Indian Mutual Fund Types
Andrew Arthur
Looking to invest in Indian mutual funds from New Zealand? Here's what you need to know:
Indian mutual fund market hit ₹66.7 trillion (USD794.45 billion) in August 2024
Kiwi investors can access 100's of Indian funds through Indus
Main fund types: Equity (stocks), Debt (bonds), and Hybrid (mix of both)
Key risks: Market volatility, currency fluctuations, regulatory changes
To get started:
Invest via the Indus platform
Choose a fund type based on your risk tolerance
Consider using Systematic Investment Plans (SIPs) for disciplined investing
How Indian Mutual Funds Work
Indian mutual funds use a system that protects investors and manages their money well. Let's look at the key parts and people that make these funds tick.
Main Parts of a Mutual Fund
An Indian mutual fund has three main layers:
1. The Sponsor
This is who starts the mutual fund. For example, HDFC Bank and Standard Life Investments started HDFC Mutual Fund. The sponsor needs a good track record in finance and must meet SEBI's money rules.
2. The Trust and Trustees
The fund is set up as a trust under Indian law. They make sure the fund follows SEBI rules and holds the fund's property for the investors.
3. The Asset Management Company (AMC)
This is where the action happens. The AMC, like HDFC Asset Management Company, runs the fund day-to-day. They decide on investments, start new schemes, and help investors.
People Who Run Mutual Funds
Several key players work together to keep mutual funds running:
Fund Managers: These experts decide what to buy and sell.
Custodians: They keep the fund's assets safe. HDFC AMC uses three: HDFC Bank, CitiBank, and Deutsche Bank.
Registrar and Transfer Agents (RTAs): They handle investment applications and keep records.
Auditors: They check that the fund's financial statements are correct and follow the rules.
The structure of Indian mutual funds has checks and balances. The AMC makes investment choices, but trustees watch over them to protect investors. This split helps keep the system honest.
For New Zealand investors looking at Indian mutual funds, knowing this setup is key. Indus (https://indus.nz) make it easier for Kiwis to invest in 100's of Indian mutual funds using just their New Zealand ID and bank account.
Main Types of Mutual Funds
Indian mutual funds come in various flavours to match different investment goals and risk appetites. Let's dive into the main types available to New Zealand investors eyeing the Indian market.
Stock-Based Funds
Stock-based funds (or equity funds) mainly invest in company stocks. They aim for high returns but pack more risk. Here's a quick rundown:
Large-cap Funds: These bet on big, established companies. The HDFC Top 100 Fund has churned out 16.35% annualised return over the last 5 years.
Mid-cap Funds: They target medium-sized companies with growth potential. The Axis Midcap Fund has delivered a solid 23.08% annualised return over the last 5 years.
Small-cap Funds: These funds hunt for smaller, high-growth companies. The Nippon India Small Cap Fund has racked up an impressive 34.85% annualised return over the last 5 years.
Multi-cap Funds: These spread their bets across companies of all sizes. The Quant Active Fund has knocked it out of the park with a 28.25% annualised return over the last 5 years.
Bond Funds
Bond funds (or debt funds) invest in fixed-income securities. They're generally less risky than stock funds but don't offer the same potential for high returns. Some types include:
Government Bond Funds: These invest in Indian government securities. The SBI Magnum Gilt Fund has given a 5-year annualised return of 6.97%.
Corporate Bond Funds: These focus on company-issued bonds. The Aditya Birla Sun Life Corporate Bond Fund has shown a 5-year annualised return of 7.08%.
Money Market Funds: These go for short-term, easy-to-sell instruments. The Aditya Birla Sun Life Money Manager Fund has delivered a 5-year annualised return of 6.08%.
Mixed Funds
Mixed funds (or hybrid funds) blend stocks and bonds in different ratios. They try to balance growth and stability. Here's what you need to know:
Balanced Funds: These keep a roughly equal mix of stocks and bonds. The HDFC Balanced Advantage Fund has given a 5-year annualised return of 19.85%.
