Tag: Mutual Fund

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A Beginner’s Guide to Mutual Fund Investments

mutual fund invesmtents india | marketfeed

Legendary investor Warren Buffett’s famous quote, “Be fearful when others are greedy and be greedy when others are fearful,” often resonates in investing. This philosophy highlights the importance of investing wisely, especially when others are uncertain or scared. The Indian mutual fund market has seen an impressive surge in retail investments, with a net inflow of ₹41,877 crores in October alone (up 22% month-on-month), despite the stock market witnessing a significant drop of over 6%. This spike in mutual fund investments shows growing confidence among Indian retail investors, who are taking advantage of market volatility.

In this article, we will explore mutual funds, the different types of mutual funds, and key metrics you should consider before investing in them. By the end of this guide, you will have a better understanding of how to approach mutual fund investments and make informed decisions.

What are Mutual Funds?

A mutual fund is a pool of money collected from various investors to invest in a diversified portfolio of securities like stocks, bonds, and other financial instruments. Instead of investing directly in individual stocks, investors contribute money to a mutual fund, which is then managed by professionals. The aim is to generate returns for the investors, who receive profits based on the performance of the fund. In India, mutual funds are run by reputed financial players like SBI, HDFC, UTI AMC, etc.

The Securities and Exchange Board of India (SEBI) tightly regulates mutual funds to protect investors, making them a trustworthy option despite inherent market risks.

Understanding Mutual Fund Categories

1. Equity Mutual Funds:

These funds invest primarily in stocks/equities (like Reliance, HDFC Bank, etc). This category is popular among retail investors who seek higher returns over the long term. The returns can be substantial when the market performs well. However, they come with higher risk, as the stock market can be volatile.

2. Debt or Liquid Mutual Funds:

These funds invest in fixed-income securities such as corporate bonds, government bonds, and money market instruments. Debt mutual funds are typically safer than equity funds and are a popular choice among investors who want to park their surplus cash. These funds generally provide stable but lower returns compared to equity funds, making them suitable for conservative investors.

3. Balanced or Hybrid Funds:

Balanced funds invest in a combination of equities, bonds, and sometimes commodities like gold. These funds aim to provide the best of both worlds: growth potential from equities and stability from debt instruments.

While balanced funds can be a good option for beginners, investors looking for higher returns may prefer to focus more on equity funds once they understand the basics of investing.

How to Invest in Different Mutual Funds?

  • Long-term goals (e.g., buying a house): High equity allocation for better returns over decades.
  • Short-term goals (e.g., a foreign trip): Focus on debt funds for stability.
  • Balanced Funds: For beginners with no specific goals, offering simplicity and diversity.

Thumb Rule:

  • Long-term = higher equity allocation.
  • Short-term/emergency = higher debt allocation.

Active vs Passive Mutual Funds

Mutual funds can be broadly categorized into two types based on their investment approach: active mutual funds and passive mutual funds. Here’s a breakdown:

1. Active Mutual Funds

Active mutual funds are managed by professional fund managers who actively make decisions about which stocks or securities to buy, hold, or sell. Their goal is to outperform a specific benchmark or index by leveraging market insights, research, and expertise.

Example: A large-cap equity fund aiming to outperform the Nifty50 Index.

2. Passive Mutual Funds

Passive mutual funds, often called index funds or exchange-traded funds (ETFs), aim to replicate the performance of a specific market index rather than beat it. They invest in the same securities in the same proportions as the underlying index.

Example: An index fund that tracks the Nifty50 or Sensex.

How to Choose an Active Mutual Fund?

When investing in mutual funds, it’s crucial to assess key factors that determine the fund’s performance. Here are five key ratios and metrics that will help you choose the best mutual fund:

1. Rolling Returns: This metric measures the fund’s performance over different periods, helping you understand its consistency. Look for funds with strong rolling returns over 3 years, ideally 30% or more.

2. Alpha: Alpha represents the percentage by which the fund outperforms its benchmark index. A positive alpha indicates that the fund manager is adding value by selecting the right stocks. Look for funds with an alpha of at least 2%, meaning the fund is outperforming its benchmark by this margin.

3. Sharpe Ratio: This ratio measures the risk-adjusted returns of a fund. It compares the return of the fund with the risk-free return (such as government bonds). A Sharpe ratio of more than 1 is considered good because it means the fund is delivering decent returns for the level of risk taken.

