Understanding Mutual Funds – A Shopping Mall Analogy

Amit: Hey Riya, I keep hearing about mutual funds, but there are so many types! Can you simplify them for me?

Riya: Sure! Think of mutual funds like different types of shopping malls—each designed for different needs. Let me break it down with examples you’ll relate to.

Amit: That sounds helpful!

Riya: Let’s start with the three main categories:

1. Equity Funds – Like a Shopping Mall

Just like how different stores in a mall cater to different shoppers, equity funds invests similarly in different types of companies:

Large-Cap Funds: Like big anchor stores—stable and reliable. You shop at these big brands because you trust their quality.
Mid-Cap Funds: Like growing retail chains that are becoming popular (think about any successful regional brands that come to your mind). Just as these stores might become the next big thing, mid-cap companies have the same sort of growth potential.
Small-Cap Funds: Like promising local boutiques or startups. These carry a higher risk since they might either succeed big or fail, but they could offer great returns—like discovering the next Big Coffee brand when it was just a single coffee shop!

Amit: Oh, so it’s like choosing between shopping at a big mall versus exploring local markets?

Riya: Exactly! Now, let’s move on to the next category.

2. Debt Funds – Like Different Bank Accounts

These are similar to different ways to save your money:

Liquid Funds: Like keeping money in a digital wallet for quick shopping—it’s easily accessible and safer than cash.
Short-Term Funds: It is similar to a recurring deposit account where you park money for your upcoming vacation in six months.
Corporate Bond Funds: Like lending money to your reliable cousin’s successful business—they’ll pay you back with interest.
Gilt Funds: Like keeping money in a government bank—super safe, but returns might be lower.
Overnight Fund: One of the best options if you are thinking about keeping money for a week to a fortnight

Amit: That makes sense! And what about the third category?

3. Hybrid Funds – Like a Balanced Diet

Just as we balance healthy and tasty food:

Aggressive Hybrid Funds: Like a diet with 70% protein (eggs, meat) and 30% carbs (rice, bread)—more growth-focused but they are still balanced.
Conservative Hybrid Funds: Like a diet with 25% protein and 75% carbs—safer but with some growth potential.
Balanced Advantage Funds: Like adjusting your diet based on your activity level—more carbs on workout days, more protein on rest days.

Special Categories:

Index Funds: Like buying everything on a shopping list without making changes—you get exactly what’s on the list (market index).
Fund of Funds: Like a food subscription box that contains different meal kits—you get variety managed by experts.

Amit: These examples really help! So, if I’m saving for my daughter’s education in 15 years, I should probably look at equity funds?

Riya: Exactly! Just like you’d plan a big purchase well in advance. For long-term goals like education:

Consider Large-Cap Funds as your main course (70%).
Add some Mid-Cap Funds for extra growth (20%).
Maybe a small portion in Small-Cap Funds for potentially higher returns (10%).

But if you’re saving for next year’s car down payment, you’d want Debt Funds—just like you wouldn’t risk your car money in a new startup!

Amit: This makes so much more sense now. One last question—what about tax-saving funds?

Riya: Ah, ELSS (Equity Linked Savings Scheme) funds! Think of them like a combo deal—you get tax benefits under Section 80C, plus the potential for good returns. It’s like getting a discount while shopping, but you need to hold onto your shopping bags for three years from the date of investment before using them!

Amit: Perfect! Now, I can actually relate mutual funds to things I understand. Thanks, Riya!

Riya: Happy to help! Just remember, just like you don’t buy all your clothes from one store, it’s good to diversify your investments based on your needs and goals.

EPF vs NPS: Making the Right Choice for Your Retirement

Madhuri (Investor): looking concerned Prayag, I’ve been reading a lot about retirement planning lately. I’ve had my EPF for years, but everyone keeps talking about NPS. Am I missing out on something better?

Prayag (Financial Planner): pulls out a calculator Let me show you something interesting, Madhuri. Let’s look at real numbers. Imagine you started investing ₹5,000 monthly in 2009. With EPF, you’d have about ₹17.5 lakh today.

