquidity. Redemption
requests in these funds are processed within one working (T+1) day.

Income funds
They invest primarily in debt instruments of various maturities in line with the
objective of the funds and any remaining funds in short-term instruments such as
Money Market instruments. These funds generally invest in instruments with
medium- to long-term maturities.

Short-Term funds
Short-term debt funds primarily invest in debt instruments with shorter maturity or
duration. These primarily consist of debt and money market instruments and
government securities. The investment horizon of these funds is longer than those of
liquid funds, but shorter than those of medium-term income funds.

Floating Rate funds (FRF)

While income funds invest in fixed income debt instruments such as bonds,
debentures and government securities, FRFs are a variant of income funds with the
primary aim of minimising the volatility of investment returns that is usually
associated with an income fund. FRFs invest primarily in instruments that offer
floating interest rates. Floating rate securities are generally linked to the Mumbai
Inter-Bank Offer Rate (MIBOR), i.e., the benchmark rate for debt instruments. The
interest rate is reset periodically based on the interest rate movement. The objective of
FRFs is to offer steady returns to investors in line with the prevailing market interest
rates.

Gilt Funds
The word ‘Gilt’ implies Government securities. A gilt fund invests in government
securities of various tenures issued by central and state governments. These funds
generally do not have the risk of default, since the issuer of the instruments is the
government. Gilt funds invest in Gilts which have both short-term and/or long-term
maturities. Gilt funds have a high degree of interest rate risk, depending on their
maturity profile. The longer the maturity profiles of the instruments, the higher the
interest rate risk. (Interest rate risk implies that there is an effect on the market price
of debt instruments when interest rates increase and decrease. Market prices of debt
instruments rise when interest rates fall and vice-versa.)

Interval Funds
Interval fund is a mutual fund scheme that combines the features of open-ended and
closed-ended schemes, wherein the fund is open for subscription and redemption only
during specified transaction periods (STPs) at pre-determined intervals. In other
words, Interval funds allow redemption of Units only during STPs. Thus between two
STPs they are akin to closed-ended schemes and therefore, compulsorily listed on
Stock Exchanges. However, unlike typical closed-ended funds, interval funds do not
have a maturity date and hence open-ended in nature. Hence, one may remain
invested in an Interval Fund as long as one wishes to like any open ended schemes.
Hence, in a sense, interval funds are akin to Fixed Maturity Plans (FMPs) with roll-
over facility, as they allow roll over of investments from one specified period to
another.

Interval funds are typically debt oriented products , but may invest in equities as well
as per the scheme’s investment objective and asset allocation specified in the Scheme
Information Document.

Interval funds are taxed like any other mutual fund, depending on whether the
underlying portfolio is pre-dominantly invested in equities or debt securities. If the
fund invests 65% or more of its corpus in debt securities, it is taxed like a non-equity
fund. Likewise, if the fund invests 65% or more in equities, it is taxed like an equity
fund .
Multiple Yield Funds
Multiple yield funds (MYFs) are hybrid debt-oriented funds that invest predominantly
in debt instruments and to some extent in dividend-yielding equities.

The debt instruments assist in generating returns with minimum risk and equities
assist in long-term capital appreciation.MYFs invest predominantly in debt and
money market instruments of short-to-medium-term residual maturities.

Dynamic Bond Funds

DBFs invest in debt securities of different maturity profiles. These funds are actively
managed and the portfolio varies dynamically according to the interest rate view of
the fund managers. Such funds give the fund manager the flexibility to invest in short-
or longer-term instruments based on his view on the interest rate movement. DBFs
follow an active portfolio duration management strategy by keeping a close watch on
various domestic and global macro-economic variables and interest rate outlook.

Fixed Maturity Plans (FMPs)

FMPs, as the name indicates, have a pre-determined maturity date (like a term
deposit) and are close-ended debt mutual fund schemes. FMPs invest in debt
instruments with a specific date of maturity, lesser than or equal to the maturity date
of the scheme, also enjoy the status of debt funds. After the date of maturity, the
investment is redeemed at current NAV and the maturity proceeds are paid back to the
investors.

The tenure of an FMP may range from as low as 30 days to 60 months. Since the
maturity date and the amount are known beforehand, the fund manager can invest
with reasonable confidence, in securities that have a similar maturity as that of the
scheme. Thus, if the tenure of the scheme is one year then the fund manager would
invest in debt securities that mature just before a year. Unlike in other open ended
funds, where one can buy and sell units from the mutual funds on an ongoing basis),
no pre-mature redemptions are permitted in FMPs. Hence, the units of FMPs (being
close ended schemes) are compulsorily listed on a stock exchange/s so that the
investors may sell the units through stock exchange route in case of urgent liquidity
needs.

Monthly Income Plans (MIPs)

MIPs are hybrid schemes that invest in a combination of debt and equity securities,
but are typically debt oriented mutual fund schemes, as they invest pre-dominantly in
debt securities and a small portion (15-25 per cent) in equities.
MIPs offer regular income in the form of periodic (monthly, quarterly, half-yearly)
dividend pay-outs. Hence MIPs are preferred option for investors seeking steady
income flows. Under MIPs, monthly income or regular dividend is neither assured nor
is it mandatory for mutual funds to pay at stated intervals, because in a mutual fund
scheme, the dividend is paid at the discretion of the mutual fund and is subject to
availability of distributable surplus from realised gains.

Due to the equity exposure, MIP returns can be volatile and may suffer losses, making
dividend pay-outs irregular - both in quantum and frequency or even skip dividend
payment. In spite of this, MIPs have a history of providing higher returns after
adjusting for tax and hence can be a better option.

Investors wary of fluctuating income from MIPs' dividend option can opt for Growth
Option and a systematic withdrawal plan, or SWP, which allows regular redemption
of a pre-determined amount. An SWP under an MIP can work as a regular source of
income for investors. SWP works better when a person invests a large sum.

Capital Protection-Oriented Funds

As the name suggests, Capital Protection-Oriented Funds (CaPrOF) are mutual fund
schemes that aim to protect at least the capital, i.e., the initial investment, providing
an opportunity to make additional gains, as per the investment objectives of the fund.
In short, a CaPrOF aims to safeguard the principal amount while offering a potential
equity-linked capital appreciation. However, it is important to note that there is no
guarantee of returns or guaranteed capital protection.

CaPrOF are closed-ended debt funds that typically invest a major portion (say 80%)
of the corpus in AAA-rated bonds, and the remaining amount in riskier securities like
equity. Some funds may even take exposure to equity derivatives to protect against
the downside risk.

It is this very structure that is oriented towards protecting the principal. By the end of
the stipulated term, the debt portion of the fund grows to give you back the principal,
while the equity portion brings the potential upside. Thus, even if the equity market
crashes, the principal amount is protected. Hence, CaPrOF are preferred over regular
FMPs. CaPrOF are ideal for investors who wish to protect their capital against the
downside risk and also participate in the equity market.