Few questions about MF investment from the beginner

[narrowgateevangelist]

So I am planning to invest some money through MF. I know basic about what is MF, Unit & NAV, etc. But I have some questions as below. Thanks in advance for your time and answering it.

1. What are types of funds and risks associated with those funds based on its type. IIRC debt funds is low risk investment.
2. High or Low value of NAV should be selecting criteria to invest? For e.g. Fund A & B was launched 5 years back with initial NAV of 10 for both. Current NAV of fund A is 50 and fund B is 25 so if I invest in B then I will get double unit but should it be selecting criteria?
3. Somewhere I read we get dividend on no of Unit whereas friend suggested it is good to not select dividend option. So everything about dividend with respect to MF for e.g. whether we receive dividend in MF? If we have options to choose dividend option then should we choose it or not and does it affect long term return?
4. How to invest directly in MF to minimize commission of distributor/agent?
5. Is investing through https://www.axismf.com/ is direct investment?
6. If I wanted to invest directly in different funds for e.g. Axis and ICICI and do I have to manage separate account with both Axis & ICICI or any singe account without adding any additional fee/commission?
7. I know about Exit load that it is the fee levied on exiting early then defined duration. Any other specific information about exit load? ELSS are without exit load as it is 3 year lock in?
8. Any other information for beginner and/or links for beginner to research specific fund information, its past performance etc.
9. Anything specific about ELSS? Can we redeem before 3 years from ELSS in case of emergency?
10. In my understanding capital gain tax calculation is same as investing in equity. Please correct if I am wrong here.

Again thanks in advance

 

[crixus123]

@narrowgateevangelist Good of you to list down queries like this.

• Q1
  
  

  What are types of funds and risks associated with those funds based on its type. IIRC debt funds is low risk investment.

  
  Typically equity funds are high-risk, and debt-funds are of lower risk. But, mathematically, risk is standard deviation in returns.
  
  If expected return from asset A1 is U1, and risk is D1; then idea is that you can expect high probability of your returns lying within U1 + D1, and U1 - D1 (normal distribution).
  
  But now if you bring in another asset A2, with risk D2 and expected return to be U2; and A2 being low risk as compared to A1 - it just means D2 < D1.
  
  It doesn't say if U2 + D2 < U1 - D1. It conveys no relationship between U1 & U2.
  
  Nor does it say your returns cannot be lower than U2 - D2 or lower than U1 - D1.
  
  Lower risk means lower spread, lower uncertainty.
  
  Typical equity returns in a year can be -10%, or 68%. But for debt, this spread would be much much lower - a liquid fund might have 6.5% return or 7.2% in a year.
  
  In real life, you should focus on source of risk. Risk of a small-cap fund (a type of equity fund) is very different from risk of a credit-risk fund or that of a gilt fund (types of debt funds).
  
  Nor does it mean your money is always safer in debt funds than in equity funds. Read up on ILFS default and how liquid / UST funds lost 7%-8% overnight.
  
  Historically, equity has a habit of bouncing back if it goes down. You cannot say the same about debt.
• Q2
  
  

  High or Low value of NAV should be selecting criteria to invest? For e.g. Fund A & B was launched 5 years back with initial NAV of 10 for both. Current NAV of fund A is 50 and fund B is 25 so if I invest in B then I will get double unit but should it be selecting criteria?

  
  Only thing that matters is what would happen to your investment after you entered the market - not what has already happened before.
  
  Say, you invest 100 INR for NAV price of X. And after investing, absolute return is r%. Then, you get (100/X) units. Depending on value of X, you might get more or less units.
  
  But, NAV price would eventually be X(1 + r/100); and your holdings would be valued at (100 / X) * X * (1 + r/100) = 100 (1 + r/100).
  
  Notice that this value is independent of X. But proportional to r and your initial capital size.
  
  Case in point, check stock price of BRKA (Berkshire Hathaway Class A).
  
  This is also the reason stock-splits don't affect investor's return.
• Q3
  
  

  If we have options to choose dividend option then should we choose it or not and does it affect long term return?

  
  Never choose dividend plans.
  
  Dividends make sense in stocks - you are part owner of the company, and company is providing shareholders with share in profit. Yes, price of stock would also subtract the dividend per share.
  
  In MFs, dividends come from your investment. It's not a cashback scheme from the AMC. That's your money, AMC is redeeming and sending to you. Consequently, your holding valuation would reduce.
  