Madhuri: Okay, that sounds decent…

Prayag: But here’s where it gets interesting. The same amount in NPS could have grown to ₹20.2 lakh with a conservative 25% equity allocation, or even ₹25.6 lakh if you’d opted for 75% equity exposure.

Madhuri: eyes widening Wait—you’re telling me I could have had nearly ₹8 lakh more? That’s almost 50% extra! Why such a big difference?

Prayag: nodding It’s all about investment flexibility. Think of EPF as a bus that takes the safest route—it moves steadily, but it won’t go faster even if the roads are clear. Now, NPS is like a car—you can choose the lane you want. If you’re comfortable with a little speed, you can take the express lane (higher equity exposure) and reach your destination faster.

Madhuri: But I’ve always heard EPF is more tax-efficient. Isn’t that true?

Prayag: smiling That’s a common misconception. Here’s something most people don’t realize—NPS actually gives you an extra tax break. Beyond the standard ₹1.5 lakh deduction under 80C that both EPF and NPS offer, you get an additional ₹50,000 deduction under 80CCD(1B). That’s like getting a “Buy 1 Get 1 Free” offer on tax savings!

Madhuri: leaning forward Tell me more about this flexibility you mentioned earlier.

Prayag: With EPF, you’re locked into contributing 12% of your basic salary, like it or not. NPS, on the other hand, is like a buffet—you can start with as little as ₹1,000 per year, pick your fund manager, and even decide how much risk you want to take with different asset allocations. You have full control!

Madhuri: thoughtfully This sounds great for new investors, but what about someone like me who already has significant EPF savings?

Prayag: You have two paths forward. The practical approach is to keep your EPF running and start an NPS account alongside. Think of it like having both a savings account and an investment portfolio—you get the best of both worlds.

Madhuri: You mentioned two paths—what’s the other one?

Prayag: adjusting glasses Technically, you can transfer your EPF balance to NPS—PFRDA approved this in 2017. But grimaces the process is still stuck in bureaucratic red tape. So for now, running both accounts is like keeping both a pension plan and a mutual fund—it’s a smart move until the transfer process becomes smooth.

Madhuri: What would you advise someone just starting their career?

Prayag: enthusiastically If their monthly basic salary exceeds ₹15,000, they actually have a choice. They can opt out of EPF and go all-in with NPS. But here’s the catch—many companies make EPF mandatory. In such cases, I recommend a hybrid approach: contribute the minimum ₹1,800 monthly to EPF and direct additional savings to NPS. It’s like ordering a thali—you get a little bit of everything, but you can choose to have extra servings of what benefits you more (NPS).

Madhuri: So basically, NPS offers triple benefits—potentially higher returns, extra tax savings, and more control over my investments?

Prayag: nodding approvingly Exactly! Think of EPF as a fixed-deposit account—safe but slow-growing. And NPS as a mutual fund SIP—it gives you the opportunity to build wealth faster while still being structured for retirement security.

Madhuri: standing up with determination Thanks, Prayag! You’ve convinced me. I’m going to start my NPS account this week itself.

Prayag: smiling That’s great! Remember, when it comes to retirement planning, it’s not just about saving money—it’s about making your money work smarter. And NPS helps you do just that!

Smart & Simple: Timeless Rules for Mutual Fund Success

Seetal (Investor): Aakash, I’ve been getting bombarded with investment advice lately – new mutual fund launches, market predictions, hot sectors. It’s overwhelming! How do I cut through all this noise?

Aakash (Financial Advisor): chuckles I completely understand, Seetal. Instead of chasing every new trend, let’s focus on fundamental resolutions that can transform your investment journey. Think of them as your financial compass.

Seetal: Hmmmm!! I am listening.

Aakash: First and foremost – try to know your portfolio like the back of your hand. You’d be surprised how many investors can’t tell me what they own beyond ” the names of some mutual funds companies.”

Seetal: looking slightly embarrassed Guilty as charged. I mean, I get my statements, but I usually just check if the total value has gone up.

Aakash: That’s more common than you think! Start simple – Start categorizing your funds into buckets: equity, debt, and hybrid. Then understand their roles. Are your equity funds focusing on large companies or small ones? Are your debt funds short-term or long-term in nature? It’s like organizing your wardrobe – you need to know what you have before deciding what to buy next.

