What is Leasing?

Leasing as financial service is a contractual agreement where the owner of equipment or

any other property transfers the right to use the equipment or property to the user for an
agreed period of time in return for a period payment. The owner of the asset is called
lessor and user of such property or asset is known as lessee.

The periodic payment is known and lease rental. At the end of the lease period, the asset
or equipment is given back to the lessor unless there is a clear provision for the renewal
of the contract in the lease agreement or there is a provision for the transfers of ownership
to the lessee. If there is any such provision for transfer of ownership to the user of assets,
the deal is treated as hire purchase.

Essentials Elements of A Lease contract

The essential elements of a lease are as follows:

 Parties: The parties to a lease are the lessor and the lessee. The lessor is also called the
owner of the asset and the lessee the user of an asset.

 Subject matter of lease: The subject matter of lease must be immovable property.
The word “immovable property” may not be only house, land but also benefits to arise
out of land, right to collect fruit of a garden, right to extract coal or minerals, hats,
rights of ferries, fisheries or market dues. The contract for right for grazing is not
lease. A mining lease is lease and not a sale of minerals.

 Duration of lease: The right to enjoy the property must be transferred for a certain
time, express or implied or in perpetuity. The lease should commence either in the
present or on some date in future or on the happening of some contingency, which is
bound to happen.

Though the lease can commence from a past day, but that is for the purpose of
computation of lease period, as the interest of the lessee begins from the date of
execution. No interest passes to the lessee before execution. In India, the lease may be
in perpetuity.

 Consideration: Like other agreements, consideration is essential in case of lease

contract. The consideration for lease is either premium or rent, which is the price paid
or promised in consideration of the demise. This premium or rent is known as lease
rental.
Advantages of Leasing
Advantages of Leasing are discussed below:

 Cash Saving: By leasing your next equipment acquisition you can save your cash on
hand to take advantage of other business opportunities. Also you can have a
contingency fund for any emergencies that just come up.

 100% Financing: With leasing you do not have to make large cash down payment in
most cases. Only the first and last month’s payments are required. With leasing you
can finance the entire cost of the new equipment including taxes, shipping and
equipment setup. With bank financing, you would have to pay for these fees separately
most of the time.

 Convenient: The leasing process requires less paperwork than bank financing.
Leasing companies usually have lower credit requirements than banks. And the
application process takes less time. A lease can be approved in as little as several
hours verses weeks or more for some banks. Most leases are approved in 24 to 48
hours.

 Flexibility: Leasing offers flexibility to both the lessor and lessee as both can
negotiate the terms and conditions of leasing in such a way as to benefit both the
parties.

 No Risk of Obsolescence: Rapid advances in technology can make equipment

obsolete quickly. Most leases can be designed so that business can get the latest
equipment when needed it and not have to worry about what to do with the old
equipment. Also, once approved for equipment leasing, you will not have to go
through the application process each time you want to get new equipment.

 Tax Advantages: Leasing payments are 100% tax deductible. If company purchase
the equipment, tax benefits will usually not be as much because of depreciation rules.

Disadvantages of leasing
Main disadvantages of leasing are as follows:

 The leasing is efficient only if the equipment or assets can be operated over the whole
period of the contract; not using this equipment over the whole period of the contract,
 mainly due to the lack of production or orders, leads to losses for the beneficiary.

 Lessee cannot enjoy ownership of asset property. At the end of the lease agreement,
not only lesser have to return the property in good operating condition as per the terms
and conditions of the lease contract.

 Taking a property or equipment on lease can be expensive. Leases are almost always
more expensive in the long run than buying items with cash, and leases are sometimes
more expensive than obtaining commercial loans to buy the same equipment.

It depends on a number of factors, such as: the cost of funds (interest rate), the length
of the lease term, the residual value of the equipment, lease initiation fees and the
capitalized cost of the assets or equipment etc.

 Difficulty of property improvements under a lease, the lessee is generally prohibited

from making improvements on the leased property without the approval of the lessor.
If the property were owned, this difficulty would not arise.

Difference between Leasing and Hire purchase

Essentially, both lease financing and hire purchase are the options of financing the assets.
These options vary from each other in many aspects viz. ownership of the asset,
depreciation, rental payments, duration, tax impact, repairs and maintenance of the asset
and the extent of finance.

