What are Mutual Funds - Know Types, Benefits & How to Invest - ICICI Bank

What are Mutual Funds?

Investment solutions such as Mutual Funds combine the capital of many investors to purchase a range of securities including stocks and bonds. Units in the fund represent each investor's portion of the total investment. Professional fund managers oversee these funds, making choices depending on the goals of the fund and the market.

Without having to pick individual stocks or bonds, Mutual Funds provide a simple method to invest in a diversified portfolio. Because they allow investments with very small sums of money, they are more appropriate for new investors.

How do Mutual Funds work?

Investors choose to invest in Mutual Funds due to its ease and high returns in the money market.

This is how they work:-

• Pooling Funds

Contributions from investors are combined into a single fund that is analysed by a qualified fund manager.

• Unit Allocation

In proportion to their investment, each investor receives units. Their portion of the Mutual Fund is represented by these units.

• Expert Management

The pooled funds are allocated among a diverse asset range by the fund managers. It is done to achieve the fund's goals.

• Net Asset Value (NAV)

NAV (Net Asset Value) implies the market value of the fund's assets after expenditures are deducted, which is the unit's value.

• Generation of Returns

Investors get returns in the form of dividends or interest from the fund's investments, or capital appreciation if asset values increase.

• Expenses Deduction

Before determining net returns for investors, expenses related to administration, research, and management are subtracted.

• Investor Redemption

Investors can sell or redeem their units at the current NAV to access their funds.

Mutual Fund Investment Fees

Here are the various types of Mutual Fund investment fees:-

• Entry Load: This cost was previously assessed at the time of initial Mutual Fund investment. But now it has been prohibited by SEBI since 2009. No fund house is allowed to charge an admission load at this time.
• Exit Load: If you keep the fund for more than a year, there is no exit load. However, exit load is assessed when you sell your Mutual Fund units within a year. Generally, it represents 1% of the redemption value.
• Transaction Fees: In case your investment goes above Rs. 10,000 then a transaction charge may be applied.
• Expense Ratio: It is an annual fee paid to the fund house for managing the Mutual Fund. It’s expressed as a percentage of the fund’s total assets.

Benefits & Features of Mutual Funds

Types of Mutual Funds

1. Equity Funds

Equity funds are investments in companies’ stocks, focusing on capital appreciation over the long term. Due to market volatility, they offer high potential gains but also high risks.

2. Debt Funds

Debt funds primarily invest in fixed-income securities like bonds, which offer stable returns and lower risk.

3. Money Market Funds

Money market funds invest in short-term debt instruments, such as treasury bills and commercial paper, offering modest returns and low risk.

4. Hybrid Funds

Hybrid funds are investments of equities and debt securities in a mixed format, having a balance of risk and returns. This type of investment is perfect for investors looking for a balance between their risk and returns. 

5. Growth Funds

Growth funds are investments that emphasise the investment plan with a company with higher potential returns and are in upward trends. They aim for capital appreciation over time and can be an option for those seeking higher returns.

6. Income Funds

Income funds primarily invest in fixed-income securities that provide regular income through interest payments for those looking for steady income.

7. Liquid Funds

Liquid funds invest in short-term, highly liquid instruments, which gives easy access to funds and has less risk. They are considered best for short-term investment with good returns.

8. Tax-saving Funds

Tax-saving funds, such as ELSS, offer tax benefits under Section 80C while investing primarily in equities, combining tax savings with potential capital.

9. Aggressive Growth Funds

Aggressive growth funds seek maximum capital appreciation by investing in high-risk assets like small-cap stocks. They are perfect for those who can tolerate higher risk.

10. Capital Protection Funds

Capital protection funds aim to protect investors' capital while offering modest returns by investing in a mix of debt and equity securities.

11. Fixed Maturity Funds

Fixed maturity funds invest in debt securities with fixed maturity times and give investors an idea of returns over a specific time frame.

12. Pension Funds

Pension funds are mainly used to build a retirement corpus by investing in a mix of equities and debt instruments. They hold long-term growth potential with a lock period.

Modes of Investing in Mutual Funds

Below are the two methods of investing in Mutual Funds:-

1. Lump Sum Investment

An investor has the option to invest using the lump sum approach. For instance, if you possess a large sum of money you can opt for this method and invest the entire amount at once. It is ideal for individuals looking to see high returns and believe that market conditions are favourable. However, due to the investment being made at once, lump sum investments can entail some risk influenced by fluctuations in the market.

2.Systematic Investment Plan (SIP)

When investors choose to make little investments over making them all at once as they can with a lump sum technique, they choose the SIP approach. Individuals can make monthly or quarterly small-scale investments in Mutual Funds through SIP (Systematic Investment Plans). By lessening the impact of market swings and providing the chance to buy more units during 

How are Returns Calculated for Mutual Funds?

Calculations for the returns for mutual funds are figured out by the amount invested, the duration of the investment, and the expected return rate. One can use two primary methods to calculate returns: lump sum investments and Systematic Investment Plans (SIPs).

For lump sum investments, the future value (FV) can be calculated using this formula:

Future Value = Present Value (1 + r/100)^n

Where PV is the present value (initial investment), r is considered as the estimated rate of return, and n is the time frame of the investment.

For SIPs, the future value (FV) can be easily calculated using the below formula:

FV = P [(1+i)^n-1]*(1+i)/i

Where P is the amount invested monthly through SIP, i is the compounded rate of return, and n is the investment duration in months.

