Debt mutual funds

Equity Right

How to choose the best mutual funds?

How to choose the best mutual funds?


Mutual fund is one of the best investment option for a regular investor, where investors can select and invest in a mutual fund scheme according to their financial goals and risk taking capability. However, an investor can directly invest or hire a mutual fund advisor. If an investor is investing directly, they will invest through direct plans of mutual fund scheme and if investor invests through a mutual fund advisor, they will invest in a regular plan of mutual fund scheme.


What are the various types of Mutual funds available to investors?


1. Equity mutual fund scheme – These funds are directly invested in stocks and returns depends on how these stocks perform over a period of time. These schemes give high returns but are very risky if invested for short term. Investors should invest for long term, at least for five to ten years. There are 10 types of equity mutual fund schemes available based on the capitalization and tenure such as Multi Cap funds, Large Cap funds, Large and Mid-cap funds, Mid Cap Funds, small cap funds, Dividend Yield Funds, Value Funds, Contra Funds, Focused Funds, Sectoral or thematic funds and Equity linked saving schemes (ELSS).


2. Debt mutual fund scheme – This MF scheme directly invests in Debt Securities. Investors who want to invest for short term i.e less than 5 years, should invest in these schemes. These schemes are less risky than equity schemes and provide modest returns. There are 16 debt mutual fund schemes based on tenure and returns such as Overnight Funds, Liquid Funds, Ultra short duration funds, low duration Funds, Money Market Funds, Short duration funds, Medium duration funds, Medium to long duration funds, Long duration Funds, Dynamic Bonds, Corporate bond funds, Credit Risk Funds, Banking and PSU funds, Gilt Funds, Gilt funds with ten years duration and Floater funds.


3. Hybrid mutual fund scheme – This scheme invests in debt and equity schemes. Investors can select these scheme based on their risk appetite. There are six hybrid mutual funds available based on the allocation and investment pattern such as Conservative hybrid Funds, Balanced Hybrid Funds, Aggressive hybrid Funds, Dynamic Asset Allocation, Multi Asset allocation, Arbitrage Funds and Equity Savings.


4. Solution oriented Scheme – These Schemes are especially for a particular solution or goal such as child’s education or retirement. However, they have mandatory lock in period of 5 years.



Mutual Fund Charges:

Total Expenses which a particular Mutual Fund incurred is known as Expense Ratio and this measures per unit cost of the funds managed. Generally, expense ratio is charged around 1.5 to 2.5 percent of the weekly (average) net asset of schemes.



How to select best Mutual Funds?


1. Know your financial goals and risk appetite – As an investor, one must first analyse his financial goals. Ask questions like, what they are looking for, short term or long term investment? Do they want to go for high risk, high return or low risk medium returns? For what purpose is money needed like retirement or any other specific purpose? Do they need money in near future? Or they want to invest for lock in period? By answering these questions, Investor will get a clear picture of their financial goals.


2. Compare the Expense RatioCost of owing some funds can be expensive so choose the lowest possible expense ratio. For example, if one fund has a cost of 0.50 percent while another has a cost of 1.5 percent as an expense ratio. Investors should choose according to the schemes and expense cost.


3. Avoid funds which have high turnoverIt is important to see turnover rate for funds, as it impacts the tax rate. It is basically a percentage of the portfolio that is brought and sold in a particular year. Usually, portfolio with more than 50 percent turnover carry higher tax rates.


4. Hire Disciplined Management Team – Fund manager should be selected on basis of the past record track and portfolio manager with high talent and experience team should be chosen.


5. Select No load Mutual FundThey are basically the fees, which are charged on assets (5% of assets usually). However, not all funds have charges. Investors should choose wisely, no load fund carry no charges and increases overall returns.


6. Check historical data and Diversify assets – investors should check historical data, reports and how they have evaluated them. Diversify whole portfolio, because in case an asset does not perform well due to some reasons, other asset class can balance them.



Some of the best mutual funds:

1. Nippon India US Equity Opportunities FundIt has an expense ratio of 1.5% and has given returns around 15% per annum in 5 years.

2. ICICI Prudential US Blue Chip Equity FundIts expense Ratio is 1.79% and returns of 13.81% Per annum in last 5 years.

3. DSP World Gold Fund – Expense Ratio 1.9% and Returns around 12.81% per annum.



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Lenders seek replacements for debt schemes

Lenders seek replacements for debt schemes

Debt mutual funds are the funds which are invested in instruments like treasury bills, certificate of deposits and c-papers. This instruments have fixed interest earnings with fixed tenure. Although, this interest is fixed for throughout the period of investment on the underlying asset. The main goal is to collect wealth through the interest earned and increase the overall investment value. Best debt scheme is decided on the basis of the credit rating given to them. If the credit rating is high. it means debt security have higher chances of paying the interest and principle during the time of maturity.

Debt schemes are usually taken by the investors and high network individual (HNI). They are risk averse and not ready to invest in equities. They choose debt funds according to their requirement for short to medium term. While investing in any scheme, investor considers points like what is the objective of funds? In which category this funds fall, how much risk is involved. Factors like cost, investment horizon and financial goal is also considered. Debt funds are evaluated on the factors like fund history, fund returns and ratios like financial ratios and expense ratios. Some best performing debt funds are SBI magnum constant maturity fund, ICICI prudential constant maturity gilt fund, UTI gilt fund, Axis banking and PSU debt fund and Kotak dynamic debt fund.


Franklin Templeton’s decision:

Franklin Templeton is one of the biggest mutual fund house and stands in 9th position in the country. They have recently announced that they are winding up the their 6 debt schemes. They are credit risk fund, duration fund, dynamic accrual fund, short term income plan, ultrashort bond fund and income opportunities fund. If valued altogether, this 6 schemes hold around 30,000 core asset of investors. After these scheme got windup, investors who had invested in this scheme cannot withdraw their cash on the basis of the asset they have put and their money is locked.


Liquidity concerns:

After Franklin Templeton scraped six debt schemes, liquidity became the main concern for the financial institution. Therefore they have asked investors and HNI’s who have borrowed fund from the banks and other financial institution to bring additional margins in debt mutual fund. This also includes franklin Templeton’s schemes. Investors and promoters have invested money in these schemes to raise money so that they can invest in the market or any other short term scheme to meet their short term capital requirement. Many high network individuals have borrowed money from NBFCs and bank to invest in the mutual funds. They are giving more than 8% returns and are more risky.



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