What are the Different Types of Mutual Funds?

Investing in mutual funds is without doubt the best idea if you have been thinking about your future and financial security. The biggest benefit is that you are able to plan it out perfectly based on your financial capabilities, plus you are able to control your investments completely when you have calculated your returns. Apart from understanding the benefits of mutual funds, you have to also understand the different kinds of funds that are present in the market today.

Open ended

One of the biggest kinds of mutual funds is open-ended which would allow you to buy or sell units of the fund at any point of time. In other words, there is no fixed maturity date on the fund. In these kinds of funds, there are a few kinds too

1.       Debt/Income funds: In this kind of fund, most of the invested money is put into debentures or other debt investment plans. This could include government security instruments too. Now, even though the capital appreciation is lower as compared to others, it is perfect for investors who want to a constant income coming through.

2.       Liquid funds:  These kinds of investments are to make the excess funds into short term investments so that you decide a better long term investment afterwards. These kinds of investments are perfect when you have saved an amount and planning a short term investment.

3.       Growth funds: These are very popular in retail investments and it could be a high risk element in both the short or long term. These kinds of schemes are a perfect example of the capital appreciation you can receive in the long run. This is probably the reason that most people look at investing in growth funds early so that the risk involved is lesser and the returns on the long run are very good.

4.       Tax saving growth funds: This probably the most recommended mutual funds, as they provide big tax benefits to its investors. Your money is invested in equities that offer long term growth opportunities called equity linked saving schemes or ELSS. These kinds of funds normally come with a 3 year lock in period.

Balanced funds

These kinds of funds are good for investors that are looking to enjoy good growth and income at the same time. These funds are invested in different kinds of securities – mostly equities and fixed income. Of course, the proportion of investment is pre-decided and is revealed in the offer documents. These are great ways to get good returns and is cut out for the investor that knows his kind of investment returns and plans. It does bring out a great deal of profits if you plan it right. This makes it one of the most popular types of mutual funds.

Close ended funds

These funds do not allow you to buy or sell units at any point of time. These kinds of funds can be invested at only during the launch of the fund. These are rolled out during the new fund offer period and can be purchased only then. These funds do come with the goal to protect the principal amount and deliver good returns at the same time.

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Ways to Invest in Mutual Funds

If you have been working for a few years in India, chances are quite high that you have heard of investing in mutual funds many times. In that past, most of these kinds of investments were driven through agents. It’s a lot different now as you would get to know every bit of information about these investments online and that surely makes your decision easier.  If you have been thinking about making an investment, here are a few simple methods:

1.       Invest via an AMC: You can invest into a mutual fund by approaching the mutual fund companies directly. Each of the companies provide online facilities to invest from the second investment onwards and thus are able to complete your transaction easily. Sounds good? Well almost. In this process, you have to fill the first form at the office of the AMC, so apart from the first investment; the rest can be done on the internet. The tough end of this deal is if you want to participate in 3-4 different funds, that means you have go to each of the offices and have the first form filled and submitted. So, this investment makes sense only when you are going to invest a big amount of money and over a long period of time too. Plus, you do not really need a demat account for this.

2.       Use your Demat account: The most common and recommended methods would be to use your demat account. You can look through all the different mutual funds and easily make your investments. All it would take is a few clicks on your mouse, to choose to invest in the fund of your choice. The only catch would be the charges you have to pay the demat medium you use. The biggest advantage though is that you can have access to all your transactions and details from one place alone. How easy is that?

3.       Use the fund directly: Certain funds allow you to purchase mutual funds online, that means not having to go through a broker or source at all. You would have all the possible information you need about the mutual fund along with the performance of the fund over the years. It is a very easy solution no doubt and is a sure option on the long term. You would have lesser commissions to pay and thus is a great idea if you are planning to invest on the long term. 

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Calculating Your Mutual Fund Returns is as Simple as 1, 2 & 3!

