FAQ’s & Knowledge Center


Mutual Fund Concepts

Mutual Fund is essentially a mechanism of pooling together the savings of a large number of small investors for collective investment, with an avowed objective of attractive yields and capital appreciation, holding the safety and liquidity as prime parameters.
  • Channelling the savings of the public
  • Helps strengthen and develop a strong capital market
  • Thereby contributes to capital formation and the growth of the economy
  • Professional Management
  • Easy Liquidity
  • Reduction / Diversification of Risk
  • Reduction in transaction costs
  • Return Potential
  • Convenience and Flexibility
  • Portfolio Diversification
  • Well Regulated
  • Investor Protection
  • Switchover Facility
  • Low Operating Costs
  • Tax Benefit
Repurchase is a facility to liquidate the investments made in any of the scheme during the tenor of the scheme by surrendering the unit certificates / statement of accounts at the Net Asset Value of the scheme. Redemption is the closure of the scheme at the expiry of the tenor of the scheme.
The charges made by the fund managers to the investors to cover the distribution / sales / marketing expenses are often called “LOAD”. The Load charged to the investor at the time of entry into a scheme is called Entry Load. The Load that the investor pays at the time of exit is called a back-end or Exit Load.
Contingent Deferred Sales Charges (CDSC) is imposed at the time of redemption or repurchase during a specified period. It is a form of load to recover the selling expenses of a fund.
  • Chances of appreciation over time
  • Better hedge against inflation
  • Growth funds have outperformed the other asset class over long term
  • Better than Gold, real estate: due to better liquidity and low transaction cost
  • From the investor point of view to see the returns over a period of 3 months, 6 months, and 12 months etc.
  • Compare the peer group in the category and benchmark the return.
  • Look at the risk -return relationship.
  • Analyze the long- term performance to understand the consistency of performance in bull and bear markets.
  • The performance of a fund can be measured by quantitative tools like Sharpe and Treynor ratios.
  • Balanced Funds: Ideal for investors preferring moderate capital appreciation and income regularly
  • Diversified funds: Ideal for the investors seeking appreciation over medium to long term. Investments in equities across various industries / sectors either large cap or small cap
  • Index funds: Ideal for the investors who wishes to and also satisfied with returns equal to that of index
  • Sector specific fund Ideal for investors who wish to invest in a particular segment or sector
Risk can only be minimised by professional management of fund. RISK CANNOT BE ELIMINATED. In the long run the fund will always gain.
No. There are no assured returns in Mutual funds. The returns can be higher over a long period. In case any mutual fund wants to assure returns they can do so, by clearly expressing the safety net / safety cushion available equivalent to the amount assured and the source in place.
Systematic Investment Plan is a method of investing into the fund of investor’s choice at regular intervals over defined time frame. This helps the investor to invest monthly, quarterly etc. Since the amount is invested regularly and it is constant, the investor is able to get more number of units in the falling market and fewer unit when the price is high. This helps the investor to smoothen out the market fluctuations and the investment will be at a low cost over a period. This strategy in investing is called “Rupee Cost Averaging”.
Just like the above, withdrawal of funds in a regular interval; benefit in the rising market to reap the benefit out of average increase in the earnings.
As per SEBI Guidelines; and also, the reason that any investment has certain amount of risk like; Market volatility in case of investment in Equities, Credit risk / interest risks in case of debt funds etc. However in the medium to long run there is always growth in the Mutual Fund schemes due to their wide and varied portfolio.


Investing Fundamentals

It’s actually pretty simple: investing means putting your money to work for you–actually, it’s a different way to think about how to make money. Growing up, most of us were taught that you can earn an income only by getting a job and working. And so that’s what most of us do. But there’s a limit to how much we can work and how much money we make out of it–not to mention the fact that having a bunch of money is no fun if we don’t have the leisure time to enjoy it.

So, since you cannot create a duplicate of yourself to increase your working time, you need to send an extension of yourself–your money–to work. That way, while you are putting in hours for your employer, sleeping, reading the paper, or socializing with friends, you can also be earning money elsewhere. Quite simply, making your money work for you maximizes your earning potential whether or not you receive a raise, decide to work overtime, or look for a higher–paying job.

There are many different ways you can go about making an investment. This includes putting money into stocks, bonds, mutual funds, real estate, gold etc. The point is that no matter the method you choose to invest, the goal is always to put your money to work so it earns you an additional profit. Even though this is a simple idea, it’s the most important concept for you to understand.

