Why Invest?

In your first step, let's understand the basics of why one should learn to invest in the 21 century.

It's no secret that for decades, we have stuck to the traditional ways of saving to accomplish our financial goals such as buying homes, financing a child's education, early retirement planning, etc. However, times are changing and so should our investing ways. The age of idle money in gullak aka piggy bank or traditional investments has gone. Let's make the shift from traditional investing methods to smart alternatives.

Let’s take a look at how the traditional savings method works

Traditional Savings method

As a result, traditional investments fail to beat the impact of taxes and ever-increasing inflation. Being a disciplined investor in this era is not enough to grow your wealth.

Disciplined Investor

Impact of inflation over the years

Let’s understand inflation better

As we can see, inflation has hiked petrol prices by almost 8 times in 33 years. Also, a dozen bananas that cost 16 in 2001 had a price of 80 in 2023.

From the above table, it is evident that inflation ends up almost doubling your monthly expenses every decade. As a result, you need to invest wisely to ensure your investment corpus beats inflation successfully

This is where Chapter 1 ends. Now that we understand the need for investing, Chapter 2 is an introduction to the many investment options.

A smart investment is one with an return on investment that beats the impact of ever-increasing ________ .

What are your investment options?

This chapter introduces you to the world of investments. When you know your investment options well enough, you become well-equipped to invest your hard-earned money the smart way that beats inflation and boosts tax-saving. It all depends on 2 major factors namely your risk-taking capability and how conservative or aggressive is your approach.

When stocks markets go through many ups and downs, it is called a volatile market which often demotivates investors like you. This is why, Mutual Funds were born to help you potentially counter volatile stock market if you stay invested for a long term. In short, the key to creating wealth through mutual funds is long term commitment.

Sensex progress over the years

This is why stock markets and mutual funds, though taxable, have an edge over other investment options as they have potential to beat inflation and provide good returns over a period of time.

Now you have a better idea of the stock market's growth trajectory. Basically, you have a better chance of overcoming volatile conditions and earning good returns with long term investments.

On that note, let's take a deep dive into the concept of Mutual Fund in the next and final chapter of module 1.

Mutual Funds were born to help you potentially counter volatile stock market if you stay invested for a _____ term

What is a Mutual Fund?

Is it risky? How much will I get in return? Is my money safe?

This chapter is not just a formal introduction but also an attempt to address your concerns, doubts or misinformation about Mutual Fund.

Mutual Fund: It is a pool of money accumulated by several investors who aim at saving and making money through their investments. The corpus of money created is invested in various asset classes like Equity, Debt, Gold, etc.

The Mutual Fund advantage:

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How risky are Mutual Funds?

• Market Risk is the impact of change in prices caused by a particular market's rise or fall due to broad outside influences.

• Inflation Risk is also referred to as 'loss of purchasing power'. Whenever the rate of inflation exceeds the earnings from your investment, you run the risk of buying less instead of more.

• Credit Risk means how stable is the company or entity to which you lend your money when you invest. It also shows how certain you are that it will be able to pay the promised interest or repay the principal when the investment matures.

• Interest Rate Risk is the volatile interest rate movements in the Indian debt markets leading to the possibility of large price movements up or down in debt and money market securities. This could change the Net Asset Value (NAV) of your investment.

Now you know Mutual Funds, the risks and its many advantages. Congratulation! You have successfully completed module 1 of the Consitution of Investing. Module 2 is all about learning how you can grow your wealth through the various types of Mutual Funds.

What are your investment options?

Welcome to Module 2. It is the foundation you need to build your mutual fund knowledge on. Broadly, mutual funds are classified into Equity, Debt, Hybrid, Solution-oriented schemes etc., followed by categorical classification within debt and equity as per your risk-taking ability. Look below to find out the difference in every fund's risk-return ratio.

Debt Funds

Invests in: Fixed income instruments including government bonds, corporate bonds, company debentures and other fixed income assets. Nature: Relatively safe investment option

Types of Debt/Debt-oriented Hybrid Funds:

This type of funds are ideal if you are not quite ready to make an investment or anticipating a near-term cash outlay for a non-investment purpose. It offers relative safety and liquidity which means you have cash in hand at the very moment of need.

