Mutual Funds Sahi Hai?

What are mutual funds?

Mutual Fund is a pool of investments in which a team of experts make investments on our behalf and earn returns for us but they charge a little percentage as their fees, although there are many types of fees in the fund’s scheme we will see it later. Most mutual funds invest money in stock of companies, Bonds issued by corporates and government, commercial paper, certificates of deposits, and debentures.

 

WHAT ARE THE PLANS TO INVEST IN IT?

There are basically two ways to invest in mutual funds, Regular and other is Direct.

·        Regular Plan: In a regular scheme, you invest your money in mutual funds through a distributor who guilds you in your investing journey. What a mutual fund distributor provides you? What do they get in return? Are they charge some fees?

I know you have these questions in your mind after listening to the word distributor.

  They provide services like mutual fund advisory, information about the funds, and help you in taxation related to investing, and financial planning.

   They do not charge any fee directly to their customers but get their commission from the mutual fund companies. For instance, they get around 0.5% to 1% depending on the scheme and their AUM (Asset Under Management).

 

·        Direct Plan: In a direct scheme you invest your money directly into the fund without any distributor or middle man. You can invest in it by directly going to the Mutual fund office, on their websites or apps, and on some other online platforms (CamsEdge, Demat account, and Karvy). In a direct plan, you do not get any advisory services and other facilities that a distributor provides.

 

Which one is better Regular Plan or a Direct Plan?

In my opinion, both the plans are good. However, the good question is not which is better, but what is better for you?

·        If you want to invest in Direct Plan, you have to have some basic knowledge of the market like how it works, up & down, boom & recession, compounding effect, and relevant scheme as per your needs; and besides market knowledge, you should have some information about the schemes. There are hundreds of schemes to invest in. However, in the direct plan, you get a little more returns (you save the amount of commission) as compared to the regular plan because of there are majorly no intermediaries involved in.

You can invest in the direct plan if you are ready to put the time to acquire some basic Knowledge of investing.

·    If you want to invest in Regular Plan, you just need to find a good and trustable distributor. They do everything for you. For instance, you do not need to choose a scheme and when you need money they redeem your investments effectively (reduce the tax liability).

 

Major Types of Funds:

·        Blue-chip/ Large-Cap Funds: It Invests in big companies like Reliance Industries, HUL, and ITC. It basically comprises of top 100 companies of India and these companies are stable. Moreover, technically large-cap companies have more than Rs.20,000 crore in Market Capitalization (Outstanding shares*Market price of a share).

    Mid-Cap Funds: It invests in mid-size companies lying between the top 101-200 companies of India. In addition, the market cap of these companies lies between Rs. 5,000 crores to Rs. 20,000 crores. It comprises growing companies and these companies are less stable as compared to large-cap funds. Examples of Mid-cap companies are Exide Inds, Amarraja Batteries, and Relaxo foot wears.

·    Small-Cap Funds: It Invests in small size companies that lie above the top 200 companies of India and their Market- cap is less than Rs.5000 crores. These Companies are the most volatile among large-cap and Mid-cap companies. Examples of small-cap companies are Bajaj Consumer products, JK paper ltd, and Siyaram silk mill ltd. 

·        Flexi-Cap Funds: A Flexi-cap fund is not restricted to investing in companies with a predetermined market capitalization. Fund managers can invest in any company, it could be small, mid-size, or large size.

      Multi-Cap Funds: In this category, the fund manager allocates the fund 25% of each size of companies (small, mid, and large).

·        International Funds: These funds invest your money in international markets such as the US, Uk, China, Taiwan, and other attractive economies. In addition to that investments could be in Individual companies such as Tesla, Meta, and Nestle or could be in Indices such as Nasdaq (USA), Heng Sheng Technology (Hong Kong), and MSCI Indices.

·        Index Funds: Index Funds are passively managed funds, for instance, these funds do not need regular research. It just replicates the respective index. For example, the Nifty 50 index fund replicates the nifty 50 index, and in the end both give you the same returns except for very minor differences such as managing fees and tracking errors.     

·        ELSS Schemes (Equity Linked Saving Schemes ): These schemes are very famous among people who want to save some taxes. You can invest in these funds under the section 80c and can save up to one lakh fifty thousand rupees. They basically invest your money in equity, in addition, these funds have a 3 years lock-in period per transaction which means you can not able to withdraw your money until the period is over.

·     Debt Funds: These funds invest in debt instruments such as corporate bonds, government bonds, and debentures. It gives you small returns as in these funds the risk is very low as compared to equity funds. For Example, it can give you 6%-8% returns.

·        Liquid Funds: These funds are the least risky funds as compared to all schemes because it invests your money in Commercial Papers, and CODs (Certificate of Deposits). These funds are the best funds if you want to park our money for few months, say two months to 6 months.

·        Hybrid funds: Hybrid funds are the funds that invest in both asset classes (Debt & Equity). It is a conservative fund. In addition, the portion of equity & debt allocates as per the market condition. It can give you around 9% to 11% returns.

·        Multi Assets Funds: These funds invest your money in multiple assets such as Gold, Debt, Equity, and Global Equity. It diversifies your portfolio and improves the chances of good risk-adjusted returns (9% to 13%).

·        Thematic Funds: Thematic funds are the fund that invests in a particular sector such as IT, consumption (FMCG), Infrastructure, Manufacturing, and Banking.

