What is Liquid Fund? Advantage and Disadvantage of Liquid Fund, How it is different from Fixed Deposit (FD)

What is Liquid Fund

Many times it may come to your mind that what is Liquid fund. Are they safe enough for investment, and are they different from other investment instruments? I will discuss these points in detail in this article.

What is Liquid Fund
What is Liquid Fund

What is liquid fund?

Firstly, let’s understand what a liquid fund is? Liquid funds are a kind of mutual fund. Mutual funds generally invest in equity(shares), whereas Liquid funds are a kind of Debt fund (One type of mutual fund).

Liquid funds don’t invest money in any company’s share, whereas they invest in bonds, government securities, and debentures.

Generally, debt funds offer a fixed amount of return, and the time frame in this type of investment is 2-3 months.

Liquid Funds Meaning

The liquid fund got its name liquid because it can invest in debt instruments for a very short time.

Liquid funds can invest in only that debt instrument which are having a maturity period of a maximum of 91 days. 

Let’s understand Liquid Funds with an example:-

If company A needs a short term loan for 91 or less than 91 days, company A will issue Debentures with maturity time of up to three months.

And the debenture issued by Company A will be subscribed by Liquid fund manager.

Finally, after the maturity period, Company A will pay the liquid fund manager amount of loan with a fixed rate of interest as agreed earlier. 

In this type of instrument, Liquid funds invest their money. In return, they get a fixed amount of return from such investment.

Here, a question may come to your mind that if liquid funds invest for a very short period, how can we invest for long periods in these funds.

We can stay invested in liquid funds for whatever period we would like. The 91 days boundation is for the fund manager.

The fund manager can not invest in any debt instruments with a maturity period of above 91 days.

Suppose the fund manager has invested in Company A debentures. After maturity, he will take the money with interest and invest it in other options.

This process keeps on repeating, and your money will keep on growing.

Liquid fund Exit load(redeem)

The inventor can withdraw or redeem his money as per his need. 

Note:- If you withdraw within seven days, you have to pay a nominal fee.

You can also say that what’s different in this fund, it looks the same as Fixed deposits. So here is a quick Comparison between FD and Liquid Funds.

Disadvantages Of Liquid Fund over FD

Returns

Generally, a Fixed deposit offer returns from 6% to 8%, which are different for different organisations.

Whereas, if we talk about liquid funds, they are almost similar to FD.

From the returns point of view, they are almost the same(But there is fluctuation involved).

Risk

Suppose you are putting your money in reputed banks or nationalised banks. In that case, your money is almost risk-free, or we can also say that zero risk.

Note: From 1st April 2020, your FD amount of up to 5 lakhs is fully insured.

In the case of a liquid fund, we can not say that it has zero risks, but we can definitely say that the risk involved is very less.

And there is a reason behind this: it is easier to estimate the risk for shorter duration investment than a longer period.

So overall, it is not as risk-free as FD is concerned.

Advantages of the liquid fund over FD

Deposit Flexibility

Liquid funds are flexible in terms of investment where you can invest weakly, monthly, or quarterly as per your choice in a single account.

Whereas fixed deposits are a one-time investment, and if you wish to invest again, you have to open a fresh account.

Withdrawal Flexibility

In liquid funds, you can withdraw your money whenever you want. Only, if you withdraw it within 7 days of investment, you have to pay a minor exit load fee.

In FD, some institutions will have a policy of no withdrawal before maturity. In contrast, some institutions will cut down interest by half or one percent.

5 Point on PPF vs Mutual Fund Which is Better

PPF vs mutual fund

Indians love safe investment options(PPF vs Mutual Fund). According to us, Safe investment is one that offers a fixed return in a fixed time. 

We believe so much in this, that we often forget what a safe investment option actually is and apart from these two parameters the other parameters to evaluate investment options.

PPF vs mutual fund
PPF vs mutual fund

PPF vs Mutual Fund Which is Better

Can PPF beat Mutual fund? to know the answer let’s begin the face off. Let’s evaluate both the options on para meter no.1 

Returns 

PPF offers a fixed interest rate. This usually hovers around 8%-9%. In the last 50 years, It has touched 12% high and gone down to as low as 4%. 

Investing in equity mutual funds for a long duration can get you better returns than any other option. In the long term, Equity Mutual Funds can easily offer 10%-12% returns. 

These kinds of returns are difficult to get in any other investment option. So I will award 4.5 to mutual funds and 2.5 to PPF. 

