Category: Mutual Funds

Value funds are open-ended equity funds that invest in undervalued shares. Meaning, these shares are worth more than their current value and may grow significantly over the years. The reason behind the lower value could be the financial situation, changes in the business model, funding of large in-house projects, or market competition. These factors temporarily affect the value of the company, which gets restored eventually.

So, the underlying shares will be of organizations that have high reputations and established businesses. Read along to find out who should invest in value funds.

How do Value Funds Work?

As per SEBI guidelines, fund managers must invest at least 65% of total assets in undervalued(equity) shares. Fund managers analyze the company’s growth plan before including the stock in the fund portfolio.

For example, ICICI Prudential Value Discovery Direct Growth has invested in shares of companies like Infosys, Reliance Industries, Bharti Airtel, Axis Bank, HDFC Bank, SBI to name a few.

Advantages of Investing in Value Funds

1. Significant Capital Gains

You purchase the stocks of companies at a discounted price with Value funds. Sooner or later, these companies will reach their true potential and beyond. The shares that are undervalued today will grow significantly over the years. You have to wait for the value to restore by staying invested for the long term.

2. Lower Risk

Fund managers strategically bring undervalued stocks into the scheme. You enter the fund when the underlying stocks are underperforming. But, these organizations have a good reputation and great track record. Therefore, the market conditions have a lower impact on these funds. 

3. Lower Volatility Concern

Equity funds can fluctuate frequently over a short duration. However, any equity fund is less volatile when you hold your investment for more than 5 years or so. In the case of value funds, there’s more possibility of value increment over a longer horizon. Holding your investment for at least 5 years can balance the risk of volatility.

Things to Consider Before Investing in Value Funds

1. Investment Horizon

You may have to hold your investment longer than any other equity funds. 4 to 5 years are ideal to beat volatility. However, it may take longer than that to reach the desired value. Be prepared to lock your money for 5+ years to benefit from significant growth. 

2. Underlying Assets

The value investment strategy may have large-cap companies or small/mid-cap companies for diversification. The allocation across the market cap will impact the overall risk of the fund. You may want to consider exploring underlying assets to ensure that the fund objective aligns with your portfolio.

3. Fund Performance

Evaluate the performance of the funds over a longer duration during various market cycles. That’ll give you an idea of the fund manager’s value investment strategy and capability to deliver returns. 

4. Expense Ratio

Fund houses charge investors a fee in the form of an expense ratio to manage funds. As per SEBI regulations, the expense ratio ranges from 0.8% to 2.25% depending on the assets under management of the fund. You may want to be aware of this fee beforehand to calculate the expected returns. 

Taxation on Value Funds

Value funds are equity mutual funds, therefore, follow equity taxation.

Investors have to pay a 20% tax on Short-Term Capital Gains(investments redeemed before 12 months).

Long-Term Capital Gains (investments redeemed after 12 months) will be taxed at 12.5% above 1.25 lakhs.

To lower tax liability, hold your investment for a longer duration. 

Who Should Invest in Value Funds?

Patience is the key while investing in Value funds. You may have to wait for years to gain significant wealth. Investors who are comfortable with a longer horizon, preferably more than 5 years, can invest in value funds. Invest your money and wait for it to steadily grow. 

Investors with moderate to high-risk appetites can take a bet on value funds to explore the potential of the scheme.

Conclusion

Technically speaking, value funds invest in companies having value. Value funds are less vulnerable to market volatility, offering downside protection. Therefore, these funds can significantly contribute to your wealth-building journey. You can start an SIP with a growth value fund for a longer horizon. But before that, talk to your financial advisor.

Make an informed decision with VNN Wealth. Get in touch with us anytime and plan your investments with us. 

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Thematic Mutual Funds are equity funds investing in companies connected to a specific theme. 

For example, rural consumption thematic funds will invest in companies that are likely to contribute to the growth of rural consumption in India. For example, FMCG companies, Retail, Telecom, infrastructure, consumer staples, automobiles, cement, etc. 

These funds allow investors to explore and include a specific theme in their portfolio. Interested in knowing more? Read along.

How Do Thematic Mutual Funds Work?

Thematic Funds are open-ended equity funds following a certain theme, an idea. Infrastructure Thematic Funds will invest in shares of cement, steel, power plant, etc.

According to SEBI, these funds must invest at least 80% of total assets into equities of the determined theme. The underlying assets in these funds are researched and strategically placed by the fund manager. 

How are Thematic Funds Different than Sectoral Funds?

As the name suggests, sectoral funds invest in a specific sector. For example, pharmaceutical sectoral funds will only invest in pharma companies. Thematic funds, on the other hand, diversify your assets among various companies tied to a single idea. These companies may belong to different sectors. 

Advantages of Investing in Thematic Mutual Funds

1. Exposure to a Specific Theme

Thematic funds allow investors to invest money in a particular trend or rising theme. For example, India is now embracing the advancement in healthcare. Therefore, companies directly or indirectly contributing to healthcare progress, such as pharmaceutical, biotech, and medical device manufacturing companies can come under healthcare thematic funds. Investing in funds that distribute your assets to a growing trend can create a huge impact over the years. It’s a unique, non-traditional investment strategy based on the economic growth of a certain theme.

2. Diversified Scheme Compared to Sectoral Funds

Thematic funds bring together various industries that other funds may not. For example, Large Cap funds will majorly invest in large-cap companies. Sectoral funds will only invest in a specific sector. Thematic funds invest in companies belonging to any sector and market cap. The only requirement is, these companies must be contributing to the growth of the theme. Therefore, these funds can bring diversity to your portfolio. 

3. Expert Fund Management

Fund managers put their skills, knowledge, and research together to create a thematic scheme. Investors wanting to invest in a specific idea won’t have to pick individual stocks. An expert will distribute your assets among shares of the right organizations. 

