Advanced

Money Market Mutual
Funds (MMMFs)

Fixed Maturity Plans
(FMPs)

Equity Linked Saving
Schemes (ELSS)

Capital Protection-oriented
Funds (CPFs)

Systematic Investment
Plans (SIPs)

Gold Exchange Traded
Funds (GETFs)


Money Market Mutual Funds (MMMFs)


What are MMMFs?
Money Market Mutual Funds (MMMFs) or liquid funds are open-ended funds that invest solely in money market instruments such as call money, repos, treasury bills, commercial papers, certificates of deposit, and collateralised lending and borrowing obligations (CBLOs). These instruments are forms of debt that mature in less than a year.


What is the aim of these funds?
The main goal of these funds is to preserve principal and maintain high liquidity; they are, therefore, the least volatile among debt funds. Corporates having surplus cash for extremely short periods of time invest in these funds regularly.


What are the tax considerations?
Dividend from MMMFs is tax free for the investor. A dividend distribution tax of 25% is, however, payable on the dividend given out. Short-term capital gains, if any, are also taxable at the marginal income tax rate while long-term capital gains are taxable at the rate of 10% without indexation benefits and at 20% with indexation benefits.


Who should invest?
Money Market Mutual Funds are ideal for investors (individuals/corporates) seeking low-risk investment avenues to park their short-term surpluses and provide one of the best alternatives to low-yield savings bank or short-term bank deposits.


Equity Linked Saving Schemes (ELSS)


What are ELSS?
Equity Linked Saving Schemes (ELSS) are tax-saving schemes offered by mutual funds and are among the only tax-saving instruments that are allowed to invest in equities. These funds may be open or close-ended and may offer dividend and growth options. Individuals, Hindu Undivided Families (HUFs) and corporates can subscribe to ELSS.


What is the tax advantage?
This scheme is allowed 100% tax deduction up to a maximum amount of Rs. 1.5 lakh under Section 80 C of the Income Tax Act. The minimum lock-in period is three years if one wants to claim tax rebate. The ELSS units can be sold at any time after this lock-in period. However capital gains would be applicable on the sale.


How do ELSS operate?
The ELSS operate much like diversified equity funds, except that the investment is locked in for three years. The lock-in enables ELSS funds to attract only long-term investors. For the fund manager, this means a stable asset base, and reduced transaction costs.


How are ELSS different from other common tax-saving instruments?
The biggest advantage of ELSS vis-à-vis fixed maturity tax saving instruments like PPFs, NSCs, and bank fixed deposits are the returns. Investing in equities has always been the best asset class for long-term returns though the risk elements are higher. Other tax-saving instruments also have longer lock-in periods than ELSS schemes. For example, NSC has a lock-in period of six years whereas PPF has a lock-in period of 15 years.


Systematic Investment Plans (SIPs)


What are Systematic investment plans (SIPs) and how are they different from Systematic encashment plans (SEPs)?
Systematic Investment Plans (SIPs) enable investors to overcome the impact of the vagaries of the financial market. These plans are offered by mutual funds to promote regular savings. They are similar to recurring deposits in post offices or banks where one puts in a small amount every month; the difference is that in the case of SIPs, the amount is invested in mutual funds. As opposed to SIPs, an Systematic Encashment Plan (SEP) allows investors the facility to withdraw a pre-determined amount or units from his fund at a pre-defined interval. The investor's units will be redeemed at the applicable NAV as on that day.


How does a SIP operate?
The minimum amount to be invested may be as little as Rs.500 and the frequency of investment may be monthly or quarterly. In a SIP, you get fewer units when the market rises and more units when the market falls. It thus allows you to participate in the stock market, without having to second guess its movements. The SIP commits you to investing a fixed amount every month. Let's say you invest Rs.1,000 per month; the following table indicates the number of units you will receive at a given NAV:

Date NAV Approx number of units you will get at Rs 1,000

Jan 1

10

100

Feb 1

10.5

95.23

Mar 1

11

90.90

Apr 1

9.5

105.26

May 1

9

111.11

Jun 1

11.5

86.95

Thus after six months, one would have a total of 589.45 units by investing just Rs.1,000 every month.


What are the advantages of SIPs?
These plans help you become disciplined in savings, by compelling you to set aside a fixed amount each month. You could either authorise the fund to debit the amount directly from a bank account, or provide post-dated cheques, instead. You receive more units when the NAV drops, and fewer units when it rises; the cost thus averages out over time. In this way, you get to tide over the ups and downs in the market by investing in SIP. Some mutual funds do not charge an entry load if you opt for SIP and do not charge an exit load if you exit a year after buying the unit. Therefore, it pays to stay invested for the long-run. Overall, the best way to enter a mutual fund is via a SIP. But to derive the best benefits from it, you need to begin with a minimum time-frame of three years.