Liqudity

Now let’s talk about the option through which the investment can be redeemed at the time of emergencies. During the financial emergencies, the money can’t be withdrawn from the PPF account. 

PPF has a lock-in of 15 years. Once invested, the investor will have to complete the 15-year term. There are a few exemptions. After 7 years for selective reasons like buying a house or medical emergency, the money can be withdrawn. But not the entire amount. 

Money can be withdrawn easily from a mutual fund account. With just a few formalities, the amount is credited to your account in 3-4 days. 

The withdrawal process is also very simple. This can be completed from the comfort of your home. With PPF you save tax with a lock-in of 15years whereas with ELSS you can save tax with a lock-in of just 3 years. 

In terms of liquidity, ELSS is an amazing option. Here I will give 4 marks to Mutual Fund and 2 to PPF. 

Also Read : How to Select a mutual Fund?

Tax On Return

Now let’s see how tax effects return in both the options. Let’s understand how returns are taxed in both these two. Because we will get to know about the real returns after we calculate the returns after tax. 

When it comes to tax, you get tax benefits under sec 80C on investment in PPF. This comes under the category of EEE. 

It means that from investment to maturity amount, no tax is levied. You can save tax by investing in equity-linked saving schemes mutual funds. 

In long term equity mutual funds, a 10% LTCG tax is levied.year, on the profit exceeding 1 lakh, in a financial. 

This 10% is levied on the profit that exceeds1 lakh. Meaning, profit up to 1 lakh is tax-free. PPF has left behind Mutual funds in tax benefits. I will award PPF 4 and Mutual funds 3. 

Inflation

The biggest test of an investment option is its ability to beat inflation. Let’s see which is the better of the two here If we talk about retail inflation then PPF can beat that because of its high interest rates. 

But, when we break inflation into sectors,then we see a different picture. The biggest example here is education inflation which is in double digits. 

PPF might not be able to accumulate sufficient wealth required for the higher education of children and retirement planning. In the long term, the equity mutual funds can give as high as 12% returns. 

It means the possibility of earning a higher return is more with mutual funds than PPF. It means mutual funds can beat inflation better. Here, I will award 3 to PPF and 4 to MF.

Also Read : What is PPF Account and Its benefits?

Risk

The next point I would like to talk about is that RISK PPF doesn’t involve any risk. You get a fixed return in this. The amount invested is locked in for a fixed time period. 

At the time of maturity, the amount is returned with the interest. In Equity mutual funds, the risk reduces substantially in the long term. 

But in the short term, there is risk involved. But just like PPF is a long term product, the money is invested for 15 years, in the long term, the risk is almost negligible in equity mutual funds. 

The possibility of getting double-digit returns is also high. Looking at the risk profile of both,i will give 4 marks to PPF and 4 to Mutual funds Mutual funds have defeated PPF. Mutual funds option is the winner of all the rounds.

Section 80c : 10 Best Deduction Under Section 80c

What Is Section 80c And Deductions under 80c

A lot of times, people look at where their colleagues and friends have invested to save tax(Section 80c) and just buy the same things without thinking if they are right for them. 

What Is Section 80c And Deductions under 80c
What Is Section 80c And Deductions under 80c

This isn’t the right approach. After all, you are putting your hard-earned money. You should know all the options available to you and then make an informed decision and that’s what we will talk about in this article.

Let’s begin. A big component of tax savings available to every taxpayer is the provisions under Section 80C. In this article, I will also discuss what is section 80c? and 10 Best Deduction Under Section 80c.

What is Section 80c?

Let us look at what is Section 80c of the Income Tax Act 1961. According to the tax laws, you can claim a deduction of Rs 1.5 lakh from your total income under section 80C. 

Basically, you can reduce up to Rs 1.5 lakh from your total taxable income by saving and investing money in the products that are listed under Section 80C towards tax benefits. 

This benefit under Section 80C can be availed by individual taxpayers and Hindu Undivided Family (HUF). Having understood this far, let us dig deeper as to how exactly you could benefit from Section 80C and utilise the Rs 1.5 lakh that you can. 

As mentioned before, you need to deploy this sum into products that are listed as tax savers under Section 80C and they are many such products. 

Various Deduction Under Section 80c

Actually, there are over a dozen avenues through which taxpayers could use to exhaust their tax savings under Section 80C. Each of these products is unique, though they all have a common objective which is to provide tax savings on the monies that flows into them each financial year. Let us understand the basic features of each one of them. 

Public Provident Fund (PPF)

The Public Provident Fund (PPF) is one of the oldest tax saving instruments in the country which was introduced in 1968. 