Aggressive Hybrid Funds: These lean more towards stocks. The JM Aggressive Hybrid Fund has shown impressive 5-year annualised returns of 24.81%.
Conservative Hybrid Funds: These play it safer with more bonds than stocks. The ICICI Prudential Regular Savings Fund has delivered a 5-year annualised return of 8.63%.
When picking a fund, think about how much risk you can handle, how long you're investing for, and what you're trying to achieve. If you're in it for the long haul and can stomach some ups and downs, equity or aggressive hybrid funds might be your cup of tea. If you prefer a smoother ride and regular income, debt or conservative hybrid funds could be more your speed.
How Funds Are Managed
Indian mutual funds use different management styles to suit various investor needs and market conditions. Let's look at the main ways fund managers handle investments.
Hands-On Management
Active management is where fund managers get their hands dirty. They dig into company research, study market trends, and decide which stocks to buy, keep, or sell. The goal? Beat the market benchmark.
Active management can be a lifesaver when markets get rocky. Active fund managers can adjust their portfolios by moving into or out of stocks based on market conditions, potentially shielding investors from major downturns.
But this hands-on approach isn't free. Actively managed funds usually cost more because of all the research and brainpower they need.
Index Tracking
On the other side, we've got passive management. These funds, also called index funds, try to copy the performance of a specific market index. They don't need as much hands-on work from managers.
A good example is the SBI Nifty 50 Index Fund. It tracks the Nifty 50 index, aiming to match the performance of India's top 50 companies by market cap.
Why choose index tracking?
It's cheaper. Less active management means lower fees.
No manager risk. You don't have to worry about a fund manager making bad calls.
You get a slice of the whole market. It's like instant diversification across an entire index.
Focus Funds
Focus funds (also known as thematic or sectoral funds) put their money into specific industries or themes. They've become a big hit lately.
Some standout examples:
SBI Innovative Opportunities Fund: Launched in 2024, it invests in companies using innovative strategies.
Aditya Birla Sun Life Defence Index Fund: Started in August 2024, targeting the growing defence sector.
These funds can bring in big returns, but they're riskier too. The mutual fund industry is flourishing, driven by opportunities within the Indian economy. This growth has led to the launch of thematic and sectoral funds aimed at capitalising on emerging trends and opportunities.
But don't jump in without looking. Relying on past performance can be misleading, as the performance of thematic and sector funds tends to follow cyclical patterns.
For New Zealand investors wanting to try Indian mutual funds, Indus (https://indus.nz) offer 100's of fund options. Whether you like the hands-on approach of active management, the cost-saving of index tracking, or the focused strategy of thematic funds, there's likely something that fits your style and goals.
Risks and Returns
Let's talk about the balance between risks and returns in Indian mutual funds for New Zealand investors.
Risk Levels
Indian mutual funds come with different risk levels, shown by SEBI's riskometer. Here's what you need to know:
1. Low Risk
These are usually debt funds that invest in government securities and high-quality corporate bonds.
For example, the SBI Magnum Gilt Fund, which invests in government securities, has shown a 5-year annualised return of 6.97% with minimal risk.
2. Moderate Risk
These are often balanced or hybrid funds.
The HDFC Balanced Advantage Fund, for instance, has delivered a 5-year annualised return of 19.85%, balancing stocks and bonds to manage risk.
3. High Risk
These are typically equity funds, especially those focusing on small-cap or sector-specific stocks.
The Nippon India Small Cap Fund, for example, has shown a 34.85% annualised return over 5 years but comes with higher volatility.
Pick a fund that matches your risk tolerance. The riskometer simplifies and clarifies the risks associated with mutual fund schemes, making them more transparent and investor-friendly.
How to Measure Fund Success
Don't just look at returns. Here's what else to consider:
Benchmark Comparison: Good funds beat their benchmark over time. If a large-cap fund consistently outperforms the Nifty 50 index, that's a good sign.
Risk-Adjusted Returns: This shows how much return you get for the risk you're taking. The Sharpe ratio is often used for this.