4. Possibility of Beating the Benchmark

Fund managers take economic growth, upcoming advancements, and various other factors to create a scheme. A right strategy backed by thorough research may generate benchmark-beating returns. 

Things to Consider Before Investing in Thematic Mutual Funds

1. Financial Goals and Investment Horizon

It takes a significant amount of time for any industry or theme to reach the highest mark. Therefore, thematic funds may take longer to bring the desired outcomes. You may have to stay invested for 5 or more years to benefit from that peak. We advise you to ensure your financial goals and investment horizon align with the scheme. Otherwise, you can consider investing in other mutual fund categories. 

2. Associated Risk

Thematic funds can be risky. The underlying theme, though trendy, may go through plenty of ups and downs. You may want to consider your risk appetite before investing. Evaluate your existing portfolio with your financial advisor before investing.

If you don’t have a financial advisor, give experts at VNN Wealth a call. We’ll walk you through the realistic possibilities of thematic or any other funds. 

3. Semi-Diversified Scheme Compared to Other Mutual Funds Categories

Thematic funds offer better diversity compared to sectoral funds. However, other categories such as Large-Cap or Flexi-Cap offer better diversity. The underlying assets in other equity funds balance each other. Whereas, in thematic funds, if a theme underperforms, the underlying companies may drop value all at once. Therefore, these funds are semi-diverse and the reward depends on the performance of the theme.

4. Expense Ratio

To get expert fund management, fund houses charge you a small fee in the form of an expense ratio. As per SEBI, the ratio ranges from 0.85% to 2.25% of the total managed assets. You can find the expense ratio associated with the fund in the factsheet. Make sure you are aware of the expense ratio to avoid confusion about your actual returns. 

Taxation on Thematic Mutual Funds

Thematic Mutual Funds follow equity taxation based on the holding period. Short-Term Capital Gains(Investments redeemed before 12 months) will attract a 20% tax. Long-Term Capital Gains(Investment redeemed after 12 months) above 1.25 lakhs will be taxed at 12.5%

Who Should Invest in Thematic Funds?

Thematic funds are suitable for investors with high-risk appetites and longer investment horizons. These funds can be risky, hence aren’t ideal for new investors. Though fund managers will take care of funds, investors must also be well-informed about the growing industries. These funds may go through aggressive volatility before reaching the peak. Investors who panic-sell funds may want to consider another scheme.

Conclusion

Thematic funds can deliver superior rewards with higher risk. Holding your investment for a longer horizon can help generate additional alpha on your portfolio using thematic funds. As mentioned above, these funds are suitable for evolved and experienced investors. Beginners can consider investing in other(slightly safer) equity funds before exploring thematic funds. 

Reach out to know more about equity or debt mutual funds. Make an informed investment decision with us.

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Sectoral Funds

Corporate bond funds are the type of debt funds that invest in bonds issued by companies. 

These funds can be of two types. 

• Funds investing in bonds with the highest possible credit rating, so the default risk is negligible. 
• Funds investing in bonds with a slightly lower credit rating that may deliver superior returns. 

Ideal for 1 to 4 years of investment horizon, here’s everything you need to know about corporate bond funds.

How do Corporate Bond Funds Work?

Any organization requires funds for smooth business operations. They can either take bank loans or offer equity instruments. 

However, there are several reasons a company would prefer issuing bonds such as exhausted bank limits, banks not funding a sector, or banks slowing down disbursement to name a few. Also, the company may not be ready for equity dilution. 

So instead, companies issue bonds to generate funds for business operations. 

Corporate bond funds open a gateway for investors to explore these debt instruments.

As per SEBI regulations, these funds need to invest at least 80% of the total assets into corporate bonds with an AA+ and above credit rating. The remaining 20% can be allocated to other debt instruments of varying credit ratings, which may or may not be AA+. Fund managers strategically invest the remaining 20% to benefit from the interest rate cycle. 

Underlying bonds can be of variable maturity periods. You may expect between 1 to 4 years of investment horizon with these funds. 

Benefits of Investing in Corporate Bond Funds

1. Superior Returns 

Corporate bonds carry higher credit risk compared to government bonds but at the same time, offer higher coupon rates to match the additional risk.

So if you are seeking higher returns than government bond funds or fixed deposits, and have the required risk appetite, you can invest in corporate bond funds. 

2. Safe to Invest in

Corporate bond funds invest 80% of the total assets in AA+ rated bonds.

The highest bond rating indicates that the company will not default on your investment. 

3. Portfolio Diversification

Corporate bond funds can be ideal for portfolio diversification. 

Equity funds may deliver superior returns than debt funds, but they are quite volatile. Debt funds, being comparatively less volatile, balance the risk and rewards. 

Things to Consider Before Investing in Corporate Bond Funds

1. Allocation

As mentioned above, these funds have two types of allocation strategies. Funds with AA+ rated bonds would be safer than funds having bonds with lower credit ratings.

If you have a low to moderate risk appetite, go with funds that invest in AA+ rated bonds. Else, you can explore lower-credit rating bond funds as they may deliver superior returns. 

Be sure to check the allocation before investing in corporate bond funds. 

2. Risk Factor

With the highest-rated bond funds, the credit risk would be lower but returns may also be lower. On the other hand, slightly low-rated bonds might be risky but may deliver better returns.  

The interest rate risk can also affect the overall returns. The bond prices are inversely proportional to the interest rate. When the interest rate rises, the bond prices fall, and vice versa. 

You can lower the interest rate risk by holding your investment until maturity. 

3. Investment Horizon

Corporate bond funds are best suited for 1 to 4 years of the investment horizon. Invest only if the tenure matches your portfolio and your investment goals.