It is a long-term retirement savings option,which functions like a savings-cum-tax savings medium. The PPF has a minimum tenure of 15 years, which can be extended in blocks of 5 years as per your wish. 

The amount deposited during a financial year in the account can be claimed under Section 80C deductions within the Rs 1.5 lakh limit. The current interest rate on PPF is 7.9%. 

There is another advantage with PPF; the interest rate is guaranteed and the gains are tax free on redemption after maturity. 

Also Read : What is PPF and Its Various Benefits

Employee Provident Fund (EPF)

Employee Provident Fund (EPF)Your contributions in EPF are eligible for tax deduction of up to Rs 1.5 lakh under Section 80C and the money that you accumulate in your EPF earns a guaranteed interest which is notified at the beginning of the financial year. 

To provide flexibility to taxpayers, they can withdraw from the account after the mandatory specified period of 5 years. Like PPF, the gains from EPF are also tax free. 

The current interest rate on EPF is 8.65%. National Saving Certificate (NSC)The NSC is a guaranteed income investment scheme that you can open at any post office. 

The tenure of this scheme is fixed at 5 years and the interest rate is guaranteed in them. The current interest rate on NSC is 8%. However, the gains from the NSC returns are taxable as they are added to your income. 

Sukanya Samriddhi Yojana (SSY)

Sukanya Samriddhi Yojana (SSY)This scheme is designed to provide a bright future for the girl child. The SSY account can be opened at the post office and designated banks for a girl child. 

The account can be opened for the girl child before she turns 10 years old. The interest offered on this account is guaranteed and is currently 8.4%. 

Like the PPF, the interest earned in this account is tax free. 5-year Tax Saving Fixed DepositThese are bank deposits for a 5-year term in which the savings up to Rs 1.5 lakh in a financial year qualify for tax deduction under Section 80C. 

The current prevailing interest rate in such deposits is in the 6.85-7.5% range. However, like the NSC, gains from this deposit are taxable as they are added to your income.

Senior Citizens Savings Scheme (SCSS)

Senior Citizens Savings Scheme (SCSS)To address the tax savings needs of senior citizens, the SCSS was introduced by the government for those who are 60 years old or more. 

The deposit matures after 5 years from the date of account opening but can be extended once by an additional 3 years. In this scheme the returns are guaranteed and currently 8.6%. 

Equity Linked Saving Scheme (ELSS)

Equity Linked Saving Scheme (ELSS)The ELSS is an equity mutual fund category in which investments qualify for tax deductions under Section 80C up to the Rs 1.5 lakh limit in a financial year. 

The ELSS is a market-linked product and doesn’t guarantee any returns and comes with a three year lock-in, which is the shortest among the tax savings options under Section 80C.

As the ELSS is a mutual fund, there is convenience to start an SIP with ELSS to make tax savings a regular exercise with just Rs 12,500 SIPeach month.

National Pension System (NPS)

National Pension System (NPS)The NPS is a voluntary retirement scheme through which you can create a retirement corpus or your old age pension and available to all Indian citizens (resident or non-resident)between 18 and 65 years old. 

The investments under Tier I of the NPS qualify for tax deductions under Section 80C up to the Rs 1.5 lakh limit in a financial year. There is an added advantage of saving additional tax with the NPS. 

NPS subscribers can claim an additional deduction for investment up to Rs 50,000 in a financial year under Section 80CCD (1B) over and above the Rs 1.5 lakh deduction under Section 80C. The gains from NPS investments as well as the final corpus are full tax free. 

Life Insurance Premium, pension plans and ULIPs

You can claim premiums paid for life insurances for self, children or your spouse under Section 80C. 

The gains from these savings and investments are tax free under Section 10(10)D if the premium is not more than 10% of the sum assured or the sum assured is at least 10 times the premium. 

However, if the sum assured is less than 10times the premium, you can claim a deduction under Section 80C only up to 10% of the sum assured. 

Repayment of Home Loan 

There is something for home buyers servicing a home loan. If you are repaying the principal component of a home loan, then that amount is eligible for deduction under Section 80C. 

This tax exemption also includes payments made towards stamp duty and registration.

Tuition Fees Deduction Under Section 80c

If you are a parent, you can claim fees paid for admission of your child in schools, colleges or universities in India for full-time courses only. 

The tax exemption under Section 80C can be claimed for up to two children for that particular financial year. 

Infrastructure Bonds

Infrastructure bonds Within the Section 80C, sub Section 80CCF is a deduction available for taxpayers who prefer to invest in the government approved bonds. 

