Finance Investment Analysis & Portfolio Management Code: KMBFM01

Unit V

Active Portfolio Management

Portfolio Management and Performance Evaluation: Performance Evaluation of

existing portfolio, Sharpe, Treynor and Jensen measures; Finding alternatives and

revision of portfolio; Portfolio Management and Mutual Fund Industry

Portfolio Management - Meaning and Important Concepts

It is essential for individuals to invest wisely for the rainy days and to make their future secure.

Portfolio

A portfolio refers to a collection of investment tools such as stocks, shares, mutual funds, bonds, cash and so on depending on the investor’s income, budget, and convenient time frame.

Following are the two types of Portfolio:

Market Portfolio
Zero Investment Portfolio

Portfolio Management

The art of selecting the right investment policy for the individuals in terms of minimum risk and maximum return is called as portfolio management.

Portfolio management refers to managing an individual’s investments in the form of bonds, shares, cash, mutual funds, etc so that he earns the maximum profits within the stipulated time frame.

Portfolio management refers to managing the money of an individual under the expert guidance of portfolio managers.

In a layman’s language, the art of managing an individual’s investment is called as portfolio management.

Need for Portfolio Management

Portfolio management presents the best investment plan to the individuals as per their income, budget, age, and ability to undertake risks.

Portfolio management minimizes the risks involved in investing and also increases the chance of making profits.

Portfolio managers understand the client’s financial needs and suggest the best and unique investment policy for them with minimum risks involved.

Portfolio management enables the portfolio managers to provide customized investment solutions to clients as per their needs and requirements.

Types of Portfolio Management

Portfolio Management is further of the following types:

Active Portfolio Management: As the name suggests, in an active portfolio management service, the portfolio managers are actively involved in buying and selling of securities to ensure maximum profits to individuals.
Passive Portfolio Management: In passive portfolio management, the portfolio the manager deals with a fixed portfolio designed to match the current market scenario.
Discretionary Portfolio management services: In Discretionary portfolio management services, an individual authorizes a portfolio manager to take care of his financial needs on his behalf. The individual issues money to the portfolio manager who in turn takes care of all his investment needs, paperwork, documentation, filing, and so on. In discretionary portfolio management, the portfolio manager has full rights to take decisions on his client’s behalf.
Non-Discretionary Portfolio management services: In non-discretionary portfolio management services, a portfolio manager can merely advise the client what is good and bad for but the client reserves full right to take his own decisions.

Portfolio Manager

An individual who understands the client’s financial needs and designs a suitable investment plan as per his income and risk-taking abilities is called a portfolio manager. A portfolio manager is one who invests on behalf of the client.

A portfolio manager counsels the clients and advises them on the best possible investment plan which would guarantee maximum returns to the individual.

A portfolio manager must understand the client’s financial goals and objectives and offer a tailor-made investment solution to him. No two clients can have the same financial need.

Roles and Responsibilities of a Portfolio Manager

A portfolio manager is one who helps an individual invest in the best available investment plans for guaranteed returns in the future.

Let us go through some roles and responsibilities of a Portfolio manager:

A portfolio manager plays a pivotal role in deciding the best investment plan for an individual as per his income, age as well as ability to undertake risks. Investment is essential for every earning individual. One must keep aside some amount of his/her income for tough times. Unavoidable circumstances might arise anytime and one needs to have sufficient funds to overcome the same.
A portfolio manager is responsible for making an individual aware of the various investment tools available in the market and the benefits associated with each plan. Make an individual realize why he actually needs to invest and which plan would be the best for him.
A portfolio manager is responsible for designing customized investment solutions for clients. No two individuals can have the same financial needs. It is essential for the portfolio manager to first analyze the background of his client. Know an individual’s earnings and his capacity to invest. Sit with your client and understand his financial needs and requirement.
A the portfolio manager must keep himself abreast with the latest changes in the financial market. Suggest the best plan for your client with minimum risks involved and maximum returns. Make him understand the investment plans and the risks involved with each plan in jargon-free language. A portfolio manager must be transparent with individuals. Read out the terms and conditions and never hide anything from any of your clients. Be honest to your client for a long term relationship.
A portfolio manager ought to be unbiased and a thorough professional. Don’t always look for your commissions or money. It is your responsibility to guide your client and help him choose the best investment plan. A portfolio manager must design tailor-made investment solutions for individuals that guarantee maximum returns and benefits within a stipulated time frame. It is the portfolio manager’s duty to suggest the individual where to invest and where not to invest? Keep a check on the market fluctuations and guide the individual accordingly.
A portfolio manager needs to be a good decision-maker. He should be prompt enough to finalize the best financial plan for an individual and invest on his behalf.
Communicate with your client on a regular basis. A portfolio manager plays a major role in setting a financial goal of an individual. Be accessible to your clients. Never ignore them. Remember you have the responsibility of putting their hard-earned money into something which would benefit them in the long run.
Be patient with your clients. You might need to meet them twice or even thrice to explain to them all the investment plans, benefits, maturity period, terms and conditions, risks involved and so on. Don’t ever get hyper with them.
Never sign any important document on your client’s behalf. Never pressurize your client for any plan. It is his money and he has all the rights to select the best plan for himself.

Selecting the right Portfolio Manager

Investment

It is essential for every individual to keep aside some amount of his income for a secure future. The art of assigning some amount of money into something, which would benefit the individual concerned in the near future, is called as investment.

Investment helps an individual to save money for the times when he would no longer be able to earn.

Investment makes an individual’s future secure and stable.

An individual can invest in any of the following:

Gold/Silver
Mutual Funds
Shares and Stocks
Bonds
Property (Residential as well as commercial)

An individual should not invest just for the sake of investing. One should understand as to why he needs to invest? Don’t just invest in any plan available in the market. Decide the best plan for yourself as per your income, age and financial requirements. One must go through the terms and conditions before investing in any market plan.

Who decides where to invest

How would one come to know where to invest and where not to invest?

How would an individual decide which organization’s share would yield him the best results in the near future and which should be sold off immediately?

Here comes the role of a Portfolio Manager.

Who is a Portfolio Manager?

An individual who understands the client’s financial needs and designs tailor made investment solutions with minimum risks involved and maximum profits is called a portfolio manager.

A portfolio manager invests money on behalf of the client in various investment tools such as mutual funds, bonds, shares and so on to ensure maximum profitability.

It is the responsibility of the portfolio manager to choose the best plan for his client as per his financial requirements, income and ability to undertake risks.

How to choose the right portfolio manager?

Portfolio managers charge a good amount of money from their clients for their services. One must be careful while selecting the right portfolio manager.

Make sure the portfolio manager you choose has complete market knowledge and knows about the existing investment plans and the various risks involved. Taking the assistance of someone who himself is not clear about the market policies does not make sense.
A portfolio manager should be trustworthy. You will find all types of portfolio managers in the market - cheat, dishonest, unprofessional. An individual must hire the best portfolio manager who understands the market well and can guide him correctly. Don’t give money to someone who does not have a good background. You never know he might run away with all your hard earned money. Ask for his business card. Check his reputation in the market.
An individual must not blindly trust his portfolio manager. Make it a point to read the related documents carefully before investing. A/C payee cheques must be issued and one should never sign any blank document.
A good portfolio manager should be transparent with his client. One should not try to confuse his client by using complicated terminologies and professional jargons. The various plans must be explained to the client in the easiest possible way.
Select a portfolio manager who does not have any personal interests in your investing in any particular plan. He should be able to help you decide the best plan available in the market.

Portfolio Management Models

Portfolio management refers to the art of managing various financial products and assets to help an Individuals earn maximum revenues with minimum risks involved in the long run. Portfolio management helps an individual to decide where and how to invest his hard-earned money for guaranteed returns in the future.

Portfolio Management Models

Capital Asset Pricing Model

Capital Asset Pricing Model also abbreviated as CAPM was proposed by Jack Treynor, William Sharpe, John Lintner and Jan Mossin.

When an asset needs to be added to an already well-diversified portfolio, Capital Asset Pricing Model is used to calculate the asset’s rate of profit or rate of return (ROI).

In Capital Asset Pricing Model, the asset responds only to:

Market risks or nondiversifiable risks often represented by beta
Expected return of the market
Expected rate of return of an asset with no risks involved

What are Non Diversifiable Risks?

Risks that are similar to the entire range of assets and liabilities are called nondiversifiable risks.

Where is Capital Asset Pricing Model Used?

The capital Asset Pricing Model is used to determine the price of individual security through the security market line (SML) and how it is related to systematic risks.

What is Security Market Line?

Security Market Line is nothing but the graphical representation of capital asset pricing model to determine the rate of return of an asset sensitive to nondiversifiable risk (Beta).

Arbitrage Pricing Theory

Stephen Ross proposed the Arbitrage Pricing Theory in 1976.

Arbitrage Pricing Theory highlights the relationship between an asset and several similar market risk factors.

According to Arbitrage Pricing Theory, the value of an asset is dependent on macro and company-specific factors.

Modern Portfolio Theory

Modern Portfolio Theory was introduced by Harry Markowitz.

According to Modern Portfolio Theory, while designing a portfolio, the ratio of each asset must be chosen and combined carefully in a portfolio for maximum returns and minimum risks.

In Modern Portfolio Theory emphasis is not laid on a single asset in a portfolio, but how each asset changes in relation to the other asset in the portfolio with reference to fluctuations in the price.

Modern Portfolio theory proposes that a portfolio manager must carefully choose various assets while designing a portfolio for maximum guaranteed returns in the future.

Value at Risk Model

Value at Risk Model was proposed to calculate the risk involved in the financial market. Financial markets are characterized by risks and uncertainty over the returns earned in the future on various investment products. Market conditions can fluctuate anytime giving rise to a major crisis.

The potential risk involved and the potential loss in value of a portfolio over a certain period of time is defined as the value at risk model.

The value at Risk model is used by financial experts to estimate the risk involved in any financial portfolio over a given period of time.

Jensen’s Performance Index

Jensen’s Performance Index was proposed by Michael Jensen in 1968.

Jensen’s Performance Index is used to calculate the abnormal return of any financial asset (bonds, shares, securities) as compared to its expected return in any portfolio.

Also called Jensen’s alpha, investors prefer portfolios with abnormal returns or positive alpha.

Jensen’s alpha = Portfolio Return – [Risk Free Rate + Portfolio Beta * (Market Return – Risk Free Rate)

Treynor Index

Treynor Index model named after Jack.Treynor is used to calculate the excess return earned which could otherwise have been earned in a portfolio with minimum or no risk factors involved.

Where T-Treynor ratio

Portfolio Revision - Meaning, its Need and Strategies

What is a Portfolio?

A combination of various investment products like bonds, shares, securities, mutual funds and so on is called a portfolio.

In the current scenario, individuals hire well trained and experienced portfolio managers who as per the client’s risk taking capability combine various investment products and create a customized portfolio for guaranteed returns in the long run.

It is essential for every individual to save some part of his/her income and put into something which would benefit him in the future. A combination of various financial products where an individual invests his money is called a portfolio.

What is Portfolio Revision?

The art of changing the mix of securities in a portfolio is called as portfolio revision.

The process of addition of more assets in an existing portfolio or changing the ratio of funds invested is called portfolio revision.

The sale and purchase of assets in an existing portfolio over a certain period of time to maximize returns and minimize risk is called as Portfolio revision.

Need for Portfolio Revision

An Individuals at a certain point of time might feel the need to invest more. The need for portfolio revision arises when an individual has some additional money to invest.
Change in investment goal also gives rise to revision in a portfolio. Depending on the cash flow, an individual can modify his financial goal, eventually giving rise to changes in the portfolio i.e. portfolio revision.
Financial the market is subject to risks and uncertainty. An individual might sell off some of his assets owing to fluctuations in the financial market.

Portfolio Revision Strategies

There are two types of Portfolio Revision Strategies.

1. Active Revision Strategy

Active Revision The strategy involves frequent changes in an existing portfolio over a certain period of time for maximum returns and minimum risks.

Active Revision Strategy helps a portfolio manager to sell and purchase securities on a regular basis for portfolio revision.

2. Passive Revision Strategy

Passive Revision Strategy involves rare changes in portfolio only under certain predetermined rules. These predefined rules are known as formula plans.

According to passive revision strategy a portfolio manager can bring changes in the portfolio as per the formula plans only.

What are Formula Plans?

Formula Plans are certain predefined rules and regulations deciding when and how much assets an an individual can purchase or sell for portfolio revision. Securities can be purchased and sold only when there are changes or fluctuations in the financial market.

Why Formula Plans?

Formula plans help an investor to make the best possible use of fluctuations in the financial market. One can purchase shares when the prices are less and sell off when market prices are higher.
With the help of Formula plans an investor can divide his funds into aggressive and defensive portfolio and easily transfer funds from one portfolio to other.

Aggressive Portfolio

Aggressive Portfolio consists of funds that appreciate quickly and guarantee maximum returns to the investor.

Defensive Portfolio

Defensive portfolio consists of securities that do not fluctuate much and remain constant over a period of time.

Formula plans facilitate an investor to transfer funds from aggressive to defensive portfolio and vice versa.

What are Mutual Funds?

Mutual funds are one of the most popular investment options these days. A mutual fund is an investment vehicle formed when an asset management company (AMC) or fund house pools investments from several individuals and institutional investors with common investment objectives. A fund manager, who is a finance professional, manages the pooled investment. The fund manager purchases securities such as stocks and bonds that are in line with the investment mandate.

Mutual funds are an excellent investment option for individual investors to get exposure to an expert managed portfolio. Also, you can diversify your portfolio by investing in mutual funds as the asset allocation would cover several instruments. Investors would be allocated with fund units based on the amount they invest. Each investor would hence experience profits or losses that are directly proportional to the amount they invest. The main intention of the fund manager is to provide optimum returns to investors by investing in securities that are in sync with the fund’s objectives. The performance of mutual funds is dependent on the underlying assets.

Breaking Down Mutual Funds

Mutual funds, unlike stocks, do not invest only in a particular share. Instead, a mutual fund plan would invest across several investment options to provide investors with the best possible returns. Also, investors are not required to do their research to pick best-performing stocks as the fund manager, and his team of analysts and market researchers do the research and choose the top-performing instruments that have the potential to offer high returns.

The mutual fund investors are allocated with fund units proportional to the amount they have invested. The returns that an investor would get will depend on the number of fund units held by them. Each fund unit has exposure to all the securities that the fund manager has chosen to include in the portfolio. Holding fund units does not provide investors with the voting rights of any company.

By investing in mutual funds, the investors need not worry about the concentration risk as the fund manager mitigates this by investing across several instruments. Therefore, investing in mutual funds is an excellent way of diversifying your investment portfolio. The price of the fund unit of a mutual fund is referred to as the net asset value (NAV). It is the price at which you buy or sell fund units of a mutual fund scheme. The NAV of a mutual fund is calculated by dividing the total worth of assets in the portfolio, minus liabilities. All mutual fund units are sold and bought at the prevailing NAV of the mutual fund.

Types of Mutual Funds

Mutual funds in India are broadly classified into equity funds, debt funds, and balanced mutual funds, depending on their asset allocation and equity exposure. Therefore, the risk assumed and returns provided by a mutual fund plan would depend on its type. We have broken down the types of mutual funds in detail below:

1. Equity funds, as the name suggests, invest mostly in equity shares of companies across all market capitalizations. A mutual fund is categorized under equity fund if it invests at least 65% of its portfolio in equity instruments. Equity funds have the potential to offer the highest returns among all classes of mutual funds. The returns provided by equity funds depend on the market movements, which are influenced by several geopolitical and economic factors. The equity funds are further classified as below:

i. Small-Cap Funds

Small-cap funds are those equity funds that predominantly invest in equity and equity-linked instruments of companies with small market capitalization. SEBI defines small-cap companies as those that are ranked after 251 in market capitalization.

ii. Mid-Cap Funds

Mid-cap funds are those equity funds that invest primarily in equity and equity-linked instruments of companies with medium market capitalization. SEBI defines mid-cap companies as those that are ranked between 101 and 250 in market capitalization.

iii. Large-Cap Funds

Large-cap funds are those equity funds that invest mostly in equity and equity-linked instruments of companies with large market capitalization. SEBI defines large-cap companies as those that are ranked between 1 and 100 in market capitalization.

iv. Multi-Cap Funds

Multi-Cap Funds invest substantially in equity and equity-linked instruments of companies across all market capitalizations. The fund manager would change the asset allocation depending on the market condition to reap the maximum returns for investors and reduce the risk levels.

v. Sector or Thematic Funds

Sectorial funds invest principally in equity and equity-linked instruments of companies in a particular sector like FMCG and IT. Thematic funds invest in equities of companies that operate with a similar theme like travel.

vi. Index Funds

Index Funds are a type of equity fund having the intention of tracking and emulating the performance of a popular stock market index such as the S&P BSE Sensex and NSE Nifty50. The asset allocation of an index fund would be the same as that of its underlying index. Therefore, the returns offered by index mutual funds would be similar to that of its underlying index.

vii. ELSS

Equity-linked savings scheme (ELSS) is the only kind of mutual funds covered under Section 80C of the Income Tax Act, 1961. Investors can claim tax deductions of up to Rs 1,50,000 a year by investing in ELSS.

2. Debt Mutual Funds

Debt mutual funds invest mostly in debt, money market, and other fixed-income instruments such as treasury bills, government bonds, certificates of deposit, and other high-rated securities. A mutual fund is considered a debt fund if it invests a minimum of 65% of its portfolio in debt securities. Debt funds are ideal for risk-averse investors as the performance of debt funds is not influenced much by market fluctuations. Therefore, the returns provided by debt funds are very much predictable. The debt funds are further classified as below:

i. Dynamic Bond Funds

Dynamic Bond Funds are those debt funds whose portfolio is modified depending on the fluctuations in the interest rates.

ii. Income Funds

Income Funds invest in securities that come with a long maturity period and therefore, provide stable returns over time. The average maturity period of these funds is five years.

iii. Short-Term and Ultra Short-Term Debt Funds

Short-term and ultra short-term debt funds are those mutual funds that invest in securities that mature in one to three years. These funds are ideal for risk-averse investors.

iv. Liquid Funds

Liquid funds are debt funds that invest in assets and securities that mature within ninety-one days. These mutual funds generally invest in high-rated instruments. Liquid funds are a great option to park your surplus funds, and they offer higher returns than a regular savings bank account.

v. Gilt Funds

Gilt Funds are debt funds that invest in high-rated government securities. It is for this reason that these funds possess lower levels of risk and are apt for risk-averse investors.

vi. Credit Opportunities Funds

Credit Opportunities Funds mostly invest in low rated securities that have the potential to provide higher returns. Naturally, these funds are the riskiest class of debt funds.

vii. Fixed Maturity Plans

Fixed maturity plans (FMPs) are close-ended debt funds that invest in fixed income securities such as government bonds. You may invest in FMPs only during the fund offer period, and the investment will be locked-in for a predefined period.

3. Balanced or Hybrid Mutual Funds

Balanced or hybrid mutual funds invest across both equity and debt instruments. The main objective of hybrid funds is to balance the risk-reward ratio by diversifying the portfolio. The fund manager would modify the asset allocation of the fund depending on the market condition, to benefit the investors and reduce the risk levels. Investing in hybrid funds is an excellent way of diversifying your portfolio as you would gain exposure to both equity and debt instruments. The debt funds are further classified as below:

i. Equity-Oriented Hybrid Funds

Equity-oriented hybrid funds are those that invest at least 65% of its portfolio in equities while the rest is invested in fixed-income instruments.

ii. Debt-Oriented Hybrid Funds

Debt-oriented hybrid funds allocate at least 65% of its portfolio in fixed-income instruments such as treasury bills and government securities and the rest is invested inequities.

iii. Monthly Income Plans

Monthly income plans (MIPs) majorly invest in debt instruments and aim at providing a steady return over time. The equity exposure is usually limited to under 20%. You can decide if you would receive dividends on a monthly, quarterly, or annual basis.

iv. Arbitrage Funds

Arbitrage funds aim at maximizing the returns by purchasing securities in one market at lower prices and selling them in another market at a premium. However, if the arbitrage opportunities are not available, then the fund manager may choose to invest in debt securities or cash equivalents.

Why Should You Invest in Mutual Funds?

Investing in mutual funds provides several advantages for investors. To name a few, flexibility, diversification, and expert management of money, make mutual funds an ideal investment option.

1. Investment Handled by Experts

Fund managers manage the investments pooled by the asset management companies (AMCs) or fund houses. These are finance professionals who have an excellent track record of managing investment portfolios. Furthermore, fund managers are backed by a team of analysts and experts who pick the best-performing stocks and assets that have the potential to provide excellent returns for investors in the long run.

2. No Lock-in Period

Most mutual funds come with no lock-in period. In investments, the lock-in period is a period over which the investments once made cannot be withdrawn. Some investments allow premature withdrawals within the lock-in period in exchange for a penalty. Most mutual funds are open-ended, and they come with varying exit loads on redemption. Only ELSS mutual funds come with a lock-in period.

3. Low Cost

Investing in mutual funds comes at a low cost, and thereby making it suitable for small investors. Mutual fund houses or asset management companies (AMCs) levy a small amount referred to as the expense ratio on investors to manage their investments. It generally ranges between 0.5% to 1.5% of the total amount invested. The Securities and Exchange Board of India (SEB) has mandated the expense ratio to be under 2.5%.

4. Systematic Investment Plan

The most significant advantage of investing in mutual funds is that you can invest a small amount regularly via a systematic investment plan (SIP). The frequency of your SIP can be monthly, quarterly, or bi-annually, as per your comfort. Also, you can decide the ticket size of your SIP. However, it cannot be less than the minimum investible amount. You can initiate or terminate a SIP as and when you need. Investing via SIPs alleviates the need to arrange for a lump sum to get started with your mutual fund investment. You can stagger your investments over time with a SIP, and this gives you the benefit of rupee cost averaging in the long run.

5. Switch Fund Option

If you would like to move your investments to a different fund of the same fund house, then you have an option to switch your investments to that fund from your existing fund. A good investor knows when to enter and exit a particular fund. In case you see another fund having the potential to outperform the market or your investment objective changes and is in line with that of the new fund, then you can initiate the switch option.

6. Goal-Based Funds

Individuals invest their hard-earned money with the view of meeting specific financial goals. Mutual funds provide fund plans that help investors meet all their financial goals, be it short-term or long-term. There are mutual fund schemes that suit every individual’s risk profile, investment horizon, and style of investments. Therefore, you have to assess your profile and risk-taking abilities carefully so that you can pick the most suitable fund plan.

7. Diversification

Unlike stocks, mutual funds invest across asset classes and shares of several companies, thereby providing you with the benefit of diversification. Also, this reduces the concentration risk to a great extent. If one asset class fails to perform up to the expectations, then the other asset classes would make up for the losses. Therefore, investors need not worry about market volatility as the diversified portfolio would provide some stability.

8. Flexibility

Mutual funds are buzzing these days because they provide the much-needed flexibility to the investors, which most investment options lack in. The combination of investing via a SIP and no lock-in period has made mutual funds an even more lucrative investment option. This means that people may consider investing in mutual funds to accumulate an emergency fund. Also, you can enter and exit a mutual fund plan at any time, which may not be the case with most other investment options. It is for this reason that millennials are preferring mutual funds over any other investment vehicle.

9. Liquidity

Since most mutual funds come with no lock-in period, it provides investors with a high degree of liquidity. This makes it easier for the investor to fall back on their mutual fund investment at times of financial crisis. The redemption request can be placed in just a few clicks, and the requests are processed quickly, unlike other investment options. On placing the redemption request, the fund house or the asset management company would credit your money to your bank account in just business 3-7 days.

10.Seamless Process

Investing in mutual funds is a relatively simple process. Buying and selling of the fund units are all made at the prevailing net asset value (NAV) of the mutual fund plan. As the fund manager and his or her team of experts and analysts are tasked with choosing shares and assets, investors only need to invest, and the rest would be taken care of by the fund manager.

11.Regulated

All mutual fund houses and mutual fund plans are always under the purview of the Securities and Exchange Board of India (SEBI) and Reserve Bank of India(RBI). Apart from that, the Association of Mutual Funds in India (AMFI), a self-regulatory body formed by all fund houses in the country, also governs fund plans. Therefore, investors need not worry about the safety of their mutual fund investments as they are safe.

12.Ease of Tracking

One of the most significant advantages of investing in mutual funds is that tracking investments is easy and straightforward. Fund houses understand that it is hard for investors to take some time out of their busy schedules to track their finances, and hence, they provide regular statements of their investments. This makes it a lot easier for them to track their investments and make decisions accordingly. If you invest in mutual funds via a third party, then you can also track your investments on their portal.

13.Tax-Saving

ELSS or Equity-Linked Savings Scheme is an equity-oriented a mutual fund which provides tax deductions of up to Rs 1,50,000 a year under the Section 80C provision. By making full utilization of the Section 80C limit, you can save up to Rs 46,800 a year in taxes. ELSS is the most popular tax-saving investment option under Section 80C of the Income Tax Act, 1961. It comes with a lock-in period of just three years, the shortest of all tax-saving investments. Investing in ELSS provides you with the dual benefit of tax deductions and wealth accumulation over time.

14.Rupee Cost Averaging

On investing in mutual funds via a SIP, you get the benefit of rupee cost averaging over time. When the markets fall, you buy more units while you purchase fewer units when the markets are booming. Therefore, over time, your cost of purchase of fund units is averaged out. This is called the rupee cost averaging. Investing in mutual funds via a SIP is beneficial during both market ups and downs, and there is no need to time the markets. This benefit is not available when you invest in mutual funds via a lump sum.

15.No Need to Time Markets

When you are investing in mutual funds via a SIP, there is no need to time markets. This is because the rupee cost averaging phenomenon ensures that your cost of purchase of fund units is on the lower side. However, you have to continue investing via a SIP for a long period. Therefore, you can invest in mutual funds whenever you feel like it. There is no ‘right time’ as such to investing in mutual funds. The best time is now!

Who Should Invest in Mutual Funds?

Everyone who has a particular financial goal, be it short-term or long-term, should consider investing in mutual funds. Investing in mutual funds is an excellent way to accomplish your goals faster. There are mutual fund plans that suit all personas. Investors need to assess their risk profile, investment horizon, and goals before getting started with their mutual fund investment. For example, if you are risk-averse and planning to purchase a car in five years, then you may consider investing in gilt funds. If you are ready to take some risk and are planning to buy a house in a period of fifteen to twenty years, then you may consider investing in equity funds. If your investment horizon is less than two years and you are looking to earn higher returns than a regular savings bank account, then you may consider parking your surplus funds in a liquid fund.

When Should You Invest in Mutual Funds?

Unlike stocks, you need not wait for any particular time to invest in mutual funds. This is because the fund managers and their team of analysts pick only the right securities and assets at all times and are going to benefit the investors, regardless of the market condition. Also, if you are investing via a SIP, then you are going to benefit from both down and high market cycles. When the markets are down, you end up buying more fund units as the stock prices would have fallen to their fresh lows, and when the markets shoot up, you buy lesser units. This is called the rupee cost averaging. This benefit is available only in the case of investing in mutual funds via SIP. Hence, you need not wait for any particular time to invest in mutual funds. The best time to invest in mutual funds is now!

Taxation of Mutual Fund
Dividends offered by all mutual funds are now taxed classically. They are added to your overall income and taxed as per your income tax slab. Capital gains offered by mutual funds are taxed based on the holding period and their type. The holding period is the duration over which you have stayed invested in a mutual fund.

· Equity Funds

If you exit an equity fund within a holding period of one year, then you make short-term capital gains. These gains are taxed at a flat rate of 15%. You make long-term capital gains on exiting an equity fund after a holding period of one year. Long-term capital gains of up to Rs 1 lakh a year are made tax-exempt. Any long-term gains exceeding Rs 1 lakh a year are taxed at a flat rate of 10%, and there is no benefit of indexation provided.

· Debt Funds

You make short-term capital gains on exiting a debt fund holding within three years. These gains are added to your overall income and taxed as per your income tax slab. Long-term capital gains are realized on redeeming your debt fund holdings after three years. These gains are taxed at the rate of 20% after indexation.

· Hybrid or Balanced Funds

If the equity exposure of a hybrid is more than 65%, then the fund is taxed like an equity fund. If not, then the rules of taxation of debt funds apply. Therefore, you need to be aware of the equity exposure before you decide to invest in a hybrid fund to plan your taxes correctly.

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