4. Underlying Assets

In these funds, 80% of the total assets would be high-rated corporate bonds. However, fund managers may invest the remaining 20% in slightly low-rated bonds. 

The overall risk of the fund changes with the remaining 20% allocation.

5. Fund Manager’s Track Record

A fund manager’s strategy plays a vital role in managing debt funds. Their analysis and decisions will reflect upon your portfolio. Hence, it is essential to check the track record of the asset management company and the fund managers. 

Tax Implications

The tax rules on debt funds have been updated since April 2023.

Both Long Term Capital Gains (Investment redeemed after 36 months) and Short Term Capital Gains (Investment redeemed before 36 months) will be taxed as per the investor’s tax slab.

The indexation benefit on long-term capital gains is only applicable for hybrid funds with more than 35% and less than 65% exposure to equity. 

Find out tax rules across all mutual fund categories.

Who Should Invest in Corporate Bond Funds?

Corporate bond funds are suitable for investors with 1 to 4 years of investment horizon. 

These funds can be an alternative investment avenue to fixed deposits. With slightly higher risk, investors can benefit from superior rewards.

If you are an aggressive investor, you can consider investing in low-rated bond funds. These funds may offer higher returns, but the risk of default increases. We recommend talking to a professional financial advisor before investing in these funds.

Final Thoughts

Corporate bond funds are ideal for investors looking to park their money for 1-4 years. 

Invest in high-rated bond funds to avoid default risk, unless you are an aggressive investor. In that case, you can explore low-rated bond funds provided it aligns with your risk appetite. 

Holding your investment till maturity can lower the interest rate risk as well. 

If you have any further queries, get in touch with VNN Wealth advisors. You can get your portfolio reviewed and plan your next investment strategy. 

Sectoral funds are equity funds that invest in companies in the same sector or industry. The sectors can be banking, pharmaceuticals, information technology, etc. These funds can potentially deliver benchmark-beating returns in a rising market scenario (bull phase). 

However, the associated risk can be high when the sector is going through ups and downs. 

Let’s understand further who should invest in sectoral funds.

How Do Sectoral Funds Work?

As per SEBI guidelines, these funds must invest at least 80% of total assets in the given sector. For example, an IT sectoral fund will invest the majority of the assets in IT companies.

Fund managers distribute the assets in large-cap, mid-cap, and small-cap companies in the specific sector. These companies are selected upon the fund manager’s strategy, analysis, and the trend in the market.

How are Sectoral Funds Different Than Thematic Funds?

Sectoral funds invest only in a specific sector. Whereas thematic funds invest in a theme that ties various sectors together. 

For example, an infrastructure thematic fund may invest in cement, steel, and construction firms. A sectoral fund sticks to the defined sector. 

Benefits of Investing in Sectoral Funds

1. Exposure to a Specific Sector

Sectoral funds allow investors to tap a specific industry that may perform well in coming years. Instead of investing in individual stocks of the sector, investors can park their money in these funds.

Fund managers take care of the allocation depending on the sector’s performance against the benchmark. 

2. Potential of Superior Returns

Sectoral funds invest in equity instruments of the same industry across market capitalization. There’s a good chance the sector may outperform and deliver superior returns. 

With thorough research and analysis, the underlying assets may beat the benchmark. Therefore, investors can earn superior returns when the sector is performing well.

3. Portfolio Diversification

The only diversification sectoral funds offer is the allocation across market capitalization. However, you can introduce diversification to your overall portfolio by introducing a new emerging sector. You can take advice from your financial advisor to choose the sector that aligns with your portfolio. 

Factors to Consider Before Investing in Sectoral Funds

1. Your Risk Appetite

Sectoral funds can be risky at times. You can earn higher returns if the sector grows. However, if the sector underperforms, all the underlying companies may drop values. 

As the diversification within funds is limited, these funds can be more volatile than other schemes. So you may want to consider your risk appetite before investing in sectoral funds. 

2. Investment Horizon

Equity funds expect you to stay invested for a longer horizon to beat the volatility. A sector also takes time to grow and achieve the desired outcomes.

Therefore, you may have to consider staying invested for a longer duration. Make sure the expected horizon of the sectoral funds is suitable for your portfolio. Otherwise, you can always explore other equity schemes. 

3. The Growth of The Sector

Make an informed decision by researching what’s expected from the sector. Select a sector that truly has the potential to grow in the coming years.

That way, you will be aware of the timeline the funds take to reach the returns you are looking for. However, please note that markets can be uncertain. A few ups and downs along the way are inevitable. 

4. Performance of The Fund Manager

Checking the past performance of the sectoral fund would be of no use. The sector is most likely to perform differently in each economic cycle.

Instead, check the performance of the fund managers. How many times have their analysis delivered superior returns over the years? That’ll give you an idea of the expertise of the fund manager.

5. Expense Ratio

The expense ratio is the small fee that mutual fund houses charge you for managing your assets. As per SEBI, the fee can be between 0.85% to 2.25% of the total assets under management. Make sure you read the factsheet of the fund to understand the expense ratio structure for the fund. 

Tax Implications on Sectoral Funds

Sectoral funds follow equity taxation rules based on the investment horizon. 

Investors have to pay a 20% tax on Short-Term Capital Gains (Investments redeemed before 12 months)

Long-Term Capital Gains (investments redeemed after 12 months) above 1.25 lakhs are taxable at 12.5%.

Who Should Invest in Sectoral Funds?

Sectoral funds are suitable for investors with high-risk appetites and longer investment horizons to beat volatility. Similar to thematic funds, these funds are not ideal for new investors.

Investors who can handle high volatility without panic-selling funds can go for it. However, it is important to make an informed decision.

Make sure you are aware of the sector’s growth potential and fund manager’s history before investing.

Conclusion

Equity mutual funds offer a wide spectrum of investment options. Sectoral funds are one such avenue that allow investors to explore a growing industry. Though the risk can be high, the reward can also skyrocket when the sector expands over the years. 

So if you want to distribute some of your assets to a high-risk-rewards scheme, go for sectoral funds.

Advisors at VNN Wealth can help you choose the right funds as per your risk appetite. Get your portfolio reviewed and sketch an investment strategy to fulfill your financial goals.

Want the stability of Large-Cap funds and superior returns of Mid Cap funds in a single scheme? The Large and Mid Cap Funds can be your next investment avenue. 

In 2017, SEBI launched this new category to offer Stability and Growth to investors exploring equity funds. Instead of separately investing in large and mid cap funds, you can just select a fund that has exposure to both categories. 

Read along to know more.

How Large and Mid Cap Funds Work?

Large Cap Funds primarily invest in the top 100 companies on market capitalization. And Mid Cap Funds invest in companies ranked from 101 to 250 on market capitalization. Therefore, these funds invest across the first 250 companies from various sectors on the market capitalization. 

As per SEBI regulations, fund houses must invest at least 35% each in large cap and mid cap companies. The remaining 30% can be distributed among equity, cash, or debt depending on the fund manager’s strategy, 

Why Invest in Large and Mid Cap Funds?

1. Growth and Stability 

Large Cap companies are thriving organizations with comparatively low volatility, hence lower risk. These companies generate significant returns over a long duration. Mid Cap funds, on the other hand, can be slightly volatile. However, there’s a good chance these funds will deliver superior returns compared to pure large cap funds. 

2. Portfolio Diversification

A single scheme can give you exposure to large and mid cap companies. Depending on the Fund manager’s strategy, you may also get exposure to Small Cap or Debt securities. Distributing your assets across various categories of equity and debt can encourage superior returns with lower risk. 

3. Ideal For Long Term Investments

These funds can be ideal for children’s higher education, planning a wedding, or buying a house in the next few years. Equity funds perform well over a longer horizon, more than 4 to 5 years.

You can rely on Debt Funds for short-term financial goals. And park your money in these funds to fulfill long-term financial goals.

Things to Consider Before Investing

1. Your Risk Appetite

These funds are less riskier than pure mid cap or small cap funds. Investors wanting to explore equity funds with lower risk can go with these funds. If you are an aggressive investor willing to take more risk, you can consider pure mid cap or small cap funds. However, we recommend discussing this with your financial advisor before taking a call. 

2. Investment Horizon

Align your investment horizon and financial goals with the scheme that you choose. Equity funds are volatile in short-horizon. Holding these funds for more than 5 years can lower the risk and generate a handsome outcome.

3. Fund Performance

Check the rolling returns of the funds to evaluate the performance. You can compare the performance of the funds from the same category with the benchmark. That’ll give you an idea of the kind of returns the fund has generated over the years. Remember, evaluating past performance isn’t the only criteria to choose the fund. 

4. Expense Ratio

Fund managers manage your investment by distributing it across stocks of various companies. To actively manage your funds, fund houses charge you a fee in the form of an expense ratio. Active funds have a slightly higher expense ratio than passive ones. You can compare the expense ratio of funds from similar categories before investing. 

Tax Implications

The taxation on these funds is the same as any other equity mutual fund.

You have to pay a 20% tax on Short Term Capital Gains (Investments held for less than a year).

Long-term Capital Gains(investments held for more than a year) above 1.25 Lakhs are taxed at 12.5%.

Who Should Invest in These Funds?

These funds are riskier compared to pure Large Cap, but less risky than pure Mid Cap or Small Cap funds. Investors with low to moderate risk appetite and longer investment horizons can invest in these funds. 

These funds are also suitable for diversifying the portfolio across market capitalization. Investors wanting to invest in Mid Cap with lower risk can rely on the stability of Large Cap exposure. 

To align your risk appetite with the fund, you may want to consider the asset allocation. After investing 35% each in large and mid cap, fund managers may invest a small chunk in small cap or increase the exposure to mid-cap. This can change the overall risk of the fund.

To Sum Up

Large and Mid Cap Funds distribute your asset across companies ranking from 1 to 250 on the market capitalization. As these companies belong to various domains, you get an opportunity to diversify your investment. As Large Cap maintains stability, Mid Cap encourages growth. If your risk appetite doesn’t align with pure Mid Cap or Small Cap, these funds can be your entryway. 

Got more queries regarding equity funds? Get in touch with our experts.

Multi Cap Mutual Funds are equity funds that invest across market capitalization. Fund managers distribute your assets among Large-Cap, Mid-Cap, and Small-Cap companies. 

It’s safe to say that these funds are synonymous with portfolio diversification across the market cap. You don’t have to manually pick funds when Multi Cap can do the job for you.

Investors with low to moderate risk appetite can invest in these funds. But before that, let’s understand how these funds work.

How Multi Cap Mutual Funds Work?

Earlier, these funds used to invest at least 65% of total assets among equity and equity-related funds. Meaning, fund managers had the freedom to decide the allocation across market capitalization.

However, in Sept 2022, SEBI circulated a new rule for Multi Cap Mutual Funds:

Now, fund managers must invest at least 25% each in Large-cap, Mid-cap, and Small-cap companies, making the total 75%. 

Fund managers can increase the focus to a particular market cap with the remaining 25%.

How Are These Funds Different than Flexi-Cap Funds?

In Flexi-Cap Funds, fund managers are required to allocate at least 65% of total assets in equity. But there is no threshold of minimum investment in each category. 

Why Invest in Multi Cap Mutual Funds?

1. Exposure Across Market Capitalization

Investing in Multi cap funds unlocks exposure across Large-cap, Mid-cap, and small-cap funds. 

Each of these categories has a varying risk-reward structure. Multi-cap funds offer a balance by investing at least 25% in each category to encourage diversification. 

2. The Right Balance to Sustain Market Conditions

After investing 75% across market capitalization, the remaining 25% can be used to your benefit. 

Fund managers make a calculated decision depending on the market conditions. If the Small and Mid-cap funds are overvalued, the remaining 25% can go into Large-cap. Or vice-versa.

This method shifts the focus of the funds into either Large-cap or Small/Mid-cap. This brings us to the next point. 

3. Risk-Adjusted Returns

These funds deliver risk-adjusted returns because of the balanced allocation. Fund managers can tweak the allocation with the remaining 25% to balance the risk.

Multi-cap funds are certainly less risky than pure Small-cap or pure Mid-cap funds. And these funds will deliver superior returns than pure Large-cap funds. 

Things to Consider Before Investing in Multi-Cap Funds

1. Investment Horizon

Equity mutual funds deliver superior returns in the long run. You may want to consider staying invested for at least 5 years or more. 

Longer duration acts as a safety guard against market volatility. Invest only if you are comfortable with a longer investment horizon. 

You can also start SIP. 

2. Risk

Sure, these funds balance the risk-reward. However, it’s always better to be aware of the asset allocation. 

Investors with a low-risk appetite can go with Large-cap focused funds. Otherwise, multi-cap funds with small/mid-cap focus have the potential to make more profit. 

3. Fund House/Fund Manager

Returns on these funds depend on the fund manager’s strategy. They shift the allocations based on their analysis.

It is important to know the fund house/manager’s strategy, scheme policy, and rolling returns. You can find this information on the scheme’s factsheet. 

4. Expense Ratio

Multi-cap funds are actively managed by fund managers. Therefore, investors will have to pay a small annual fee in the form of an expense ratio. 

You can find the expense ratio structure in the fund’s factsheet. 

Note: The expense ratio is not a huge dent in your returns. A higher expense ratio is not a bad thing. Sometimes, fund houses may charge extra but the returns will also be higher compared to other schemes in the similar category. 

If you want to check, compare the expense ratio and the rolling returns of the funds in a similar category. That is, see the performance of the multi-cap funds of various fund houses.

Tax Implications on Multi Cap Mutual Funds

Taxation on these funds is similar to any other equity funds. It depends on the investment horizon. 

Investors have to pay:

• 15% tax on Small-Term Capital Gains (Investment held for <12 months)
• 10% tax on Long-Term Capital Gains above 1 Lakhs (Investment held for >12 months.)

Note: Long-term capital gains up to 1 Lakh are tax-free.

Who Should Invest in Multi Cap Mutual Funds

These funds are suitable for first-time investors as well as investors looking for a balanced portfolio.

Instead of going for a specific category, first-time investors can begin with Multi cap funds. These funds are great to introduce diversification in your portfolio.

Investors looking for long-term investments can welcome these funds into their portfolios. Instead of pure small-cap or pure mid-cap. Multi cap funds are less risky. 

Conclusion

Distributing your assets across market capitalization is a great way to balance risk-reward. Though it can be tedious to manually ensure diversification. 

That’s when Multi cap funds come into the picture. These funds can be a great start to get the best of all equity worlds. 

We’d recommend starting a SIP and benefiting from compounding. As these funds can stay for the long-term, you’d end up building a large corpus. 

Reach out to our advisors to know more about Equity Mutual Funds. We’ll help you introduce a proper balance to your portfolio.

Medium Duration Funds are debt funds with 3-4 years of investment horizon.

Investors looking to invest for at least 3 years can park their money in Medium Duration Funds. These funds can cater to your financial goals like buying a property, planning your child’s higher education abroad, or any significant expense happening within 3-4 years. 

These funds can be an alternative to fixed deposits as they deliver superior returns. 

Read along to know more about Medium Duration Debt Funds.

How Do Medium Duration Funds Work?

To create a Medium Duration scheme, fund managers distribute assets among debt and money market securities provided the Macaulay Duration is 3-4 years.

What Is Macaulay Duration?

It is the weighted average number of years the present value of a fixed income instrument’s cash flows will take to match the amount paid for the instrument.

In simple words, Macaulay duration means the average time you will need to recover the initial investment through the instrument’s cash flow.

Please note that- in this case, duration does not mean tenure. Duration measures the value/sensitivity of the principal amount with respect to a change in interest rate. And tenure indicates maturity.

If the Macaulay duration is higher-> the instrument’s sensitivity to the changing interest rate is also higher.

These funds have higher maturity than Short Duration, Low Duration, Ultra Short Duration, and Liquid funds. And lower maturity than Medium-to-Long and Long Duration Funds.

Investors with moderate risk appetite can invest in these funds instead of bank FD.

Top 4 Advantages of Medium Duration Funds

1. Superior Returns

These funds have the potential to deliver superior returns than short-term debt funds and even FDs. 

Due to a slightly longer investment horizon, returns are subject to change in the interest rate cycle. These funds perform well, especially during falling interest rates. 

2. Portfolio Rebalancing

Medium Duration funds can balance the risk of equity mutual funds. The equity market is often volatile. A lot of factors affect the market. 

Debt funds are comparatively safer and more stable. Investors can rely on these funds to keep their portfolios balanced against other investments with similar horizons.

3. Fixed Deposit Alternative

FDs are popular because of their security and guaranteed fixed returns. However, these returns may not be satisfying during falling interest rate scenarios. In that case, Medium Duration funds can replace FDs. 

4. Liquidity

Medium Duration Funds offer better liquidity than Long Duration debt funds. 3 to 4 years is a good enough horizon to earn superior returns and achieve your financial goal. 

Though if you are looking for an even shorter horizon, go for liquid funds, Ultra Short Duration, Low Duration, Short Duration funds.

Things to Consider Before Investing

1. Risk

Debt funds come across interest rate risk and credit risk. 

In the case of Medium Duration funds, a rising interest rate scenario is not ideal. It can lower the NAV of the funds, thereby reducing your returns. Though if you hold till maturity, the risk can be mitigated.

Credit risk occurs when the underlying assets have low credit quality. Though fund houses often maintain high credit quality. 

You can check the fund scheme to understand the underlying assets and their credit quality. 

2. Investment Horizon

Each investor has different money goals, risk appetite, and expectations. For some investors, 3-4 years can be a short-term goal, whereas others might think it’s too long.

It depends on what you are comfortable with. Make sure the investment horizon of Medium Duration Funds aligns with your preferred horizon. 

3. Your Investment Goals

Debt funds can serve multiple purposes. You can rely on debt funds for risk balancing. Or for fulfilling a specific goal like buying a car. 

Among the 15 Types of debt funds, you’ll find a specific scheme for each of your short or long-term goals.

Analyze your investment goals to decide when and how much you should invest in Medium Duration Funds. 

4. Modified Duration (MOD) of the Fund

In the case of Medium to Long Duration Debt Funds, the Modified Duration (MOD) plays a vital role.

Modified duration measures the change in the value of a bond in response to a change in 100-basis-point (1%) change in interest rates.

During the falling interest rate scenario, with each 1% fall, the NAV of the funds goes up by MOD%. If the Modified duration is 6, then the NAV will go up by 6% every time the interest rate falls by 1%.

NOTE: In reality, the interest rate rarely actually falls by exactly 1% in one go. The calculations will modify based on the actual fall in the interest rate. 

Tax Implications

As per new tax rules on debt funds applicable since April 2023: Both Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) will be taxed as per your tax slab. 

Investors will no longer benefit from indexation on Long-Term Capital Gains. 

Who Should Invest in Medium Duration Funds?

Medium Duration funds are ideal for investors who want better returns than fixed deposits but don’t want the risk of equity markets.

Investors who want to balance their equity portfolio can also bring these funds on board. We’d recommend evaluating your existing portfolio to make sure these funds align with your goals. And as said earlier, you’d earn more returns if you invest during the falling interest rate scenario.

Conclusion

Medium Duration Debt Fund can be a game changer if you invest at the right time with the right goal. Your financial goals for the next 3-4 years can be strengthened with these funds.

If you are not a fan of FD, park your money in Medium Duration funds. Not only will you earn superior returns but also achieve portfolio balance.

However, as mentioned above, these funds are more suitable during a falling interest rate scenario. To know more about the effect of current repo rates on debt funds, get in touch with our advisors. We will help you align your portfolio with the suitable type of debt fund. 

Low Duration Funds are debt funds that invest in debt and money market securities with up to 1-year maturity. 

Let’s say you have a big expense coming up in the next 6 to 12 months. For example, a wedding, moving into a new home, or your child’s educational milestone.

Low Duration Funds can make accumulation for these short term expenses easier for you. You can comfortably achieve your goals without significantly increasing the risk on your capital. 

Read till the end to know everything about these funds. 

How Do Low Duration Funds Work?

The underlying securities in Low Duration funds have up to 1 year of maturity. Fund Managers design the scheme keeping the Macaulay Duration between 6 to 12 months.

What Is Macaulay Duration?

It is the weighted average number of years the present value of a fixed income instrument’s cash flows will take to match the amount paid for the instrument.

In simple words, Macaulay duration means the average time you will need to recover the initial investment through the instrument’s cash flow.

Please note that- in this case, duration does not mean tenure. Duration measures the value/sensitivity of the principal amount with respect to a change in interest rate. And tenure indicates maturity.

If the Macaulay duration is higher-> the instrument’s sensitivity to the changing interest rate is also higher.

These funds have a longer horizon than Liquid and Ultra Short debt funds and a shorter horizon than medium to long-term debt funds.

Investors planning to invest for a few months to a year can go for these funds. 

Top 4 Advantages of Low Duration Debt Funds

1. Suitable for Short-Term Investment Goals

Low Duration funds offer better liquidity compared to short, medium, and long-term debt funds. You can invest a lumpsum amount and withdraw it within a year.

Short-term tenure preferences can vary for each investor. Some would prefer liquid or ultra short duration funds for higher liquidity. 

Low Duration funds also qualify for a short-term goal that ranges between 6 months to a year.

2. Lower Risk

In the case of debt funds, the longer the maturity period the higher the volatility. The interest rate cycle can have a massive impact on debt funds.

Debt funds with comparatively shorter tenures mature quickly and blend with the new interest rate. That’s why they perform well during rising interest rates. On the other hand, long-duration funds are suitable during the falling interest rate scenario. 

As the investment horizon is short, Low Duration funds are less affected by the interest rate cycle. 

And as far as credit risk is concerned, fund managers often invest in securities with high credit quality. You can check the scheme details to understand credit risk. 

3. Potential For Superior Returns 

Debt funds often outperform the returns on FDs. FDs can be safe but the returns are not as good as debt funds.

You have a better chance to earn superior returns within a year with Low Duration funds than the FD. And as mentioned above, these funds deliver even better returns when the interest rates are rising or are steady at the peak. 

4. Diversification

Low Duration funds can be great for balancing the risk. If you have invested in equity mutual funds already, add debt funds to diversify your portfolio.

These funds are less riskier than equity funds. By investing in them, you can fight equity volatility to some extent. 

Things to Consider Before Investing in Low Duration Debt Funds

1. Credit Risk

Interest rates are cyclical and the risk arising out of the interest rate movement can be managed. Credit risk, on the other hand, can alter the outcomes. 

