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In this policy, the investment risk in the investment portfolio is borne by the policyholder.
Kotak e-Invest
Features
Ref. No. KLI/22-23/E-BB/492
Mutual funds are investment tools that pool or collect money from numerous investors to invest in a diversified portfolio of securities, such as stocks, bonds, or other assets. This diversification strategy helps to mitigate investment risk and potentially enhance returns. These funds are managed by professional fund managers who conduct in-depth research and make investment decisions on behalf of the investors.
The mutual fund concept is not something new for investors. As per mutual fund definition, mutual funds represent an investment tool that pools funds from various investors to create a diversified portfolio of assets. This pooled money is then invested in various securities like stocks, bonds, or other assets. In return for their investment, investors receive units of the mutual fund. Professional fund managers expertly manage the pooled funds and the resulting investments. These managers employ their expertise to make investment decisions aligned with the fund’s objectives and strategies.
Some of the common types of mutual funds are debt, equity, bond funds, or market funds. You can choose the investment of your choice and start your investment journey.
For a more detailed understanding of mutual fund meaning, let us see this example: Imagine you’re hosting a party and want to provide a variety of snacks. The total cost of the snacks is ₹100. You and three friends each contribute ₹25, pooling your resources to buy a diverse selection of chips, drinks, and other treats. You then divide the snacks equally among yourselves. This collaborative effort to purchase and share snacks mirrors how a mutual fund functions. Investors pool their money to invest in a diversified portfolio of securities, benefiting from professional management and shared ownership of the investments.
In India, mutual funds come in various types, each categorized by the asset class they invest in, their structure, risks, and benefits. Investors can invest in mutual funds through a Systematic Investment Plan (SIP) or by making a lump sum investment.
Professional fund managers, supported by a team of skilled researchers, oversee the pooled money from investors. They allocate investments across different asset classes based on their expertise to achieve the fund’s objectives. Investors receive their share of the mutual fund in the form of units, and any returns generated by the fund are distributed among investors according to their investments.
Mutual fund investments fall into two categories: actively managed funds and passively managed funds. In actively managed funds, the fund manager conducts market research and adjusts the fund’s portfolio based on their analysis. Conversely, passively managed funds seek to replicate the performance of a stock market index or benchmark.
Let us see how mutual funds work, starting from the launch of a mutual fund scheme to investing in and redeeming mutual funds.
An asset management company (AMC) initiates a first-time subscription offer for a new mutual fund scheme, a New Fund Offer (NFO). Through the NFO, the fund house raises capital from the public and then invests in securities such as shares, bonds, etc., using the fund’s strategy. NFOs have a limited subscription period, after which investors can only purchase units of the fund.
Mutual funds gather money from many investors, each contributing small amounts. This pooled investment allows investors to access diversified portfolios of securities.
The performance of a mutual fund scheme is evaluated based on its Net Asset Value (NAV), which represents the market value of all securities held by the scheme. NAV fluctuates daily in line with changes in the market value of securities. Returns generated by mutual fund schemes are distributed among investors or reinvested into the fund. In dividend-paying mutual fund schemes, returns are distributed to investors as dividends.
Investors have the option to sell or redeem their mutual fund investments. To facilitate this, the fund manager utilizes the portfolio’s cash balance to fulfill redemption requests from investors.
Mutual funds have become a foundation of modern investment portfolios, which benefit you as an investor from different backgrounds and experience levels. Mutual funds take funds from different investors to invest in a diversified portfolio of stocks, bonds, or other securities. Let us take a look at the benefits of mutual fund investments:
Unlike conventional investment options like fixed deposits, mutual fund schemes provide liquidity. As a result, one can redeem their units quickly at any point in time. However, an appropriate penalty or exit load is applicable on the withdrawal.
Most people hesitate to invest due to the instability created by market fluctuations and volatility. However, putting all your eggs in one basket is never wise. Mutual funds are generally diversified in various securities depending on your plans and terms to minimize the risks of losses.
Experts manage mutual funds with a deep understanding and thorough market knowledge. They know where to put your money for the safest and maximum outcomes. In addition, fund managers take care of timely exits and new investments.
