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Frequently Asked Questions

A mutual fund is a scheme in which several investors pool their money, which in turn gets invested by a professional fund manager. He/she may invest these contributions in stocks, bonds, gold, and/or a combination of these. We call them securities. When these securities are grouped at one place in a mutual fund scheme, these are referred to as a portfolio. In this way, mutual funds provide you an opportunity to invest in a variety of assets through which you can build wealth for your financial goals. Mutual funds are for everyone- whether it’s a first-time investor or an experienced investor, anyone may invest in mutual funds and get his/her portfolio managed by experts.

Every mutual fund has an investment objective that it attempts to achieve. It can be as varied as wealth creation to generate fixed income for the investors. Based on this objective, the fund manager decides the scheme’s asset allocation or how to distribute your investment between stocks and bonds. Afterward, he/she identifies a suitable set of securities and buys them at the right time. Put together, these securities form the portfolio composition of the scheme. Post that, you are assigned fund units in the proportion of your investment in the fund. The value of your units is known by the Net Asset Value (NAV) and this may change daily due to market fluctuations. Over the long run, as and when the prices of underlying securities rise, the fund NAV goes up to multiply your investments.

Broadly, mutual funds are of three categories i.e. equity funds, debt funds, and hybrid funds. Here’s an overview of each one of these:

a. Equity Funds

These funds employ your invested capital in stocks of companies that are present in one or more sectors. They use the growth potential of stocks to build wealth over the long term. The gains come by way of dividends and capital appreciation. The invested capital multiplies when the stock prices rise. These funds entail a relatively higher market risk that causes their NAV to fluctuate severely as compared to other fund categories. At the same time, these funds hold a prospect to deliver relatively higher returns on investment when you stay invested for more than 5 years. This makes them suitable to fulfill long term goals like children’s higher education, retirement planning, and others.

Within equity funds, you may find sub-categories based on market capitalization and investing strategy. The former include funds like Large/Mid/Small Cap funds, Large and Mid Cap Funds, and MultiCap Funds. The latter includes funds like Value Funds, Contra Funds, Focused Funds, Sectoral/Thematic Funds, Dividend Yield Funds, and Equity Linked Savings Scheme (ELSS Funds).

b. Debt Funds

These funds park your invested money in securities like treasury bills, government securities, commercial paper, and bonds that generate fixed income. Their main objective is the safety of investments and to offer a regular income across several time horizons. The invested capital multiplies when the bond prices rise. These funds have a lower risk that makes the fund NAV to fluctuate moderately as compared to equity funds. At the same time, these funds have the potential to deliver moderate returns on investment over a short to medium-term horizon. This makes them ideal to fulfill intermediate goals like building an emergency fund, planning an exotic vacation, and others. Within debt funds, you would find sub-categories based on duration and theme. The former includes funds like Overnight Funds, Liquid Funds, Ultra-Short/Low/Short/Medium/Long Duration Funds, Money Market Funds, Medium to Long Duration Funds, and Dynamic Bond Funds. The theme-based sub-category includes funds like Corporate Bond Funds, Credit Risk Funds, Banking & PSU Funds, Gilt Funds, Gilt Fund with 10-year constant duration and Floater Funds.

c. Hybrid Funds

These funds invest across different assets like equity shares, debt securities, and gold in a given proportion. The equity component acts as a return booster whereas debt and gold provide the safety of capital during market volatility. These funds hold the potential to offer higher returns than plain vanilla debt funds. Thus, the overall portfolio risk is moderately high and the volatility of your fund value would depend upon the percentage of stock allocation in your portfolio. The structure of a hybrid fund portfolio makes it well-diversified by default. In a nutshell, these funds may help you to build adequate wealth for your bigger goals over the medium to long term.

Within hybrid funds, you may get several subcategories like Conservative/Balanced/Aggressive Hybrid Funds, Dynamic Asset Allocation/Balanced Advantage Funds, Multi-Asset Allocation Funds, Arbitrage Funds, and Equity Savings Funds.

While many investment options help you to grow wealth, here are a few reasons that would encourage you to invest in Mutual Funds:

a. Professional Fund Management

Mutual fund portfolios are looked after by the fund managers who know the capital markets and have experience in portfolio management. They keep an eye on the market movements and adjust your portfolio accordingly to offer optimal returns. This way you get free from worries of keeping track of the market and portfolio-related decisions. Thus, whether or not you possess financial knowledge, you can create wealth via mutual funds.

b. Higher Returns on Investment

With mutual funds, you get to earn relatively higher returns than other traditional forms of investments. It happens because, unlike bank FDs, mutual funds entail a higher amount of risk and are linked to capital markets. They compensate for this higher risk by offering you more returns that lead to the multiplication of wealth over the long term.

c. Flexibility of Investments

Open-ended mutual funds like Liquid Funds offer you high liquidity and flexibility to withdraw your investments in case of an emergency. Not only this, but you also earn higher short-term returns than a savings bank account.

d. Power of Diversification

Diversification involves distributing your investment amongst various assets to lower the risks involved. Mutual funds allow you the benefit of diversification by allocating your SIPs across several securities. This way, if one stock goes down, the other securities may balance it out by giving better performance.

e. Convenient Online Investing

With the opening up of several online mutual fund platforms, you may invest in mutual funds in a convenient and hassle-free manner. At Paytm Money, you can get your KYC done instantly and become investment-ready within minutes.

