Mutual Fund Basics

When it comes to investing in equity markets, investors tend to prefer investing through mutual funds. Investors can invest in a wide range of mutual fund schemes, suiting their investment horizon, and risk appetite. One such investment option is the Exchange Traded Funds which is populary know as ETFs. Equity ETFs tracks an underlying equity index and the main difference between traditional mutual fund schemes and ETF is, ETFs can be traded on the stock exchange. 

Public Provident Fund (PPF) has traditionally been one of the preferred investment options to save taxes, as it provides fixed returns through interest income and aims to cater to long-term investment needs. Hence, it suited the preferences of conservative investors looking for assured returns. However, with the evolution of financial markets, increasing awareness of financial planning, and the availability of newer options, investors are exploring choices beyond PPF.

Mutual funds have continued to be preferred by the retail investors with sustained SIP inflows during recent times. Investors may choose from a vast universe of mutual funds, which may be primarily classified into five major categories – equity funds, debt funds, hybrid funds, solution-oriented schemes, and other funds. Different types of mutual fund schemes tend to suit investors with different variants of risk profile, investment horizon, financial goals, etc.

When it comes to investing in mutual funds, data suggests that investors are highly inclined to invest in equity funds. As per the quarterly data for July - September 2022, about 9.2 crore folios featured equity schemes across the mutual fund industry, with the total Assets Under Management (AUM) of ₹14.64 lakh crores. In comparison, the number of folios in debt-oriented schemes stood at around 72 lakh. (Source: AMFI)

Index funds are a type of funds, which aim to replicate a particular index. The fund manager does not have any individual discretion to make changes in the portfolio changes, and the portfolio can be changed only to align it with the changes in the underlying index. 

Planning for the child’s career is often one of the significant financial goals for parents. It is generally conceived that one should start planning for their child’s education at an early stage. A prudent planning and investment strategy from an early stage often helps the parents to provide a broader range of education options. 

New Fund Offer (NFO) refers to the new mutual fund schemes being offered to the investors. This is akin to Initial Public Offering (IPO) made by the unlisted companies for their equity shares, wherein the companies offer shares to the public for the first time. NFOs aim to attract household savings by offering new mutual fund schemes to the investors. 

A Systematic Investment Plan (SIP) is an investment option for investors to invest in mutual funds periodically. Once a SIP is registered, the investment amount is automatically deducted from the bank account on the specified date and invested in mutual funds. This allows investors to make consistent investments towards their financial goals. 

SEBI (Securities and Exchange Board of India) guidelines classify the stocks into large-caps, mid-caps, and small caps based on the market capitalisation of listed companies. The top 100 companies are termed as large-cap companies. In contrast, the companies with the ranking from 101 to 250 are classified as mid-cap companies. The companies featuring beyond that are classified as small-cap companies.

While retirement planning is often discussed, not many take it seriously. Since the post-retirement phase generally does not have regular cash flows, it is crucial for the investors that their financial plans consider all the eventualities. It is also essential that investors have enough investment corpus to maintain their lifestyle and take care of medical expenses post-retirement.