4. Assets Under Management (AUM): AUM refers to the total market value of the assets managed by the fund. A higher AUM can indicate a stable, trusted fund with significant investor interest. However, a very high AUM may affect the fund’s ability to generate returns, especially in smaller-cap stocks.

5. Percentage Away from All-Time High: This metric indicates how much the fund has fallen from its peak. While investing in a fund that has recently dipped might seem like a good deal, it’s essential to evaluate the reasons behind the drop. Look for funds that have a reasonable distance from their all-time high and aren’t in a downtrend due to poor management or strategy.

    Practical Application: Using Screening Tools

    To simplify the process of selecting mutual funds, investors can use online tools like TickerTape. TickerTape allows you to filter mutual funds based on the above metrics, helping you narrow down your choices. You can analyze funds in different categories (like small-cap, mid-cap, or large-cap) and make informed decisions based on their performance metrics.

    For example, if you’re looking for a small-cap mutual fund, you can apply the following filters:

    • Rolling returns of at least 30% over 3 years
    • Alpha greater than 2%
    • Sharpe ratio of more than 1
    • AUM above 5,000 crores

    By using these parameters, you can shortlist funds that meet your investment objectives and risk profile.

    Check out the filtered Google Sheet of mutual funds derived from the formula given above: https://marketfeed.me/mutualfundlist

    Conclusion

    Mutual fund investing can be a smart way to build wealth over time, especially for those who are new to the stock market. By understanding the different types of mutual funds and applying key metrics like rolling returns, alpha, and Sharpe ratio, you can make informed decisions and build a diversified portfolio. Remember to tailor your investments to your financial goals—whether it’s a long-term objective like retirement or a short-term goal like funding a vacation.

    The Indian mutual fund market is growing rapidly, and by making the right choices, you can benefit from the wealth of opportunities available. Always do thorough research and, if necessary, consult a financial advisor to ensure your investments align with your goals and risk tolerance.

    Disclaimer: Mutual fund investments are subject to market risks. Please do your own research or talk to a registered investment advisor/profession before investing in mutual funds.

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    5 Critical Mistakes SIP Investors Must Avoid

    sip investors | marketfeed

    Investing through Systematic Investment Plans (SIPs) can be a powerful way to grow your wealth over time. However, many investors unknowingly make mistakes that can severely limit their returns. These mistakes often allow brokers or banks to benefit at your expense, leaving you with lower profits than expected. In this article, we’ll explore five common mistakes SIP investors make and how to avoid them. Learn how to maximise your profits and safeguard your financial future!

    1. Choosing Regular Mutual Funds Over Direct Mutual Funds

    One of the most common mistakes investors make is not understanding the difference between regular and direct mutual funds. Regular mutual funds involve a middleman—often an agent or broker—who takes a commission on your investments. This commission can range from 1% to 1.5% or even higher, depending on the mutual fund scheme. Over time, this seemingly small percentage can have a massive impact on your returns.

    For example, if you invest ₹10,000 every month in a regular mutual fund with a CAGR (Compound Annual Growth Rate) of 22.8%, your returns after 20 years could amount to ₹4.63 crores. However, if you had chosen a direct mutual fund with a slightly higher CAGR of 24.6%, your returns would have increased to ₹6.33 crores— a difference of ₹2 crores!

    Solution: Always opt for direct mutual funds when possible. You can easily switch from regular to direct funds by stopping your regular SIPs and starting new ones with direct funds. While there may be a small tax implication, the long-term benefits are worth it.

    How to Identify Regular and Direct Mutual Funds?

    When investing, look for clear indicators on the mutual fund’s platform. Most reputable mutual fund houses will display both regular and direct options. If you’re approached by a bank or broker, they will likely recommend regular funds. If you prefer to manage your investments independently, opt for direct mutual funds to enhance your returns.

    2. Selecting IDCW Mutual Funds Instead of Growth Plans

    Another common mistake is choosing Income Distribution cum Capital Withdrawal (IDCW) mutual funds instead of Growth Plans. IDCW funds distribute dividends to investors, which might seem attractive for those seeking regular income. However, this option can hinder the compounding benefits of your investment, ultimately reducing your long-term returns. In contrast, growth mutual funds reinvest profits back into the fund, allowing your investment to compound over time.

    For instance, an HDFC Flexi Cap mutual fund with an IDCW option might yield a 12% CAGR, whereas the same fund with a growth option could yield over 23% CAGR. The difference in returns can be substantial over time. Moreover, the taxation on IDCW could further reduce your net gains.

    Solution: Always choose the growth option if your goal is long-term wealth creation. This allows your returns to compound within the fund, leading to higher gains over time.

    3. Lack of Diversification: Investing Solely in Small-Cap Funds

    Diversification is a fundamental principle of investing that many SIP investors overlook. Investors often get swayed by the impressive returns of small-cap funds, leading them to allocate all their investments into these high-risk funds.

    While small-cap funds may have outperformed the market recently, they can also be highly volatile. Investing all your money in small caps without diversifying into large-cap or mid-cap funds exposes you to increased risk. During market downturns, small-cap funds often underperform, which can lead to significant losses.

    Solution: Diversify your investments across large-cap, mid-cap, small-cap, and flexi-cap funds. You can also consider a portfolio that includes various asset classes, such as gold and debt instruments. For example, gold often performs well during market crashes. This provides a safety net that can be leveraged when equity investments decline in value. This strategy allows you to capitalise on different market conditions and helps mitigate risks.

    Identifying Overlap in Mutual Funds

    Even when diversifying, it’s crucial to ensure that your funds are not investing in the same underlying stocks. Use platforms to check the fund’s holdings and understand their investment philosophy. If multiple funds have significant overlaps in their holdings, it reduces the effectiveness of your diversification strategy.

    4. Not Having an Emergency Fund

    Investing in SIPs without first establishing an emergency fund is a mistake that can jeopardise your financial goals. Life is unpredictable, and an unexpected event, such as job loss or a medical emergency, could force you to sell or liquidate your SIP investments prematurely. This could result in losses, as you may need to sell your holdings during a market downturn.

    Solution: Before starting any long-term investments, ensure you have an emergency fund in place. This fund should be easily accessible and sufficient to cover at least six months of living expenses. You can keep this fund in a high-interest savings account or a liquid mutual fund.

    5. Ignoring Health and Term Insurance

    Many individuals are eager to grow their wealth through SIPs but overlook the importance of protecting themselves and their families against unforeseen events. Health emergencies can arise at any time. Without proper insurance, you may be forced to dip into your investments to cover medical expenses.

    For instance, let’s say you’ve been investing ₹10,000 monthly in SIPs, targeting ₹6.33 crores over 20 years. However, a health emergency after five years forces you to withdraw from your SIPs, leaving you with only ₹11.8 lakhs—far below your goal.

    Solution: Ensure you have a comprehensive health insurance plan and a term insurance policy before committing to long-term SIP investments. If you have limited funds, it’s better to reduce your SIP contributions to allocate some funds towards insurance premiums. This safety net will protect your investments and help you stay on track to achieve your financial goals.

    Conclusion

    Investing in SIPs can be a rewarding strategy for wealth accumulation, but it’s essential to avoid common mistakes that can undermine your efforts. By understanding the differences between regular and direct mutual funds, choosing the right fund type, diversifying your investments, establishing an emergency fund, and securing adequate insurance, you can enhance your investment outcomes significantly.

    Take the time to review your current investment strategy and make necessary adjustments to avoid these mistakes. By doing so, you will not only protect your wealth but also maximise your potential returns over the long term. Start today by addressing these critical areas and watch your investments flourish!

    Watch the full video on marketfeed’s YouTube channel: SIP Mistakes to Avoid in 2024 | marketfeed

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    Who are Domestic Institutional Investors (DIIs)?

    Domestic Institutional Investors or DIIs are key players in the Indian stock market. These financial institutions, ranging from mutual funds to insurance companies and pension funds, have significant influence over the stock market. In this article, we explain who these institutional investors are and the different types of DIIs. We will also discuss the role of DIIs in the Indian stock market.

    Who are Domestic Institutional Investors?

    DIIs are large institutions based in India such as mutual funds, insurance companies, pension funds, and banks & other financial institutions. They pool money from different sources to invest in various securities. For example, an insurance company invests the premiums collected from its policyholders on different assets. Life Insurance Corporation (LIC) is an insurance company that is a DII.

