Mutual Fund India: Investments by NRIs

Mutual Fund were introduced in India in the year 1963 with the formation of the Unit Trust of India (UTI). It was an initiative of the Government of India and the Reserve Bank of India. Much later, in 1987, SBI Mutual Fund became the first non-UTI mutual fund in India. Mutual Fund India have gotten extremely popular in recent times.

What are Mutual Funds?

As the name suggests, a “Mutual Fund” is an investment vehicle that allows several investors to pool their resources in order to purchase stocks, bonds and other securities.

These collective funds (referred to as Assets Under Management or AUM) are then invested by an expert fund manager appointed by a mutual fund company (called Asset Management Company or AMC).

The combined underlying holding of the fund is known as the ‘portfolio’ and each investor owns a portion of this portfolio in the form of units.

franklin mutual fund india

Types of Mutual Funds

There are 2 major types of Mutual Funds in India.

Equity Mutual Funds:

Equity Mutual Funds try generating high returns by investing in the stock of companies across all market capitalisations. Equity Mutual Funds are the riskiest class of mutual funds and hence, they have the potential to provide higher returns. The performance of the underlying stocks plays a significant role in determining the returns to the investors. Equity Mutual Funds can be divided further as follows:

By Market Capitalization:

  • Large Cap : Invests in Top 100 stocks
  • Mid Cap: Invests in next 150 stocks
  • Small Cap : Invests outside Top 250 stocks
  • Large and Mid cap : Invests in Top 250 stocks

By Solutions:

  • ELSS : Invest to save taxes under section 80C and earn additional returns. These are also known as tax saver mutual funds.

By Diversification:

  • Multi Cap: Invests in stocks across market caps.
  • Focused: Invests in top stocks  in specific industry / segment
  • Value Oriented mutual funds : Invests in under valued stocks with upside potential
  • International: Invests in world’s top stocks
value mutual fund india

By Sector & Themes:

  • Thematic – Dividend Yield : Invests in dividend paying stocks
  • Sectoral – Banking : Invests in banking stocks
  • Sectoral – Technology : Invests in Technology stocks
  • Sectoral – Infrastructure : Invests in Infra stocks
  • Thematic – Consumption: Invests in Consumption stocks
  • Thematic – Energy : Invests in Energy stocks
  • Sectoral – Pharma : Invests in Pharma stocks
  • Thematic – PSU : Invests in PSU stocks
  • Thematic – MNC : Invests in  MNC stocks
sbi mutual fund

Debt Mutual Funds:

Debt is a major market in which people invest their hard earned money to make profits. The debt market consists of various instruments which facilitate the buying and selling of loans in exchange for interest. Considered to be less risky than equity investments, many investors with a low risk tolerance prefer buying in debt securities. However debt instruments offer lower returns as compared to equity investments.

Debt funds invest in securities which generate fixed income like treasury bills, corporate bonds, commercial papers, government securities, and many other money market instruments. All these instruments have a pre-decided maturity date and interest-rate that the buyer can earn on maturity – hence the name fixed income securities. The returns are usually not affected by fluctuations in the market. Therefore, debt securities are considered to be low risk investment options.

Debt funds can further be divided into the following categories:

Park your savings:

  • Overnight – For up to 1 week
  • Liquid : For 1 week to 1 month
  • Ultra Short Duration : For 2 to 4 months
  • Low Duration: For 3 to 9 months
  • Money Market: For 6 to 12 months

Better than FDs:

  • Banking and PSU : Lends only to Banks and PSUs
  • Corporate Bond : Lends to Safe and Sound Companies
  • Short Duration : For 1 to 3 years

Debt for long term:

  • Medium Duration : For 2 to 4 years
  • Medium to Long Duration : for 3-5 years
  • Long Duration : For years or more
  • Dynamic Bond : Lends based on interest rate movements

Others:

  • Credit Risk : Invests at least 65% in not so highly rated securities
  • Gilt : Invests primarily in government securities
  • Gilt with 10 year Constant Duration : Invests passively in government securities
  • Floater: Invests at least 65% in floating rate bonds
  • FMP : Invests in Fixed Maturity Plans

What are Arbitrage Funds?

Arbitarge mutual funds in India are a type of mutual fund that has the characteristic of having low risk and working well in an unstable or volatile market. When there is a price difference for a particular share, in the cash market (or spot market) and the future market (or derivatives market), arbitrage funds act as an advantage by using the price difference as their profit.

Here’s an example to understand how best arbitrage funds in India work – a company‘s stock is trading at Rs.2000 in the cash market and Rs.2500 in the derivatives market. Therefore, when investors buy the share from cash market and sell in the derivatives market, simultaneously, they earn a profit of Rs.500 per share. To earn a consistent gain, arbitrage funds need to execute a large number of trades each year.

Bodies regulating Mutual Funds in India:

  • Securuties and Exchange Board of India (SEBI)
  • Association of Mutual Funds in India (AMFI)
association of mutual funds
us nri mutual fund

Types of Mutual Fund plans in India:

  • Regular Plan : Regular Plans are those plans in which you buy mutual fund units through an advisor, broker or distributor
  • Direct Plan : Direct Plan Mutual Funds are those plans where you buy mutual fund units directly from the company.

What is an NFO?

When a company needs to raise money, they come up with an initial Public Offering or an IPO. Similarly, when an Asset Management Company wants to launch a new fund, the come up with an New Fund Offering or an NFO for a mutual fund.

 ETF vs mutual fund in India:

Mutual funds are usually are actively managed to buy or sell assets within the fund in an attempt to beat the market and help investors profit.

ETFs are mostly passively managed, as they typically track a specific market index , they can be bought and sold like stocks.

Which mutual funds are the best for US NRIs?

There are very few AMCs which allow US residents to invest through Mutual Funds in India. Some of these include Franklin Templeton, Parag Parikh AMC, L&T Mutual Fund etc.

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