Anyone can invest in mutual funds to reach his/her short term and long term goals. However, it becomes necessary that you select a mutual fund based on your financial goals, target amount, risk profile, and investment horizon. When you are unsure of your risk profile, you can take a simple Risk Assessment at Paytm Money and know your risk profile.

If you have short-term goals that are, say 1-3 years ahead from today, or you need regular income from your investments, you may consider investing in debt funds. Debt funds are low-risk options that deliver better returns than traditional bank fixed deposits. Liquid Fund is a type of debt fund that gives you higher short-term returns than a bank account, with similar levels of liquidity. Additionally, if you are looking for an instant withdrawal facility along with higher returns, then Super Saver Funds may come to your rescue. Moreover, long-duration debt funds may be an ideal option for conservative investors who have an investment horizon of more than 5 years.

If you have intermediate goals that are, say 3-5 years further, then you may invest in balanced/hybrid funds. These funds give you the return aspect of equity along with the stability of debt. Moreover, you may earn higher returns than pure debt funds. Investors who have a relatively higher risk appetite may invest in Aggressive Hybrid Funds that invest around 60%-80% in stocks. Similarly, if you want to invest in a portfolio of multiple asset classes like stocks, bonds, and gold, then you may choose Multi-Asset Allocation Funds. Those who don’t have adequate time to rebalance their portfolio frequently and want to make the best use of market volatility may go for Dynamic Asset Allocation/Balanced Advantage Funds.

When you want to save for a long-term goal that is 5 or more years ahead, you may invest in Equity Funds. These funds are high-risk options that offer higher returns and enable you to accumulate greater wealth for your bigger goals like retirement planning. Owing to relatively greater market risk, these funds are suitable for investors who have an aggressive risk profile. Similarly, if you are looking to save taxes and grow wealth at the same time, then ELSS Funds may help you achieve your goal. Investing in ELSS Funds helps you to claim a tax deduction of up to Rs 1.5 lakh under Section 80C, which leads to a tax-saving of up to Rs 46,800. Likewise, Sector Funds and Thematic Funds offer you the growth potential of specific sectors/themes.

There are two ways through which you can go about investing in mutual funds – investing via a systematic investment plan (SIP) or through a one-time lump sum investment.

A lump sum investment involves investing the whole amount into a given mutual fund, in one go. It happens when you may have a big chunk of savings at your disposal and would want to invest it in a haven to earn short term returns. SIP, on the other hand, is a step-by-step way of investing wherein you choose to invest smaller amounts in a mutual fund at regular intervals. When you set up a monthly SIP, a fixed amount gets deducted from your savings bank account and is invested into the specific mutual fund.

It depends on individual preference and availability of income, which method one may choose to invest in mutual funds. However, if you are planning for a long haul and aim to build higher wealth then SIP may be a good option for you.

Here are a few benefits of investing via SIP:

a. Builds Discipline

When you invest via SIP, you commit yourself to a fixed schedule that helps you to save every month. This way you develop an investing habit and are positioned better off to stick to your financial goals.

b. Accumulates Higher Wealth

SIP enables you to benefit from the power of compounding that acts on your regular contributions. This allows you to earn interest on your original investment as well as on the capital gains that are reinvested every month. In the end, you get a relatively bigger corpus for your goals.

c. Keeps Away Worries

The fear of market risk may keep many investors from investing. Also, young investors may face difficulty about which is the right way to invest. Such procrastination may cause them to miss the immense growth opportunity that mutual funds offer. With SIP, you can put a stop to market-timing related worries as you get to invest a smaller amount regularly and spread your risks throughout your investment timeline.

d. Averages Investment Cost

SIP acts on the idea of rupee cost averaging. In this, with the same SIP amount, you get to buy more fund units during market downturns. Similarly, you get relatively lesser units when markets are on a rise. Over the long run, it lowers your overall cost of investment and boosts your returns.

e. Convenience

SIP offers a lot of convenience and flexibility by busting the misconception that mutual fund investing requires a lot of money. At Paytm Money, you can start an SIP of as low as Rs.100 every month in the mutual fund of your choice. Also, with the ‘Auto Pay’ feature, you can automate your SIPs and stay committed to your investments.