Investing is NOT gambling. Gambling is putting money at risk by betting on an uncertain outcome with the hope that you might win money. Part of the confusion between investing and gambling, however, may come from the way some people use investment vehicles. For example, it could be argued that buying a stock based on a ‘hot tip’ you heard at the water cooler is essentially the same as placing a bet at a casino.

A ‘real’ investor does not simply throw his or her money at any random investment; he or she performs thorough analysis and commits capital only when there is a reasonable expectation of profit. Yes, there still is risk, and there are no guarantees, but investing is more than simply hoping lady luck is on your side.

Obviously, to earn more money.

However, investing is becoming less of an extra thing to do and more of a necessity. For the average person, investing is the only way they can retire and yet maintain their present standard of living.

By planning ahead you can ensure financial stability during your retirement. Now that you have a general idea of what investing is and why you should do it, it’s time to learn about how investing lets you take advantage of one of the miracles of mathematics: compound interest.

Albert Einstein said that compound interest is ‘the greatest mathematical discovery of all time.’

The wonder of compounding (sometimes called ‘compound interest’) transforms your money into an income-generating tool. Compounding is the process of generating earnings (multiplying your money) on presently invested money. To work, it requires two things: (1) the re-investment of earnings, and (2) time. The more time you give your investments, the more you are able to accelerate the income potential of your original investment, which takes the pressure off of you.

To demonstrate, let’s look at an example:

If you invest INR1, 000 today at 6 per cent, you will have INR1, 060 in one year (INR1, 000 x 1.06). Now let’s say that rather than withdraw the INR60 gained from interest, you keep it in there for another year. If you continue to earn the same rate of 6 per cent, your investment will grow to INR1, 123.6 (INR1, 060 x 1.06) by the end of the second year.

Because you re-invested that INR60, it works together with the original investment, earning you INR123.6 in total, as against INR120 that you would have earned if you had kept INR1000 for two years without reinvesting the INR60. This is INR3.60 more interest than the previous year. This little bit extra may seem a paltry amount now, but let’s not forget that you didn’t have to lift a finger to earn the extra INR3.60. More importantly, this INR3.60 also has the capacity to earn interest. After the next year, your investment will be worth INR1, 191.016 (INR1, 123.6 x 1.06). This time you earned INR191.016, which is INR11.016 more interest than the first year. This increase in the amount made each year is compounding in action: interest earning interest on interest and so on. It’ll continue as long as you keep re-investing and earning interest.

Consider two individuals, we’ll name them Ram and Sham. Both Ram and Sham are the same age. When Ram was 25 he invested INR15, 000 at an interest rate of 8.0 per cent. For simplicity, let’s assume the interest rate was compounded annually. By the time Ram reaches 60, he will have INR221, 780 (INR15, 000 x [1.08^35]) in his bank account.

Ram’s friend, Sham, did not start investing until he reached age 35. At that time, he invested INR15, 000 at the same interest rate of 8 per cent compounded annually. By the time Sham reaches age 60, he will have INR102, 727 (INR15,000 x [1.08^25]) in his bank account.

What happened? Both Ram and Sham are 60 years old, but Ram has INR119, 053 (INR221, 780 – INR102, 727) more in his savings account than Sham, even though he invested the same amount of money! By giving his investment more time to grow, Ram earned a total of INR206, 780 in interest and Sham earned only INR87, 727.

Even though all investors are trying to make money, they all come from diverse backgrounds and have different needs. It follows that specific investing vehicles and methods are suitable for certain types of investors. Although there are many factors that determine which path is optimal for an investor, we’ll look at three main categories: investment objectives, timeframe, and your personality.
Generally speaking, investors have a few primary objectives: safety of capital, current income, or capital appreciation. These objectives depend on a person’s age, stage/position in life, and personal circumstances. A 65-year-old widow living off her retirement savings is far more interested in preserving the value of investments than a 33-year-old business executive would be. Because the widow needs income from her investments to survive, she cannot risk losing her investment. The young executive, on the other hand, has time on his or her side and can therefore risk losing his money simply because he has time to make more money An investor’s financial position will also affect his or her objectives. A multi-millionaire is obviously going to have very different goals compared to a newly married couple just starting out.
As a general rule, the shorter your time horizon, the more conservative you should be. If your investment is for a long-term objective like retirement planning and you are still in your 20s, then you still have time to make up for losses and can therefore invest in aggressive investment vehicles like stocks. At the same time, if you start when you are young, you have the power of compounding on your side. On the other hand, if you are about to retire, then the opportunity to recover losses on your investments is limited and therefore it is critical to invest your assets conservatively.
Peter Lynch, one of the greatest investors of all time, has said that the ‘key organ for investing is the stomach, not the brain.’ In other words, you need to know how much volatility you can stand to see in your investments. Figuring this out is difficult; but there is some truth to an old investing maxim: you’ve taken on too much risk when you can’t sleep at night because you are worrying about your investments. This is an indicator of your investment personality.
By now it is probably clear to you that the main thing determining what works best for an investor is his or her capacity to take on risk (to get an indication of your risk taking ability, use our Risk Profiler). The core factors that define your risk tolerance are:

  • Investment Objectives
  • Timeframe
  • Your personality


Portfolio construction fundamentals

Deciding what amount of risk you can take while remaining comfortable with your investments is very important.

In the investing world, the dictionary definition of risk is the chance that an investment’s actual return will be different than expected. Technically, this is measured in statistics by standard deviation. Practically, risk means you have the possibility of losing some or even all of your original investment.

Low risks are associated with low potential returns. High risks are associated with high potential returns. The risk return trade-off is an effort to achieve a balance between the desire for the lowest possible risk and the highest possible return. The risk return trade-off theory is aptly demonstrated graphically in the chart below. A higher standard deviation means a higher risk and therefore a higher possible return.

A common misconception is that higher risk equals greater return. The risk return trade-off tells us that the higher risk gives us the possibility of higher returns. There are no guarantees. Just as risk means higher potential returns, it also means higher potential losses.

How do you know what risk level is most appropriate for you? This isn’t an easy question to answer. Risk tolerance differs from person to person. It depends on goals, income, personal situation, etc. Hence, an individual investor needs to arrive at his own individual risk return trade-off based on his investment objectives, his life-stage and his risk appetite.

Diversification is a risk-management technique that mixes a wide variety of investments within a portfolio in order to minimize the impact that any one security will have on the overall performance of the portfolio.

Diversification essentially lowers the risk of your portfolio. There are three main practices that can help you ensure the best diversification:

Spread your portfolio among multiple investment vehicles such as cash, stocks, bonds, mutual funds, and perhaps even some real estate. Alternately you could invest only in mutual funds but of varied types. For example you could invest 30 per cent in equity schemes, 40 per cent in debt/income schemes and 30 per cent in money market schemes. You could also invest in commodity funds although as and when permitted by SEBI

Vary the risk in your securities. If you are investing in equity funds, then consider large cap as well as small cap funds. And if you are investing in debt, you could consider both long term and short term debt. It would be wise to pick investments with varied risk levels; this will ensure that large losses are offset by other areas.

Vary your securities by industry. This will minimize the impact of specific risks of certain industries Diversification is the most important component in helping you reach your long-range financial goals while minimizing your risk. At the same time, diversification is not an ironclad guarantee against loss. No matter how much diversification you employ, investing involves taking on some sort of risk.

If you ask any professional investor what their hardest task is, he or she will tell you that it is timing the market. Trying to time the market is a very tricky strategy. Buying at the absolute low and selling at the peak is nearly impossible in practice. This is why investment professionals preach rupee cost averaging (RCA).

RCA is the process of buying fixed amounts into a security/stock/mutual fund at fixed points in time regardless of the prevailing price. This means you buy more units of the security at lower prices, and fewer units at higher prices. The cost per unit/share over time therefore averages out. This reduces the risk of investing a large amount in a single security/mutual fund at the wrong time.

This principle is very powerful and works best over long periods of time. The Systematic Investment Plans (SIPs) launched by mutual funds work on this principle and are therefore a highly recommended investment option.

Asset allocation is an investment portfolio technique that aims to balance risk and create diversification by dividing assets among major categories such as bonds, stocks, real estate, and cash. Each asset class has different levels of return and risk, so each will behave differently over time. At the same time that one asset is increasing in value, another may be decreasing or not increasing as much.

The underlying principle of asset allocation is that the older a person gets, the less risk he or she should face. After you retire you may have to depend on your savings as your only source of income. It follows that you should invest more conservatively at this time since asset preservation is crucial.

Determining the proper mix of investments in your portfolio is extremely important. Deciding what percentage of your portfolio you should put into stocks, mutual funds, and low risk instruments like bonds and treasuries isn’t simple, particularly for those reaching retirement age. Imagine saving for 30 or more years in the stock market only to see the stock market decline in the years just before your retirement! Therefore one must change asset allocation over time to move more towards safer asset classes (bonds, treasuries) as one gets older. To determine your asset allocation plan, we suggest you speak to an investment advisor who can customize a plan that is right for you.