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Mutual Fund Investment

  • Overview
  • History
  • How to invest?
  • What is SIP?
  • Mutual Fund Products
  • Other links
What is Mutual Fund?

A mutual fund is a pool of money managed by a professional Fund Manager.

It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities. And the income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a scheme’s “Net Asset Value” or NAV. Simply put, the money pooled in by a large number of investors is what makes up a Mutual Fund.

Why do we need Mutual Fund?

Don’t just save but invest. Understand the difference between saving and investment. Spending less than earnings is saving but rising prices will mean that your saving will actually be reducing in value with time. An investment should not just match inflation but deliver something more thus becoming a second source of income. Mutual funds offer an array of innovative products like equity funds, debt funds, fund of funds, exchange-traded funds, fixed maturity plans, sectoral funds and many more. Whether the objective is financial gains or convenience, mutual funds offer many benefits to its investors.

Birthplace of Mutual Funds – USA

History in India:
  • 1964-1987 (Phase I) – Growth of Unit Trust of India (UTI)
  • 1987-1993 (Phase II) – Entry of Public Sector
  • 1993-1996 (Phase III) – Emergence of Private Funds
  • 1996-1999 (Phase IV) – Growth and SEBI (Securities and Exchange Board of India) Regulation
  • 1999-2004 (Phase V) – Emergence of large & uniform Industry
  • 2004 onwards (Phase VI) – Consolidation and growth

One could start investing in mutual funds with just Rs. 5,000 for a lump-sum/one-time investment with no upper limit and Rs. 1,000 towards subsequent/additional subscription in most of the mutual fund schemes. And for Equity linked Savings Schemes (ELSS), the minimum amount is as low as Rs. 500.
In fact, one could invest via Systematic Investment Plan (SIP) with as little as Rs. 500 per month for as long as one wishes to.

Systematic Investment Plan (SIP) is an investment plan (methodology) offered by mutual funds wherein one could invest a fixed amount in a mutual fund scheme periodically, at fixed intervals – say once a month, instead of making a lump-sum investment. The SIP instalment amount could be as little as Rs. 500 per month. SIP is similar to a recurring deposit where you deposit a small, fixed amount every month.

SIP is a very convenient method of investing in mutual funds through standing instructions to debit your bank account every month, without the hassle of having to write out a cheque each time. Some of the benefits of SIP are listed below.

  • Rupee cost averaging
  • The power of compounding
  • Starting early pays well

To get the best out of your investments, it is very important to invest for the long-term, which means that you should start investing early, in order to maximize the end returns.

There are wide variety of mutual fund schemes that cater to your needs, whatever your age, financial position, risk tolerance and return expectations. Before investing in mutual fund schemes; you should know which scheme suits your requirements.

Growth Schemes

Aim to provide capital appreciation over the medium to long term. These schemes normally invest a majority of their funds in equities and are willing to bear short-term decline in value for possible future appreciation.

Income Schemes

Aim to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.

Balanced Schemes

Aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest in both shares and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace or fall equally when the market falls.

Money Market/Liquid Schemes

Aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments such as treasury bills, certificates of deposit, commercial paper, and interbank call money. Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market.

Tax Saving Schemes (Equity Linked Saving Scheme - ELSS)

These schemes offer tax incentives to the investors under tax laws as prescribed from time to time and promote long term investments in equities through mutual funds. Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index. Sectoral fund schemes are ideal for investors who have already decided to invest in a particular sector or segment.

Fixed Maturity Plans

Fixed Maturity Plans (FMPs) are investment schemes floated by mutual funds and are close ended with a fixed tenure, the maturity period ranging from one month to three/five years. These plans are predominantly debt-oriented, while some of them may have a small equity component.

Exchange Traded Funds (ETFs)

Exchange Traded Funds are essentially index funds that are listed and traded on exchanges like stocks.