The deduction limit is up to Rs 20,000 per year and applicable on long-term bonds having a minimum tenure of 10 years with a lock-in period of 5 years. 

While the interest rate is fixed with these bonds, the gains on maturity are taxable. Having seen how each of the products in which savings and investments qualify for tax deductions under Section 80C, you can decide on those that meet your needs. 

You should also know that to claim the tax deductions under Section 80C, you need to produce proof of savings and investments inthe products that you choose. 

The tax savings options within Section 80C is exhaustive and overwhelming that many forget how much income tax they actually save. 

Example

For instance, at the highest 30% tax bracket,a taxpayer who exhausts the entire Rs 1.5 lakh deduction under Section 80C can save Rs 46,800 including 4 per cent cess. 

In the 20% tax slab, the savings works toRs 31,200 and at 5% tax slab it is Rs 7,800. As we said in the beginning, it is our belief that tax savings should be done with some planning and thinking. 

You should not get into the herd mentality of saving tax in an instrument just because your father does it or a friend thinks it is good. 

I mean, just because you can save tax on insurance policy, doesn’t mean you take a policy to save tax. Think if you need insurance cover and take an adequate cover with tax savings as an additional benefit. 

Another aspect that you should be watchful of is the tax savings on home loan repayment. Just because there is a tax saving window,do not go into taking a home loan to purchase a house. 

But, when you do buy a house on a loan, use the available tax benefits under Section 80C towards loan repayment. We think there are essentially three must have tax saving products that every taxpayer should consider. 

You need life insurance, especially a term life policy to make sure your dependents live comfortably in your absence. A term insurance policy provides pure life cover which is very affordable compared to other life insurance covers. 

For instance, a 30-year old healthy male will need to pay about Rs 20,000 annually for a Rs 1 crore term insurance plan. At less than Rs 2,000 a month not only do you get peace of mind, you also get the tax benefit under Section 80C. 

The second product which will work for you and help you to build a retirement corpus is the National Pension System (NPS). Retirement is a financial goal that everyone one needs to plan for. 

The NPS with its long term lock-in, choice of investment options and growth possibility is a powerful tax saving cum retirement planning tool. 

Closing Thoughts

Lastly, there is scope to create wealth and save income tax with investments in ELSS. The mutual fund structure of ELSS lets you plan and automate your investment in them for the whole year through SIPs (systematic investment plan). 

You could use the ELSS as the first step towards wealth creation along with the available tax deduction that you could claim under Section 80C. 

To recap; Section 80C of the income tax allows individual taxpayers and HUF to claim a deduction of Rs 1.5 lakh from the total income by saving and investing money in the products that are listed under Section 80C towards tax benefits. 

And, the best way to leverage tax savings under Section 80C is to plan for it and align it smartly to your financial needs and goals. Doing so, will help you save tax and also realise your financial goals.

Top 7 Best ELSS Funds Review in India

best elss fund

ELSS mutual funds are a very good option to save tax. I am sure that you must have heard about it many times. And this is true because by investing in these funds, you not only save tax but also create wealth for yourself.

But with 38 options to pick from, deciding which is best ELSS fund to invest in, can be quite confusing.

Not anymore. In Credit Gyani, we believe that we should do all the necessary work on your behalf. And in this article, we will tell you about 7 best ELSS funds, in which you can invest.

best elss fund
best elss fund

What is ELSS Funds?

So let’s get started If you have no idea about what are ELSS funds, here is a quick review. ELSS funds are a type of equity mutual fund wherein by investing in it, you can claim a deduction of up to 1.5 lakh in a year under section 80c.

ELSS funds are multi cap funds which means they can invest without any hindrance despite the company’s size and sector.

There are two benefits of this approach –

    1. One is you will get a diversified portfolio which lowers your risk
    2. and second is, you invest in those sectors that are actually advancing India.

How We Shortlisted These 7 Top ELSS Funds

Now that you know what ELSS funds are, let’s talk about how we shortlisted these 7 funds.

The very first thing we did, was to analyse all 38 ELSS funds Then we checked those funds that had at least 3 year history.

With this, 34 funds remained in the list After that, we evaluated the performance of funds under different time frames We also analysed how these funds perform in the falling markets.

Good downside protection i.e. loss control when the market falls, is a hallmark of a good fund.

We dug deeper and evaluated each fund’s performance against its benchmark, just to analyse that for how many times and with what margin it beats its own benchmark.

And lastly we checked the return of every fund in comparison to the ELSS category average.

