Mutual Funds Sahi Hai! A Beginner’s Guide

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Concept of Mutual Funds:MF concept 1.PNG

What is NAV (Net Asset Value)?

NAV is the price of a unit in the fund. Just as a stock has a share price, a fund has an NAV.

There is a misconception among people that NAV should be low, but that is not the case.

NAv

As we can see above, the value of both the funds after the change in NAV remains the same. It is the performance of the fund that matters, not the NAV at the time of investing.

Main Types of Mutual Funds:

Types of mutual funds

Once you have selected your fund based on the above criteria, you have to choose whether you want to invest in the Growth option or the Dividend option of that fund. Let’s see the difference:

Growth vs Dividend option

What is an SIP (Systematic Investment Plan)?

It is like an EMI, you’re buying a pre-fixed value (NAV x No. of units) in a mutual fund on a regular basis (monthly/quarterly/weekly). Unlike lump sum investment (investing a bulk amount in one go), through SIP we are able to ride the ups and downs of the market without bias and skip the need to time the market. Since the amount invested is constant, one buys fewer units when the price is more and more units when the price is less, which leads to lower average cost.

What is an STP (Systematic Transfer Plan)?

Suppose you get a bonus or sold off your house, one option is to put the money into SIP, but that will not maximize your returns, as your money will lie idle till the next SIP transaction. To maximize our returns, we can setup an STP. You can initially deposit your money in a debt fund rather than keeping it in a savings account (as the return is higher in debt fund) or an equity fund (as equity fund is risky in the short term) and then gradually withdraw it and move it to an equity fund via STP.

STP

How stp works

What is an SWP (Systematic Withdrawal Plans)?

Systematic Withdrawal Plan allows you to withdraw a fixed amount from the mutual fund scheme whether monthly/ quarterly/ yearly. The amount to be withdrawn can be customized, the investor can either withdraw a particular amount or just the capital gains.

Example: Suppose you have 1000 units of a fund and you want to withdraw Rs.5000 every month.

In the first month the NAV is Rs.100, then to get Rs.5000, No. of units of fund sold= 5000/100= 50 units. Remaining units = 950

Now, suppose in the next month the NAV changes to Rs.50, then to get Rs.5000, No. of units of fund sold= 5000/50 = 100 units.

So, the amount of Rs.5000 will be given to you till you want to continue the withdrawals.

How Are My Mutual Fund Gains Taxed?

Equity vs devt fund taxation

Some Key Points:

  • In case, you need money, try and sell those funds which have no capital gains tax and have been invested for more than a year.
  • If you want to rebalance or shift your funds, keep the tax treatment in mind. Note that even STP and SWP are taxable as they are considered as fresh investments. Maybe wait for a year to pass before you move across funds.

Platforms That You Can Use to Research and Invest:

  • You can create your own portfolio on fundsindia.com, from where you can buy or sell your MFs by linking your bank account.
  • To research which fund to invest in, you can use two websites moneycontrol.com and www.valueresearchonline.com
    • On Value Research Online, you can scroll down and select their Fund Ranking Tool and fill in your required parameters.
    • Under the Basic Details, check the Risk Grad and Return Grade of the fund. The best fund should have a low risk grade and a high return grade. Now validate your findings on Money Control.
    • Check the CRISIL rating of the selected fund on Money Control. Higher the rating, better the fund.

There are many websites out there that help you in the same way, you can do your own research and find the suitable one!

How to Review Your Investments?

  • Make sure that you review your funds at least once a year.
  • MF investment is for a long term, so some losses in the short run should not disturb you.
  • Analyze the fund’s performance over 3 quarters, if it is consistently below the category average, it may be time to switch.

How to Balance Your Portfolio?

There are two thoughts on this:

  1. Invest 80% in debt and 20% in equity for a person with lower risk appetite.
  2. Use your age to determine the proportion of debt, for ex- at age 35, invest 35% in debt and 65% in equity. This is suitable for a person with higher risk appetite.

Hope that you have got some clarity on Mutual Fund investing and are good to start investing! Do share if you like!

We will soon be sharing a post with you on the difference between small cap, mid cap and large cap companies.

For any queries, you can write to us at mail.investxp@gmail.com

We will be happy to help, cheers!

Some Technical Terms in simplest language if you wish to know about them:

  • Fund House: The entity which owns the fund. Ex- for an HDFC mutual fund, HDFC is the Fund House.
  • AUM (Assets Under Management): The total amount of money that investors have put into a fund.
  • Exit Load: Charge for redeeming your fund units. Usually 0.5% if withdrawn before a year.
  • Redemption: Selling your funds back to the fund house and getting money that is equal to NAV-Exit load.
  • Lock-in period: Applicable for tax saving funds where it is 3 years and also for close ended funds.

Author:
Akanksha Goel | LinkedIn