Mutual Funds are considered safer options comparing to invest directly in stock market. It gives most of the time better results than than normal saving instruments like FD, RD etc.
But when you decide to invest in MF you will come across many terms which needs to be looked into and most of the time looks confusing initially.
To solve this riddle, I am compiling all the information you require to invest in mutual fund and simplifying all the info at one place.
I will be covering terms
1. Debt funds
2. Equity Funds
3. ELSS funds
5. Dividend — Reinvestment
6. SIP | LumpSum | STP | SWP
7. Expense ratio
9. Performance of the scheme Vs Category Average
10. Capture Ratio
Before going further, I would like to quote Pablo Picasso,
“Action is the foundation key to all success.”
Take action, start small, invest for better future.
#1 Debt Fund :
These funds are allocated to invest in fixed income securities issued by government & companies. The debt funds are also of various types depending upon the time frame of the investment. There are many investment funds like Dynamic bond funds, Income funds, Short term & ultra short term debt funds, liquid funds and many more funds.
Those who want to have a conservative approach in mutual funds can go for debt fund.
#2 Equity Fund :
Stock investment, bonds & paper are the two primary component of equity funds. There is also a certain amount of total assets in cash. The primary investment of the money is in the stock market.
The equity funds are managed by a fund manager, who are in this field for a considerable time and know the game well.
Equity funds are divided into various types depending upon different parameters like stock of companies investing in, the sector in which the companies are falling (thematic), the market capitalization of the company etc.
#3 ELSS Funds :
We all want to save the tax, this funds will help you to do that. These are better than traditional options like PPF at least in terms of lock-in period.
PPF has locked in period of 15 years.
NSC investments lock in period of 6 years
Bank deposit eligible for lock in period of 5 years
ELSS lock in period 3 years
So you can see from the above comparison, why ELSS are better at least in terms of lock in period. These are equity funds. So if you are looking for Tax benefits, this may help you.
#4 Dividend :
When the mutual funds make a profit through investment, that will be shared with you, according to your investment.
If you want to have a pie of profits periodically, you should go for dividend options while investing in a particular MF.
#5 Dividend — Reinvestment [Growth Fund] :
When you do not opt to cash out the profit made by Mutual Fund scheme periodically then the profit will be reinvested in the same mutual fund to buy more shares of the same.
The choice is entirely yours, which one you like to opt for.
#6 Investment Strategy
SIP is Systematic Investment Plan, you must have come across this term many times by now as this is hugely promoted by Mutual Fund houses.
SIP is monthly recurring deposit in your Mutual Fund. He has to be
b. LumpSum : Let's say you have an amount of 20,000/- in your account and you want to invest in one shot, then it will be termed as LumpSum.
c. STP : Systematic Transfer Plan helps you to invest in Equity funds systematically when you have a LumpSum amount and you do not wish to invest in Mutual Fund Scheme in one shot.
In this case, we can invest the amount to a Debt fund, which gives more return than bank deposit, and then the amount will be transferred to equity fund like a SIP.
STP can be done the other way too, equity fund to debt fund.
d. SWP : Systematic Withdraw Plan
It is not an investment mode, but a withdrawal procedure. I am mentioning this as you will come across this term while investing on your own through dedicated mutual fund portals.
As the name suggests, plan to withdraw money from the amount invested systematically and not in one go.
#7 Expense Ratio :
As the term “expense” suggest it is related to expenses incurred in the background by the company who is managing your mutual fund.
Lets say, L&T Mutual Fund is there, they have a team to manage it, they buy and sell stocks, agents commission, registrar fees etc which has to be incurred indirectly by you( the investor in mutual fund).
In long term, the fund which has low expense ratio should be the one you should opt for. It indicates the health/expertise of the team who are working to manage our money and their money too. It indicates that how healthy are their operations and knowledge about the overall scenario.
Lets take a practical example.
In Small and Mid-cap category we will take two funds and compare them in terms of 1 year return, 5 year return, & expense ratio.
SBI Small & Midcap Fund direct plan — Refer as SBIMF — Rated 5 star
DSP Blackrock small cap fund direct plan — Refer as DSPMF- Rated 4 star
Data according to Valuesearch.com
DSPMF |1 yr Return - 12.82%- 5 yr Return — 34.17% Expense Ratio — 2.03%
SBIMF |1 yr Return - 39.90%- 5 yr Return — 37.48% Expense Ratio — 1.40%
So you can clearly see the expenses ratio is lower of SBIMF and returns are more comparing to DSPMF. There will be an anomaly in some cases where in the expense ratio is high and the returns are also higher, but ideally while investing we should look for lower expense ratio.
#8 Assets Under Management (AUM) :
It tells about assets ( amount ) that particular fund is managing. In general it should not be too small or too big. It should be around average. In most of the cases, this factor do not affect much. So you need not worry about this factor.#9 Performance of the Scheme Vs Category Average :
This is a very important term and the health of a fund can be determined very easily by looking at it.
Let’s take an example.
Franklin India Smaller Companies Fund — Direct Plan(G)
As you can clearly see, fund returns for all the years are much higher than category average which naturally qualifies this fund as a good one.
#10 Capture Ratio :
It is the ratio to evaluate the performance of the fund manager.
Just like our report cards are evaluated by the interviewer before job is offered, we also need to know the report card of the fund manager.
There are 2 types of Capture Ratio:
a. Up market Capture Ratio
b. Down Market Capture Ratio
As the name suggest, when the market is up we capture Up market Capture Ratio and when market is down we calculate Down Market Capture Ratio.
Let’s take an example to understand it better.
We can see this metrics from many online free tools available. I used advisorkhoj.com to know the capture ratio of different schemes in Small & Mid Cap Mutual Fund category.
Capture ratio research tool. As you can clearly see a trend here more the capture ratio, more is the return of the scheme for a period of 5 years.
Now, you must be thinking that 5 years is a too long period and you want to see how capture ratio helps for a shorter period of time. I am covering the scenario for 3 years now. We can see, how it fairs.
For 3 years, using the same tool.
Again we can see the same trend. More the capture ratio, more is the performance of the scheme.
Capture ratio helps to zero down. More the capture ratio, more will be the return in most cases. If you search for one year than trends may buck you, but considering to invest in MF, then I will suggest look for the long term trends rather than short term trends of one year.
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These are the factors I came up with, to zero down while selecting a fund.
I have compiled all the important information above discussed in a small sheet below, that will help you to recap.
I hope this will information will empower you to become financially stronger.
Please write me on firstname.lastname@example.org or comment below if you have any queries or if you like to share something.