Before arriving at any final selection we evaluated keenly each and every fund on these parameters.

Also Read : How to Select A Mutual fund?

List of 7 Best ELSS Funds

Are you ready to know which are those 7 funds? They are –

    1. Axis Long Term Equity Fund,
    2. DSPTax Saver Fund,
    3. Invesco Tax Saver Fund,
    4. Kotak Tax Saver Fund,
    5. Canara Robecco Equity TaxSaver Fund,
    6. Mirae Tax Saver Fund
    7. Motilal Oswal Long Term Equity Fund
Top ELSS Funds
Top ELSS Funds

Axis Long Term Equity

This fund was launched in 2009 and now has become one of the biggest fund of the ELSS category.

This fund invests 65-75% of its portfolio into the large caps i.e. in India’s top 100 companies. rest 25-30% in mid-sized companies and remainingportion in small companies.

The return consistency of this fund is its hallmark and in the last 10 years of its history, only for one year it gave less returns in terms of category and benchmark.

However this fund has not witnessed a big correction like 2008 but in 2011 and 2018 when the market was falling; it contained its losses in quite an impressive manner.

If we talk about its return, then for 10 years the average annual return of this fund has been 17.91%.

At the same time the 7-year and 5-year returns are 19.95% and 11.61% respectively.

Invesco Tax Saver

The Invesco Tax Fund was launched in 2006 and it follows the strategy of growth at areasonable rate.

This fund has been navigating beautifully both – the increasing markets and falling markets. So when in 2008, 2011 and 2018 the market fell, the losses of this fund were less than average and benchmark category.

Also in the rising market of 2010 and 2014 it offered more returns than the average and benchmark category.

Since inception, Invesco Tax saver Fund has given 14.01% of average annual returns. And its 7-year returns are 16.24%, which is around 3% more than the average category.

This fund is a great option in long term investment because of its growth at a reasonable rate strategy.

DSP Tax Saver

The DSP Tax Saver Fund was launched in 2007. This fund uses a combination of growth and value investing styles and switches in both according to the market.

Since its launch, DSP Tax Saver Fund has givenan average annual returns of 13.55%, and its 5-year and 7-year returns are 16.10% and 10.61% respectively, which is about 3% higher than the category average.

This fund is one of the most consistent performersin the ELSS category. Hence if you are looking for a reliable optionthen you should consider this.

Kotak Tax Saver

Kotak Tax Saver was launched in 2005 and since inception, it has given an average annualreturns of 11.80%.

This fund follows the flexicap approach whichmeans that it is not biased towards similar sized companies.

It has been increasing its allocation in mid-sizedand small companies in recent times. And today about 45% of money is invested insmall and mid-size companies and the rest is invested in large caps.

When we talk about 7-year returns of thisfund, its 13.99% and 5-year returns are 9.56%.

Mirae Tax Saver Fund

Mirae Tax Saver is a relatively new entrant in the ELSS category. It was launched in 2015.

This fund maintains about 65%-70% allocation in India’s top 100 companies and invests  the rest in mid-sized companies.

Talking about the returns of this fund, we see that since launch it has beaten its benchmark and category returnsby a big margin.

It’s 3-year returns is 14.60% which is 5%higher than the average category. Not only this, during the 2018 market correction,it contained its losses well.

This is pretty impressive but due to its small track record, its performance consistency across market cycles is still not known.

Canara Robeco Equity Tax Saver

This fund was launched in 1993 and it is one of the oldest ELSS Funds.

This fund invests maximum money in India’stop 100 companies. The downside protection capability of this fund is considered to be one of the best.

In the year 2008, 2011 and 2018 during market corrections, this fund fell below category and benchmark.

In 2018 when the overall average returns inthe ELSS category were negative, this fund gave positive returns.

In terms of returns generated since launch,Canara Robeco Equity Tax Saver has delivered an annual average returns of 14.61% and its 7 and 5 year returns are 13.91% and 9.17%  respectively.

Motilal Oswal Long Term Equity

Motilal Oswal Long Term Equity is also a relatively new entrant. It was launched in 2015.

This fund uses the QGLP – Quality, Growth, Longevity, and Price framework for stock selection.

And once the stock is picked, it holds itfor a long period. This fund has performed very well in its shorthistory and its 5-year returns is 13.73% which are the highest returns in the ELSS categoryin this period.

These are the 7 ELSS funds handpicked by us. You have witnessed yourself that all these funds have delivered good returns in the long-term.

However, they all have different approaches. So, if you want to go in for an aggressive strategy, you can pick Kotak Tax Saver Fund.

