All About Mutual Funds on r/IndiaInvestments Wiki

What is a Mutual Fund?

Mon, 01 Jan 0001 00:00:00 +0000

What is a Mutual Fund?

A mutual fund is an instrument / vehicle by which a company (called Asset Management Company or AMC) collects money from investors by selling units / shares and using that money to make investments.

Depending upon the mandate; a mutual fund can invest in equities, bonds, a mix of both, gold, international equities, other mutual funds etc. So, mutual fund automatically does not mean equity mutual fund. Equity mutual funds are a subset of all mutual funds.

Types of Mutual Funds

Mon, 01 Jan 0001 00:00:00 +0000

Types of Mutual Funds

Income Objective

You have to opt for dividend option if you want to get the dividend declared to come to your account. Alternatively, you can opt for growth option and ask for a specific amount of money as per needs to get the actual income. This can be automated with SWP or it can be done as per your request.

Liquid Funds

These are a type of Money-market funds. These types of mutual funds invest in highly liquid and high credit rated securities with very short maturity time frames (usually less than 91 days) like CD (certificate of deposit which is a big FD), government securities, commercial papers, and corporate bonds (AA+ and above, mostly).

What and Why of Mutual Fund Ratings

Mon, 01 Jan 0001 00:00:00 +0000

What and Why of Mutual Fund Ratings

AKA Mutual Fund Rankings do not make Sense! Or Do They?

You will find lot of media (print, TV, blogosphere, sites) screaming their heads off about 5 star funds. Friends swearing about some sites about 5 star funds. We will try and dissect the methodology of this, and then the disadvantages.

The major sites (Valueresearchonline, Morningstar, Moneycontrol) first categorise different funds in different categories, according to their own whims and fancies (if you will check, they will tell you they have definite criteria but all those criteria are based on relatively short-term periods of recent past, eg. 1 year or 3 year). Few years back, VRO had a group of Diversified Equity, which later got divided into Large, Large-midcap, Multicap, Mid-Small cap. In future, it can happen with the higher number of funds, that there will be a Large-Medium-Mid and a Medium-Mid group too (who knows!).
According to their current portfolio, different funds are kept in different groups at different times. Eg, a flexi-cap fund like HDFC Equity will be placed in Large-mid cap fund group at one time, while at other times it will be put in multi-cap group (which is actually its group). So, the place of individual funds can change over time. Which means, if you categorise HDFC Equity as a 5 star fund in the large-mid cap fund group and later on, its group changes to multi-cap, then the rating of 5 star of large-mid cap is just junk for this particular fund. (For clarity sake, HDFC Equity can invest in any company, will prefer to get mid and large companies, and since its benchmark is CNX 500 (major 500 companies, so it is best characterised as a multi-cap).
The method of Rating. A Risk adjusted Return is followed which includes a lot of maths, usage of exotic terminology like ‘downside risk’, ‘utility function theory’,‘risk aversion’, etc. Then they compare monthly/weekly returns with a risk-free return (savings bank account rate or short term FD), and assign downside risk and excess returns, do some more jugglery in terms of percentages allocated to various parameters. Then all the funds of a category are separated into different star groups, the top 10% are awarded 5star rating, next 22.5% 4 star (so the top third are 4/5 star).
All these ratings are purely quantitative without any subjective component. If the main catalyst of all fund selection – eg the fund manager, leaves, there will be no change in the rating. Even, the complete change of the entire management team like Fidelity leaving lock-stock-and-barrel does not change the rating of their funds which have been taken over by L&T with a new team. Amazing, if you really look at it.
Then these ratings are disseminated to people in various forms and adverts. And people flock to the 4 and 5 star funds.

What are the problems in this way? Is it not better to use 4/5 star funds than to use the lower performing funds (the 1 and 2 star funds)?. Yes, selecting funds on basis of stars can be a good start, since most of the long term decent funds are 3 or 4 or 5 funds. But the problems are:

How to Select a Mutual Fund

Mon, 01 Jan 0001 00:00:00 +0000

How to Select a Mutual Fund

PRINCIPLES

It is important to understand that selection of mutual funds is NOT the first or the most important step in the making of a portfolio.