Seetal: That makes sense. And the other resolution?

Aakash: Regular portfolio check-ups – but here’s the key – with a disciplined schedule. Think of it like your annual health check-up. You wouldn’t skip it, right?

Seetal: True, but I’ve heard people say you should track your investments daily. Isn’t that better?

Aakash: shaking head That’s like weighing yourself five times a day while on a diet – it’ll drive you crazy! I recommend half yearly reviews to stay informed, but make major changes only after 18 months or so. Unless there’s a significant event, like a fund manager change or a major strategy shift.

Seetal: Oh! That’s actually a relief. And what’s the last one?

Aakash: This is crucial – SIP discipline. Think of SIPs as your financial fitness routine. Just like you wouldn’t expect six-pack abs from random gym visits, wealth building needs consistency.

Seetal: But what about when markets crash? Last time that happened, I got scared and stopped my SIPs.

Aakash: That’s exactly when SIPs are most powerful! It’s like getting a discount on your favorite brands. When markets are down, your same SIP amount buys more units. Remember, you’re not just investing in funds – you’re investing in India’s growth story.

Seetal: nodding thoughtfully And I suppose I should increase my SIP amounts when my income grows?

Aakash: Absolutely! Most people remember to upgrade their lifestyle when they get a raise but forget to upgrade their investments. I suggest the 50-50 rule – allocate at least 50% of any raise to increasing your SIPs.

Seetal: These actually sound doable. But how do I stay motivated to stick to them?

Aakash: Here’s how I explain it to my clients – think of your investment journey like driving a car. Your SIPs are the accelerator, pushing you toward your goals. Your half yearly reviews are the brakes and steering, keeping you safely on track. And just like driving, once you develop good habits, they become second nature.

Seetal: smiling That’s brilliant! No more getting distracted by every new fund launch or market prediction.

Aakash: Exactly! Focus on these three resolutions – know your portfolio, review with discipline, and maintain SIP consistency. Master these basics, and you’ll be surprised how much clarity and confidence they bring to your investment journey.

Seetal: Thanks, Aakash! These are definitely going to be my financial resolutions this year. Simple but powerful!

How do you navigate market volatility with mutual funds?

Characters:

Rita (Investor)
Krishna (Financial Planner)

Scene: A cozy coffee shop where Rita and Krishna meet to discuss the recent market downturn.

Disclaimer: All characters in this article are fictitious and do not bear any resemblance to any person, living or dead.

Rita: Krishna, the stock market has been on a rollercoaster ride lately. From an all-time high of 85,478 in September 2024, it’s now down to 76,190—that’s over an 10.8% drop! I’m worried. Should I exit my mutual fund investments?

Krishna: Rita, I understand your concern. Market fluctuations can be unsettling, but it’s important to remember that equities are inherently volatile in the short term. Selling now might not be the best move.

Rita: But what if the market falls further? I don’t want to see my investments shrink any more.

Krishna: That fear is natural, but exiting during a downturn could lock in losses. History shows that markets recover over time, and staying invested allows you to benefit from that recovery.

Rita: So you’re saying I should hold on? But what about my SIPs? Should I pause them until things stabilize?

Krishna: No, Rita! Your SIPs are actually working in your favor right now. When the market is down, you buy more units at lower prices. This helps reduce your average cost and positions you for better long-term returns.

Rita: Hmm, that makes sense. But I’m still unsure about where to invest in this volatile market. Any suggestions?

Krishna: It all depends on your goals and risk tolerance. Let me break it down for you:

Short-term goals (1-3 years): Stick to fixed-income investments like short-duration debt funds / ultra-short bond funds to ensure stability and capital preservation.
Medium-term goals (3-5 years): A small equity exposure can help boost returns. Consider equity savings funds for a balanced approach or a conservative hybrid fund.
Long-term goals (5+ years): Focus on an equity-heavy portfolio. If you’re conservative or worried about volatility, aggressive hybrid funds are a great option. For experienced investors, flexi-cap funds offer good diversification, while small-cap and mid-cap funds can add higher returns, albeit with greater risk.

Rita: Okay, that gives me some clarity. I think I should review my portfolio and align it with my goals.

Krishna: Absolutely! And diversification is key. A well-balanced portfolio across market caps can help manage risks effectively.

Rita: Got it. But what about timing the market? Should I wait for a better entry point?

Krishna: Trying to time the market is a risky game. It’s nearly impossible to predict the bottom. Instead, stay focused on your long-term goals and maintain a disciplined approach.

Rita: I see what you mean. So, the moral of the story is to stay invested and stay disciplined?

Krishna: Exactly! Market downturns are temporary. By sticking to a consistent investment framework based on your time horizon, risk appetite, and asset allocation, you can build lasting wealth.

Rita: Thanks, Krishna. I feel much more confident now. I’ll stay the course and continue with my investments.

Krishna: That’s the spirit, Rita! Remember, patience is the key to financial success.

Too many cooks spoil the broth!!

Seema: Hi Kapil, I’ve been investing in mutual funds for a while now, and with all these new campaigns, I feel like I should add more funds to my portfolio. What do you think?

Kapil: Hi Seema! It’s great that you’re interested in mutual funds, but adding more funds isn’t always the best approach. Let me ask you: How many funds do you have in your portfolio right now?

Seema: Hmm, I think I have about 14. Is that too many?

Kapil: Well, it depends on your experience and portfolio size, but 14 sounds like it might be too many. Think of your portfolio like a cricket team. Imagine having 11 Best players on the field—brilliant right? Naaaah……… You will lack the balance and coordination. Similarly, having too many mutual funds can dilute your returns and make tracking your portfolio more difficult.

Seema: Oh, that’s an interesting analogy. So how many funds should I ideally have?

Kapil: For someone new to investing—lets say less than five years of experience—four to five funds are usually enough. For seasoned investors with more than five years of experience, around 8 funds is reasonable. And for those with portfolios in crores, they might need more than 10, but only if each fund offers meaningful diversification.

Seema: I see. So, how do I decide which funds to keep and which to let go?

Kapil: Start by evaluating each fund’s role in your portfolio. Here’s a simple checklist:

Give equity funds time: Hold them for at least three years before judging their performance.
Avoid sectoral and thematic funds: These are risky and often cyclical. Most investors jump in after the best phase has passed.They can be used as a satellite fund to your portfolio provided you understand that sector well
Focus on high-quality funds: Look for funds with not much expenses and consistent performance over more than 5 plus years
Eliminate insignificant funds: If a fund contributes less than 5% to your portfolio, it’s probably not making a meaningful impact.

Seema: That makes sense. So, it’s better to have fewer but high-quality funds that align with my goals?

Kapil: Exactly! A lean, purposeful portfolio is like a well-balanced cricket team—each player or fund has a role to play, ensuring maximum efficiency and peace of mind.

Seema: Thanks, Kapil! I’ll review my portfolio with this approach and start decluttering.

Kapil: Great! Let me know if you need help with the process. Investing is never about the quantity of financial products you own but the quality and alignment it serves with your own goals. Remember keeping it simple always works.

Section 45 Made Simple: Your Insurance Rights

Mohan (The Investor): Kumar, I’m planning to buy an insurance policy, but I heard there’s a clause in the Insurance Act called Section 45. What does it mean, and how does it affect me as a policyholder?

Kumar (Financial Planner): Great question! Section 45 of the Insurance Act, 1938, ensures fairness between the insurer and the insured. It essentially states that after three years from the commencement of a policy, the insurance company cannot question the validity of your policy.

Mohan: Oh, so the insurer can’t cancel my policy after three years?

Kumar: Exactly! However, this protection applies unless there’s evidence of fraud or deliberate misrepresentation on your part when you purchased the policy. For example, if you knowingly hide a major health condition or provide false information, the insurer can still challenge the policy, even after three years.

Mohan: That sounds reassuring. But what about the first three years? Can they cancel my policy during that time?

Kumar: In the first three years, the insurer can investigate and cancel your policy if they find that the information you provided was incorrect or incomplete. However, they must prove that the discrepancy was deliberate or material to the risk. They can’t cancel it without strong justification.

Mohan (The Planner): Honesty is key while filling out the proposal form.