Consistency: Check performance over different time periods. The HDFC Top 100 Fund, for example, has maintained a 16.5% annualised return over the last 5 years, showing consistent performance.
Expense Ratio: Lower fees can boost long-term returns. Compare fees within the same fund category.
Evaluating the fund's risk-adjusted returns can provide more meaningful insights than focusing solely on absolute returns.
Building Your Fund Mix
Here's how to create a balanced portfolio:
Know Your Risk Tolerance: If you're cautious, lean towards debt funds. If you're okay with more risk, consider equity funds.
Spread Your Bets: Mix different fund types. Combine a large-cap fund with a balanced fund for stability and growth potential.
Think Long-Term: Longer investment periods can help smooth out market ups and downs, especially for equity funds.
Rebalance Regularly: Adjust your portfolio to keep your desired risk level. This might mean selling some winners and buying some losers to stay balanced.
Use SIPs: Systematic Investment Plans can help you buy at average prices over time, reducing the impact of market timing.
Make sure your fund choices match your financial goals and risk appetite.
Key Points to Remember
As a New Zealand investor eyeing the Indian mutual fund market, here's what you need to know:
Understand the Basics
Indian mutual funds come in three main types: equity, debt, and hybrid. Each has its own risk and return profile.
Know Your Investment Options
Indus (https://indus.nz) makes it easy
Align with Your Goals
Pick funds that match your investment timeline and risk comfort level. The Indian mutual fund market offers a viable and potentially lucrative investment opportunity for foreign investors
Use SIPs for Disciplined Investing
Consider Systematic Investment Plans (SIPs). They help with rupee cost averaging and keep your investing on track.
Stay Informed and Seek Advice
Keep up with market trends and rule changes. Don't be shy about talking to financial advisors who know investments inside and out. They can help you fine-tune your investment strategy.
FAQs
What are the new categories of mutual funds?
In 2017, SEBI introduced new mutual fund categories to simplify comparisons for investors. Here's the breakdown:
1. Equity Schemes
Large, mid, and small-cap stocks now have clear definitions. For example, large-cap funds must put at least 80% of their assets in large-cap stocks.
2. Debt Schemes
These include various bond funds, like corporate bond and government securities funds.
3. Hybrid Schemes
Now split into:
Conservative hybrid fund (10-25% equity)
Balanced hybrid fund (40-60% equity)
Aggressive hybrid fund (65-80% equity)
4. Solution Oriented Schemes
This category covers retirement and children's funds.
5. Other Schemes
Includes index funds, ETFs, and fund of funds.
The new categorisation requires Mutual Fund Houses to classify all their equity schemes into 10 distinct categories, enhancing transparency and making it easier for investors to make informed choices.
What's the structure of a mutual fund AMC?
Mutual fund Asset Management Companies (AMCs) are set up to protect investors and manage funds effectively. Here's how they're organised:
1. Sponsors
These are the big players who set up the mutual fund. Think HDFC Bank and Standard Life Investments for HDFC Mutual Fund.
2. Trustees
They're like the watchdogs, making sure everything's running smoothly and by the book. For HDFC Mutual Fund, that's HDFC Trustee Company Ltd.
3. Asset Management Company (AMC)
This is where the action happens. The AMC manages the fund's investments day-to-day. In our example, that's HDFC Asset Management Company.
4. Custodians
These folks keep the fund's assets safe. HDFC AMC uses three: HDFC Bank, CitiBank, and Deutsche Bank.
5. Registrar and Transfer Agents (RTAs)
They handle all the paperwork - investor transactions, record-keeping, you name it.
6. Fund Managers
These are the brains behind the operation, making the big investment decisions.
This setup creates a system of checks and balances. The AMC makes investment calls, while trustees keep an eye on things to protect investors.
For Kiwi investors looking to dip their toes in Indian mutual funds, Indus (https://indus.nz) is a simple way for New Zealand investors to tap into Indian mutual funds without getting tangled in cross-border investing complexities.