Understanding how mutual funds work is very important if you are planning to invest in them. Unlike the stock market which fluctuates through the day, a pricing for a fund is decided only one a day and that is typically done at the end of business hours. Calculating your return on investment is very important and is quite simple to do too. The ROI should be calculated for a specific time period and would be the total increase in capital divided by the total investment made. This percentage would give you the best idea of how well your investment is doing. 

There are different methods of calculating the profit that you have made on your investment also. Different formats are taken by different investors but the simplest two ways are to break it down by an absolute return method or by a total return in fund. 

In the absolute return method, you most important dates are the date of investing and the date of exiting the fund. You can calculate the absolute return by dividing the total chance in the NAV during period of investment and the NAV that was present at the start of your investment. With this you are easily able to figure out the return and you can use this on any kind of mutual fund. So, this is how the absolute return is calculated using - (NAV(end) - NAV(start))/NAV(start).

The other way to use a mutual fund calculator is by calculating the total return that is obtained from the fund. In this method, you include the dividends that you have received too. So add the dividends in the holding period and then remove the total change in the NAV. Finally divide this with the initial NAV when you purchased the fund. This can be calculated with - {Dividends +[NAV(end) - NAV(start)]}/NAV(start).

With these calculators, you would be able to plan your investment and know how close to your target you’ve reached.

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Why You Should Invest in ULIP: Unit Linked Insurance Plan

Investment plans should always have a firm plan and that is precisely what you get when you invest in Unit Linked Insurance Plans – it is a combination of insurance and investment. While many have reasons to think of the reasons to invest here, the honest idea is quite simple. Because it has elements of insurance as an aspect of it, you are in it for the long term. Just like you would with an insurance policy for your child or an investment for your child's wedding perhaps. It is long term and has plenty of benefits. What are they? Let's find out.

1.       You are protected: With a volatile market and not much to guarantee on economic conditions, there is a severe need to be sure of the goal you have in mind. Irrespective of the policyholder, your investment is safe. The final target which you had with the investment is cleared out in the event of death or at the period of maturity. You are safe from fluctuations and that keeps you protected.

2.       Tax exemptions: We are all struggling to reach our exemption limits with respect to tax. If your total investment is to a level of Rs 1 Lakh, this would be deductible and also the amount you get on maturity is tax free. Do note that this is applicable if the total premium paid is not over 20% of the insured amount.

3.       Flexibility: Not all investments give you this opportunity and with ULIP, you have just that. You can switch without any thought and that means a seamless and tax friendly method. You can do this at any time and change your portfolio in many ways.

4.       Long term thinking: Anyone who is planning to invest here should be thinking of exiting only after 12-14 years. That is a long time and the dividends come out only in such periods. When you enter this investment, you are protecting your long term goals and that gives you so much more than any short term investment.

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How to Calculate Mutual Fund Performance and Returns?

As we progress through our career and financial goals, there would come a time when you are required to take informed decisions on financial planning. Each time, you would have to take a call on the evaluation of the investment and how well you are planning it out. Yes, there has to be a diversified approach to your investment, but having a constant watch over the growth is a must.

Mutual funds are a common choice by many to plan out their investment for a long period. Equity based funds almost always beats other investment forms in the market today. To evaluate the performance of your fund, it is important to keep a benchmark. This benchmark will and must always give you an idea of exiting or progressing ahead.   

So, how would you go about this? Here are a few simple methods –

1.       Absolute return: The two most important dates with respect to an investment are – the beginning date and the end of the holding. This is calculated by the dividing the absolute change in the NAV from the investing period and the NAV during the start of the investment. The simplest advantage is that we can use this calculation on any kind of fund to track out the return. (NAV(end) - NAV(start))/NAV(start) would give you the percentage increase.

2.        Total return in fund: Another method to calculate the total return that has come from the fund is to include the dividends that are in place too. This can be calculated by adding the dividends which are spread across the holding period and with the total change to the NAV, divided by the NAV at the initial day. {Dividends +[NAV(end) - NAV(start)]}/NAV(start)

With these calculations, the mutual fund performance can be tracked and you would be able to know when the fund is performing well as per your ‘benchmark’.

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