Investors have enormous flexibility regarding their investments, even when investing a comparatively low amount. One can invest monthly or quarterly using the Systematic Investment Plan (SIP) at convenience. Mutual funds can be easily traded in a brief period when needed. The excellent combination of low cost and ease of use makes mutual funds accessible. You can begin investing from anywhere in the world through brokerage firms, Asset Management Companies (AMC), or online investing platforms.
Your financial advisors review the statistics, financial statements, and other crucial understanding of the company before investing so that you can rest assured. In addition, however, you can track the performance of your funds using regular Net Asset Value (NAV) updates and monthly fund factsheets.
You can avail of tax benefits under Section 80C of the Income Tax Act for investments in Equity Linked Saving Schemes or ELSS. This is because the government wants its citizens to be financially secure and encourages the investment culture, following which these tax benefits are provided not only on the amount invested but also on the amount earned as mutual funds returns. This is a win-win for the investor, where your money sits in mutual funds, makes profits, and saves you taxes.
To know how much you can expect to earn from your mutual funds, you can use various formulas in various scenarios. Let us take a look at these different methods of calculating mutual fund returns:
Here are some of the key methods to calculate mutual fund returns:
Absolute Return= (Current NAV - Beginning NAV) / Beginning NAV * 100
Where,
Current NAV: The fund’s current Net Asset Value (market value per unit).
Beginning NAV: The fund’s NAV at the start of the investment period.
SAR= (1 + Absolute Return)^(365/Number of Days) - 1
Where,
SAR= Simple Annualized Return
CAGR= (Ending Value / Beginning Value)^(1/Number of Years) - 1
XIRR formula= XIRR (value, dates, guess)
When it comes to investing in mutual funds, there are two popular modes you can invest through:
Investing a lump sum in a mutual fund involves putting in a significant amount of money all at once. This approach can be ideal if you have a substantial amount of cash on hand, such as from a bonus, inheritance, or savings. It allows you to potentially benefit from market gains immediately but also exposes you to the risk of market volatility.
A Systematic Investment Plan (SIP) allows you to invest a fixed amount of money at regular intervals, such as monthly or quarterly. SIPs are popular because they promote disciplined saving and investing, and they help reduce market timing risks by spreading your investments over time. This mode especially benefits those who prefer to start with smaller amounts and gradually build their investment portfolio.
Mutual funds are categorized based on various factors, including the asset class they invest in and the investment objectives they aim to achieve. Understanding the different types of mutual funds can help investors make informed decisions about their investment portfolios.
An asset class refers to a category of financial assets with similar characteristics and behaviours, such as stocks, bonds, real estate, or cash equivalents. Discover diverse Mutual Funds categorized by an asset class.
Equity Funds invest in shares of companies. For example, large-cap Equity Funds target well-established, large companies, while small-cap funds focus on smaller, high-growth businesses.
Debt Funds invest in bonds, providing a steady income. They include categories like Government Bond Funds and Corporate Bond Funds.
Money Market Funds invest in low-risk, short-term securities, such as Treasury bills and commercial paper.
Hybrid Funds blend stocks and bonds, like balanced funds, which aim for growth and stability in a single package.
These funds cater to specific financial objectives, offering diverse options to match the investors’ unique goals.
Growth Funds focus on capital appreciation by primarily investing in stocks of companies with high growth potential. They are suited for long-term investors seeking substantial returns.
They emphasize regular income generation by investing in bonds, fixed-income securities, or dividend-yielding stocks. They suit investors looking for a steady income stream.
Liquid Funds prioritize liquidity and safety by investing in short-term debt instruments. They are ideal for investors seeking quick access to funds with minimal risk.
Tax-saving funds, or ELSS, offer tax benefits under Section 80C. They invest primarily in equities and serve as a tax-efficient investment option.
Aggressive Growth Funds target substantial capital appreciation and are willing to accept higher market risks. They suit investors with a long-term horizon and a risk-taking approach.
Capital Protection Funds focus on safeguarding the principal amount while generating modest returns. They are ideal for risk-averse investors looking to protect their investments.
Maturity Funds have a predetermined maturity date, providing investors with a clear investment horizon. They are suited for those looking for fixed returns and minimal interest rate risk.
Pension Funds aim to create a corpus for retirement by investing in various assets. They cater to individuals planning for a secure financial future after retirement.
The main objective of investing in mutual funds is to minimize risk while maximizing returns. Some other objectives of mutual fund investing are:
Mutual funds invest in a basket of securities (stocks, bonds, etc.) across different sectors and asset classes. This diversification helps spread investment risk, reducing the impact of poor performance by any single security.