Kumar: Absolutely! It’s important to disclose everything truthfully, especially regarding your health, lifestyle, and financial details. It not only ensures a smooth claims process but also safeguards your loved ones against any unpleasant surprises later.

Mohan : What if I make an unintentional error while filling out the form?

Kumar: Good point. If the mistake is unintentional and doesn’t significantly impact the risk assessment, most insurers are understanding. They may request clarifications or corrections instead of cancelling the policy.

Mohan : This clause sounds like a safety net for both parties. But how do I ensure I don’t fall into any trouble later?

Kumar: To stay on the safe side, always:

Provide complete and honest information.
Read the policy document carefully.
Ask questions if you’re unclear about any terms.
Keep all communication and documents related to your policy safe for future reference.

Mohan : Thanks, Kumar. This explanation really helps. I feel more confident about buying a policy now!

Kumar: You’re welcome! Let me know if you need help choosing the right policy or filling out the proposal form. It’s all about securing your financial future without worries.

Smart Start: A Father’s Guide to Future-Proofing His Child’s Education

Scene: Inside Jatin’s office. Ashwini, looking both excited and worried, has come for financial advice regarding his newborn’s future.

Ashwini: Thank you for meeting me, Jatin. My wife and I just had our first child, and I’m already worried about their future education.

Jatin: Congratulations! That’s wonderful news. It’s great that you’re thinking about this so early. What’s your primary concern?

Ashwini: Well, these days children choose their careers. My parents decided that I would be an engineer when I was born, but times have changed. How do I plan financially when I don’t know what path my child will take?

Jatin: (smiling) That’s a very valid concern. Let me share something interesting – engineering might cost around ₹79.3 lakhs after 15 years, and medicine could go up to ₹1.2 crores, assuming 8% annual inflation.

Ashwini: (shocked) What? That’s… that’s astronomical! My neighbour just suggested me a money-back insurance policy…

Jatin: (interrupting gently) I’m going to stop you right there. While many Indian parents opt for money-back policies, they’re not the best solution. Instead, let me show you a more effective approach.

Ashwini: I’m all ears.

Jatin: Start with monthly SIPs in mutual funds. Look at these numbers – if you start now, you’ll need to invest about ₹10,996 monthly to accumulate ₹50 lakhs in 15 years, assuming 11% annual returns. But if you wait just five years, that monthly requirement jumps to ₹23,041.

Ashwini: That’s a huge difference! But isn’t the stock market risky?

Jatin: That’s why we’ll use a balanced approach. Think of it like a three-course meal. Your main course would be diversified equity mutual funds, especially flexi-cap funds. They help beat inflation over the long term.

Ashwini: And the other courses?

Jatin: (chuckling) For your appetizer and dessert – safer options like PPFs and Sukanya Samriddhi Yojana. They’re government-backed and tax-free instruments. But remember, don’t make these your main course – fixed returns might not keep up with the education costs. Stick to regular diversified funds. Also, avoid ULIPs – they’re expensive and inflexible.

Ashwini: But what if my child’s interests change? What if they want to study abroad?

Jatin: That’s the beauty of this plan – it’s flexible. As your child grows and their interests become clear, we can adjust the target amount and investment strategy. And here’s a pro tip – about 2-3 years before you need the money, we’ll gradually move it to safer options through an STP.

Ashwini: And if we still fall short?

Jatin: A small education loan can bridge the gap. It might even help teach your child financial responsibility and he will start paying off the loans. The key is starting early and staying flexible.

Ashwini: (looking relieved) This makes so much sense. When can we start?

Jatin: How about now? Let’s work out the exact numbers based on your current finances and comfort level.

Ashwini: Perfect! You know, I feel much better knowing there’s a clear plan. It’s like you said – start early, stay flexible, and keep reviewing the plan.

Jatin: Exactly! Remember, we’re not just planning for education; we’re planning for your child’s future, whatever they may be.

Ashwini: Thank you, Jatin. I am much relieved now.

Learn to Break from the EMI Trap: An alternative Approach that can save you a LOT!

Rita: Hi Mohan, I need some advice. Every month, my salary gets credited in the last week, and within hours, most of it disappears into EMIs. I feel like I’m stuck in this vicious circle. With the festive season approaching, the offers are so tempting, but I’m worried I might overborrow again.