     Since these organisations invest people’s money, they have a fiduciary relationship with their investors. DIIs perform due diligence while making investment decisions. They don’t invest in stocks and other securities that are unsafe. Therefore, a DIIs investment in a company shows its conviction in that company’s future prospects.

    Analysing the shareholding pattern of DIIs in companies is a part of fundamental analysis. If these institutional investors hold a significant stake in a company, it is a positive sign. Furthermore, the investment trend in these companies also says a lot about it. A decrease in the shareholding over months or years means they are selling their investment in the company. This either means that the company has limited upside potential or the risk has increased.

    Types of Domestic Institutional Investors:

    Below are a few of the different types of Domestic Institutional Investors:

    Mutual Funds

    A mutual fund takes money (investments) from different individuals and entities who have a common investment objective. This pooled sum of money is managed by a professional fund manager, who invests in securities and assets to generate returns for investors. Investors buy units in the mutual fund. A unit represents proportional ownership. Experienced professionals manage the funds and make investment decisions on behalf of the investors.

    According to the risk appetite of the investment scheme, they broadly invest in equity (comparatively riskier), gold, and fixed-income securities (bonds, debts).

    Let us look at the top mutual fund houses in India by Assets Under Management (AUM). AUM refers to the total market value of the investments made by a fund house:

    Fund HouseAUM
    SBI Mutual Fund₹7.1 lakh crore
    ICICI Prudential Mutual Fund₹5.1 lakh crore
    HDFC Mutual Fund₹4.37 lakh crore
    Nippon India Mutual Fund₹2.87 lakh crore
    Kotak Mahindra Mutual Fund₹2.84 lakh crore
    (As of March 2023)

    Insurance Companies

    An insurance policy is an agreement between the insuree (customer) and the insurer (insurance company). According to this contract, the insured person has to pay regular premiums to the insurance company.  There are multiple insurance options from life insurance to health, automobile, electronics, etc. In case of any claim by the insuree, the company will provide them with a lump sum amount within the policy limit. In order to hedge this risk, the insurance company pools in the premiums collected from clients and invest in various financial instruments.

    Life Insurance Corporation of India (LIC) has a massive 50%+ market share in the life insurance segment. It is one of the largest DIIs in India.

    InsurerAUM
    LIC₹43.97 lakh crore
    SBI Life₹3.07 lakh crore
    ICICI Prudential Life₹2.6 lakh crore
    HDFC Life₹2.5 lakh crore
    Max Life₹1.06 lakh crore
    (As of March 2023)

    Pension Funds

    Pension schemes are offered to citizens to create a hassle-free retirement life with a sufficient corpus. An individual pays a fixed amount during their working life and will receive a monthly pension post-retirement.

    Since these schemes are market-linked products, a fund manager will pool money and invest in multiple financial assets.

    National Pension Scheme (NPS),  Public Provident Fund (PPF), and Employees Provident Fund Organisation (EPFO) are some of the pension funds.

    Banks & Other Financial Institutions

    Banks and Non-Banking Financial Institutions (NBFCs) also participate in investments for their long-term goals. They primarily invest in government securities and corporate bonds as they are low-risk, fixed-return investment vehicles.

    Difference Between DIIs and FIIs

    Foreign institutional investors (FIIs) are those investors or funds who make investments in assets located in nations other than their own. FIIs can include hedge funds, insurance companies, pension funds, investment banks, and mutual funds of foreign countries and can aid in the growth of our economy. FIIs are also known as Foreign Portfolio Investors or FPIs.

    All FIIs in India must register with the Securities and Exchange Board of India (SEBI) to participate in the market. To learn more about FII’s, click here!

