Investment

Mutual Fund

Mutual funds are a type of certified managed combined investment schemes that gathers money from many investors to buy securities. There is no such accurate definition of mutual funds, however the term is most commonly used for collective investment schemes that are regulated and available to the general public and open-ended in nature. Hedge funds are not considered as any type of mutual funds.

Mutual funds are identified by their principal investments. They are the 4th largest category of funds that are also known as money market funds, bond or fixed income funds, stock or equity funds and hybrid funds. Funds are also categorized as index based or actively managed.

In a mutual fund, investors pay the funds expenditure. There is some element of doubt in these expenses. A single mutual fund may give investors a choice of various combinations of these expenses by offering various different types of share combinations

The fund manager is also known as the fund sponsor or fund management company. The buying and selling of the funds investments in accordance with the funds investment is the objective. A fund manager has to be a registered investment advisor. The same fund manager manages the funds and has the same brand name which is also known as a fund family or fund complex.

As long as mutual comply with requirements that are established in the internal revenue code, they will not be taxed on their income. Clearly, they must expand their investments, limit the ownership of voting securities, disperse most of their income to their investors annually and earn most of their income by investing in securities and currencies.

Advantages of Mutual funds are

  • Increase in diversification.
  • Liquidity on a daily basis.
  • Professional investment management.
  • Convenience as well as service.
  • Capacity to participate in investments that may be available only for larger investors.
  • Government oversight.
  • Easier comparison

There are different types of Mutual funds as well.

Here are some of them.


01. Open-end funds

02.Close-end funds

Close-end funds generally issue shares to the public just once, when they are created via an initial public offering. These shares are then listed for trading on a stock exchange. Investors, who dont wish any longer to invest in the funds, cannot sell their shares back to the funds. Instead, they must sell their shares to another investor in the market as the price they may receive may be hugely different from its net asset value. It may be at a premium to net asset value (higher than the net asset value) or more commonly at a lesser to net asset value (lower than the net asset value). A professional investment manager will oversee the portfolio, in buying or selling securities whichever is appropriate.

03.Unit Investment Trusts

UIT or Unit Investment Trusts issue shares to the public just once when they are created. The investors in turn can cash in on the shares directly with the fund or they may also sell their shares in the market. UITs do not have any professional investment managers. Their portfolio of securities is established by the creation of the UITs and does not undergo any changes. UITs in general have a limited life span, which is limited at their creation.

Corporate Fixed Deposits

The Corporate Fixed Deposits, as the name suggests are like any other Fixed deposits issued by the banks. It has also got some characteristics of fixed deposits with some restrictions. The Corporate Fixed Deposits are issued by the Public and Private Limited companies. It is governed by Section 73 of the Companies Act. It is also called Company Deposits. Bank Deposits are governed by the Banking Regulation Act.

Why Companies Take Deposits

The companies require funds for their business activities. Normally they take loans from banks. The interest rate on these loans is comparatively higher. To reduce interest cost, companies invite deposits from the general public. The interest on these deposits is generally 3-5% less than the interest on the loans taken from banks. This helps them in reducing the cost of production. Thereby keeping the cost of their products competitive in the market.

Who can issue corporate fixed deposits

Financial companies and Non-Banking Financial Companies (NBFC) are allowed to take deposits from the public. But for Public and Private Limited companies the issuing of Corporate fixed Deposits is subject to the provisions of Section 73 to 76 of the Companies Act,2013.

A Public Company likely to take deposits from the public must have Net worth of Rs 100 Crs or Turnover of not less than Rs 500 Crs. The Company has to obtain shareholders’ consent through Special Resolution and the same has to be filed with the Registrar of Companies before accepting the deposits from Public.

Conditions Precedent to obtention of deposits from public

The companies have to necessarily fulfil the following conditions before accepting deposits from the public:
  •  Deposits shall not be repayable on demand.
  • The period of deposits shall not be less than 6 months. The company may accept the deposits for their short-term requirement for not less than 3 months. But such deposits should not exceed more than 10% of their paid-up share capital and free reserves.
  • Company has to issue an advertisement in a new paper in form-DPR-1 for inviting deposits from the public.
  • Company cannot accept the deposits from public exceeding 25% of its share capital and free reserves. In the case of Government companies limit is 35%.
  • Company shall obtain the Credit Rating from accredited agencies at the time of accepting the deposits and every year thereafter. The same shall be informed to the Registrar of companies in form-DPT-3.
  • Company shall maintain a Repayment Reserve Account and keep a minimum of 20% of the number of deposits maturing during the following financial year.

Bonds

Bonds are the instruments to raise the funds by the Government and Corporate entities from the public. It is considered as a loan from the subscribers. It carries a fixed rate of interest and called Fixed income instruments. It carries a maturity period of 7-10 years. But infrastructure bonds are issued for longer periods up to 30 years. Bonds are considered less risky than Equities or Shares as a return in the form of interest is assured. Whereas in the case of Equities return is in the form of dividends. Companies declare dividends out of the profits earned.

WHO CAN ISSUE THE BONDS?