Mohan: I hear you, Rita. This time of the year is designed to make spending irresistible. The EMI culture makes it even easier to fall into the trap. Have you thought about how these EMIs are affecting your financial health?

Rita: I know the interest rates are high—somewhere around 12-20%. But when I see those “pay just Rs. 3,000 a month” deals, they seem manageable. It’s only later that I realize how much extra I end up paying.

Mohan: That’s exactly how they get you in the debt trap. Most people focus on the affordability of the monthly payment, not the total cost. But what if I told you there’s a way to avoid this EMI trap altogether? There’s a way out

Rita: Avoid EMIs? How? I thought they’re the only way to afford big-ticket purchases.

Mohan: Not at all! You can create a ‘Corpus’ fund. It’s simple—you set up an SIP in a short-term mutual fund with the same amount you’d typically pay as an EMI. Let that fund grow, and when you’ve saved enough, use that money to make your purchase outrightly. Don’t wait for the festival times.

Rita: Hmm, that sounds interesting. But how is it better than just buying on EMI?

Mohan: Think of it this way: With an EMI, you’re paying an interest rangig from say 12-20%, which means your purchase costs significantly more over time. With a Corpus build up, instead of paying interest, you earn returns—in the range of 6-8% since you are investing with debt funds for a period ranging from 6 months to 18 months max.

Rita: That’s a good point. But what if I want something immediately? Waiting for my fund to grow might not be feasible.

Mohan: Fair concern, but this approach will gradually teach you to keep your patience and financial discipline. If you really can’t wait, you can use part of your savings as a buffer. Over time, the habit will pay off. Also, if you save consistently, you’ll eventually have money ready for future purchases.

Rita: I like this idea. It’s like paying myself instead of the lender. But how do I start?

Mohan: Pick a short-term mutual fund suitable for your needs. Start an SIP with the same amount as your typical EMI. Think of this fund as your expenditure fund, not savings. Use it only when the balance is enough for your desired purchase.

Rita: Makes sense. I can also show this concept to my kids—it’s a great way to teach them financial responsibility. Maybe I’ll even use it to buy them something better in the future.

Mohan: That’s an excellent idea, Rita! It’s a practical demonstration of how patience and time can help you grow your money. Once you see the results, I’m sure you’ll never want to go back to the traditional EMI culture.

Rita: Thanks, Mohan. I feel like this is the mindset shift I needed.

Mohan: Great decision, Rita! Your future self will thank you. And who knows, maybe by next festival times, your fund will be ready for something bigger and better.

Understanding the Science behind Index Funds

Sweta: Hi Ravi, I’ve heard a lot about index funds lately. Could you help me understand what they are and if I should consider investing in them?

Ravi: Of course, Sweta! Let me explain it simply. Do you know how we have the Sensex and Nifty index that we see in daily news channel, headlines and newspapers?

Sweta: Yes, I see them all the time.

Ravi: Well, an index fund is a mutual fund that mirrors these indices. For example, if you invest in a Nifty index fund, your money gets distributed across all the 50 stocks that make up the Nifty, in the same proportion.

Sweta: That sounds straightforward. But why would I choose an index fund over a regular mutual fund?

Ravi: I Knew that you would ask about it. Well, there are several advantages to it. The biggest one is the cost factor. Since index funds are not actively managed by the fund managers, they have lower expense ratios. For instance, while an active fund might charge 0.30%, an index fund might only charge 0.15%.

Sweta: Oh, that’s a significant difference! But doesn’t that mean lower returns too?

Ravi: Not necessarily. Especially in the large-cap space, most actively managed funds struggle to beat the index consistently. The lower costs of index funds give them an advantage. Think of it this way – every rupee you don’t pay in fees is a rupee that stays invested and compounds over time.

Sweta: That makes sense. What should I look for when choosing an index fund?

Ravi: Focus on 2 main things: expense ratio and tracking error. You want the lowest possible expense ratio, and you want a fund that closely tracks its index – that’s what tracking error measures. The lower the tracking error, the better the fund is at replicating the index’s performance.

Sweta: Are there any disadvantages I should know about?