These are discussed as follow:

 Ownership of the Asset: In lease, ownership lies with the lessor (owner of asset). The
lessee has the right to use the equipment and does not have an option to purchase.
Whereas in hire purchase, the hirer has the option to purchase. The hirer becomes the
owner of the asset/equipment immediately after the last installment is paid.

 Depreciation: In lease financing, the depreciation is claimed as an expense in the

books of lessor. On the other hand, the depreciation claim is allowed to the hirer in
case of hire purchase transaction.

 Rental Payments: The lease rentals cover the cost of using an asset. Normally, it is
derived with the cost of an asset over the asset life. In case of hire purchase,
installment is inclusive of the principal amount and the interest for the time period the
asset is utilized.
  Duration: Generally lease agreements are done for longer duration and for bigger
assets like land, property etc. Hire Purchase agreements are done mostly for shorter
duration and cheaper assets like hiring a car, machinery etc.

 Tax Impact: In lease agreement, the total lease rentals are shown as expenditure by
the lessee. In hire purchase, the hirer claims the depreciation of asset as an expense.

 Repairs and Maintenance: Repairs and maintenance of the asset in financial lease is
the responsibility of the lessee but in operating lease, it is the responsibility of the
lessor. In hire purchase, the responsibility lies with the hirer.

 Extent of Finance: Lease financing can be called the complete financing option in
which no down payments are required but in case of hire purchase, the normally 20 to
25 % margin money is required to be paid upfront by the hirer. Therefore, we call it a
partial finance like loans etc.

Types of the Lease

Leasing takes different types which are given below;

 Based on Nature.
1. Operating lease.
2. Financial lease.
 Based on the Method of Lease.
1. Direct lease.
2. Sale & Leaseback.
3. Leverage lease.

1. Operating Lease: An operating lease is a cancelable contractual agreement whereby

the lessee agrees to make periodic payments to the lessor, often for 5 or fewer years,
to obtain an asset set’s services. According to the International Accounting Standards
(IAS-17), an operating lease is one that is not a finance lease.
2. Financial Lease: A financial (or capital) lease is a longer-term lease than an
operating lease that is non-cancelable and obligates the lessee to make payments for
the use of an asset over a predetermined .period of time. According to the
International Accounting Standard (IAS-17), in a financial lease, the lessor transfer to
the lessee substantially all the risks and rewards identical to the ownerships of the
asset whether or not the title is eventually transferred.
3. Direct Lease: Under direct leasing, a firm acquires the right to use an asset from the
manufacture directly. The ownership of the asset leased out remains with the
manufacture itself.
4. Sale & Leaseback: Under the sale & leaseback arrangement, the firm sells an asset
that it owns and then leases to the same asset back from the buyer. This way, the
lessee gets the assets for use, and at the same time, it gets cash.
5. Leveraged Lease: Leveraged lease is the same as the direct lease, except that a third
party, the lender, is involved in addition to the lessee & lessor. The lender partly
finances the purchase of the asset to be leased; the lessor turns to be a borrower.

Distinguish between the Operating and Financial Lease

Topics Operating Lease Financial Lease

Operating lease is short term A financial lease is the lease used in

lease used to finance assets & is connection with long term assets &
Definition
not fully amortized over the life amortizes the entire cost of the asset
of the asset. over the life of the lease.

Duration Short term leasing Long term leasing

The lessor pays the maintenance

Cost Lessee pays the maintenance cost.
cost.

Cancel & Cancelable lease & It is a Non-cancelable lease & It is not a

Changeable changeable lease contract. changeable lease contract.

Risk lessor bears the risk of the asset. The lessee bears the risk of the asset.

At the end of the asset is hot At the end of the contract, the asset is
Purchase
purchasable. purchasable.

Renew It is a renewable contract. It is not a renewable contract.

Service lease, short term lease, A capital lease, long term lease, non-
Also called
cancelable lease. cancelable lease.

Bill Discounting/ Invoice Discounting:

“The Bill Discounting/ Invoice Discounting refers to the process through which the
seller/ exporter arrange funds from financial institutions such as bank, NBFCs, finance
companies etc against the bill of exchange or invoice raised to the buyer/ importer.”
 
In other words, Bill Discounting is the process of trading/ selling the bill of exchange/
invoice to the financial intermediary to avail funds prior to its maturity date against a
fees/ interest paid to the finance company. In simple words, we can say the bill
discounting is a source of working capital financing for micro, small and medium type
enterprises.
 