But if you prefer stability, then DSP Tax Saver Fund and Invesco Tax Saver Fund are good choices.

Don’t forget to share this article with your friends. For any questions write down in the comment section below. 

How To Select a Mutual Fund?

How To Select a Mutual Fund

So after all the research for where to invest your money, you zeroed-in on Mutual Funds.

You are all set to invest. But like many of us, you may be wondering How To Select a Mutual Fund.

How To Select a Mutual Fund
How To Select a Mutual Fund

Today, we are going to help you. So, how should you choose your first fund? The good part about Mutual Funds is that they offer scheme categories that match almost every risk appetite & time horizon.

Categories To Select Mutual Fund

So let us take a look at some of the fund categories that could match your requirements:

Funds for investments up to 1 year

If you are investing for say, 1 week to 1 year, you have to stick to Debt Schemes. And specifically, don’t go beyond these 5 categories –

  • Overnight Funds – when your horizon is for up to 1 week.
  • Liquid Funds – When you are looking to invest for 1 week to 1 month
  • Ultra Short Duration: for 1 to 3 month investment
  • Low Duration Funds: for 3 to 6 month investment and
  • Money Market Funds: for your investment that you can do for 6 months to 1 year

All these Scheme Categories are a far better alternatives for the same duration’s FDs that you would get in a bank.

Funds for 1-2 year investment horizon

For this investment duration too, you should stick to Debt Funds. Short Term Debt Funds can be a good category for this. These funds mostly lend to good companiesfor a period of 1 to 3 years.

If you complete 3 years they tend to deliver much better returns than Bank Fixed Deposits as you would pay far lower effective tax on your returns than what you pay on the interest you receive on FDs.

Funds for 2-3 year investment horizon

From debt funds, you can go for Banking and PSU Debt Funds. These funds lend only to banks and public sector companies, These companies have good credit rating & hence the risk is controlled, even if money is lent for a couple of years or more.

Hybrid Scheme category that suits a 2-3 year horizon is Equity Savings Funds. These funds put around 30-35% in stocks, 30-35%in equity securities that offer arbitrage opportunities, while the remaining is invested in debt.

Equity offers growth potential while debt adds stability. The arbitrage part is more or less risk-free as it buys and sells the stock at the same time to take advantage of different prices of the same stocks in different markets.

Funds for 3-4 year investment duration

ELSS Funds If you can lock-in your money for 3 years, you should go for ELSS funds. These funds have an added advantage of helping you save up to Rs. 46,800 in taxes every year, plus you get the growth potential of equities.

These are hybrid funds that buy stocks at low prices and sell automatically when the prices rise.

These funds keep changing the allocation to stocks & debt to generate optimal return & minimize risk.

Funds for 4-5 year investment duration

Aggressive Hybrid Equity Funds

If you want to control risk, go for Aggressive Hybrid Equity Funds.

They invest 65% -80% of your money into equityand 20%-35% of the money in debt. This is the ideal category for long-term investments for every first-time investor.

Large-Cap funds

Another category for your 4-5 year horizon is Large Cap Equity Mutual Funds.

They invest in the Top 100 companies, some of whom are most loved brands like, HDFC Bank, SBI, Hindustan Unilever or Reliance Industries,etc.

These funds provide relatively stable returns and are not as volatile as other equity fund categories.

Multi cap Funds

A slightly aggressive cousin of Large Cap Mutual Funds, they follow a Diversified Portfolio strategy that gives your money exposure in companies of all sizes, across sectors.

Also Read :

Funds for 5-7 year investment duration

Large and Mid Cap

These funds invest in a combination of India’s biggest and India’s fastest-growing mid-sized companies, giving you a mix of growth and stability.

Mid Cap Funds

These funds invest in mid-sized companies in India. The companies in this space are some of the fastest-growing companies.

For this reason, you can get market-beating returns. However, they can be volatile in the short to medium duration.

Funds for 7+ year investment horizon

Small Cap Funds

These funds invest in the smallest companies in India These companies have the potential to become mid and even large companies in the future and can give outstanding returns in this journey.

However, this space is extremely volatile, so you need to be prepared. Now that you know how to pick your first fund,time to get started on your investment journey.

Don’t forget to share this article with your friends!  

What is Expense Ratio in Mutual Fund?

What is Expense Ratio in Mutual Fund

You must have heard, “Mutual fund Sahi hain.” (Mutual funds are good.) But are they free? When you invest in a mutual fund, you might have thought that how does Mutual Funds charge you.