Ravi: Yes, the main one is that you’re essentially settling for average market returns. You won’t beat the market, but you won’t underperform it either. Also, since these indices are usually market-cap-weighted, they’re dominated by larger companies.

Sweta: How should I use index funds in my portfolio?

Ravi: I usually recommend using index funds for the large-cap portion of your portfolio – about let’s say 35 to 60% of your total equity investments. You can then diversify the remaining portion into actively managed small-cap, multi-cap, or sectoral funds based on your risk appetite.

Sweta: That sounds like a balanced approach. So I get the benefit of low costs for my core portfolio while still having room for potentially higher returns in other segments?

Ravi: Exactly! Index funds provide a solid foundation for your portfolio. They’re simple, predictable, and cost-effective. For your large-cap allocation, you could consider Nifty, Junior Nifty, or Sensex index funds.

Sweta: Thanks, Ravi! This really helps clarify things. I think I’ll start looking into some index funds for my portfolio.

Ravi: That’s great! Remember to check the expense ratio and tracking error when comparing funds. And as always, make sure it aligns with your overall investment goals and risk tolerance.

Overnight Funds: A Smart Alternative for Idle Cash Management

The Indian investor prefers to keep large amounts of cash idle in their savings bank accounts with two things in mind. Point number one they need it for emergency purposes; Point number 2 it gives them a piece of mind and Point 3 could be any other reason haha haha…!!!

What If I tell you that by investing into an overnight fund you can earn daily an average between ₹ 1.40 to 1.60 /- per day on a lump sum investment of ₹ 10,000/- this way you will make more money when compared to a normal savings bank account. Yes, you heard it right.

Let’s decode this fund type today through this short conversation between 2 people.

Jay: Hey, Nikunj! I wanted to pick your brain on overnight funds. Have you looked into them?

Nikunj: Oh, absolutely, Jay. They’re pretty useful if you’re looking for a place to park surplus funds with minimal risk for a short period. Overnight funds are open-ended debt funds that invest in assets with a maturity of just one day.

Jay: So, they’re like super-short-term investments?

Nikunj: Exactly! Here’s how they work: every day, the fund manager starts with cash, invests in overnight bonds, and those bonds mature by the next business day. Then, they reinvest that cash, and the cycle continues daily.

Jay: Got it. And the returns? I’m guessing they’re pretty stable?

Nikunj: Yes, returns are low but consistent since they’re purely interest-based on the daily borrowing and lending rates. This keeps them stable and liquid without much fluctuation. They’re far less volatile compared to other debt funds since the investment only lasts a day.

Jay: That makes sense. And what about redeeming the funds?

Nikunj: SEBI has set specific timings for the cut-off, so if you invest in overnight funds, make sure you’re aware of those. For example, to get the NAV applicable for that day, you need to invest by 12:30 PM. And for redemption, the cut-off is 1 PM.

Jay: Ah, good to know! And are these funds safe against market volatility?

Nikunj: Absolutely. Overnight funds are low-risk because they don’t face credit or interest rate risks like other debt funds with longer maturities might. They don’t get affected by RBI interest rate changes or credit downgrades as much. And since they don’t have an exit load, they’re quite liquid too.

Jay: Sounds ideal for someone like me, who’s risk-averse but wants a safe, short-term option. Any considerations before investing?

Nikunj: Yeah, since returns are lower, it’s essential to check the expense ratio and compare returns among different funds. The returns may vary slightly across funds, so it’s good to pick one with consistent performance and a reasonable expense ratio. Also, these funds are a suitable investment option for anyone who is looking to park their funds for the short term with zero risk and high liquidity. It is also suitable for small investors who are yet to decide the use of funds or are holding for a few days. For example, a borrower who has to make a payment to a supplier in a week can hold the funds in overnight funds rather than in a savings account. This would ensure an optimum utilization of surplus funds with low costs and higher liquidity.

Jay: And what about taxes?

Nikunj: Tax-wise, it’s like other debt funds. The returns are taxed based on your income tax slab.

Jay: Thanks, Nikunj! I might give these a try for short-term cash parking. They seem like a smart alternative to a standard savings account.

Nikunj: Definitely! Just remember to align it with your goals and risk tolerance.