These formulas consider compounding interest to estimate the final value of the investment. Using a mutual fund calculator, investors can know their expected future investment return.

Terms used in Mutual Funds

Mutual Funds (MFs), a popular investment choice, involves a variety of terms that are essential for investors to understand. Here are some key terms commonly used:

Net Asset Value (NAV)

NAV serves as the pricing unit for MF, representing the cost of a single unit. Calculated by dividing the total net assets of a scheme by the units issued, NAV changes daily based on the market value of the securities held.

Assets under Management (AUM)

AUM is a significant indicator reflecting the current value of an MF scheme's assets. A higher AUM generally implies a higher client base and investor trust.

Portfolio

The collection of stocks, bonds or other securities that an investor or fund manager invests in.

Fiscal Year

A one-year period that companies and governments use for financial reporting and budgeting.

Expense Ratio

It represents the annual fee that all funds charge their investors. It expresses the percentage of assets deducted each fiscal year for fund expenses, including administrative fees, management fees and other operating costs.

Load

This term refers to the commission or sales charge applied when buying or selling MF units. There are different types of loads - front-end load (charges when you buy shares), back-end load (charges when you sell shares) and no load (no sales charge).

Diversification

Diversification involves holding a variety of investments in different sectors or asset classes to reduce the impact of any one security's poor performance on the overall portfolio.

Systematic Investment Plan (SIP)

This is a method of investing a fixed amount regularly in an MF. It's a disciplined investing approach and helps in averaging the cost of purchase.

Redemption

This refers to the process of an investor selling their units back to the fund. MF redemptions are usually processed within a few days.

Benchmark

A standard against which the performance of an MF can be measured. Funds are often compared to benchmarks like stock or bond indices to gauge their performance.

Capital Gain Distributions

These are payments made to MF shareholders from profits realised on the sale of securities in a fund's portfolio. They can be short-term or long-term and are subject to capital gains taxes.

Dividend Reinvestment

An option offered by most MFs that allows investors to use their dividend payouts to purchase additional shares in the fund.

Fund Manager

It is the professional responsible for making investment decisions for the MF's portfolio, including what securities to buy or sell and when.

Total Return

This is a measure of an MF’s performance. It includes any changes in NAV, dividends and capital gain distributions.

Risk Tolerance

An individual investor’s capacity to endure a loss in their investment. Different MFs have varying levels of risk suited to different investor profiles.

How to invest in Mutual Funds

Investing in Mutual Funds is easy and can be done online with ICICI Bank internet banking or the iMobile App. Here's how:- 

1. Net Banking

• To begin, sign in to the net banking website of your bank. Click "Buy Mutual Funds" after selecting "Investments and Insurance."
• Choose from the "Top categories" or look into other plans.
• After deciding on your favourite Mutual Fund plan, input the desired investment amount and complete the transaction.

2. iMobile App

• As an alternative, you can use the iMobile App from ICICI Bank.
• To choose and invest in a scheme, just log in, click "Invest and Insure," pick Mutual Funds, and start investing.

Both of these online platforms make it accessible for anybody wishing to begin investing in Mutual Funds. These offer a go-to option by providing a quick and simple method to invest in Mutual Funds.

Objectives of a Mutual Fund

Mutual Funds (MFs) aim to achieve specific goals for investors, providing diversified portfolios, capital protection, capital growth and tax-saving opportunities. Here are the key objectives of a Mutual Fund:

Diversification

MFs naturally diversify across securities, assets and geographies, reducing risk by avoiding concentration in a single investment. This approach creates a balanced and resilient portfolio.

Capital Protection

Certain funds, like money-market and liquid funds prioritise protecting capital. While safer, they offer lower returns, making them suitable for investors seeking stability and capital preservation.

Capital Growth

Equity Funds focus on capital growth by investing in stocks, offering a hedge against inflation. Despite higher returns, they come with higher risks, making them suitable for investors with a higher risk appetite.

Saving Tax

Equity-linked Savings Schemes (ELSS) or tax-saving funds provide dual benefits—capital growth and tax savings. Offering income-tax deductions up to Rs 1.5 lakh in a financial year, they are an attractive option for tax-conscious investors.

Conclusion

Understanding the meaning of Mutual Funds is fundamental for effective financial planning and investment decisions. Mutual Funds represent a collective investment approach offering diversification, expert management and accessibility to various investors. These funds combine resources from multiple investors to invest in numerous assets, catering to different financial goals and risk preferences.

Exploring the landscape of Mutual Fund types and their benefits enables individuals to create investment strategies that align with their specific objectives. Whether the aim is wealth accumulation, income generation or risk management, Mutual Funds provide a versatile platform that empowers investors to make informed financial choices guided by professional Fund Managers. Mutual Fund equips individuals with the tools to navigate the complexities of financial markets and work toward their long-term financial goals.

Mutual Fund Related FAQs

1. What Are The Tax Implications of Mutual Funds?

There are tax implications on mutual funds, which are usually based on the fund type and the fund holding period. With a good understanding of these, investors can plan their investments conveniently.

2. Are mutual funds safe?

There are market risks with mutual funds, which often include potential loss of principal. However, mutual funds are aligned with a few advantages and features like diversification, professional management, and regulatory oversight. Mutual funds are considered one of the safest investment options, with reduced risk, providing exposure to various assets and investments.

3. Can I withdraw money from Mutual Funds anytime?  

Mutual Funds provide liquidity and allow you to easily withdraw money. It's essential to remember that certain Mutual Funds do impose fees for short-term trading or early withdrawals. 

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