EQUITY FUNDS

Invests in: Equity stocks or shares of a company.
Nature: Capable of higher returns and are a high-risk option

Types of Equity/Equity-oriented Hybrid Funds:

• Mid Cap Funds invest atleast 65% of their total assets in equity and equity-related th instruments of mid-cap companies (101-250 placed companies according to market capitalization). You could get better returns than the large-cap schemes at the cost of its volatile nature.

• Small Cap Funds invest atleast 65% of their total assets in equity and equity-related st instruments of small cap companies (251 companies onwards in terms of market capitalization). If you are looking for highly volatile funds with great potential returns, consider small cap funds.

• Multi Cap Funds invest atleast 75% of their total assets in equity and equity-related instruments with minimum 25% investment in each of large cap, mid cap and small cap companies. It's perfect for those who seek the ideal blend of growth and stability

• Flexi Cap Funds invest around 65% of their total assets in equity and equity-related instruments of large cap, mid cap and small cap companies in varying proportions. By taking the market, economic conditions and investment objective of the scheme into consideration, your fund manager continues to rebalance your portfolio.

• Large and Mid Cap Funds invest atleast 35% of their total assets in equity and equity-related instruments of mid cap companies and large cap companies each. It's a great blend of lower volatility and better returns.

For instance: Mr. X buys ABC share from cash market at `1220 and shorts a futures contract to sell the shares at `1235. As the prices coincide towards the end of month, Mr. X will sell the shares in the futures market and generate a risk-free profit of `15 per share less the transaction costs. If you prefer the conservative approach, Arbitrage funds is an ideal and safe option for you to park your surplus money when there is a persistent fluctuation in the market.

INDEX FUNDS

An index is a group of securities defining a market segment like Sensex or Nifty 50. An index fund endeavours to imitate the portfolio of an index at all times.

For instance: If an index fund tracks a benchmark like the Nifty 50, its portfolio will have the 50 stocks that comprise Nifty 50 in the exact same proportions. What you get is the NAV of your index fund moving virtually in line with the index its tracking. In short, with every rise and fall in Nifty, the NAV of your Nifty-linked index fund may also roughly appreciate or drop by a similar % margins. You can expect minor deviation in returns, aka tracking error, from the benchmark. Since index funds are passively managed unlike the 'active funds', where the fund managers constantly fine-tune portfolios basis the market changes, the fees are less in comparison with active funds. This is exactly why Index funds are perfect for risk-averse investors who are cost conscious and content with returns at par with index.

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Debt and Debt-oriented hybrid funds are relatively a ________ option.

Mutual Fund terminologies?

Here's your quick guide to learning commonly used terms in the Mutual Fund world.

Direct and Regular plans

All Mutual fund schemes (actively managed) offer a Direct Plan and Regular plan. The difference is that Direct Plan does not route the investment through distributors like the Regular Plan. As a result, Regular Plans expense ratio is higher in comparison since more people are involved. Also, Direct Plans have a separate NAV which is often marginally higher than the normal Regular Plans NAV.

Growth and Income Distribution cum Capital Withdrawal options

Growth Option

• Capital appreciation in the scheme is ploughed back into the Scheme.
• Investors do not receive any periodic payments.
• This option is suitable for investors who do not require a regular income.

Income Distribution cum Capital Withdrawal Options

• Capital appreciation in the investment is paid to the investor in the form of dividend.
• Dividend payment is subject to the availability of surplus in the scheme.
• Dividend income is taxable in the hands of investor w.e.f. 1 April '20 and subject to withholding tax as applicable.
• This option is suitable for investors who need regular income.

Systematic Transfer Plan (STP)

Systematic Transfer Plan is a useful feature for investors that allows transfer of a fixed amount from one scheme to the other at regular intervals. For instance, if you invest 'systematically' in equities, you aim to earn better returns even during volatile market scenarios. Now, imagine investing a lumpsum amount in one scheme (e.g. Liquid scheme) and transferring a fixed amount to another scheme regularly (e.g. Equity scheme). STP is a great choice for investors who seek to invest lumpsum but don't want to invest it together in equity.

