INVESTMENTS IN MUTUAL FUNDS

Introduction

  • Different investment avenues are available to investors. Mutual funds also offer good investment opportunities to the investors. Like all investments, they also carry certain risks. The investors should compare the risks and expected returns after adjustment of tax on various instruments while taking investment decisions. The investors may seek advice from experts while making investment decisions.

  • With an objective to make the investors aware of functioning of mutual funds, an attempt has been made to provide information in question-answer format which may help the investors in taking investment decisions.

What is a Mutual Fund?

Mutual fund is a mechanism for pooling money by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is diversified because all stocks may not move in the same direction in the same proportion at the same time. Mutual funds issue units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unitholders.

The profits or losses are shared by investors in proportion to their investments. Mutual funds normally come out with a number of schemes.
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Liquid funds invest in short-term high-credit quality fixed income earning money market instruments like a certificate of deposit, treasury bills, commercial paper, etc.

Liquid funds are mutual fund schemes that invest their corpus in financial instruments such as Bank fixed deposits, Treasury Bills, Bill Rediscounting, Commercial Paper and other debt securities with maturities up to 90 days. The NAV (Net Asset Value) of the funds is calculated for 365 days, unlike other debt mutual funds where NAV is computed for business days only.

Liquid Funds have no restrictions of a lock-in period. These funds allow withdrawals to be processed within 24 hours on business days. So for all transactions received within a cut of time (say 2:00 pm) where money is also realized within the cut-off time, the units are allotted as per previous day NAV. Liquid funds have the lowest interest risk associated with all the class of debt funds. This is because they primarily invest in fixed income securities with short maturity. Another notable benefit of liquid funds is that they do not have any entry or exit load.

Who should invest in liquid funds?
How to evaluate Liquid funds?

Things to consider as an investor

Fund Objectives

Liquid funds are least risky of all the debt funds. The Net NAV doesn’t fluctuate too frequently because the underlying assets mature within 60-91 days. This somehow prevents the fund NAV from getting impacted too much by the underlying asset price fluctuations. However, there might be a chance of a sudden drop in NAV in case of a sudden downgrade of the credit rating of the underlying security. To put it simply, liquid funds are not completely risk-free.

Expected Returns

Historically, liquid funds have been found to generate returns in the range of 7%-9%. It is way higher than the mere 4% returns obtained on savings bank account. Even though the returns on liquid funds are not guaranteed, in most of the cases they have delivered positive returns upon redemption.

Cost

Liquid funds charge a fee to manage your money called an expense ratio. Till now SEBI had mandated the upper limit of expense ratio to be 2.25%. Considering the hold till maturity strategy of the fund manager, liquid funds maintain a lower expense ratio to provide relatively higher returns over a short period of time.

Investment Horizon

Liquid funds are exclusively meant to invest surplus cash over a very short period of time say up to 3 months. Such a short horizon helps to realize the full potential of the underlying securities. In case you have a longer investment horizon of up to 1 year, then you may consider investing in ultra-short-term funds to get relatively higher returns.

Financial Goals

If you want to create an emergency fund, then liquid funds can prove to be very useful. In addition to receiving higher returns, these will help you to take out your money easily in case of emergencies.

Things to consider as an investor

Fund Objectives

Liquid funds are least risky of all the debt funds. The Net NAV doesn’t fluctuate too frequently because the underlying assets mature within 60-91 days. This somehow prevents the fund NAV from getting impacted too much by the underlying asset price fluctuations. However, there might be a chance of a sudden drop in NAV in case of a sudden downgrade of the credit rating of the underlying security. To put it simply, liquid funds are not completely risk-free.

Expected Returns

Historically, liquid funds have been found to generate returns in the range of 7%-9%. It is way higher than the mere 4% returns obtained on savings bank account. Even though the returns on liquid funds are not guaranteed, in most of the cases they have delivered positive returns upon redemption.

Cost

Liquid funds charge a fee to manage your money called an expense ratio. Till now SEBI had mandated the upper limit of expense ratio to be 2.25%. Considering the hold till maturity strategy of the fund manager, liquid funds maintain a lower expense ratio to provide relatively higher returns over a short period of time.

Investment Horizon

Liquid funds are exclusively meant to invest surplus cash over a very short period of time say up to 3 months. Such a short horizon helps to realize the full potential of the underlying securities. In case you have a longer investment horizon of up to 1 year, then you may consider investing in ultra-short-term funds to get relatively higher returns.