The majority of the debt funds, apart from Credit Risk funds, invest in high-credit quality assets. Sometimes, fund managers may bring a low-rated asset into the scheme if it has the potential to deliver superior returns. But overall credit risk is never high. 

We recommend checking the scheme factsheets to understand the credit quality of the underlying assets. 

2. Risk-Reward

Many investors distribute their money among debt funds to balance the overall risk. As equity funds deliver higher returns in the long run, debt funds offer security.

However, debt funds come with variable maturity periods and underlying assets. Liquid funds, Ultra short duration funds, and Low Duration funds offer safety against interest rate risk. But, the returns may not be as superior. 

Low Duration funds are safer than Dynamic bond funds or Gilt funds in terms of volatility. But the returns would be comparatively lower.

Invest in these funds based on your risk appetite. 

3. Investment Tenure

As mentioned above, these funds are more compatible with your goals outlined within 6-12 months. Otherwise, you have more options on the debt fund spectrum based on the tenure. 

Taxation on Low Duration Debt Funds

Before April 2023, investors had a benefit of 20% tax with indexation on long-term capital gains. However, the tax rules have been revised and the above benefit is no longer applicable to funds with less than 35% exposure to equity.

Now, both short and long-term capital gains on debt funds will be taxed as per your tax slab. 

Who Should Invest in Low Duration Debt Funds

The beauty of debt funds is, you can plan a certain expense by investing in specific types of debt funds. Low-duration funds are perfect if you are planning to achieve a milestone within a year. 

By investing your money for about a year, you can earn decent returns and balance your portfolio as well.

You can also start Systematic Transfer Plan with Low Duration funds. Instead of withdrawing your money, you can transfer it into different equity or debt funds in installments. 

STP works like SIP but within funds. Read more about STP here. 

Conclusion

Bigger expenses like a wedding, children’s education, or a new house can be stressful. Fortunately, you can plan it beforehand by investing in debt funds. 

Low Duration debt funds can be really helpful to fulfill your financial goals in the near future. Take advantage of debt funds to make your money work for more money as you plan your expenses. 

You can evaluate the timeline of your next big expense and choose suitable debt funds. 

For more insights on debt funds, contact our advisors. Get complimentary portfolio analysis and restructure your portfolio for better outcomes. 

Ultra Short Duration Funds are debt funds with 3 to 6 months of investment horizon. 

These funds are suitable if you have an expense planned within 3 to 6 months. For example, a down payment for a car or a house.

Ultra Short Duration Funds are comparatively safer than medium to long-duration debt funds and deliver decent returns. 

Read along to know where these funds stand on the spectrum of all debt funds.

How Do Ultra Short Duration Funds Work?

Ultra Short Duration Funds primarily distribute your assets among debt and money market securities, keeping the Macaulay Duration of the scheme between 3 to 6 months.

What Is Macaulay Duration?

It is the weighted average number of years the present value of a fixed income instrument’s cash flows will take to match the amount paid for the instrument.

In simple words, Macaulay duration means the average time you will need to recover the initial investment through the instrument’s cash flow.

Please note that- in this case, duration does not mean tenure. Duration measures the value/sensitivity of the principal amount with respect to a change in interest rate. And tenure indicates maturity.

If the Macaulay duration is higher-> the instrument’s sensitivity to the changing interest rate is also higher.

These funds have a maturity period of slightly more than liquid funds and lesser than short-duration funds. 

These funds are perfect to park your money for a few months.

Top 4 Advantages of Ultra Short Duration Funds

1. Liquidity

Ultra Short duration funds offer better liquidity compared to medium to long-duration debt funds. 

You can keep your money in these funds for 3 to 6 months (or more if you’d prefer) instead of a bank account. These funds can deliver superior returns compared to savings accounts and FDs. 

2. Lower Risk

As these funds mature within months, the interest rate risk is comparatively lower. And as for credit risk, almost all the funds in a similar category prefer to maintain high-credit quality.  

You can always check the credit ratings and performance of the funds before investing. 

Note: The interest rate risk, if at all, is a temporary effect on the fund’s performance. Ultra Short Duration Funds can be your go-to investment during a rising interest rate scenario as their underlying assets mature quickly and capture the new interest rate.

3. Shorter Investment Horizon

Ideally, your portfolio should be a blend of short and long-term investments. You must be planning for both long and short-term financial goals.

Equity mutual funds and long-duration debt funds can take care of your long-term goals based on your risk appetite. Ultra Short and Short Duration funds are better suited to achieve a quick financial goal. 

If you are looking for a comparatively shorter investment horizon, these funds are the right fit for you. 

4. Suitable to Start The Systematic Transfer Plan(STP)

Similar to liquid funds, Ultra Short Duration funds can also be the source funds for the STP. 

STP is a SIP alternative. Instead of transferring money from a bank account to mutual funds, you transfer it from one mutual fund to another fund(s). You can invest a lumpsum amount and start STP into equity funds. 

Read more about Systematic Transfer Plan. 

Things to Consider Before Investing in Ultra Short Duration Funds

1. Investment Horizon

These funds are suitable for investors looking to park their money for 3-6 months. These funds can sometimes be slightly more volatile than liquid funds. Holding them for at least 3 months will lower the risk and generate better returns.

2. Risk and Returns

Interest rates impact each debt fund in a different way, primarily based on the investment tenure. Ultra Short Duration funds are less risky than short to medium-duration funds but riskier than liquid funds.

Fund managers may introduce underlying assets with lower credit quality but the potential to deliver superior returns. In such a case, your portfolio may come across credit risk. 

Don’t forget to check the fund’s past performance, rolling returns, and overall ratings before investing. 

