Stock alpha and beta mutual funds refer to the diversification of funds across different asset classes, such as equity, debt, gold, commodities (such as copper and aluminium), and pre-listed shares of companies. It is usually performed by a fund manager/organisation on a large scale to minimise the risks of losses and maximise returns. A manager who has a higher AUM (asset under management) or handles a significantly high amount of funds is usually well-educated and has at least 10-15 years of experience in online share trading.
In addition, any ready investor needs to undergo a psychometric test to measure the risk appetite, or the financial risk one is willing to take while choosing a suitable mutual fund scheme. Targeting long-term returns is the best way to deal with mutual funds since ‘time’ is also a variable that determines the level of returns for the investor apart from the rate of return. This is usually measured by CAGR or compounded annual growth rate. It measures the total returns to date from the first day of investment. Apart from this, one can invest in mutual funds through SIPs (systematic investment plans) or a lump-sum investment. Usually, it is advised to invest through SIPs for middle-class individuals since it improves their financial health and encourages the ‘saving habit’ among those who typically have a high MPC marginal propensity to consume). On the other hand, lump-sum investments are higher in value since they are one-time investments and are preferred by high-income individuals, especially HNIs (high net-worth individuals). Hence, investors need to have a good balance of equity and debt-based mutual funds.
It refers to buying and selling shares through an online platform. One can see a wide range of mutual funds on the Kuvera Mutual Fund platform.
Mutual Funds that channel more investment towards equity and a very small portion to other asset classes are called equity mutual funds. These funds characterise a higher risk than debt-based instruments and are suitable for medium to high-risk investors. The best-performing mutual funds can be found on the websites of capital institutions and financial services companies. The primary investment objective of equity mutual funds is to provide capital appreciation by investing in equity and equivalent securities.
Equity mutual funds
Equity mutual funds are suitable for investors who are willing to leverage moderate-to-high levels of risk appetite. In addition, it is advised that the investor stays invested in the long term in the market and does not choose to withdraw when the NAV (net asset value) falls in the short term. One can allocate about 9-15% of their investments towards equity mutual funds. The rest of the assets are efficiently allocated among low-risk mutual funds involving debt, fixed income, and gold. Usually, if the funds are sold in the market within 365 days of purchase, 1% of the amount redeemed would be charged as exit load.
Deriving insights from the data of the past seven months, many funds are trading below their 200-day moving average due to global cues related to inflation, war, Fed-Rate hike, and tremendous FII (foreign institutional investors) selling. Thus, the equity market indices, such as BSE Sensex and the NSE Nifty, dipped by a huge margin. Compared to October 2021, the Sensex index has dropped by 12-15%. However, in such cases, debt instruments are the best instruments to invest in through this mutual fund scheme. Hence, it is advisable to have a multi-fund asset allocation and possibly include more debt funds during uncertainty and heavy volatility due to global cues.
Debt-based mutual funds
These funds mainly focus on money market instruments and do not comprise equity instruments. Due to their guarantee of returns and low-risk factor, they are well-suited for investors who would prefer investments that would give them a safe fixed income in the short and long term. Usually, if the investment is sold after three years from the date of purchase, the long-term capital gain tax would be charged on the earnings. The prevailing tax rate is the minimum value between 10% of the profit or 20% of the profit adjusted after indexation benefits. However, if it is sold within three years from the date of purchase, the short-term capital gain tax would be applicable.
One of the strengths of these funds is their investments in government bonds (such as 364 DTB 05052022) and commercial paper of listed companies (such as Bharti Airtel Ltd.). In addition, these funds can be withdrawn upon maturity in multiples of 91 days, depending on the types of asset classes included in the debt funds. These financial instruments give high returns in a short period and also require the associated institutions to return the investment amounts plus interest upon maturity, even if they encounter bankruptcy/insolvency or any other financial hurdles, such as negative financial returns in a particular year, improper maintenance of financial accounts, etc.
One can explore these sections on Kuvera and compare different mutual fund categories after a psychometric test to arrive at a conclusion.