The supplier or exporter has to approach the banks or other institutions (providing such
facilities) to discount the bill/ invoice and bank rectify the credentials of Bill of
exchange and disburse the amount after deducting the interest/ fees charged.
 
The interest or fee charged to avail the funds depends upon the previous payment history,
creditworthiness of the buyer, risk involved and how long the maturity date is etc factors.

Advantages of Bill Discounting:

Bill Discounting offers the following benefits:
 Bill discounting reduces the chances of bad debt as the risk of defaults or non-
payment by the buyer/ importer is bored by the intermediary institutions.
 It facilitates the seller to improve the cash inflow and hence avoid cash crunch
during a trade.
 Typically bill discounting services are provided on a low rate of interest/ fees as
compared to other advanced facilities, therefore, beneficial for sellers.
 Since the bill of exchange is a negotiable/ tradable instrument and can be further
rediscounted by the central banks or can be sold to other financial institutions
hence processed quickly. Thus seller will be able to instant backup of funds.
 The seller/ beneficiary has to interest on used amount only unlike other business
loans.
Bill Discounting Process: 
 The seller/ exporter sell the goods or services and raise the bill/ invoice to the
buyer/ importer.
 The buyer receives the goods and sign/ accept the invoice raised. This means
buyer obligate to pay the entire amount as per invoice to the seller on the due date.
 The seller approaches his bank or concerned financial institutions with the
accepted bill of exchange by the buyer to discount it.
  The banks examine the bill of exchange and evaluate the risk involved as per their
norms.
 Finally, the banks will transfer the money to the seller’s account after deducting
their charges/ interest.
 Further on the due date, the seller’s bank receives the entire amount from the
buyer/ buyer’s bank.
Example:

Let us understand the concept from an example.

 
Suppose a Mr A wants to buy some computer equipment worth $10,000 from a company
XYZ but he does not have immediate funds and hence Mr A wants to purchase the goods
on credit for 6 months.
 
The company has to sell the product but the major issue is the credit period is too long.
Here bill discounting plays a vital role and company supply the goods and raised the
invoice of $10,000 to Mr A.
 
The company approaches its bank to discount the bill/ invoice and bank check the Mr A
credential. The bank deducts its charges say $200 and pay the rest $9800 to the company
XYZ. Further on the maturity date of bill of exchange (after 6 months) the bank will
receive the full payment ($10,000) from Mr A.
 
Thus in the whole process, Mr A (buyer) purchased the goods on credit (6 months),
company XYZ (seller) sold the goods, earned profit and also received the payment
without waiting for 6 months, the bank (intermediary) also earned a profit of $200.

What is credit rating?

Meaning: Credit rating is a mechanism by which the reliability and
viability of a credit instrument is brought out. Credit rating reveals the
soundness of any credit instruments issued by various business concerns
for the purpose of financing their business.
When a company borrows or when a businessman raises loan, the
lenders are interested in knowing the credit worthiness of the borrower
not only in the present conditions but also in future. In credit rating, the
investor is not only able to know the soundness of the credit instrument,
but he is also able to analyze between different credit instruments and he
can make a trade off.

Benefits of Credit rating:

Credit rating offers various benefits from the point of view of investors,
companies, regulating authorities and public. Credit score of a company
matters a lot when it comes to boost confidence in investors. Good credit
rating reflects how much a company is financially strong and secure.

Benefits of credit ratings from the point of view of

investors:
1. The investors can choose their investments on the basis of good
credit ratings.
2. As the credit rating is done by professionals, the investors can rely on
the credit rating.

3. It gives scope for the investors to forecast about the future of their
investments.

4. A comparative study between different credit instruments enables the

investors to choose their investments.
5. Even unknown securities could be purchased based on credit rating. It
also enables the investors to go for a diversified investment.

6. As there is periodical review of the companies by credit rating

agencies, the investors have the opportunity of swapping their weaker
investment with a stronger investment, based on the credit rating.

6. The investors can minimize their existing loss by choosing effective

future investment. Thus, credit ratings acts as hedge for the investors.
7. Liquidity, safety and profitability are duly considered through credit
rating mechanism by investors.

Benefits of good credit ratings from the point of view

of companies:
1. Companies will be able to raise funds from the market as their debt
instruments are backed by good credit rating.