Capital Protection Oriented Schemes

Capital Protection Oriented Schemes are schemes that endeavour to protect the capital as the primary objective by investing in high quality fixed income securities and generate capital appreciation by investing in equity/equity related instruments as a secondary objective.

Gold Exchange Traded Funds (GETFs)

Gold Exchange Traded Funds offer investors an innovative, cost-efficient, and secure way to access the gold market. Gold ETFs are intended to offer investors a means of participating in the gold bullion market by buying and selling units on the Stock Exchanges, without taking physical delivery of gold.

Quantitative Funds

A quantitative fund is an investment fund that selects securities based on quantitative analysis. The managers of such funds build computer-based models to determine whether an investment is attractive. In a pure "quant shop" the final decision to buy or sell is made by the model. However, there is a middle ground where the fund manager will use human judgment in addition to a quantitative model.

Funds Investing Abroad

With the opening up of the Indian economy, mutual funds have been permitted to invest in foreign securities/American Depository Receipts (ADRs)/Global Depository Receipts (GDRs). Some of such schemes are dedicated funds for investment abroad while others invest partly in foreign securities and partly in domestic securities. While most such schemes invest in securities across the world there are also schemes which are country specific in their investment approach.

Fund of Funds (FOFs)

Fund of Funds are schemes that invest in other mutual fund schemes. The portfolio of these schemes comprises only of units of other mutual fund schemes and cash/money market securities/short term deposits pending deployment. Fund of Funds can be Sector specific e.g. Real Estate FOFs, Theme specific e.g. Equity FOFs, Objective specific e.g. Life Stages FOFs or Style specific e.g. Aggressive/Cautious FOFs etc.

Please bear in mind that any one scheme may not meet all your requirements for all time. You need to place your money judiciously in different schemes to be able to get the combination of growth, income and stability that is right for you. Remember, as always, higher the return you seek higher the risk you should be prepared to take.

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Frequently Asked Questions (FAQs)

  • Are mutual fund products available in Bank of Baroda?

    All the products are available with the Bank of Baroda. You can contact the branch manager in each branch or can call our toll-free number or visit our website.

  • Who regulates the mutual fund in India?

    All mutual funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of mutual funds are regularly monitored by SEBI.

  • Who can sell the mutual fund in India?

    As per SEBI Mutual Fund Regulations, all MFDs must fulfil the following two requirements before engaging in sale and/or distribution of mutual fund products, namely

    • Obtain the relevant certification of National Institute of Securities Management (NISM); and
    • Register with Association of Mutual Funds in India (AMFI) and obtain AMFI Registration Number (ARN).

    Likewise, before being employed in sale and/or distribution of mutual fund products, employees of MFDs are also required to obtain the relevant NISM certification and register with AMFI and obtain Employee Unique Identification Number (EUIN).

  • What is the suggested portfolio based on risk tolerance?
    Aggressive Plan Moderate Plan Conservative Plan
    Growth Schemes 60-70% 30-40% 10%
    Balanced Scheme 10-20% 40-50% 20-30%
    Income Scheme 10-15% 20% 50-60%
    Money Market Scheme 5% 10% 10%
    Suitable for
    • Investors in their prime earning years and willing to take more risk
    • Investors seeking growth over a long term
    • Investors seeking income and moderate growth
    • Investors looking for growth and stability with moderate risk
    • Retired and other investors who need to preserve capital and earn regular income
  • How is the value/performance of the Mutual Fund products known?

    The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV).

    Mutual funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day-to-day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs. 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs. 20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly - depending on the type of scheme.

  • How Mutual Funds can be useful in achieving financial/Investment goals?

    Mutual funds can be for the short term or for longer term based on one’s investment horizon and objective. There are different types of mutual fund schemes – which invest in different types of securities – in equity as well as debt securities that are suitable for different investor needs and investment goals.

    Capital Presevation Saving Bank Account PPF (Public Provident Fund) Liquid Funds
    Generate Income Fixed Deposits Po-mis Debt Funds
    Capital Appreciation Real Estate Gold Equity Funds

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