Fixed Maturity Plans (FMPs)


What are FMPs?
Fixed Maturity Plans (FMPs) are close-ended investment schemes floated by mutual funds. Their maturity period ranges from one month to five years. These plans are predominantly debt-oriented, while some may have a small equity component.


What is the objective of the FMP?
The basic objective of pure debt-oriented FMPs is to generate steady returns over a fixed-maturity period, thus protecting the investor from market fluctuations. They are structured to offer capital protection and appreciation without an explicit guarantee.


How do FMPs work?
Fixed Maturity Plans are passively managed fixed-income schemes, where the fund manager locks in investments with maturities corresponding with the maturity of the plan. This effectively reduces what is called price risk or the potential for making a loss on bonds due to pressures to sell them off in the market. These schemes are launched in back-to-back series, with each scheme replacing the one that has just matured.


Where do FMPs invest?
FMPs usually invest in certificates of deposits (CDs), commercial papers (CPs), money market instruments, corporate bonds and sometimes even in bank fixed deposits. The quality of investment typically consists of highest rated paper.


Capital Protection-oriented Funds (CPFs)


What are CPFs?
The structure of the scheme in CPFs, with or without external support, ensures protection of the original investment at the scheme’s maturity. In India, capital protection has to be ensured by the scheme’s portfolio characteristics; third party protection is currently not permitted. Capital Protection-Oriented Funds provide attractive opportunities for investors looking to enhance yield on their portfolios through exposure to risky asset classes such as equity, and yet seeking assurance on the protection of their principal sum. They offer a platform to risk-averse investors who wish to participate in the upturns in the equity markets, but at the same time, do not want to suffer erosion in the value of the invested amount. The CPF’s structure and the performance of the debt and equity markets determine the returns on investments.


Gold Exchange Traded Funds(GETFs)


What is an Exchange Traded Fund (ETF)?
Exchange Traded Funds are mutual fund schemes listed on the stock exchanges and traded like common stock. The traded price of ETF units on the exchange reflects, before expenses, the value per unit of the underlying assets of the fund.


What is a GETF?
Gold Exchange Traded Funds are open-ended funds and present a relatively cost-efficient and secure way to access the gold market but without the necessity of taking the physical delivery of gold. These funds may be bought and sold on a stock exchange after listing.


How do GETFs work?
Gold Exchange Traded Funds provide returns that, before expenses, closely correspond to the returns provided by the domestic price of gold through physical gold. Each GETF unit will be approximately equal to the price of 1 gram of gold.


How do I invest in GETFs?
Initial investments may be made through a new fund offering (NFO) in the specified form of the mutual fund selling the GETF. Units during NFO will be available at the NAV-based price on allotment date. After the NFO, investors can buy or sell units on an exchange where the GETF is traded.


Who can invest in a GETF?
An individual Indian resident, NRIs, firms, HUFs, companies, banks and trusts can invest in GETFs.


What type of account is required for trading in a GETF?
You need a trading account with an exchange through its broker and a demat account as GETF units are issued only in demat form.


How is a GETF valued?
According to SEBI guidelines, since physical gold and other permitted instruments linked to gold are denominated in gold tonnage, a GETF will be valued on the market price of gold in the domestic market, and marked to market on a daily basis. The market price of gold in the domestic market on any business day will be arrived at as under:
Domestic price of gold = (London Bullion Market Association AM fixing in US$/ounce X conversion factor for converting ounce into kg for 0.995 fineness X rate for US$ into INR) + custom duty for import of gold + sales tax/octroi and other levies applicable.


Which is the benchmark index for a GETF?
As there are no indices catering to the gold sector or to securities linked to gold, GETF is currently benchmarked against the price of gold.


What are the advantages of GETFs over physical gold?
Gold Exchange Traded Funds have the following advantages:

  • They are cost effective, because investors hold gold at the prevailing market price without being subject to designing and storage charges and insurance costs
  • They carry no impurity risk unlike physical gold
  • Their underlying asset, gold, is held by a custodian, and is, therefore, highly secure
  • They have high liquidity and can be easily sold in an exchange at prevailing prices. Investors can also buy as little as 1 gram of gold through a GETF.

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