2. Credit rating acts as a motivation for companies to either improve

their position or maintain their existing position, if they are in a higher
level of credit rating.

3. When companies of equal standing are issuing their credit

instruments, better placed companies are identified with a positive signal
on the credit rating such as A+.

4. In the market, companies with a higher rating will be in a position to

provide better liquidity for their credit instruments.

5. When companies are raising funds in the overseas market, credit

rating enables them to mobilize more funds.

6. Good Credit rating will provide better security from the lenders’ point
of view. This will enable the companies to sell their credit instruments
easily.

Benefits of credit ratings from the point of view of

Regulating authorities:
1. The regulatory authorities can discipline financial institutions by
insisting on good credit rating before going for public issue.

2. By imposing various conditions in credit rating, the financial

soundness of the companies is maintained.
3. Any down-grading of credit rating will send clear signals to the
regulating authorities  to closely monitor the functioning of the company
concerned.

4. The general economic condition in the company could also be

analyzed by the regulating authorities from the credit rating of various
companies.

5. Good Credit rating also provides authority, responsibility and

accountability to the regulating authorities.

Benefits of credit ratings from the point of view of

public:
1. Any unknown company or infant company cannot try to cheat the
public by offering an unusually higher rate of interest, as without credit
rating, the reliability of the company will be in question.

2. Proper credit rating also channelizes the savings of the public to

productive purposes and prevents unwanted conspicuous consumption,
such as investing in gold.

3. Public can also discriminate their investments and go in for better

credit instruments on the basis of good credit rating.

4. Off-shore savings can be attracted through credit rating. Individuals

settled abroad can choose investment in domestic companies based on
credit rating.

5. Legal action could be taken when credit rating companies fail to fulfill
their obligations. This will instill confidence in the minds of the
investors.

6 Important Functions of the Credit Rating

Credit rating serves following functions:
(1) Provides superior Information:
Provides superior information on credit risk for three reasons: (i) An
independent rating agency, unlike brokers, financial intermediatories,
underwriters who have vested interest in an issue, is likely to provide an
unbiased opinion; (ii) Due to professional and highly trained staff, their
ability to assess risk is better, and finally, (iii) the rating firm has access to a
lot of information which may not be publically available.

(2) Low cost information:

Rating firm gathers, analyses, interprets and summarises complex
information in a simple and readily understood formal manner. It is highly
welcome by most investors who find it prohibitively expensive and simply
impossible to do such credit evaluation of their own.

(3) Basis for a proper risk and return:

If an instrument is rated by a credit rating agency, then such instrument
enjoys higher confidence from investors. Investors have some idea as to what
is the risk associated with the instrument in which he/she is likely to take, if
investment is done in that security.

(4) Healthy discipline on corporate borrowers:

Higher credit rating to any credit investment tends to enhance the corporate
image and visibility and hence it induces a healthy discipline on corporate.

(5) Greater credence to financial and other representation:

When credit rating agency rates a security, its own reputation is at stake. So it
seeks financial and other information, the quality of which is acceptable to it.
As the issue complies with the demands of a credit rating agency on a
continuing basis, its financial and other representations acquire greater
credibility.

(6) Formation of public policy:

Public policy guidelines on what kinds of securities are eligible for inclusions
in different kinds of institutional portfolios can be developed with greater
confidence if debt securities are rated professionally.

What are its main features?

Credit rating is the rating which gives the estimate of the individual company, corporation of
country's worth. Credit bureau makes an evaluation of borrower's credit history and then
according to that the actions on it take place. Credit rating shows the ability of the borrower to
pay the debt to the lender on request to the credit bureau. The calculation of it depends on the
financial history, current assets and liabilities. The probability of a borrower to pay back of its
loan can be seen by this which tells a lender or investor about it.

The main features which are involved with the credit ratings are as follows:-

1) It is used to estimate the worthiness of the credit for the company, country or any individual
company.

2) Credit rating is been done after considering various factors such as finacncial, non-financial
parameters, and past credit history.

3) The rating which gets done is simple and it facilitates universal understanding. Credit rating
also makes it widely accepted as the symbols which are used are generalized and made common
for all.

4) The process of credit rating is very detailed and it involves lots of information such as
financial information, client's office and works information and other management information.
It involves in-depth study.

When is credit rating obligatory?