Systematic Withdrawl Plan (SWP)

SWP feature allows you to withdraw a fixed or variable amount from your mutual fund scheme periodically, every month on a fixed date. If you need a fixzed income every month, just go for SWP. The major SWP benefit is that the withdrawals are tax efficient as only the capital gains are taxed, and subject to withholding tax, (applicable for non-resident investor) and not the entire amount withdrawn.

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Fund Fact Sheet and Product Labelling

Fund Fact Sheet

• Current Investment Philosophy
• Portfolio Composition
• Benchmark
• Industry Allocation
• Load Structure
• Dividend History
• Total Expense Ratio

Product Label:

Mutual Funds are required to label their schemes as follows:

• Time horizon of every scheme (short/ medium/ long term)
• Kind of product (Equity/ Debt/ Hybrid)
• Level of risk as per the Riskometer
  Low - Principal at low risk
  Low to Moderate - Principal at low to moderate risk
  Moderate - Principal at moderate risk
  Moderately High - Principal at moderately high risk
  High - Principal at high risk
  Very High - Principal at a very high risk
• A disclaimer that says, ”Investors should consult their financial advisers if in doubt about whether the product is suitable for them Investors should consult their financial advisors if they are not clear about the suitability of the product.”

A fund fact sheet helps you to assess the scheme and keep a track of its performance. The fund fact sheet is easy to understand and provides a snapshot of various schemes.

The fund fact sheet showcases the NAV, returns, fund manager managing the portfolio, Riskometer that gives an indication whether the scheme carries a low, low to moderate, moderate, moderately high, high or very high risk and other statistics that help you compare mutual funds and decide which ones to invest in.

NAV

You will often come across the term 'NAV (Net Asset Value)' which is the market value of all the scheme investments, less the liabilities and expenses divided by the outstanding number of units. NAV of a mutual fund scheme is like a share price of a particular stock.

Mutual Fund Taxation

Mutual Funds are tax-efficient as compared to other forms of investments. Amount invested in Equity Linked Savings Schemes (ELSS) schemes is eligible for tax deduction u/s 80C of Income Tax Act 1861, up to `1.5 lakh Individuals/HUF get an aggregate deduction of `1.5 lakh from the gross total income for investments in an ELSS scheme during the relevant financial year.

• Long term capital gains from Equity-oriented Mutual Funds are exempt up to 1 lakh p.a. gains and above over 1 lakh are taxable at 10% (+Applicable surcharge and cess)
• Capital Gains from other than Equity-oriented Schemes are as follows
  Short Term Capital Gain (STCG) @ applicable rates
  Long Term Capital Gain (LTCG) @ 20% with indexation

However, w.e.f 1 April 2023, The Finance Bill 2023 has removed indexation benefit on long term capital gain for the investment made in specified mutual fund schemes. In such case, any capital gains would be considered as short term in nature and taxed as per applicable tax rate slab of the investor irrespective of the holding period. This provision is applicable only for any fresh investments made on or after 1 April 2023. “Specified Mutual Fund” means a Mutual Fund scheme which does not invest more than 35% in equity shares of domestic companies.

Note: (A) Investor is individual/HUF (B) Investor is a Tax resident.

Disclaimer

The information being provided in this material is for the sole purpose of creating awareness about Mutual Funds and for their understanding, in general. The views being expressed only constitute opinions and therefore, cannot be considered as guidelines, recommendations or a professional guide for the readers. Many of the statements and assertions contained in this booklet merely reflect the views, opinions and beliefs of Nippon Life India Asset Management Limited (NAM India) and therefore, Nippon Life India Asset Management Limited (NAM India) does not in any manner guarantee the completeness, efficacy, accuracy or authenticity of such information. This information is not intended to be an offer or solicitation for the purchase or sale of any financial product or instrument. Before making any investments, the readers are advised to seek independent professional advice, verify the contents in order to arrive at an informed investment decision. Neither, the sponsors, investment manager, Mutual Fund, Trustee, their respective directors, nor any person connected with them, accepts any liability arising from the use of this information.

Helpful information for investors

All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in. For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/investoreducation/what-to-know-when-investing

An investor education and awareness initiative by Nippon India Mutual Fund.