You don’t pay them separately. So, today, in this article, we will tell you what are expense ratios. How are they deducted? And how do they impact your returns?

What is Expense Ratio in Mutual Fund
What is Expense Ratio in Mutual Fund

What is Expense Ratio in Mutual Fund?

The charges which mutual funds charge to manage your fund are called expense ratios. You don’t need to pay this expense ratio separately.

But they are deducted from your NAV. NAV means net asset value. NAV is published daily.

Now you may be thinking about what is NAV. Just like a share has a price, Mutual Funds have units,which has NAV for example, if you are investing Rs. 10, if NAV of a fund is Rs. 10and if that NAV becomes 15. Then it means that you have earned50%  returns. And this expense ratio is yearly charged on a daily basis.

Why Expense Ratio is Charged?

Now you may be thinking why this expense ratio is charged. To fund or to run any business, they incur some expenses. There are different components of expense ratio:-

    1. Fund Management Expenses
    2. Marketing and Distribution Expenses
    3. Legal and Audit Expenses

Fund Management Expenses

Your fund managers, your researchers,who choose stocks for you, who put them in your mutual fund after doing research, they are paid a fees. These are fund management expenses.

Marketing and Distribution Expenses

All the ads you see,”Mutual fund sahi hain,” You see the hoardings,ads on TV. Expenses are incurred for them.

Legal and Audit Expenses

It includes auditor fees, charges of legal advisors,it includes them all. Because, you have to followall the compliances of SEBI. If you break any regulations, you have to pay extra penaltyor extra charges.

Also Read :

What is the Total expense Ratio?

Hence, you have to pay these expenses. Combining all these,comes the total expense ratio. And this total expense ratio,according to the guidelines of SEBI, can be charged at a maximum of 2.5%.

Now we will tell you how expense ratios are deducted. For simple calculations, let’s assume Mutual Funds gives you no return So let’s assume you have invested Rs 50000 in a mutual fund and expense ratio is 2% So you must be thinking now that Rs 1000 will be deducted.

But it is not like that Your expense ratio is deducted daily from your invested amount So invested amount at Day 1 is Rs 50000 calculating with 2% you will divide it with 365 Day 1 expense ratio comes around Rs 2.73 when you will see your next day invested amount that will be around Rs 49997 So the Day 2 expense ratio will not be calculated at Rs 50000 but at Rs 49997 which comes around Rs 2.73 So continuing in the same manner, On Day 365 the amount will be Rs 2.685 So if you add each day expense ratio the total comes around Rs 990 and not Rs 1000.

So this is a simple example where we have demonstrated how expense ratio will impact your investment if no returns are considered but generally, Mutual Funds gives you some return.

The expense ratio is deducted daily from your invested amount so if you have earned 10% returns then the expense ratio will be deducted on Rs 55000 So you must be thinking Rs 2.7 is very less for you but if you see it from long term perspective it impacts your investments significantly.

Now let’s see with an example, how this expense ratio can impact your investment in the long term of 10-15 years As we have discussed, you have investedRs. 50,000 in a mutual fund.

Let’s consider that you have put themfor 30 years & CAGR is 15% CAGR means compounded annual growth rate. Your return is increasing every yearby 15%.

If you are paying zero expense ratio, with around 15% CAGR,your amount will be around 33 lakh. But if the expense ratio is 2% in 30 years,the amount will be Rs. 18 lakh.

It means that in 30 years, slowly, you have paid Rs. 15 lakh. But if the expense ratio is 0.2%, the amount will be 31 lakh. It means you have paid fees ofonly Rs. 2 lakh in the whole 30 years.

It is normal in mutual funds to charge fees. Whenever you are investing in a fund you should checkwhat is their expense ratio. But it is not right to take decisionsonly on the basis of expense ratio.

But it will give you an ideahow much fees you will be paying. You have to see their past performancethat what was their fees before now what is the fees. And, the expense ratio of the mutual fundcan change.

But whenever they change, Mutual Funds will inform you beforehand that the expense ratio of this fundis increasing or decreasing. There are two types of mutual funds, Regular and Direct. In Direct Mutual Funds,expense ratio is less because you buy these mutual funds directly from AMC.

But if you are buying regular Mutual Fund, distributor charges also add up.Like if you’re buying through a broker, or some advisor or distributor then it is a regular Mutual Fund because it also has their charges.

You might have heard, active mutual fund and passive mutual fund. In active Mutual Fund, fund managers regularly change stocks, they do extra research on them.

