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A mutual fund collects money from investors and invests the money on their behalf. It charges a small fee for managing the money. Mutual funds are an ideal investment vehicle for regular investors who do not know much about investing. Investors can choose a mutual fund scheme based on their financial goal and start investing to achieve the goal.

An equity fund is a mutual fund that invests principally in stocks. It can be actively or passively (index fund) managed. Equity funds are also known as stock funds.Stock mutual funds are principally categorized according to company size, the investment style of the holdings in the portfolio and geography.The size of an equity fund is determined by a market capitalization, while the investment style, reflected in the fund’s stock holdings, is also used to categorize equity mutual funds.Equity funds are also categorized by whether they are domestic (U.S.) or international. These can be broad market, regional or single-country funds.Some specialty equity funds target business sectors, such as health care, commodities and real estate.

There are different types of Mutual Funds that invest in various securities, depending on their investment strategy.Debt Mutual Funds mainly invest in a mix of debt or fixed income securities such as Treasury Bills, Government Securities, Corporate Bonds, Money Market instruments and other debt securities of different time horizons. Generally, debt securities have a fixed maturity date & pay a fixed rate of interest.

The returns of a debt mutual fund comprises of –

  • Interest income
  • Capital appreciation / depreciation in the value of the security due to changes in market dynamics

Debt securities are also assigned a ‘credit rating‘, which helps assess the ability of the issuer of the securities / bonds to pay back their debt, over a certain period of time. These ratings are issued by independent rating organisations such as CARE, CRISIL, FITCH, Brickwork and ICRA. Ratings are one amongst various criteria used by Fund houses to evaluate the credit worthiness of issuers of fixed income securities.

There is a wide range of fixed income or Debt Mutual Funds available to suit the needs of different investors, based on their:

  • Investment horizon
  • Ability to bear risk

Different types of Debt Mutual Funds

There are different types of Debt Mutual Funds that invest in various fixed income securities of different time horizons.

  • Ultra Short Term Funds
  • Floating Rate Funds
  • Short Term & Medium Term Income Funds
  • Income Funds, Gilt Funds and other dynamically managed debt funds
  • Corporate Bond Funds

They bridge the gap between equity and debt schemes by investing in a mix of equity and debt securities. This adds a considerable amount of risk to the product and will suit investors looking for commensurate returns with higher levels of risk than regular debt funds.

  • Monthly Income Plans (MIPs) strive to offer the benefit of diversification across asset classes by investing a proportion of the portfolio in debt securities (70% to 95%) with a smaller allocation in equity securities (5 % to 30 %).
    As the correlation between prices of equity and debt is low, this product endeavors to give an investor returns that are relatively higher than debt market returns. MIPs can be classified as debt oriented hybrids that seek to –
  • generate income from the debt securities
  • maximise the benefits of long term growth from equity securities
  • aim for periodic distribution of dividends

However, an important point to be noted is that monthly income is not assured and it is subject to the availability of distributable surplus in the fund.

If you are new to the world of debt mutual funds, here’s what you need to know about the liquid fund category.Instead of parking your cash in a savings bank, why not put it where it fetches higher returns? A liquid fund is such an option. The risk in it is minimal, though not completely absent. Here’s how to make the most of a liquid fund.Liquid funds could also be used when you have a sudden influx of cash, which could be a huge bonus, sale of real estate and so on. Many equity investors also use liquid funds to stagger their in vestments into equity mutual funds using the systematic transfer plan (STP), as they believe this method could yield higher returns.

What is it?

A liquid fund is a debt mutual fund scheme. You use it if you have excess cash and think you might need the cash in a few days or weeks or months. If you wish to invest a large sum in an equity fund, but want to stagger the investments over a period, put your money in a liquid fund and enrol for a systematic transfer plan (STP) whereby you invest a fixed sum from your liquid fund to an equity fund each month.

A new fund offer (NFO) is the first subscription offering for any new fund offered by an investment company. A new fund offer occurs when a fund is launched, allowing the firm to raise capital for purchasing securities. Mutual funds are one of the most common new fund offerings marketed by an investment company. The initial purchasing offer for a new fund varies by the fund’s structuring.