    The differences between FIIs and DIIs are:

    FIIsDIIs
    FIIs are not residents of the country they invest in.DIIs reside in the country in which they invest in.
    FIIs can only invest up to 24% of the entire paid-in capital of the company.DII ownership is not subject to such restrictions. 
    FIIs own around 21% of the companies that comprise the Nifty 500.DIIs own approximately 14% of all shares in the Nifty 500 companies.
    FIIs generally invest with a short to medium-term horizon in mindDIIs generally make long-term investments
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    Multi-Cap Funds in Danger?

    sebi

    On Sept 11, 2020, the Securities and Exchange Board of India(SEBI) released a crucial circular regarding the asset allocation in Multi-Cap mutual funds. Summary of the circular is as follows:

    • All Multi-Cap funds will allocate at least 75% of the funds to Equity as compared to the earlier 65%.
    • Out of the amount set for Equities, a minimum of 25% each shall be allotted to Large Cap, Mid Cap and Small Cap each, respectively. The was no such limit set earlier on the allocation within equities in Multi-Cap funds.
    • All the existing Multi-Cap Funds shall ensure compliance with the above provisions within one month from the date of publishing the next list of stocks by AMFI, i.e January 2021.

      AMFI or Association of Mutual Funds in India releases a list every 6 months on which stocks are Large Cap, Mid Cap and Small Cap.

    Why did SEBI do so?

    • Large-cap funds required a minimum 80% in large-cap stocks, Mid-cap fund required minimum 65% in mid-cap stocks, Small-cap fund required minimum 65% in small-cap stocks. There was no such requirement for Multi Cap funds, except that they needed to invest 65% in Equity stocks.

      A Multi-Cap fund is one that can invest in all segments by market capitalization i.e. Large Cap, Mid Cap and Small Cap. There was no obligation earlier as to where a Multi Cap fund could invest.

      Taking advantage of this, fund manager across India would allocate most of their funds to well-performing large-cap stocks as this would reduce the risk involved and ensure steady returns. They also had the flexibility to invest in well-performing Mid Cap and Small Cap stocks.

      This made the funds, lesser “Multi-Cap” in nature and more of large cap in nature causing a skewed allocation of funds.
    Name AUM(Rs. Cr) Large Cap Mid  Cap Small-Cap
    Kotak Standard Multicap Fund 29,965.94 72% 28% 0%
    HDFC Equity 19,381.37 83% 13% 4%
    Motilal Oswal Multicap 35 Fund 11,427.26 87% 9% 5%
    UTI Equity 11,144.25 64% 31% 5%
    Aditya Birla Sun Life Equity 10,884.43 67% 26% 7%
    SBI Magnum MultiCap 8,991.12 73% 20% 7%
    Franklin India Equity Fund 8,375.15 76% 17% 7%
    Average Investment   75% 21% 4%

    The table above shows a list of Top 7 Multi-Cap mutual funds sorted by AUM(Asset Under Management). As seen in the table above it is clear that most mutual funds have allotted more than 50% of their funds in Large Cap stocks. This, if not completely, substantially makes the fund, a Large-Cap fund. This is why SEBI set a floor for the amount invested in each segment.

    SEBI’s new regulation where it allots 25% per cent each to Large Cap, Mid Cap and Small Cap shall leave the other 25% at the fund manager’s discretion.

    New Structure as Proposed By SEBI for Multi Cap Funds

    How Will This Impact The Market?

    It is clear now that there will be a divestment in Large cap Stocks. There will be an investment spree in Small Cap and Mid Cap stocks as well, but will this affect market rates much? Let us find out.

    • According to AMFI, the total Asset Under Management for Multi-Cap Funds is Rs 145,907.04 Crores. Out of this Rs 145,907.04 Crores, there will be a divestment of almost Rs 34,000 Crores-Rs 36,000 Crores which is almost 23-25%, in Large Cap stocks.
    • The amount taken out from Large Cap stocks will be invested in Mid-Cap and Small-Cap stocks. However, this shall happen over a period of 3-4 months and should be a gradual process instead of a sudden one.
    • The investment in Mid Cap stocks by Multi-Cap funds will increase by ~4%(nearly Rs.5800 Crores). Moreover, investment in Small Cap stocks by Multi-Cap funds will increase by ~21%(nearly Rs. 29000 Crores).

    What does it mean for a retail investor or a mutual fund holder?

    SEBI released another circular on 13th September which clarified a lot of speculations. In fact, AMFI welcomed the step and fund managers took on to Twitter to calm investors.

    All the points listed above might not happen at all. There is a high probability that mutual fund houses might decide to merge their current Multi-Cap Mutual Funds with other Large Cap Funds or Large Cum Multi-Cap. There is also an option given by SEBI to convert these multi-cap funds to large-cap funds or any of their choice.
    Fund houses can also give you an option to move your funds to a fund of your choice.

