Mutual Funds FAQs

When you buy into a mutual fund, you pool your money along with other investors. As an investor in a respective scheme, you get units of the fund. And as an investor, you share the profits or losses of a respective mutual fund scheme in proportion to your investment in it.

Mutual fund houses (also known as Asset Management Companies) are the entities that manage the money accumulated under mutual funds. They offer schemes with different style and investment objectives. The mutual fund schemes focus on stocks, bonds, money market, gold commodities, portfolio. They also offer variants like sector funds, thematic funds, and hybrid funds. For instance, HDFC Mutual Fund is a fund house with several funds under it.

The total value of a fund's cash and securities less its liabilities or obligations are considered as net assets of the fund.

A group of securities held by the mutual fund is called a funds portfolio. A portfolio could be a mixture of stocks, bonds and cash, or any other asset class as per the funds investment objective.

Portfolio Turnover is a measure of the amount of buying and selling activity in a mutual fund's portfolio. Turnover Ratio is defined as the lesser of securities sold or purchased during a year divided by the average of monthly net assets.

A turnover of 100 percent, for example, implies positions are held on average for about a year, or 100% of the portfolio is churned in a years time. Similarly, a turnover of 50 percent, implies positions are held on average for about two years, or around 50% of the portfolio is churned in a years time.

Open-ended funds are the funds that are available for subscription throughout the year ' even after their NFO (New Fund Offer) period. Investors under this scheme are free to join the fund or withdraw from the fund at any time, (after an initial lock-in period in case of ELSS). Such funds announce sale and repurchase prices from time to time. In an open-ended scheme, investors can resell units in the fund to the issuing mutual fund at the net asset value (NAV) of the units. As an investor, you, have the 'flexibility to buy or sell units of these funds at a price linked to the fund's NAV.

Unlike the open-ended schemes, close-ended schemes do not issue units for repurchase redemption on a periodic basis. Its units can be redeemed only on termination of the scheme, or through dealings in the secondary market.

Close-ended funds are available for subscription only during a specified period, i.e. when they arrive as new fund offer. Thereafter, as an investor, you can buy or sell the units of a close-ended fund only on a recognised stock exchange (secondary market) after they are listed.

These funds are 'close-ended' for a particular period of time, e.g. 3 years, 5 years, 10 years, etc. After this period ends, the mutual fund house decides to redeem, i.e. pay/ transfer into the account of the investors, or to convert the respective close-ended scheme into an open-ended.

Mutual Fund portfolios can be classified on the basis of portfolio holdings, function and geography.

The capital market regulator, the Securities and Exchange Board of India (SEBI) has categorised and rationalised mutual fund schemes into five broad categories:

Equity Mutual Funds have an objective to generate capital appreciation over the long term. Such mutual funds normally invest a major part of their corpus in equities. Naturally, equity funds have comparatively high risks. Therefore, from a suitability standpoint, only if you have the stomach for high risk and an investment time horizon of at least 5 years, own them in your portfolio.

Note that equity-oriented mutual funds are most suitable to plan long-term goals such as children's education needs, their wedding expenses, and your own retirement.

There are 10 sub-categories of equity mutual funds

A large-cap funds are funds that are required to invest a minimum of 80% in equity & equity related instruments of large-cap stocks (i.e. first 100 companies on full market capitalisation basis).

These funds are suitable for investors looking at growth and stability with exposure to blue-chips and predominantly larger companies while seeking capital appreciation, this sub-category of equity fund can be apt. When the equity markets turn turbulent, a pure large cap fund has the potential to arrest the downside risk better compared to their pure mid-cap counterparts and even large & mid-cap peers. Ones investment time horizon in large cap funds should be at least 5 years.

A large & mid-cap fund, as characterised by SEBI, is required to invest minimum 35% of its assets in equity & equity related instruments of large-cap companies and simultaneously maintain minimum 35% allocation to mid-cap stocks (i.e. companies from 101^st to 250^th on full market capitalisation basis). The remaining portion is parked in debt & money market instrument.

A large & mid-cap fund could be an appropriate fit for investors planning for long-term goals and want the stability of large-caps along with the agility of mid-caps in the journey of wealth creation and accomplishing financial goals. But again, the time horizon should be at least 5 years.

A mid-cap funds, as the name suggests and as defined by the regulator, invests a minimum 65% of its total assets in mid-cap stocks (i.e. companies from 101^st to 250^th on full market capitalisation basis).

Mid-cap funds offer the potential to generate significant wealth. However, do note that the risk is substantially magnified. During bull phases, mid-cap funds tend to outperform their pure large-caps and even large & mid-cap peers by a significant margin. Conversely, in the bear periods, they also have a tendency to plunge more.

Hence, one should invest in mid cap funds only if they have the stomach for very high risk and have a fairly long investment time horizon of at least 5-7 years.

A small-cap invests a minimum 65% of its total assets in equity & equity related instruments of small cap companies. (i.e. companies that are 251^st onwards on a market capitalisation basis). Small-cap stocks, due to their size, usually have a low trading volume and are fairly illiquid. Thus note that the risk associated with small-cap funds is greater than mid-cap funds.

Small-cap funds have the tendency to go from thrilling highs to dangerous lows. Therefore, as an investor, one needs to be wary of high volatility and have the appetite for very high risk. Investors looking to boost their long-term returns where the investment time horizon is over 10 years, may consider investing some portion in a small-cap fund/s.

Multi-cap Funds are funds that are mandated to invest at least 75% of its total assets in equities, with at least 25% exposure each in large cap, mid cap and small cap stocks.

So, you get the best of both worlds --- the high-return potential of mid, and small caps and stability of large-caps. Multi-caps funds need to maintain reasonable allocation to large-caps, mid-caps, and small cap stocks.

On the risk-return spectrum, multi-cap funds usually falls between large-cap funds and mid-cap funds. Hence, investors willing to take high risk and looking for capital appreciation across market capitalisation segments may consider investing in multi-cap funds. They may be appropriate for an investment time horizon of at least 5 to 7 years.

Dividend yield funds, as characterised by SEBI, should predominantly invest in high dividend yielding stocks and hold a minimum 65% investment in equities. These funds usually invest in companies that report robust earnings and have a history of declaring appealing dividends. Note that such companies are always on the investment radar of many value investors.

Since dividend history is a true measure of ascertaining the true worth of the company (in midst of all business cycles and volatility of the equity markets), dividend yield funds may be worth if one is looking to safeguard against extreme volatility. But one needs to have an appetite for high risk and an investment time horizon of at least 5 years.

Value funds / contra funds follow a defined style of investing, namely value and contra, and maintain minimum 65% investment in equity & equity related instruments.

Value investing involves identifying fundamentally sound stocks that are trading at a discount to their fair value. Fund managers adopt different approaches to value investing.

Contra funds aim to adopt a contrarian style of investing and are an alternative provided by the regulator to Value Funds. This means, a fund house can have either a Value Fund or Contra Fund, but not both.

Value and contra funds are suitable for investors having high-risk profile and whose investment horizon is at least 5 to 7 years. On the risk-return spectrum, they are notch above dividend yields funds.

Focused funds are concentrated funds that limit the maximum number of stocks in the portfolio (to a maximum of 30), and invest a minimum 65% of its assets in equity & equity related instruments. So, the fund manager holds a conviction-oriented portfolio in order to enhance returns.

Focused equity funds expose investors to concentration risk. The fund on the risk-return spectrum is placed higher, just a mark below mid cap and small cap funds. Hence, one should invest in a focused fund if they have stomach for high risk and an investment time horizon of at least 5 to 7 years.

Sector and Thematic Funds are funds having mandate to invest is respective sector or a theme, viz. banking & financial services, pharma & healthcare, technology, consumption, as per the view formed and opportunities for the sector or themes like ESG, PSU, etc.

The fortune of a sector and thematic funds is closely linked to the fortune of the underlying theme or a sector. Thus, the portfolio concentration makes them a very high risk-high return investment proposition vis-'-vis diversified equity funds invest that hold the mandate to invest across sectors and various market capitalizations (whereby the risk is reduced). Sector/ thematic funds are not for the faint-hearted. They are placed at the top on the risk-return spectrum.

ELSS (also known as tax saving funds) is basically a diversified equity fund, that has the flexibility to hold exposure across market caps, as per the fund managers choice.

Investments in ELSS are subject to a lock-in period of 3 years and eligible for a deduction (upto Rs 1.5 lakh p.a.) under Section 80C of the Income Tax Act, 1961.

If you are a risk taker, then ELSS is a promising investment avenue for tax planning. But your investment time horizon should ideally be at least 5 years when you invest in them.

Debt Mutual Funds invest in fixed income securities such as bonds, corporate debentures, Government securities, and money market instruments.

The objective of Debt Mutual Funds is to offer steady and regular income to investors but varies in accordance to a sub-category. Therefore, from a risk-return standpoint, they are considered to be less risky compared to equity-oriented mutual funds. But, remember debt-oriented are not completely risk-free or safe. Some debt funds may carry higher credit risk and may even erode ones invested principal if the fund manager ends up investing in a poor quality instrument.

Under debt mutual funds, there are 16 sub-categories as defined by SEBI'

Overnight fund have a mandate to invest in overnight securities that have a maturity of as low as 1 day. They are typically money market instruments viz. Treasury bill (T-Bills), Repos, TREPs, etc. Overnight funds are considered to be the safest category in debt funds, even when compared to liquid funds.

On a risk-return spectrum, overnight funds are placed at the bottom; meaning they are a very low risk-very low return investment proposition. To park money for the very short-term, say from day to a week, one can consider an overnight fund as a substitute for holding money in a savings bank account.

Liquid funds are funds that are mandated to invest in debt & money market instruments with a maturity of upto 91 days only. They invest in money market instruments such as Certificate of Deposits (CDs), Commercial Papers, Term Deposits, Call Money, Treasury Bills and so on.

Liquid fund entails low risk. So, if your risk appetite is low, want to park money for short-term, are planning for short-term goals that are, say a few months away, planning for contingency needs, want to offset greater volatility of bond and/or equity markets; then consider liquid funds.

However, all liquid funds are not safe. Some fund managers take high credit risk to generate higher yield, which may have adverse effect if the issuer defaults or downgraded. So, you should consider liquid funds that focus on safety of capital over returns.

Ultra-short Duration Funds invest in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 months to 6 months. So, compared to liquid funds they invest in higher maturity debt papers and money market instruments.

The Macaulay Duration (named after Frederick Macaulay) is the weighted average term-to-maturity of the cash fl¬ows from a bond. The weight of each cash fl¬ow is determined by dividing the present value of the cash ¬flow by the price.

As the duration is slightly higher, the risk is slightly higher as well compared to a liquid fund. Hence, if you are planning for short-term goals, where say the money is required after 6 months, ultra-short term fund may be considered. The ideal time horizon to park money in an ultra-short term fund is 3 to 6 months.

Low duration fund, compared to an ultra-short duration fund, invests in debt and money market instruments such that the Macaulay duration of the portfolio is between 6 months to 12 months. Hence, what changes here is the maturity profile of the debt portfolio.

On the risk-return spectrum, a low duration fund is placed a little above than ultra-short duration fund. This is because; the slightly higher duration increases the risk as well to the portfolio. They are okay for investors who are willing to take more risk and have an investment time horizon of upto a year.

Money Market funds, as the name suggests, predominantly invest in Money Market instruments having the maturity of upto 1 year. The instruments include Certificate of Deposits (CDs), Commercial Papers, Term Deposits, Call Money, Treasury Bills and so on. However, unlike an overnight fund and liquid fund, the maturity profile of the portfolio is higher.

A money market fund is suitable for investors who wish to have dominant exposure to money market instruments and have an investment time horizon of upto a year. On the risk-return spectrum, owing to a longer maturity profile, they are placed above low duration fund. Therefore, the returns will be quite competitive to 1-year bank Fixed Deposit (FD).

Short Duration Fund invests in debt and money market instruments such that the Macaulay duration of the portfolio is between 1 year to 3 years, as characterised by the regulator. Hence, compared to a low duration fund, the maturity profile of the debt portfolio is longer while they could invest in a variety of debt papers, corporate bonds/debentures, government securities, and money market instruments.

As the duration of short durations funds are relatively higher than low duration funds, the risk is two levels above a low duration fund. Hence, while you may consider a short duration fund for an investment time horizon of anywhere between 2 to 3 years, be ready for low-to-moderate interest rate risk as well (in a rising interest rate scenario). The returns could be comparable to a 3-year Fixed Deposit.

Medium duration fund invests in debt and money market instruments such that the Macaulay duration of the portfolio is between 3 to 4 years. Clearly, the maturity profile is longer than a short duration fund while it invests in various debt papers, including corporate bonds/debentures, government securities, and money market instruments.

Relatively higher duration compared to a short duration fund, makes medium duration fund a moderate risk-moderate return investment proposition. The fund may face interest rate risk and credit risk as well. If you are a moderate to high risk taker and your investment time horizon is anywhere between 3 to 5 years, you may consider a medium duration fund.

Medium to Long duration funds, as characterised by the regulator, invest in debt and money market instruments such that the Macaulay duration of the portfolio is between 4 to 7 years. So, compared to a short duration and medium duration fund, the maturity profile is higher while it invests in various debt papers, including corporate bonds, debentures, government securities, and money market instruments.

Medium-to-long duration fund is a moderate-to-high risk contender. During a rising interest scenario, the risk gets accentuated and the return potential is limited. Focusing at the medium to longer end of the maturity curve, they are subject to higher interest rate risk, and may also carry credit risk. Thus, invest in a medium-to-long duration fund only if you have a high risk profile with a longer time horizon of at least 5 years. If you are planning for long-term financial goals, such a fund would be appropriate, provided you have appetite for higher risk.

Long duration funds invest in debt and money market instruments such that the Macaulay duration of the portfolio is greater than 7 years. They invest across debt instruments viz. corporate bonds/debentures, government securities, and money market instruments.

Focusing at the longer end of the maturity curve, a longer duration fund exposes you, the investor, to higher interest rate risk. During a rising interest scenario, the risk gets heightened and the return potential is limited. Thus, invest in a long duration only if you have a high-risk profile with a longer time horizon (over 7 years). If you are planning for long-term financial goals, such a fund may be appropriate provided you have a higher risk appetite.

Dynamic Bond funds hold the mandate to invest across durations: short-term, medium-term, and long-term. It has the fl¬exibility to adjust the duration of the portfolio to benefit from the possible change in the interest rate structure. Therefore, a dynamic bond fund could move into short-term instruments, such as commercial paper (CP) and certificates of deposit (CDs), or long-term instruments, such as corporate bonds and gilt securities, depending on the fund managers outlook on interest rates.

Only if you have an investment time horizon of 3 to 5 years, and wish to be exposed to moderate risk compared to an equity mutual fund, you may consider investing in a dynamic bond fund. On the risk-return spectrum of debt funds, a dynamic bond is placed between medium duration debt and a long duration debt fund. Dynamic Bond Funds are exposed to interest rate risk and credit risk as well.

Corporate Bond Funds are mandated to invests a minimum 80% of its assets in corporate bonds (only in highest rated instruments i.e. AA+ and above). The kind of duration the fund will hold is not specifically defined. However, the duration of the portfolio is typically in a range of 3 to 5 years.

On the risk-return spectrum of debt funds, a corporate bond fund is relatively safer than a credit risk fund. If you wish to seek exposure to highest rate corporate bond, this category of debt mutual fund would be appropriate. However, you also ought to keep a close watch on the duration and issuers in the funds portfolio.

As the name suggests, a credit risk fund invests minimum 65% of its total assets in corporate bonds (below the highest rated instruments). i.e. investments are predominantly in AA and below rated instruments, according to the regulatory guidelines. Again here, like the corporate debt fund, the duration is not defined.

In comparison to a corporate bond fund, a credit risk fund have higher risk exposure, and lack safety. While credit risk funds aim to generate higher yield, chances of losing invested capital is higher. So, only if you are willing to take higher credit risk for higher yield, you may consider investing in a credit risk fund. Also, keep a close watch on the portfolio duration of the scheme.

Banking and PSU (Public Sector Undertaking) Debt Funds are required to invest minimum 80% of its total net assets in debt instruments of Banks, PSUs, and Public Financial Institutions. Therefore, a dominant exposure of the portfolio is skewed to debt instruments from this segment. The duration of debt papers the fund should hold is not defined. However, they typically hold duration in the range of 3 to 5 years.

If you wish to seek exposure to debt instruments of Banks, PSUs, and Public Financial Institutions, you may consider such a debt fund. But do look at the portfolio of a respective scheme. Banking and PSU Debt Funds provide an added advantage in terms of quality of instruments, vis-à-vis Corporate Bond Funds.

Gilt funds are mandated to invest minimum 80% of its assets in Government securities (G-secs) —across maturities as per the regulatory guidelines. The government securities could be issued by state and/or central government.

If you wish to seek exposure to debt instruments issued by the government and have a time horizon of 5 years, consider a gilt fund. But do pay attention to the underlying assets i.e. quality of the debt papers held by the fund too. On the risk-return spectrum for debt mutual funds, a gilt fund is a high risk-higher return investment proposition. The returns you could yield are hinged on the interest rate scenario – whether rates are falling, or rising. When interest rates are expected to fall, that’s the best time to invest in gilt funds

Gilt Fund with 10-year Constant Duration invest minimum 80% of the total net assets in G-secs, such that the Macaulay duration of the portfolio is equal to 10 years. The portfolio duration for this category of gilt funds is well-defined.

On the risk-return spectrum, compared to normal gilt fund, Gilt Fund with 10-year Constant Duration is placed a notch below. The returns you could yield are hinged on the interest rate scenario – whether rates are falling, or rising. When interest rates are expected to fall, that’s the best time to invest in gilt funds. But make sure you have a time horizon of at least 7 to 10 years when you invest in this fund and pay attention to the quality of the underlying assets.

Floater Funds are mandated to invest a minimum 65% of total assets in fl¬oating rate instruments. A unique trait of a ¬floater fund is that it invests in debt instruments whose interest rate varies as per the underlying interest rate scenario. Thus, a ¬floater fund is less sensitive to interest rate risk as well as duration risk. But do look at the credit quality of the portfolio it holds.

If your time horizon is between 2-3 years, and wish to mitigate the risk of ¬fluctuating interest rates, you may consider a ¬floating rate fund. Compared to a liquid fund and money market mutual fund, a fl¬oater fund would expose investors to high risk depending on the quality of debt papers it holds.

Hybrid Funds, as the name suggests, invest in a mix of multiple asset class i.e. equity, debt & money market instruments, as well as Gold. These funds aim to provide investors with the best of both worlds – capital appreciation of equity assets and the regular income of debt securities.

Broadly, hybrid funds are ideal for investors with a moderate-to-high risk appetite. The risk or volatility of these funds lies in allocation between equity, debt, and gold.

Depending on their exposure to equity, these funds can be further classified into Conservative Hybrid Funds, Aggressive Hybrid Funds, Balanced Funds, Dynamic Funds, etc.

The capital market regulator has sub-categorised hybrid funds into 6 types:

Conservative Hybrid Funds are mandated to invest between 10% to 25% of its total assets in equity & equity related instruments, and the remaining 75% to 90% of the total assets in debt instruments. Owing to the dominant allocation to debt instruments with slight equity push, it is termed as a conservative hybrid fund. It is expected to follow a distinctive strategy for the equity portfolio and debt portfolio.

If you are conservative investor or do not have the stomach for high risk, at the same time wish to have some exposure to equity & equity related instruments to yield a better return, you could consider a conservative hybrid fund. However, you need to be careful, as the predominant debt portion of the portfolio may be exposed to credit and interest rate risk.

Balanced Hybrid Funds invest 40% to 60% of total assets in equities and 40% to 60% in debt instruments. No arbitrage is permitted in this scheme. Tactically, from an asset allocation standpoint, the portfolio is well-balanced between equity and debt instruments. Clearly, a balanced hybrid fund does not qualify as equity funds. But they stand true to their name, by keeping a balanced exposure to equity and debt.

An Aggressive Hybrid Funds, on the other hand, are mandated to invest 65% to 80% of total assets in equities and 20% to 35% in debt instruments. Therefore, on account of the portfolio being skewed to equities, they are termed as ‘aggressive’.

If you wish to have almost an equal balanced allocation to both equity and debt, are a moderate-to-high risk-taker; a balanced hybrid fund would be an appropriate choice, provided your investment time horizon is at least 3 to 5 years. However, if you wish to have a slightly higher exposure to equity, an aggressive hybrid fund would be appropriate. But again, your investment time horizon ought to be at least 3 to 5 years.

The allocation to equity and debt in Dynamic Asset Allocation Fund is managed dynamically by such a fund. So, it can hold 0 to 100% in equity or 0% to 100% in debt. There is no restriction on minimum or maximum exposure to either equity or debt.

The fund can choose to be fully allocated either to equity or debt instruments depending on the fund manager’s view of the market. Certain dynamic asset allocation funds have a formula-driven approach that takes into consideration market valuations and other factors.

The allocation is pre-decided based on the formula that defines the equity exposure based on the different variables.

Balanced Advantage Funds, on the other hand, set their asset allocation as per the direction of the market, they tend to keep a minimum 65% exposure to equity at all times.

The risk a dynamic asset allocation fund would expose you to would depend on its exposure to equity and debt over a period of time. For a dynamic exposure to equity and debt, a dynamic asset allocation fund may be suitable provided your investment time horizon is at least 5 years and willing to assume moderate-to-high risk. However, if the fund holds the portfolio in the nature of a balanced advantage fund (i.e. keep a minimum 65% exposure to equity at all times), then the risk-reward potential would be similar to that of an aggressive hybrid fund.

Multi-asset Allocation Funds are mandated to invest in at least three asset classes (mainly equity, debt, and gold) with a minimum allocation of at least 10% each in all three asset classes.

The basic purpose of investing in multi-asset allocation fund is to diversify investments in assets classes that share very low positive correlation. Lower positive correlation between two asset classes indicates that they are unlikely to move in the same direction.

While debt is considered safer than equities; equities can generate superior returns. And including gold would improve the diversification of your portfolio.

If you are aiming to tactically diversify your portfolio with a single fund, leave rebalancing to the discretion and expertise of the fund manager, and lower risk, you may consider multi-asset fund with an investment time horizon of at least 3 to 5 years.

Equity Savings Funds are mandated to invest minimum 65% in equity & equity related instruments and a minimum of 10% in debt instruments. The schemes minimum hedged & unhedged is to be stated in the SID, while its asset allocation under defensive considerations may also be stated in the Offer Document.

To put it simply, an equity savings fund could invest in equity and equity related instruments (including derivatives), debt & money market instruments, and could explore arbitrage opportunities. If there are no arbitrage opportunities available, the fund has the ¬flexibility to invest in debt.

From a risk-return standpoint, given that it skews the portfolios to equity & equity related instruments, an equity savings fund is a high risk-high return investment proposition. So, consider only if you have the stomach for high risk and an investment time horizon of at least 3 years.

Arbitrage Funds endeavours to take advantage of mispricing of stocks (or a stock index) in different market segments, known as arbitrage. However, these are short-term opportunities that spring up due to lack of information to a set of market participants in one of the markets.

An arbitrage fund is mandated to follow arbitrage strategy and invest minimum 65% of its total assets in equity & equity related instruments. Since the transactions are in either direction, the positions are completely hedged.

Arbitrage transactions are virtually risk-free. Hence an arbitrage fund carries low risk and the returns you can expect could be in the range of 6%-7% p.a. – depending on the market conditions and fund manager’s ability to reap rewards from arbitrage opportunities. One may consider an arbitrage fund to park money for the short-term.

Solution oriented schemes are funds those that focus on specific investment for investors. They aim to provide investors the benefit of a fund offering suitable allocation and risk appetite that is in line with the objective of the investor.

Solution oriented funds help you, the investor, plan for your life goals such as your children’s future needs (education and wedding expenses) and your retirement. As per the regulator’s categorisation, they are required to carry ‘Retirement Fund’ or ‘Children’s Fund’ in their complete scheme name

Solution oriented funds are classified into:

There are many ways you can invest in gold —coins, bars, jewellery, etc. These are the conventional avenues to invest in gold.

But buying gold via mutual funds is a smart, unconventional, and an easy way to invest in gold.

You have mainly 2 options to invest in gold via mutual funds:

Gold Exchange Traded Fund (ETF) are gold backed schemes offered by mutual fund houses that are listed and traded on a stock exchange. Each units of Gold ETF represents ownership of gold assets. This gold is held on your behalf by an appointed custodian by the ETF.

Gold ETFs track prices of physical gold. Each unit of gold in the fund you can buy is equal to 1 gram of gold (some fund houses also offer 1 unit at 0.5 gram of gold). When you buy a Gold ETF, you get a contract indicating your ownership in gold equivalent to the rupee amount of your investment. A few gold ETFs give the option of taking physical delivery and some don't; and if they do, it’s only after exceeding a certain quantity.

Gold ETFs are listed and traded on a stock exchange. Hence, these can be bought and sold like stocks on a real-time basis. But to own them, you need to open a demat account along with a share trading account with your broker.

While transacting in Gold ETFs, you are required to simply call your broker and place your orders (at the prevailing market price), or transact through the online trading application provided by the broker.

Also known as a “gold fund”, Gold Savings Fund is another unconventional way to invest in gold. A gold savings fund is a fund of fund scheme that invests its corpus into an underlying Gold ETF which benchmarks the performance against the physical prices of gold. Hence by doing so, the returns closely correspond to the one clocked by the underlying gold ETF.

However, unlike a Gold ETF (where you hold units in your demat account); in a gold fund, you are allotted units of the fund in a paper form, which would re¬flect in your mutual fund account statement.

Both, gold ETF and a gold savings fund are smart ways to invest in gold without actually tangible hold. If you do not possess a demat account, gold fund is an option for you. Note, the precious yellow metal as an asset class is an effective portfolio diversifier and shows its trait of being a safe haven during economic uncertainties. From an asset allocation standpoint, you may consider apportioning some portion (say, for example, 10%-15% of your total investment portfolio to gold) and hold it for the long-term.

Index Funds are passively managed mutual fund schemes as they seek to replicate a particular index, say S&P BSE Sensex or NSE Nifty 50. They maintain an investment portfolio that replicates the composition of the chosen index.

As per the regulatory guidelines, index funds and ETFs are expected to invest a minimum 95% of the assets of the scheme in securities of a particular index (which is being replicated/ tracked by the scheme).

The performance of the index fund is typically inline with the underlying index, subject to tracking error.

Fund of Funds invests money in other schemes of the same mutual fund house or other mutual fund houses. A minimum of 95% of the scheme’s total assets is invested in the underlying fund/s.

So, FOFs facilitate holding a single portfolio of funds rather than overcrowding your portfolio. These schemes provide the opportunity to build a portfolio of well-researched fund portfolio across mutual funds, picked by the fund manager.

Mutual funds are a promising investment avenue for wealth creation. There are a variety of mutual fund schemes, from which you should choose wisely in the journey of wealth creation. Before you invest in a mutual fund scheme, take into the consideration the following:

This will not only help you select the best mutual fund schemes but even the most suitable one for you.

Under the Growth Plan offered by mutual funds, the investor realises only the capital appreciation on the investment (by an increase in NAV), and aims for compounded growth. They do not offer income distribution in the form of dividend.

Under the Income Plan or Dividend Option, the investor realises income in the form of dividend. However, the NAV of the fund will fall to the extent of the dividend. The investors might miss the compounded growth on the portion that is distributed in the form of dividends.

Here the dividend accrued on mutual funds is automatically re-invested in purchasing additional units in open-ended funds. In most cases mutual funds offer the investor an option of collecting dividends or re-investing the same.

Systematic Investment Plan or SIP is a mode of gradually investing in mutual funds in a systematic manner at a regular interval.

SIP works similarly to recurring deposits (RD) with a bank, where you deposit a fixed sum of money regularly. The only difference here is, your money is deployed in a mutual fund scheme (equity schemes and / or debt schemes) and not in a bank deposit.

SIP enforces a disciplined approach towards investing and infuses regular saving habits. It works on the simple principle of investing regularly which enable you to build wealth over the long-term.

Here the investor will get units worth pre-specified investment amount on the pre-specified SIP date at the prevailing NAV.

Systematic Transfer Plan (STP) is the most suitable option for investors who wish to invest a lump sum amount in liquid and debt funds and gradually transfer that amount over a period of time to Equity Funds.

Under a mutual fund Systematic Transfer Plan (STP), a lump sum invested in one scheme can be transferred at regular intervals systematically in a piecemeal manner into another mutual fund scheme (as desired by the investors) of the same mutual fund house.

Most fund houses offer a daily, monthly, weekly, and quarterly option to systematically transfer money from one scheme to another. 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.

As opposed to the Systematic Investment Plan (SIP), the Systematic Withdrawal Plan allows the investor the facility to withdraw a pre-determined amount/units from his fund at a pre-determined interval. The investor’s units will be redeemed at the prevailing NAV as on the withdrawal date.

401(K) plan is a popular contribution program in the USA, available through many employers. Within these tax-sheltered plans, participants often can choose mutual funds as one or more of the investment choices.

Mutual funds are superior to other comparable investment avenues because of the following reasons:

Investors are exposed to reduced investment risk due to portfolio diversification, economies of scale in transaction cost and professional management.

Diversification of Risk

Investors are exposed to reduced investment risk due to portfolio diversification, economies of scale in transaction cost and professional management.

Diversified investment

Small investors can participate in larger basket of securities and share the benefits of efficiently managed portfolio by experts, and are freed from maintaining records of company share certificates, and tracking tax rules. Mutual fund investments are less risky due to portfolio diversification, which is possible mainly due to large funds available at their disposal. Small investors can never spread their risks across such a wide portfolio, as can mutual funds.

Freedom from tracking investments

Investors do not have to track their investments regularly, as the tracking is done by experts who buy and sell securities for them. Investors are only required to track the performance of the mutual fund.

Professional management

Mutual funds are run by professionals, with experience in portfolio management. Analysts employed by mutual funds analayse data and information available in a manner that cannot be matched by the lay investor.

Tax benefits

Income tax benefits are granted to investors in mutual funds, making it more tax efficient as compared to other comparable investment avenues.

The custodian, is an independent organisation typically a custodian bank or financial institution, that has the physical possession of all securities purchased by the mutual fund, and undertakes responsibility for its handling and safekeeping. They work with mutual funds through third party arrangements and are responsible for holding and safeguarding the securities owned within a mutual fund.

While mutual fund managers manage the investor money and take investment decisions, the securities owned in the funds portfolio are held with the custodian. They are not directly held with the fund house itself. Custodian are appointed to reduce the risk of fraud.

For instance, the Stock Holding Corporation of India Ltd (SCHIL), HDFC Bank, ICICI Bank, State Bank of India, Société Générale Securities Services, are the custodian for most fund houses in the country.

Asset Management Company (AMC) are assigned the task of managing the assets held by mutual funds. The fund managers and research analysts in the fund management team are employed by the Asset Management Company and are responsible for managing investors money.

They are a highly regulated organisation that pools money from many people into a portfolio structured to achieve certain objectives. Hence it is termed as an Asset Management Company. Typically, an AMC manages several funds - open-end /closed-end across several categories - growth, income, hybrid, debt, etc. Every mutual fund has an AMC associated with it.

For instance, ICICI Prudential Mutual Fund is associated with ICICI Prudential Asset Management Company Ltd.

Ex-dividend date is normally, one business day after the record date of distribution of dividend. Investors purchasing unit on or after the ex-dividend date are not entitled to collect dividends or bonus units. The NAV falls by the amount of the dividend distributed and/or bonus issued. The terms ex-bonus and ex-dividend often are used synonymously.

For instance, if the record date for dividend is October 15th, then investors who don’t have their names in the list of unitholders as on that day, will not receive dividend. This works very similar to dividend and bonus declarations in the case of stocks.

The expense ratio for a fund is the annual expenses charged by the mutual fund (over a financial year), including the management fee, administrative costs, divided by the number of units on that day.

The expense ratio of regular plans sold via distributors is higher than the expense ratio of direct plans offered by mutual funds. Thus, one benefits more by investing in direct plans of the mutual funds in the form of lower cost due to lower expense ratio.

As is evident from the definition, a lower expense ratio underlines the efficiency of a fund. This is a yardstick that investors need to apply to gauge the efficiency (or lack of it) between funds.

Direct Plans offered by mutual funds carry lower expense ratio compared to Regular Plans, and is thus cost effective.

Asset Management Fee is the fee charged by the asset management company (AMC) for portfolio management. The fee charged on an annual basis is calculated as percentage of net assets under management.

A back-end load imposed on an investor if he exits from the fund before a pre-determined period (say 12 months). The exit load charges decline the longer an investor stays invested with a fund.

A fund (overnight fund or liquid fund) that calculates dividends daily, paying out dividends or reinvesting the same in the scheme.

Financial instruments based on some primary underlying asset or index such as a stock, bond, commodity, or a benchmark of stock prices. Derivative securities fluctuate up and down in tandem with the primary security. Derivatives often are leveraged, making them more volatile. They can be used to speculate as well as to reduce or control an unwanted risk. Options and Futures are standardised derivatives. Others are customised to meet specific needs.

The sale of a mutual fund units of the scheme for the first time to investors is called New Fund Offer (NFO). It is offered typically when the fund is launched and allows the investors to buy units of the fund at the face value. NFO launched by mutual funds can be open-ended or close-ended.

The sale of a company's shares to investors for the first time is called Initial Public Offering. It is a process of offering share of ownership in the private company to the public, and helps the company raise capital from public investors.

A popular investment style whereby fund managers identify companies showing promise of above-average earnings. Stocks are held primarily for price appreciation as opposed to dividend income. Growth investors (or managers) are willing to pay a premium to acquire a stock if they feel it has the right prospects. Growth investing is an alternative to value investing. For instance, buying an over-valued banking stock would be the part of a growth manager’s investment strategy.

As opposed to growth investors, value investors (or managers) focus on identifying under-priced stocks. Value investors look out for stocks trading at prices lower than their fair value, but which have the potential to give attractive returns in long run. It is a strategy of buying stocks available at a discount and holding them for the long run until their full potential is realised.

This is the investment style espoused by index fund managers who simply invest by benchmarking their portfolio to a common stock market index like the S&P BSE-30 or the Nifty-50 index.

The fund manager replicates the index and invests only in stocks available the index in exactly the same proportion. There is no attempt to beat the benchmark index, but to simply replicate it, and therefore it is called as passive investing. The index fund will never outperform the benchmark index, nor does it attempts to outperform the index.

A general term used to describe any of several risk-reduction strategies. A fund manager might partially hedge against a market decline simply by moving a larger fraction of the portfolio into cash. Alternatively, the manager could sell stock-index futures contracts. If the market falls, the gains on the shorted futures would more or less offset the decline in the portfolio's value.