Fund Offerings

Mutual funds are the most common type of new fund offering. New fund offerings can be for open-end or closed-end mutual funds. New exchange traded funds are also first offered through a new fund offering. Below are details on how to invest in a few of the market’s common types of new fund offerings.

Open-Ended Fund

In a new fund offer, an open-end fund will announce new shares for purchase on a specified launch day. Open-end funds do not limit their number of shares. These funds can be bought and sold from a brokerage firm on their initial launch date and thereafter. The shares do not trade on an exchange and are managed by the fund company and/or fund company affiliates. Open-end mutual funds report net asset values daily after the market’s close.

Fund companies can launch new fund offers for new strategies or add additional shares classes to existing strategies.

Close Ended Fund

A close-ended fund is a fund that has a defined maturity period, e.g. 3-6 years. These funds are open for subscription for a specified period at the time of initial launch. To provide liquidity these funds are listed on a recognized stock exchange. However, these funds are not very popular in India.

If you have a lump sum amount and want to transfer that amount over a period of time to Equity Funds, Systematic Transfer Plan (STP) is the most suitable option for you. Under a mutual fund Systematic Transfer Plan (STP), a lump sum amount you invested in one scheme can be transferred at regular intervals systematically in a piecemeal manner into another mutual fund scheme (as desired by you) of the same mutual fund house.

Most fund houses have a daily, monthly, weekly, and quarterly option to transfer money. But not all offer the weekly option – only a handful of them do. Moreover, different fund houses have different requirements for the minimum amount invested through STP.

How does STP work?

Mutual funds are the most common type of new fund offering. New fund offerings can be for open-end or closed-end mutual funds. New exchange traded funds are also first offered through a new fund offering. Below are details on how to invest in a few of the market’s common types of new fund offerings.

How does it work ?

To gain the maximum benefit of a STP and market volatility, a lumpsum amount can be initially invested in an ultra-short term debt fund and/or a liquid fund. This amount can be systematically transferred –monthly or quarterly – to an equity-oriented fund of your choice (but ideally which can prove worthy for long-term wealth creation) over a period.

If you would prefer to stay invested in liquid funds today, but going forward you also want to take a gradual exposure towards equity (as you perceive them to do well), you can certainly opt for the STP option offered by mutual funds. Likewise, if you expect the markets to undergo a corrective phase, and thus as a smart move you prefer gradually disinvesting from equity mutual funds, then you can opt for an STP from your equity fund and transfer into a liquid fund.

Also, while you plan some of your important financial goals such as buying your dream home, getting married, children’s education, their marriage, your retirement, etc.; STP can be of great utility because it can help you to shift gradually from equity to debt as you are near to your financial goals.

Under STP, a lump sum amount earlier invested by you can be transferred at regular intervals in a piecemeal manner systematically into another mutual scheme (as desired by you) of the same fund house. Typically, 6 such transfers are allowed by the fund houses. Also, most funds houses generally allow an STP from a debt mutual fund scheme to an equity mutual fund scheme, and only handful of them allow it vice versa. Likewise, most fund houses allow a monthly or a quarterly option, while a handful of them allow even a weekly or a quarterly option. Moreover, different fund houses have different requirements for the minimum amount to be invested through STP.

FMPs are closed-ended schemes with a pre-defined maturity, which invest in various debt instruments based on the investment objective and asset allocation of the Scheme such as debt instruments ,certificates of deposit (CDs) and commercial papers (CPs). Normally available tenures are 90, 180 and 370 days; and three years or like . FMPs’ one of the most attractive point is that they invest in a portfolio of debt securities whose maturity or tenure matches that of the scheme.

If the FMP is for 12 months, the fund manager will invest in instruments with a maturity of on or before 12 months, which helps to locking the yield of the portfolio and lowering the interest rate risk. In case interest rates are high at the time of the FMP’s launch, the invested portfolio would reflect high yields and, thus, be value accretive. For liquidity purposes, FMPs are listed on stock exchanges where you can buy / sell your units.

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