Bonds are issued by the following entities:

Corporate

Corporate issues the bonds to raise the funds to conduct their business activities. They may need funds for long term basis for their Capital expenditures or short term basis for working capital requirements. Bonds issued by corporate also called Debentures.

Corporate issues the following type of bonds:

Convertible Debentures

These type of bonds are converted into shares as per the pre-decided terms and conditions of the debentures. It could be fully convertible or partly convertible debentures. In the case of fully convertible bonds, no amount is payable on maturity. In the case of Partially convertible bonds, the amount about the nonconvertible part is repaid on maturity. Corporate bonds carry a certain amount of risk as the repayment of bonds depends upon the profit earned by the company. Therefore companies offer more interest on their bonds.

Non-convertible Debenture

Nonconvertible debentures remain as a debt instrument and carries the fixed rate of interest. Redemption amount is repaid on maturity.

Government

The government also issues the bonds to fund their various developmental activities mostly for infrastructure projects. Government bonds are also known as G-Sec or Government Securities. These bonds are considered a safe investment as repayment is guaranteed by the government. These bonds carry little less interest compared to Corporate bonds. The duration of the bonds is also longer for up to 30 years. The interest rate offered on Government bonds is also called Coupan rate.

Type of Bonds:

The following type of bonds are in vogue:

Government Bonds

These bonds are issued by Central and State Governments to fund their development activities.

Local Authorities Bonds

These bonds are issued by the local authorities like Municipal Corporations.

Public Sector Bonds

These bonds are issued by Public Sector Enterprises of Central and State Governments.

Tax-Free Bonds

These bonds are issued by the Central Governments. Interest paid on these bonds is tax-free.

Sovereign Gold Bonds(SGB)

These types of bonds are issued by the Central Government. The underlying security in these bonds is Gold.

The price of the bond is fixed based on the prevailing price of the gold. The value of a bond is mentioned in no. of grams of gold.

On maturity, investors can opt to get either the physical gold in grams or equivalent amount of value in rupees. The interest payable in these bonds is @2.50% pa. Interest can be taken half-yearly or can be taken at the time of maturity. The interest paid on these bonds is tax-free.

Estate Planning

Our talented real estate advisors remain primarily focused towards providing independent real estate solutions to huge clientele, within the stipulated period of time. Our efficient and well qualified team remains dedicated towards maximizing the objectives of clients to the utmost level. The fundamental approach of our team is to explore the maximum values by managing the risky areas wisely. Searching a fresh solution, allowing an accurate peace of mind and exploring various synergies keep us at par than our competitors.

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Gold

Investment Options In Gold

Parameters Sovereign Gold Bond Gold ETF Gold Mutual Funds Physical Gold
Issuer RBI on behalf of GOI Mutual Funds / Other entities Mutual Funds N/A
Who can invest Individuals, HUF, Charitable Trusts, Universities Anyone Anyone Anyone
Form of Holding Physical Holding Certificates/ D'mat. D'mat. Electronic Form (Statement of Account) Physical
Min Investment 1 gram 1 gram Rs.1,000/- (depends upon scheme to scheme) Any Amount
Max Investment 20kg for institutions & 4kg for all other investors per year Any Amount Any Amount Any Amount
Interest rate 2.50% p.a credited semiannually (Taxable) N/A N/A N/A
Redemption Value Average of closing price of gold of 999 purity of previous 3 business days from the date of Gold ETFs are represented by 99.5% pure physical gold bars. As per underlying value of holding (generally Gold ETF) Prevaling price of gold
Tenure Lock-in for 8 years, early redemption from 5th year No fixed tenure No fixed tenure No fixed tenure
Liquidity Traded on stock exchanges (Only if held in D'mat) Traded on stock exchanges. Can be sold back to fund anytime. Fairly liquid.
Exit Load N/A Nil Applicable between 1-2% for upto 1-3 years. Nil
Tax No TDS. Interest is fully taxable. No Capital Gains tax if held till maturity. Capital Gains Tax applicable if Capital Gains Tax is applicable Treated as Debt Mutual fund. Capital Gains Tax charged as applicable Capital Gains Tax is applicable
Impurity Risk None None None Yes
Pledge Yes No Yes Yes
Cost of Holding Nil Fund Management cost applies. (Generally between 0.50 - 1.00% per year. (Generally between 0.50 - 1.00% per year. Fund Management cost applies. (Generally between 1.00 - 1.50% per year. Nil

Should You Invest In Gold?

Wow or Oops!

Let us look at the recent Gold ETF returns..

Returns ( as on 31-May-20)
1 Year 3 Year 5 Year 7 Year
46% 16% 11% 7%
Source:MFI, Fundsindia Research Returns ( as on 31-May-19)
1 Year 3 Year 5 Year 7 Year
2% 2% 3% 0%
Oops. We need to sell Gold 🙁

Same asset class – but two completely different interpretations!

Note: Returns of Nippon India ETF Gold BeES (largest Gold ETF with AUM above Rs. 3,500 crs) is used for illustration How do we form our return expectations?

In the long run, the usual narrative is that Gold is expected to be a good inflation hedge (i.e it will beat inflation). But as always let us verify if there is evidence to prove it..

M