    The amount of outflow in Large Cap funds is about 4-5% of total AUM of Equity Mutual Funds. So impact on market might be significant but not large in magnitude.

    To ensure that there is no haphazard in terms of market stability, this transition shall be a gradual process, which will avoid major fluctuations in mutual funds and stock prices. This will also give a time of 3-4 Months to mutual fund houses to figure out and plan the next course of action so there is no need for panic across the board.

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    What are Open-Ended and Closed-Ended Funds?

    What are Open-ended Funds?

    Open-ended funds are the funds in which an investor can redeem their investment at any time he wants. Thus, the main characteristic of the fund is its liquid nature. Most of the investors want to invest in this type of fund. Open-ended funds form the biggest part of the mutual fund market. There are no limits on the number of units which can be issued.

    These open-ended mutual fund units are bought and sold at their Net Asset Value or NAV. These funds are more suitable for investors who have less or no knowledge of the markets. An open-ended mutual fund’s NAV varies according to the performance of securities and its distribution inside a fund. Hence, they are prone to market risks and are highly volatile.

    Top 5 Open-Ended Mutual Funds in India 2023

    Fund Name5 Year Return
    SBI Small Cap Fund25.1%
    Mirae Asset Emerging Bluechip Fund21.19%
    Motilal Oswal NASDAQ 100 Exchange Traded Fund22.04%
    Aditya Birla Sun Life Banking & Financial Services Fund15.04%
    ICICI Prudential Banking & Financial Services Fund13.93%
    (Figures as of December 19, 2023)

    What are Closed-Ended Funds?

    Closed-ended funds are the funds which issue a fixed number of fund units. Unlike, open-ended funds, the investors can redeem their units only when the fund matures. Investors cannot purchase or redeem units of this type of fund once the NFO (New Fund Offer) has expired. Similarly to stocks, these funds are traded in the market.

    Just like a stock is launched via an IPO, a new fund is launched via an NFO. Thus, these closed-ended funds can be liquidated only as per the fund norms and not as per the investor’s wish. As the investments are rigid, it gives more space to the portfolio managers to get a stable base of assets.

    Top 5 Closed-Ended Mutual Funds in India 2023

    Fund Name5 Year Return
    Quant Tax Plan Direct Growth30.36%
    Bandhan ELSS Tax Saver Fund Direct Plan Growth20.52%
    Parag Parikh ELSS Tax Saver Fund Direct Growth24.67%
    Kotak ELSS Tax Saver Fund Direct Growth19.18%
    SBI Long Term Equity Fund Direct Plan Growth19.84%
    (Figures as of December 2023)
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    Exchange-Traded Funds: What are they?

    Exchange-Traded Funds or ETFs are listed and traded on exchanges like stocks. It is a fund that pools the financial resources of several people and uses it to purchase shares, bonds, derivatives, etc. The trading value of an ETF is based on the net asset value (NAV) of the stocks that are present in the fund. Thus, an Exchange-Traded Fund is said to have qualities of both shares and mutual funds.

    One of the main benefits of ETF is diversification. When an investor invests in a stock, he does not have a space to limit his risk. If the company fails to perform, the investor will make losses. Now, an ETF helps you to keep your finances spread over the equities of different companies. If one of the stocks performs poorly, other stocks might act to limit the risk exposure by performing well. If other assets perform exceptionally well, an investor would still be earning profits.

    Exchange-Traded Funds vs Mutual Funds

    Exchange-Traded FundsMutual Funds
    Market orders can be placedMarket orders cannot be placed
    Traded intra-day like stocksTraded at the end of the day
    Generally, a lower expense ratio than
    mutual funds    		Generally, a higher expense ratio when
    compared to ETFs

    Common types of ETFs

    Gold ETF – Gold is a commodity. This makes the ETF a commodity ETF. A gold ETF is based on gold prices and it invests in gold bullion. Purchasing shares in this ETF makes you a virtual owner of gold.

    Equity ETF – As the names suggest, these ETFs invest in the shares of different companies to earn interest and reduce risk exposure.

    Currency ETF – The main objective of a currency ETF is to reduce the exposure to foreign exchange (forex) currencies.