·        Precious Metals Funds: It invests in precious metals such as gold and silver. These funds are famous for investing in gold. However, Silver is recently added to this.

 

MUTUAL FUNDS’ TERMINOLOGIES

SIP (Systematic Investment Plan): I know that you definitely heard this word many times in your life. Meanwhile, many people think it is the type of investment, but it is definitely not, SIP is just a mandate for a bank in which your bank automatically deducts the amount you want to invest monthly, daily, or fortnightly. It is one of the most beautiful things in a mutual fund as a small amount of money becomes large without hurting your pocket. Another benefit of it is that you put a fixed amount monthly in the funds, this helps you to average out your investments on a regular basis. For Example, say you invest $100 dollar in the first month and after that in the second month, the market downed because of some reason, so do your fund hypothetically, it becomes $90 and your SIP date hit and buy at $90, and average out your investment at $95.

 

STP (Systematic Transfer Plan): STP is similar to SIP but in it, there is a systematic transfer from your existing fund (from which you want to transfer) to the target fund (in which you want to invest). For Example, you have $50,000 in a debt fund, and now the market has corrected sharply and you want to invest it, you can use STP as a $2000 transfer from your debt fund to your equity fund.

 

SWP (Systematic Withdrawal Plan): This tool enables you to withdraw your investments at a particular date of the month on regular basis. It can be very helpful when you are in your retirement age as a fixed amount is credited to your bank account on regular basis just like your salary.

 

Passive Funds & Active Funds: Active funds are the funds that are actively managed by the fund manager as they buy and sell securities frequently and do research to generate more returns as compared to the market. On the other hand, passive funds are the funds that do not need research and excessive buying and selling as these funds track their respective indices.

 

HOW TO MAKE YOUR PORTFOLIO?

In this section, we will look only look at how to make and manage a mutual fund portfolio. I will categorize all funds into two types.

1.     All Weather Portfolio: This portfolio consists of defensive funds such as Large-cap funds, Index funds, and Debt funds. It has a 60 – 40 equity-debt allocation so if you expect long-term equity returns at 14% and debt expected returns at 7%, this portfolio can give you expected 11.2% returns.

2.     Pure Alpha Portfolio: This portfolio consists of aggressive funds such as Mid-cap, Small-cap, Index Funds, and Debt funds. It has 70-30 equity debt allocation, for instance, if you expected long-term equity returns at 16% and debt at 7%, this fund can give you the expected 13.3% returns.

 

Can Fund Managers Beat the market?

There is a war out there between Passive funds and active funds. We will look at the last ten years of fund returns to reach the conclusion, is it worth it to give our money to active fund managers to invest?

      

Top 5 funds		Active fund Returns			Benchmark Returns (index fund)
Fund Name	Fund Type	10 Yrs	5 Yrs	3 Yrs	10 Yrs	5 Yrs	3 Yrs
Axis Bluechip Fund	Large Cap	9.15	11.96	14.06	11.60	11.63	13.27
Mirae Asset Large Cap Fund		10.70	10.96	16.08	11.35	11.47	13.35
SBI Bluechip Fund		11.03	9.80	14.86	11.60	11.63	13.27
ICICI Prudential Bluechip Fund		11.58	11.03	13.99	11.35	11.47	13.35
HDFC Top 100 Fund		7.86	9.26	12.50	11.35	11.47	13.35
HDFC Mid-Cap Opportunities Fund	Mid Cap	17.94	10.17	15.52	17.58	12.06	17.72
Kotak Emerging Equity Fund		19.46	12.64	18.92	17.58	12.06	17.72
Axis Midcap		18.96	15.34	17.56	17.20	12.03	19.12
DSP Midcap Fund		16.86	8.99	12.55	17.58	12.06	17.72
Nippon India Growth Fund		15.97	12.76	17.96	17.58	12.06	17.72
Nippon India Small Cap	Small Cap	23.73	16.04	25.22	14.59	7.31	17.45
HDFC Small Cap Fund		17.05	12.15	15.19	11.87	7.56	16.41
SBI Small Cap Fund		24.31	16.92	23.30	11.87	7.56	16.41
Axis Small Cap Fund		na	17.27	24.03	na	7.31	17.45
DSP Small Cap Fund		20.74	10.48	21.86	11.87	7.56	16.41

 Returns as on 1st July, 2022.

As we can see in the table, the Fund manager fails to beat the market in the 10 years period of investment, in addition to that, only one fund succeeded to do so from our sample although the difference is merely 23 bps. In Midcap,  3 out 5 funds succeed in beating the market in the 10-year period. In the small-cap category, all available funds beat the market very handsomely

·        Bluechip Category: In my opinion, we should not invest in actively managed bluechip funds as for these funds beating the market is becoming harder and harder every day. For Instance, a report finds almost 80% of active fund managers are falling behind the major indexes. We can invest in index funds for the exposure of large-cap companies in our portfolio.

·        Mid Cap Category: In this category, 3 out of 5 funds overperformed the market in 10 years periods and 5 years periods. Therefore, These funds are good for a longer horizon, in addition to that, you can invest in actively managed mid-cap funds.

·        Small-Cap Category: This category is a bit different as all funds from our sample outperformed the market very well almost in every time horizon 10, 5 and 3 years. We should allocate some of our investment to this category.

Note: we should not judge the future performance of the fund by seeing its past performance.

Thanks for reading it.

AUTHOR: Amaan Ahmad Ansari