Hence, expense ratio of such funds is more. Whereas, you might have seen that in a passive mutual fund they have a set procedure. They have a set criteria.

Hence they do not need to do much research. Therefore they have less expense ratio. I hope, now you have all the information about expense ratio.

If you still have a doubt about anything, comment and let us know If you want knowledge or information about any financial term or investing term, please tell us that through the comment. If you like this article, do share it with your friends and family.

How Investing In Stock Market is Easy Today

If you’ve always wanted to start investing in stock market, but you haven’t because it looks way too complicated, then this article is definitely for you.

Indeed, professional trading is pretty technical, but when it comes to getting started investing, it’s not as hard as it looks.

Investing In Stock Market

I’m not a professional by any means, but I am very proud that I started trading stocks about six years ago because I’ve learned a ton of new information, and I like to share this with you guys.

How Investing In Stock Market is Easy Today

In this article, I’m covering the three reasons why investing in the stock market is not nearly as hard as it looks and trusts me from a beginners point of view you guys are going to like this article because I’m just going to talk about the basics. Let’s start talking about the stock market and why it’s not very hard to get into it.

1. Brokerages are very low

Now the first reason why it’s not very hard to start investing in the stock market is just because of the simple fact that there’s a lot of brokerages out there that don’t charge any trading fees. On top of that, they have meager minimum investments required, which is easy to get started because you don’t need much money.

If you went back even five to ten years ago, you’d notice that most of the brokerages out there were charging about twenty bucks per trade, and then they required you to have an Rs. 15000 minimum balance just to even get started.

Now the problem with that business model is that if you’re a beginner investor, you’re probably not going to be putting much cash into the market and then on top of that if you’re wasting a bunch of money on fees because you don’t have a lot to trade with then that’s just a waste of money

But in today’s world, you can start investing straight from your smartphone. The minimum required balance for a lot of these brokerages is zero so if you want to start with just a buck you could if you could find a share that cost that much but to be honest with you guys you’re probably not going to find a company that cost just a buck a share.

But you really can’t find plenty of reputable companies that are about ten bucks, so definitely keep that in mind when you’re starting investing.

2. Availability of Easy options

Now the second reason why it’s not very hard to start investing is that if you don’t want to invest in just an individual company and do all the research that’s required, you can buy groups of assets called ETFs. They’re cool these are called exchange-traded funds and what they are is they’re kind of like mutual funds where they’re just a basket of assets.

But the cool thing is that you can trade them right on the stock market just like individual companies they can hold any asset that you can think of. The cool thing about ETFs is that they force you to diversify your portfolio because you’re investing in multiple companies or multiple assets simultaneously.

For example, you could invest in vanguards S&P 500 index called vo o on the stock market, holding 500 of the top US companies right inside the ETF, so technically speaking, if you were invested in that ETF. A few companies had a bad day on the market. Then you’d have 497 other companies that could make up for those losses because of the diversified portfolio.

ETFs have their pros and cons, but I’m a big fan of them personally because you don’t have to do a ton of research to get into them, and then on top of that, they diversify your portfolio, so you don’t have as much risk.

3. Availability of lots of information on the stock market

Now the third reason why it’s not very hard to start investing in the stock market is that there are way too many resources out there to help you learn how to invest.

There are a million different books you can read out there. Still, you’ve got to keep in mind that the internet also has a ton of various articles and videos so you can learn any investing that you want to

It just takes a little bit of research on your own. There’s way too much information out there to help you start investing.

So really there’s no excuse why you can’t get started today because it’s just too easy I’ll also mention that you can even do paper trading or simulated investing which means that you can play around in the stock market just like it’s for real except you’re using fake money.

So that way you can learn a ton of different things about investing. There’s no risk for you because it’s not real money.

I use the Zerodha brokerage app because they don’t charge any trading fees. They also have paper trading, which is the simulated platform inside their app so that you can practice trading with fake money.

So if you want to get some fantastic welcome offers from Zerodha or want to check out their simulated trading, then I’ve got an affiliate link below, which means I may be compensated if you click through it.

I’ve been using Upstox for quite a while now, and I’ve been happy with them, but they also have one of the best signup bonuses out there.

The paper trading thing is just awesome, and remember when it comes to investing that you’re never going to make any money or lose any money until you sell your shares.

Investing for the long term is statistically the best approach that you can take when it comes to investing in the stock market because you’ve got to understand that there’s always going to be bad days in the market. You’ve got to be able to withstand those thinking long term.

Otherwise, you’re going to get emotional, and you’re going to sell your shares, and you’re going to lose money because you just weren’t patient.