Financial Goals

If you want to create an emergency fund, then liquid funds can prove to be very useful. In addition to receiving higher returns, these will help you to take out your money easily in case of emergencies.

Things to consider as an investor

Fund Objectives

Liquid funds are least risky of all the debt funds. The Net NAV doesn’t fluctuate too frequently because the underlying assets mature within 60-91 days. This somehow prevents the fund NAV from getting impacted too much by the underlying asset price fluctuations. However, there might be a chance of a sudden drop in NAV in case of a sudden downgrade of the credit rating of the underlying security. To put it simply, liquid funds are not completely risk-free.

Expected Returns

Historically, liquid funds have been found to generate returns in the range of 7%-9%. It is way higher than the mere 4% returns obtained on savings bank account. Even though the returns on liquid funds are not guaranteed, in most of the cases they have delivered positive returns upon redemption.

Cost

Liquid funds charge a fee to manage your money called an expense ratio. Till now SEBI had mandated the upper limit of expense ratio to be 2.25%. Considering the hold till maturity strategy of the fund manager, liquid funds maintain a lower expense ratio to provide relatively higher returns over a short period of time.

Investment Horizon

Liquid funds are exclusively meant to invest surplus cash over a very short period of time say up to 3 months. Such a short horizon helps to realize the full potential of the underlying securities. In case you have a longer investment horizon of up to 1 year, then you may consider investing in ultra-short-term funds to get relatively higher returns.

Financial Goals

If you want to create an emergency fund, then liquid funds can prove to be very useful. In addition to receiving higher returns, these will help you to take out your money easily in case of emergencies.

Things to consider as an investor

Fund Objectives

Liquid funds are least risky of all the debt funds. The Net NAV doesn’t fluctuate too frequently because the underlying assets mature within 60-91 days. This somehow prevents the fund NAV from getting impacted too much by the underlying asset price fluctuations. However, there might be a chance of a sudden drop in NAV in case of a sudden downgrade of the credit rating of the underlying security. To put it simply, liquid funds are not completely risk-free.

Expected Returns

Historically, liquid funds have been found to generate returns in the range of 7%-9%. It is way higher than the mere 4% returns obtained on savings bank account. Even though the returns on liquid funds are not guaranteed, in most of the cases they have delivered positive returns upon redemption.

Cost

Liquid funds charge a fee to manage your money called an expense ratio. Till now SEBI had mandated the upper limit of expense ratio to be 2.25%. Considering the hold till maturity strategy of the fund manager, liquid funds maintain a lower expense ratio to provide relatively higher returns over a short period of time.

Investment Horizon

Liquid funds are exclusively meant to invest surplus cash over a very short period of time say up to 3 months. Such a short horizon helps to realize the full potential of the underlying securities. In case you have a longer investment horizon of up to 1 year, then you may consider investing in ultra-short-term funds to get relatively higher returns.

Financial Goals

If you want to create an emergency fund, then liquid funds can prove to be very useful. In addition to receiving higher returns, these will help you to take out your money easily in case of emergencies.

This article covers the frequently used terminologies
that one may encounter while understanding or reading
about Mutual Funds

1. Acid Test Ratio:

It is the ratio obtained by dividing the current assets of a company by the current liabilities. It is an indication of the company’s financial strength.

2. Annual Fund Operating Expenses

The expenses acquired by an Asset Management company for fund management during a particular year

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Mutual Fund Performance Analysis

1. Compare Fund Performance against a Benchmark

You may start by comparing the performance of a fund against the benchmark. When you compare, use a fair and appropriate benchmark. It should always be an apple-to-apple comparison. Using the wrong yardstick will only give misleading data.

Let’s take the case of a Large-Cap Equity Fund. Compare its performance with a broad-based index like Nifty 500. The fund returns for a period were 15% whereas the benchmark returns were only around 12%. If your fund has delivered such higher returns consistently, then it’s good to go fund.

Compare Fund history

A mutual fund’s real worth can be understood only during difficult market phases, and a fund history can validate that. Look for a fund which has a relatively longer fund history say 5 to 10 years. Compare fund performance across different time intervals and business cycles.

A mutual fund’s real worth can be understood only during difficult market phases, and a fund history can validate that. Look for a fund which has a relatively longer fund history say 5 to 10 years. Compare fund performance across different time intervals and business cycles.

A mutual fund’s real worth can be understood only during difficult market phases, and a fund history can validate that. Look for a fund which has a relatively longer fund history say 5 to 10 years. Compare fund performance across different time intervals and business cycles.