3. Financial Goals and Current Portfolio

Investors should evaluate their portfolios before investing in any mutual funds. Though these funds are Short Duration, you may want to check if they align with your goals. The risk and returns in debt funds are different compared to equity funds. 

Ultra Short Duration funds can be a good addition to your portfolio to balance the risk without a long lock-in period.

These funds are suitable for any of your short-term goals. Be it buying a card in the next few months or planning a wedding. You can invest a lumpsum amount and earn returns. 

Taxation on Ultra Short Duration Funds

As per the tax rule applicable from 1st April 2023, the debt funds will not enjoy 20% tax with indexation. 

Now, both long-term and short-term gains will be taxed as per your income tax slab. 

Who Should Invest in Ultra Short Duration Funds?

Ultra Short Duration funds are for investors planning to invest for a few months. 

If you have a lumpsum amount to invest, equity funds may not be safe. And FDs, well… you may not earn superior returns.

Instead, invest your lump sum amount in these funds. You enjoy the benefit of high liquidity, safety, and better returns. Additionally, you can start STP to gradually distribute your investment among other mutual funds. 

Conclusion

Debt funds come into the picture when you want to earn returns without risking your money with market volatility. Instead of keeping the money idle in your bank account, transfer it into Ultra Short Duration funds.

The returns on these funds will contribute to the expense you have planned within 3-6 months. For example, a car or home down payment, or a vacation abroad. 

Debt funds are suitable for anyone, especially to balance the risk and returns. However, we’d recommend talking to a financial advisor to see which debt funds are suitable for your goals.

Advisors at VNN Wealth have a decade worth of experience in debt funds. Get in touch to plan your next investment.

Planning to buy a new phone? Going on vacation next month? Alright. Let’s discuss Liquid Funds.

Liquid funds are the best avenue to park your money for a week or a couple of months. An alternative to your bank account. These funds are suitable for investors looking for short-term investments and quick withdrawals.

Sounds convenient? Read along.

How Do Liquid Funds Work?

As the name suggests, these funds are liquid in nature. Meaning, you can withdraw as quickly as you invest.

Liquid funds are a collection of bonds, RBI treasury bills, and commercial papers that mature within 91 days. However, investors are free to withdraw the funds in a week with zero exit load.

You can also withdraw these funds in a day. But by holding them for 7 days, you become eligible for the zero exit load.

These funds are not only safe to invest in but also deliver better returns than your saving account.

Please note-> Even though the maturity period is short, you can choose to hold these funds for a longer duration. The ultimate goal is to have a flexible and quick withdrawal process. 

Top 4 Advantages of Liquid Funds

1. Short Investment Tenure

As these funds have a short average maturity, you can park your money for a couple of weeks to months.

FD, PPF, Equity Funds, and Long-Term Debt funds can encourage your long-term wealth goals. Liquid funds can fulfill your short-term goals like buying a phone or planning a trip. 

2. Low Risk

The underlying assets in these funds are of high credit quality (RBI T-Bills). Fund houses invest in assets with AAA credit quality. The chances of credit risks are scarce. 

These funds have very little to do with market volatility. And as these funds mature quickly, interest rate changes also have a low effect on the returns.

3. Decent Returns

Liquid funds prioritize security and liquidity. The returns may not be as high as equity funds or other debt funds in an ideal scenario. 

But you for sure will earn better returns than the saving account. Shift a certain amount in liquid funds instead of keeping it all in a bank account. 

4. Suitable for Systematic Transfer Plan

The systematic Transfer Plan (STP) is a SIP alternative with an option to invest a lumpsum amount. 

You can invest a lumpsum amount in a source mutual fund and transfer it in installments into target mutual fund(s).

These funds are perfect as a source mutual fund of STP. As the liquidity is high and the exit load is zero, setting up an STP becomes convenient. 

Read more about Systematic Transfer Plan. 

Things to Consider Before Investing in Liquid Funds

1. Returns on Investment

Liquid funds deliver decent returns compared to your savings account. If you are expecting much higher returns, then you may want to explore other debt funds or equity funds. 

The primary reasons to invest in these funds are security and quick redemption. Returns may not touch the sky but you will earn a decent profit.

2. Financial Goals

You may already have investments in place for certain goals in life. Retirement funds, education funds, family wealth goals, etc.

Similarly, you can invest a certain amount for short-term goals like buying a new bike or a laptop. These funds help you earn some extra money for the things you want to purchase in the near future. 

3. Risk

Every mutual fund will carry some sort of risk. Though liquid mutual funds offer security, both credit and interest rate risk are not completely absent.

The good thing is, most funds allocate the majority of the assets to high-credit quality assets. And as for the interest rate risk, that’s temporary. You will still earn decent returns. 

While you can surely invest in these funds for up to 91 days, we recommend taking advice from financial advisors. Reach out to us to know more.

Taxation on Liquid Funds

As per the new 2023 tax rule on debt funds, investors no longer have the benefit of indexation on Long-Term Capital Gains.

Now both long and short-term capital gains on debt funds will be taxed as per your income tax slab. 

Who Should Invest in Liquid Funds?

Liquid funds are particularly suitable for investors looking for short-term investments. You can park your money in these funds to earn superior returns than a saving account. 

Investors planning to start Systematic Investment Plan should definitely go with liquid funds to invest a lumpsum amount.

Conclusion

So, next time you buy a gadget or shortlist vacation spots, think about liquid funds as your companion. It’s the most convenient way to earn extra returns without any lock-in period or exit load.

These funds often deliver superior returns compared to interest on savings accounts, are secure and offer quick withdrawal. And as mentioned above, these funds are best to start an STP. 

To know more about debt funds and plan your investment, give our advisors a call. With a complimentary portfolio analysis, let’s align your investments with your financial goals.