  It hampers compounding. Let the money remain invested.
  
  And if you need the money, you can simply redeem what you need, because Dividend per unit would be too small compared to your fund's NAV price anyway.
  
  Also note, there's DDT (Dividend Distribution Tax) before dividend makes it way to your bank account (dividend payout).
  
  It's just a gimmick, to pacify some folks in investment industry. Always select "Growth" scheme.
• Q4
  
  

  How to invest directly in MF to minimize commission of distributor/agent?

  
  Doesn't matter where you buy from - AMC website, MFUtility, Kuvera, PayTM Money, Groww. Just make sure the name of the fund has the word "Direct" in it; like this.
  
  This is what fund name of a regular plan looks like. The word "Direct" is missing.
  
  Consequently, Kuvera blocks the purchase (click on "Invest" button).
  
  Platforms like FundsIndia, Scripbox, Goalwise, Wealthy, ICICI Direct wouldn't offer you any fund that has the word "Direct" in its name. So never invest through these platforms.
• Q5
  
  

  Is investing through https://www.axismf.com/ is direct investment?

  
  It can be, if you select Direct like in the image when investing.
  
  AMC websites offer both regular and direct plans - you've to be careful when purchasing, that you've selected the Direct option. It's NOT selected by default.
• Q6
  
  

  If I wanted to invest directly in different funds for e.g. Axis and ICICI and do I have to manage separate account with both Axis & ICICI or any singe account without adding any additional fee/commission?

  
  You can do that if you like, and manage your accounts on AMC websites with the help of a password manager.
  
  Or, use an aggregator platform like Kuvera (exclusively Direct), or MFUtility (both Direct and Regular), or Groww (both Direct and Regular), or Piggy (exclusively Direct), or PayTM Money (exclusively Direct).
  
  I use Kuvera predominantly, but I've accounts on all of these, as well as AMC websites.
• Q7
  
  

  I know about Exit load that it is the fee levied on exiting early then defined duration. Any other specific information about exit load? ELSS are without exit load as it is 3 year lock in?

  
  Exit load is different from lock-in. If you have lock-in, like ELSS; you cannot withdraw.
  
  If you have exit load applicable, you can withdraw - but AMC would charge you the exit load when you withdraw.
  
  Exit load gets added back to the fund's NAV. So if you exit before exit-load period is over; it benefits other investors in the fund that remained invested.
  
  Another thing to note here, if you purchase units at different times - different units would have their own exit load period.
  
  Like, you have an SIP in an Equity fund (1 year exit load period) from 2019 January. Then units purchased in January 2019 can be redeemed without exit load on January 2020. But if you redeem units purchased in February 2019 on January 2020 - exit load would be deducted for only those units inside exit-load applicability period.
  
  ELSS has no exit load, but it has a lock-in of 3 years.
• Q8
  
  

  Any other information for beginner and/or links for beginner to research specific fund information, its past performance etc.

  
  There's obviously a lot to learn. Start with the wiki of this sub.
• Q9
  
  

  Anything specific about ELSS? Can we redeem before 3 years from ELSS in case of emergency?

  
  No.
• Q10
  
  

  In my understanding capital gain tax calculation is same as investing in equity. Please correct if I am wrong here.

  
  Didn't understand your query.
  
  Are you asking how capital gains are computed for equity funds? Or are you asking how it's different from investing in equity?
  
  No tax in MFs (or TDS, for that matter), until you realize any gain, i.e., until you actually redeem any units.

 

[narrowgateevangelist]

@crixus123 Thank you so much for detailed response. I really appreciate it and I am sure it would be helpful to other reader of this sub. Thanks again.

Doesn't matter where you buy from - AMC website, MFUtility, Kuvera, PayTM Money, Groww. Just make sure the name of the fund has the word "Direct" in it;

Just curious then how does platform like Kuvera make money or what is in for them as they are exclusively direct

Is investing through https://www.axismf.com/ is direct investment?

It can be, if you select Direct like in the image when investing.

I believe here "I am investing directly"

https://imgur.com/ZZ2otJD

option is selected which means invest directly

Also can you provide more information that when one should buy lumpsum and or when through SIP

 

[crixus123]

@narrowgateevangelist

Just curious then how does platform like Kuvera make money or what is in for them as they are exclusively direct

At present, doubt Kuvera makes much.

They have some value added service with third-part partnerships (term insurance with HDFC, ITR filing with H&R block etc.).

Eventually they would get around to building a paid tier, I assume.

But your investment isn't dependent on Kuvera's business viability.

MFs are highly regulated, and under regulation - only central RTAs can hold your units, while AMC holds your money.

Kuvera can go out of business if push comes to shove, but your investments would be accessible on websites of AMC or you can easily move to any other platforms, by uploading your account statement.

Kuvera don't hold your units, Kuvera don't handle your money (all financial transactions on Kuvera gets routed through BSE / ICCL under the hood).

At no point, Kuvera has any hold over you.

As a market participant, these platforms are registered with SEBI or AMFI - in case of Kuvera, it's a SEBI RIA registration.

And that means there are certain restrictions on what they can do with your data - one of them being not able to share your personal data without your explicit authorization to any third party.

You should check their terms & conditions.

I've been using Kuvera for ~1.5 years now - yet to get a single SMS from them.

They communicate via Email on transaction updates, and never received anything remotely promotional from their side (not even top 5 funds in 2019 or invest in this NFO).

I've tested Groww, Piggy, Kuvera, and a few other platforms. Settled on Kuvera because they seem to have a good customer support that don't make me go back-n-forth.

which means invest directly

The final check is in the statement - name of the fund must have the word "Direct". Validate that before completing any payment.

Also can you provide more information that when one should buy lumpsum and or when through SIP

This is actually not an either-or scenario.

You might not like hearing this, but SIP is also a lumpsum.

People have monthly SIP because they get monthly salary.

In other words, they are investing only what they can invest at that point of time - which is the very definition of lumpsum investment.

Real test of lumpsum vs. SIP, is if you've a huge corpus, that you want to put in equity, like 10-15L.

Now would you invest the amount all at once, or would you gradually insert this in your equity funds, over weekly STP or monthly STP?

And if so, how long should that STP run?

Backtesting data shows, in almost all cases, you'll be better off with lumpsum investments.

With a rupee-cost-averaging, you might get higher return, but each return applied to lower leg of investment, could result in lower final amount.

Your target is higher final amount, not higher returns.

My personal take would be if you've a big corpus you're trying to put into Equity, you can probably do an STP or SIP on that amount, but that duration shouldn't be more than 2-3 months.

As for my investment, I do something similar to weekly SIP (trust me, no benefit in terms of returns weekly vs. monthly SIP - if anything, you now have more transactions to track).

SIP is a convenience, to put your investments on autopilot. You can login and place a lumpsum purchase order of your own, for same amount.

That's what I do.

This allows me to skip, if I have an emergency (SIPs can be difficult to cancel or stop).

To put it all in simpler terms: if you've money to invest, and you don't need that for next 7-8 years - invest in one shot. Don't try to time the market. If you're not comfortable putting entire amount at once, you can do a very small duration STP, but don't do it over 2-3 years either.

 

[narrowgateevangelist]

@crixus123 Man thanks again for detailed information. One last question for now

Eventually I am planning to invest in equity and I am not well-versed to shortlist which share to buy analysis etc. Hence settling with MF for now. Can you pinpoint any resources (article,video,etc) which may help beginner like me to help better understand stock market and equity/MF investment

 

[crixus123]

@narrowgateevangelist Start with Zerodha Varsity and EightyTwenty Investor.

 

[weiguang]

@crixus123 Also need to add that STP to ELSS/Debt MF has tax implication. e.g. -

You have parked 2L in liquid (Growth) fund (

 

[crixus123]

@weiguang Yeah, ideally, if you're doing an STP - it's expected you know what exactly you'd do with respect to capital gain.

I think STCG will be on 7% of STP amount

It'd be levied on sum of gains realised by each STP-installment, at slab rate. Since the duration is small, gains would be negligible, and so would your taxes.

 

[weiguang]

@crixus123

It'd be levied on sum of gains realised by each STP-installment, at slab rate.

Yes, you are right STCG on debt MF is at slab rate, but on Equity it taxed at 15%.

Do you know if MF house provides detailed STCG data for each STP? Or, we have to calculate manually?

 

[crixus123]

@weiguang MF house as well as your transaction platform - would provide Capital Gain statement for all redemptions.

An STP is a series of redemptions (with series of purchases); hence, you would get capital gain statement that would show all taxable gains from STP.

 

[weiguang]

@crixus123 Thanks. I'll definitely try STP from next FY. I wasn't sure about STCG calculation, but now things are crystal clear. Many thanks.