For all long-term investors, there is only one objective – maximum total real returns after taxes (John Templeton). Warren Buffett has specified the same with the phrase, across the prospective holding period.

CORE INVESTMENT BELIEFS

Investing is a young field with only a few decades old historical data. And new data cannot be created so scientific analyses cannot be applied rigorously to different trading / investing systems. That is probably a reason why there is no consensus system of something which works across everything (no irrefutable laws). So, you believe or you do not believe in them!

FAQs for Mutual Funds

Mon, 01 Jan 0001 00:00:00 +0000

FAQs for Mutual Funds

Can I buy mutual funds directly? Or do I need a broker like Zerodha? Or does it depends on MF/AMCs?

Refer to our FAQ on Best platform / app for buying mutual funds.

What is the best mutual fund app for investments?

Are MFs also stored in demat?

Not necessarily. Only if you buy from a broker, then you can see them in your demat account. In all other options, you get statements like demat accounts and it can work out completely online, eg. for a particular AMC, you can have an account wherein you can do all types of transactions. From Karvy/CAMS, you can get overall statements of all of your MF based on the PAN. There is no advantage of having MF units as demat.

SIP and Mandates

Mon, 01 Jan 0001 00:00:00 +0000

SIP and Mandates

Most retail investors prefer SIPs over any other mode of investments, reason being it’s automated, and drives the whole thing on auto-pilot.

It should be abundantly clear that SIP only automates the process of investing, and keeps investors disciplined. It’s a behavioral easing tool.

If you manually purchase (lumpsum first purchase, or additional purchase), for same amount, on SIP date; you’d receive same NAV and units against those NAVs.

How to Become Crorepati using Mutual Funds

Mon, 01 Jan 0001 00:00:00 +0000

How to Become Crorepati using Mutual Funds

Mutual funds are outstanding investment vehicles after you learn how to utilize them correctly. Most people, however, do not have a solid understanding or conviction about mutual funds.

The first absolutely essential point to understand is that the big money in mutual funds is always made by sitting through several business cycles. In other words, to reap large returns from funds, you have to have the strong belief and patience to sit tight for 10 or 15 years or longer. It’s like real estate. You may not make anything if you buy and later become impatient or shortsighted and sell out after only three or four years. It simply takes time. Nervous Nellies are not good fund shareholders. Investors in open-end investment companies, as mutual funds are sometimes called, tend to buy the best-performing fund after it has had a huge performance year. The next year or two will probably show slower or poorer results followed by an inevitable economic recession. This is usually enough to scare out those with less conviction or the “I want to get rich quick” fund holders.

Analysis using long term equity and debt funds in India

Mon, 01 Jan 0001 00:00:00 +0000

Analysis using long term equity and debt funds in India

Part 1: Only Equity Fund

Data used: NAV of Franklin Blue Chip funds, since its inception. Modifications: Used average monthly NAVs for analysis. I did not put the 2% investment charge which was there for most of the period.

Some basic data:

Time	NAV	Note
Dec 1993	9.4
Dec 1994	20.2	(a jump of 100%)
Dec 1995	15.6	-22% loss
Feb 1997	10.3	back to starting point of 3 years back (with 30% loss)
Feb 1998	14.0	40% up in 1 year, but still not recovered over 2 years
Jan 1999	20.3	gain in 1 year, but over last 4 years, Nowhere.
Feb 2000	57	almost tripled in 1 year (+200%)
Oct 2000	20.7	retraced back, & lost 65%, back to level of 6 years ago.
Oct 2001	16.1	20% more loss.
Nov 2002	20.3	same old story, back to 8 year level.
Jan 2004	53.9	again a 150% increase.
Jan 2005	61	just 11%
Jan 2006	92.9	50% more
Jan 2007	132	50% more
Jan 2008	181	50% more & 9 times in last 5 years.
Jan 2009	97	lost 50% in 1 year.
Jan 2010	186	gained 100% again
Jan 2011	217	an 11% increase
Jan 2012	196	a 10% loss.
Jan 2013	241	20% increase.
Jan 2014	242	flat.

Few conclusions: