[Gautam Misra]

What is a mutual fund:
A mutual fund is a professionally managed type of collective investment that pools money from many investors to buy stocks and other financial instruments.

Advantages:

• Better returns due to diversification

• Professional investment management

• Ability to participate in investments that may be available only to larger investors

• Lower Tax cuts

Disadvantages:

• Low Transparency over costs

• Less predictable income

• New tax regime from 2012

Prominent Fund Houses:

• HDFC
• SBI
• ICICI
• Reliance MF
• Sundaram Finance
• Birla Sun Life
• DSP Black Rock
• Fidelity MF
• Franklin Templeton
• IDFC

Types of Mutual Funds:

The following are some of the different types of Mutual Funds. Kindly take note that the list is not exhaustive.

• Equity Diversified
• Tax Saving (will die a natural death after 1.4.2012)
• Debt Funds
• Gold
• Balanced Funds

Prominent Recommended Funds

• HDFC Equity
• DSP Black Rock Top 100
• Reliance Growth
• HDFC Top 200
• Birla Sun Life Dividend Yield
• ICICI Prudential Discovery
• HDFC Prudence (Balanced Fund - safer option)

[Gautam Misra]

As per the the new Direct Tax Code which may be effective from 1.4.2012 the Mutual Funds which are classified as "Tax Savers" qualifying for tax breaks will no longer be eligible for Tax Cuts.

Some of the recommended Tax Savers are-

• HDFC TAX SAVER
• FRANKLIN TAXSHIELD
• SUNDARAM Tax Saver

The lists given by me are not exhaustive and one can make his own research before investing.

One key thing - Mutual Fund Investments are subject to Market Risks.

[vina]

Very good post and will probably help several BHPians. I have some comments -

Originally Posted by Gautam Misra

What is a mutual fund:
A mutual fund is a professionally managed type of collective investment that pools money from many investors to buy stocks and other financial instruments.

Advantages:

• Better returns due to diversification

Actually better safety due to diversification is more apt. For a lucky guy returns may sometimes be better by direct investment.

• Professional investment management

• Ability to participate in investments that may be available only to larger investors

• Lower Tax cuts

I believe you meant lower taxes.

I'll also add:

• Liquidity (compared to investments like Real Estate and FD)
• Very little knowledge of markets required (can be gained over a weekend)
• Convenience (most banks allow you to buy it online from your bank account)

Disadvantages:

• Low Transparency over costs

Biggest problem - always check fund management charges and other fees.

• Less predictable income

• New tax regime from 2012

This still is not that big a problem - almost all other investments (FD, real estate ...) are taxed at a higher rate.
Also between owning stocks and owning mutual fund units, the latter gives you continuous diversification without short term capital gains tax.

Prominent Fund Houses:

• HDFC
• SBI
• ICICI
• Reliance MF
• Sundaram Finance
• Birla Sun Life
• DSP Black Rock
• Fidelity MF
• Franklin Templeton
• IDFC

Types of Mutual Funds:

The following are some of the different types of Mutual Funds. Kindly take note that the list is not exhaustive.

• Equity Diversified
• Tax Saving (will die a natural death after 1.4.2012)
• Debt Funds
• Gold
• Balanced Funds

Prominent Recommended Funds

• HDFC Equity
• DSP Black Rock Top 100
• Reliance Growth
• HDFC Top 200
• Birla Sun Life Dividend Yield
• ICICI Prudential Discovery
• HDFC Prudence (Balanced Fund - safer option)

Rediff Money, Outlook Money, moneycontrol.com etc. list hundreds of mutual fund with a lot of advice (though quite a bit of it is questionable - but given the complete lack of financial knowledge in most of our population even this advice is good)

[sgiitk]

Let me add my tuppence worth, having being a MF subscriber for well over a decade:

For a lazy chap like me, Equity Diversified are the best.
There are flavours here as well
1. Predominantly Giant/Large Cap- FT Blue Chip, etc. The safest but in General with the lowest long returns. There are also many with the Top xxx tag which can be classified here. HSBC has fallen a bit in the Value Research rratings but over 5 years it is at par with its many peers. Obviously you cannot be selective only in the bad times!

2. Giant/Large Cap with significant midcap exposure: DSPBR Equity, HDFC Equity, Templeton Equity Income (a true Mark Mobius fund).

3. Dynamic funds: all over as the FM seems fit - ICICI Dynamic, etc.

4. Primarily/totally small/mid cap: IDFC Premier, SME, etc.

5. Balanced Equity based: With 60 (or is it 65%) in Equity at all times these enjoy the same tax treatment as Equity Funds. Lower returns but safer - good examples HDFC Prudence, DSPBR balanced.

6. Balanced Debt based: these do not have tax benefits (expect indexation) and I think a 20% tax rate. Here the manager has the option to go totally into debt (see the terms) if he so feels.

7. Puccca debt: Again many flavours. These may not always do better than FDs!

Look out. In my own experience all the better funds in a category are similar with similar portfolios, and returns. So not much fun in over diversifying. Pick up, say, four or five fund houses and stick with them. If you look over a five plus year time frame, you will not lose (vis a vis FDs) in an equity based fund, unless you are very unlucky.

Yes, ELSS have been removed from next year, but 2011-12 can take another tranche of investment. The DTC is not very clear, but seems to be having the potential to hit the elderly. Many have cashed their PPFs and may be left with no real avenues for 80C with ELSS, NSC's etc all history. Banks also messed up saying that a max three renewals of a PPF were allowed.

You cannot expect a 65 something to go for a PPF which will mature only when he/she is 80+.

I find the Value Research ratings very good, but seem to be working on a time frame which is shorter than I like.

[BaCkSeAtDrIVeR]

All funds have a "benchmark" index against which the fund managers expect us to assess performance of that particular fund. So, if your fund gives a smart 25% return over six months and the index against which the fund is benchmarked gives a 36% return for the same period,your fund has underperformed.

Or if the fund erodes in value by 10% while the index erodes in value by 15%, you have an exceptionally good fund manager.

Some funds are "index funds" - means they invest in the shares which constitute that index in same proportion as that index is made of. WHich means the value of the investment will move exactly in tandem with movements of the index.

Some ldi0ts like yours truly prefer not to invest in mutual funds because they like the sense of thrill and danger of investing directly in the market. (I however have a small invest ment in ELSS funds - for tax saving purposes).

Investing MFs is like buying a car. There are two kinds of car buyers - the "follow crowd" types - which blindly buy the car which most others buy - based on brand and numbers of service stations nearby.

But like some of us who look at the inane and irrelevant things like turning radius, torque curve, gear ratios, etc. before buying cars, there are guys who look at the weekly statements published by fund houses listing the shares held by each fund before making the investment.

Some funds are exclusively for buying debt instruments.

Some funds are for investing in overseas equities.

Some funds are open ended. "Close ended fund" means they are converted back into cash and sent back into your bank account at end of the fund's duration. (so make your own conclusion about what an open ended fund means).

Some funds will give your your returns in cash every year, by declaring a dividend. Some funds are "growth" schemes - no dividend is declared. Some schemes are "dividend reinvestment" schemes - dividend declared is converted into more units of the fund. Most schemes give an option between both growth and dividend schemes.

You can put in a small mount in a mutual fund every month. When you do this, this is called a "systematic investment plan" or SIP for short. The units you get for each tranche of investment you make is linked to the value of each unit on the day the SIP is received by the fund house.

I check net asset value of each scheme from this link :-

http://www.amfiindia.com/spages/NAV1.txt

That is updated every day, sometime late in the evening.

You need to go through a special "KYC" process before investing in a MF. The SEBI says you need to go through that process only once. I say "you need to go throguh that process only once in a few months".

You can buy mutual funds through your share broker and keep them in your demat a/c; but you still need to comply with that special KYC process for MFs.

Dividend and proceeds from ELSS funds are not taxable.

Will somebody please enlighten about taxation status of other kinds of funds?

[download2live]

Originally Posted by sgiitk

Let me add my tuppence worth, having being a MF subscriber for well over a decade

Sirji, You are the person who is best placed to answer my questions. I have started a SIP (not the tax saving ones, usual HDFC and Reliance growth etc) since last year and plan to carry on with it till at least 5 years minimum. Since you already have been there since last 10yrs, tell me this: Have the returns managed to beat the inflation?

Friends say it does. But I want to hear it from you.
I assume worst case inflation of 18%. When my advisor says that you will get minimum 20% return no matter what over a period of 5 years, then I start thinking will it still be a positive return if I adjust for inflation too. If post adjustment returns are puny, then I would rather go for gold coins.

I know people will suggest real estate but I wont think beyond a flat an that too for living and not as investment. And no plot buying in Bangalore. Its too messed up.

[rishab.k]

Originally Posted by BaCkSeAtDrIVeR

Dividend and proceeds from ELSS funds are not taxable.

Will somebody please enlighten about taxation status of other kinds of funds?

ELSS funds have a lock in period of 3 years.

There is no long term capital gains or LTCG (i.e. if held for at least 12 months) tax on equity oriented mutual funds & a 10 % tax on short term capital gains plus education cess & applicable surcharges.

LTCG tax on liquid & debt funds would be 10 % without indexation or 20 % with indexation, whichever is less.Any STCG in these funds would be according to your income tax slab.

[vina]

Originally Posted by BaCkSeAtDrIVeR

All funds have a "benchmark" index against which the fund managers expect us to assess performance of that particular fund. So, if your fund gives a smart 25% return over six months and the index against which the fund is benchmarked gives a 36% return for the same period,your fund has underperformed.

Or if the fund erodes in value by 10% while the index erodes in value by 15%, you have an exceptionally good fund manager.

Some funds are "index funds" - means they invest in the shares which constitute that index in same proportion as that index is made of. WHich means the value of the investment will move exactly in tandem with movements of the index.

Some ldi0ts like yours truly prefer not to invest in mutual funds because they like the sense of thrill and danger of investing directly in the market. (I however have a small invest ment in ELSS funds - for tax saving purposes).

I belong to your category of idiots - this is dangerous for new investors though. If you are up to it we can discuss the strategies and methods offline.

Investing MFs is like buying a car. There are two kinds of car buyers - the "follow crowd" types - which blindly buy the car which most others buy - based on brand and numbers of service stations nearby.

But like some of us who look at the inane and irrelevant things like turning radius, torque curve, gear ratios, etc. before buying cars, there are guys who look at the weekly statements published by fund houses listing the shares held by each fund before making the investment.

Some funds are exclusively for buying debt instruments.

Some funds are for investing in overseas equities.

Some funds are open ended. "Close ended fund" means they are converted back into cash and sent back into your bank account at end of the fund's duration. (so make your own conclusion about what an open ended fund means).

Some funds will give your your returns in cash every year, by declaring a dividend. Some funds are "growth" schemes - no dividend is declared. Some schemes are "dividend reinvestment" schemes - dividend declared is converted into more units of the fund. Most schemes give an option between both growth and dividend schemes.

You can put in a small mount in a mutual fund every month. When you do this, this is called a "systematic investment plan" or SIP for short. The units you get for each tranche of investment you make is linked to the value of each unit on the day the SIP is received by the fund house.

I check net asset value of each scheme from this link :-

http://www.amfiindia.com/spages/NAV1.txt

That is updated every day, sometime late in the evening.

You need to go through a special "KYC" process before investing in a MF. The SEBI says you need to go through that process only once. I say "you need to go throguh that process only once in a few months".

You can buy mutual funds through your share broker and keep them in your demat a/c; but you still need to comply with that special KYC process for MFs.

I think you can apply for the KYC at the same time as applying for the first mutual fund investment - both happen at the same time.

Also KYC is linked to your PAN number (that is a MUST before you event think about investments) and once you have KYC done for any other investment it is not needed to be done again.

Dividend and proceeds from ELSS funds are not taxable.

Will somebody please enlighten about taxation status of other kinds of funds?

Debt funds - 20% or indexed (if held for a year).
Equity funds - 15% or indexed (if held for less than a year) 0% for more than a year.
Dividend income in not taxed in the hands of the investor (taxes already paid by the company paying dividends)

It is best to check with in the fund prospectus or on the internet before making an investment.

[vina]

Originally Posted by download2live

Sirji, You are the person who is best placed to answer my questions. I have started a SIP (not the tax saving ones, usual HDFC and Reliance growth etc) since last year and plan to carry on with it till at least 5 years minimum. Since you already have been there since last 10yrs, tell me this: Have the returns managed to beat the inflation?

Friends say it does. But I want to hear it from you.
I assume worst case inflation of 18%. When my advisor says that you will get minimum 20% return no matter what over a period of 5 years, then I start thinking will it still be a positive return if I adjust for inflation too. If post adjustment returns are puny, then I would rather go for gold coins.

I know people will suggest real estate but I wont think beyond a flat an that too for living and not as investment. And no plot buying in Bangalore. Its too messed up.

SG sir will add much better than what I'm writing here but a few things:

20% return may or may not happen. Also adjusted for inflation in the past 10yrs stock market has returned way more than FDs etc., some economists have argued that the party is over. And Gold over a long period may or may not be a good bet (before 2005 it had been really lousy for 20yrs).

Personally I suggest you put most of your money into equity mutual funds till you are 35 and then start putting more into debt mutual funds (more secure than eauity - similar to FD, far better liquidity).


regarding real estate - while as an investment I actively dissuade people, owning a house is a wonderful experience and you must look into that if you are going to be in any city for at least 5yrs.

[sgiitk]

Originally Posted by ghodlur

Bad news is Gold is again is zoom away from the reach.

There are a few (about 4-5) Gold Funds as well. I am entering one.

[Gautam Misra]

It is really nice that the "original" thread has been restored. A big thank you to technocrat.
In fact the restoration is timely as with the recent dip in equity markets, it may be an appropriate time to invest in MFs.

Happy investing.

[phamilyman]

or it may be a good time to withdraw your money and invest later?

We bought a handful of reliance stock the day the stock market dipped below 8000 points. That one buy has erased the losses of lemon stocks like RCOM and suchlike.

Given that we're in for another recession - what do junta think about taking their money out?

[sgiitk]

@phamilyman; Hope beats eternal in the human breast.

I recall a bank FA recommending (with approval of the HQ) that investors pull out of Equity when the Sensex crossed 6000. I fortunately did not take his advice. We all know what happened.

Remember, that with a share transaction there is a buyer and a seller, and both expect to make a profit - so one will turn out to be wrong. If you are a long term investor (5-10 year perspective) do not try to time the market, just stay put.

I may add what I heard from an Insurance Guy. The maximum percentage of your capital which should be in Equity in 100-<your age>. This is very sensible, since you may need the money when to market is down.

[mobike008]

I am not a finance guy. Appreciate some inputs

Invested in two different SIP's a few weeks ago. Both are from HDFC MF's

a) Top 200

b) Equity

Each SIP is Rs.10,000/month and Hope to invest for 3 years minimum. Any idea what should be a fair returns expectation?

[ghodlur]

Originally Posted by mobike008

I am not a finance guy. Appreciate some inputs

Invested in two different SIP's a few weeks ago. Both are from HDFC MF's

a) Top 200

b) Equity

Each SIP is Rs.10,000/month and Hope to invest for 3 years minimum. Any idea what should be a fair returns expectation?

HDFC Top 200 is a good fund.

IMO the diversification till 45 yrs of age should be 70% - Equity, 15% - Balanced & 15% - debt funds. Thats my investment allocation till now. As you go beyond the age of 45 the equity exposure should reduce with an increase in an exposure to Balanced and debts funds.

Apart from these One should also try to invest in PPF too.