Most mutual funds offer investors the ability to redeem their investments relatively easily, providing liquidity and flexibility.
Many mutual funds aim to increase the value of the investments over time. This is often the primary goal of equity-focused funds.
Some funds prioritize generating regular income for investors. This is common with bond funds and certain equity funds that focus on dividend-paying stocks.
Some mutual funds, such as Equity-Linked Savings Schemes (ELSS), offer tax deductions under Section 80C of the Income Tax Act. This reduces your taxable income.
Mutual funds offer an easy way to invest in a diversified portfolio. Imagine you invest ₹10,000. This amount gets added with investments from others. Professional fund managers then invest this combined capital across various companies’ stocks. In return, you receive units of the fund proportionate to your investment.
If the fund performs well, let’s say with a 10% return, your ₹10,000 would grow to ₹11,000. However, if the market declines and the fund experiences a 5% loss, your investment would decrease to ₹9,500. This is how the inherent market risk is associated with mutual funds.
Over time, the power of compounding can significantly enhance your returns. This means that the earnings generated by your initial investment are reinvested, leading to further growth.
When investing in mutual funds, it’s crucial to know the various fees that may apply. These charges can significantly impact your overall returns, so understanding them is essential for making informed investment decisions. Some key mutual fund fees are:
It is important to note that SEBI abolished entry loads in 2009 in India, eliminating a significant upfront cost for investors. By carefully considering these fees and choosing funds with lower costs, you can optimize your investment returns and maximize the potential for long-term growth.
It is always important to see both sides of the coin before investing. Here are some pros and cons of mutual fund investing:
Pros of Mutual Fund Investing
Cons of Mutual Fund Investing
Investing in mutual funds can be an excellent decision for long-term wealth generation. If you want to invest in mutual funds, follow these steps:
Earnings from mutual funds are calculated based on the Net Asset Value (NAV) of the fund. Let us see how it works:
The NAV represents the per-share value of the mutual fund and is calculated by dividing the total value of the fund’s assets minus liabilities by the total number of outstanding shares.
If the NAV of the mutual fund increases, your investment grows. For example, if you bought shares at an NAV of ₹100 and the NAV rises to ₹20, you’ve gained ₹20 per share.
Mutual funds may distribute earnings in the form of dividends (from interest or dividends earned by the fund’s assets) or capital gains (from the sale of securities). These distributions can be received as cash or reinvested in additional fund shares.
The total returns of a mutual fund include capital appreciation (increase in NAV) plus any dividends or capital gains distributions received.
The tax implications of mutual funds refer to how the Indian government taxes the earnings you generate from mutual funds. Let us take a look at the tax implications of mutual funds:
Investing in mutual funds is an excellent choice as you can put your money to work and grow wealth with even novice market knowledge. Also, as experts manage the funds, you do not have to worry about understanding mutual funds and the financial market. In addition, you are provided transparency, liquidity, the lowest lock-in period, and tax benefits with the mutual funds.
1
Mutual fund returns are generated through capital gains and dividend income. Capital gains occur when the value of the fund’s investments appreciates, while dividend income is earned from dividends paid by the underlying securities held within the fund’s portfolio.
2
Mutual funds come in various types, including equity, bond, money market, index, sector, and balanced funds. Each type of mutual fund has its own investment objectives, risks, and potential returns.
3
Actively managed mutual funds are overseen by fund managers who make investment decisions based on market research and analysis. In contrast, passively managed mutual funds seek to replicate the performance of a specific index or benchmark and typically have lower management fees.
4
Investors can invest in mutual funds through a Systematic Investment Plan (SIP), which involves investing a fixed amount regularly or via the lump sum route, where investors invest a single large amount at once. They can purchase mutual fund shares directly from the fund company or through a financial advisor or broker.
5
Yes, you can withdraw money from an open-ended mutual fund anytime. However, withdrawals might be subject to exit loads and tax implications.
6
Yes, you can invest as little as ₹100 in some mutual funds through Systematic Investment Plans (SIPs), depending on the fund’s minimum investment requirements.
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
In this policy, the investment risk in the investment portfolio is borne by the policyholder.
Kotak e-Invest
Features
Ref. No. KLI/22-23/E-BB/521
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
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