Credit rating is obligatory when the lenders need to share some information about you and it is
also been done to protect their interest that the client will one day repay the loan. In this what
happens is that all the lenders remain in the sync with each other and keep the information of the
client with each other so that they can share the information together because if a lender gives
money to the client then tomorrow if another client gives the money to the same client then it
becomes difficult for the client to pay it off the loan which has been taken so they both can
collaborate together to prevent this misunderstanding.

Main Role and Functions of RBI

 Monetary Authority: Formulates, implements and monitors the monetary policy for A)
maintaining price stability, keeping inflation in check ; B) ensuring adequate flow of credit to
productive sectors.
 Regulator and supervisor of the financial system: lays out parameters of banking operations
within which the country”s banking and financial system functions for- A) maintaining public
confidence in the system, B) protecting depositors’ interest ; C) providing cost-effective banking
services to the general public.
 Regulator and supervisor of the payment systems: A) Authorises setting up of payment
systems; B) Lays down standards for working of the payment system; C)lays down policies for
encouraging the movement from paper-based payment systems to electronic modes of payments.
D) Setting up of the regulatory framework of newer payment methods. E) Enhancement of
customer convenience in payment systems. F) Improving security and efficiency in modes of
payment.
 Manager of Foreign Exchange: RBI manages forex under the FEMA- Foreign Exchange
Management Act, 1999.  in order to A) facilitate external trade and payment B) promote the
development of foreign exchange market in India.
 Issuer of currency: RBI issues and exchanges currency as well as destroys currency & coins not
fit for circulation to ensure that the public has an adequate quantity of supplies of currency notes
and in good quality.
 Developmental role : RBI performs a wide range of promotional functions to support national
objectives. Under this it setup institutions like NABARD, IDBI, SIDBI, NHB, etc.
 Banker to the Government: performs merchant banking function for the central and the state
governments; also acts as their banker.
 Banker to banks: An important role and function of RBI is to maintain the banking accounts of
all scheduled banks and acts as the banker of last resort.
 An agent of Government of India in the IMF.

What is a Mutual Fund?

Mutual fund is a financial instrument that pools money from different investors.
The pooled money is then invested in securities like stocks of listed companies,
government bonds, corporate bonds, and money market instruments.

As an investor, you don’t directly own the company’s stocks that mutual funds
purchases. However, you share the profit or loss equally with the other investors of
the pool. This is how the word “mutual” is associated with a mutual fund.
How Do Mutual Funds Work?

Mutual fund investment is simple. You invest in a fund consisting of several assets.
Thus, you need not risk putting all eggs in one basket.

Additionally, the headache of tracking market movements is not there. The mutual
fund house takes care of the research, fund management, and market tracking. This
makes the mutual fund a highly popular investment option for all types of
investors.

A mutual fund is managed by the asset management company (AMC). Mutual

fund investment starts with the pooling of money from several investors.

The pooled money is invested in a meticulously built portfolio of different asset

classes like equity, debt, money market instruments, and other funds. Hence, you
have the advantage of diversification, the time tested market mantra.

Additionally, your money is invested in instruments like Government bonds, that

you wouldn’t be able to afford individually.

The best part about mutual funds is that a team of experts along with the fund
manager picks all the investments to build a portfolio. The investments are made
according to the defined objective of the mutual fund.

Expert and professional fund management help you outperform the returns of
traditional investment vehicles like a bank savings account and fixed deposits.

As an investor, you are allotted units for your contribution to the pooled fund.

The portfolio value depends on the price movements of the underlying assets. The
portfolio value is net assets divided by the number of outstanding units which is
called the net asset value or NAV.
The gains are reflected in higher NAV and lower NAV indicates a loss in portfolio
value.

Different Types of Mutual Funds Based on Asset Class

Investors should pick mutual funds based on their financial objectives and risk
appetite. Proper mutual fund selection helps you meet your life goals in the defined
time period.

Mutual fund type depends on the defined objective and the underlying asset. The
three broad categories of mutual funds are:

#1. Equity Mutual Funds

Equity mutual funds invest the pooled money majorly in stocks of different
companies. Hence, equity mutual funds have an inherent higher market risk.

Factors like earnings, revenue forecasts, management changes, and company &
economic policy impact price movements and the returns.

Returns from equity mutual funds have high fluctuations. Hence, you should
invest, if you have a fair understanding of the asset class risks associated with
equity.

Types of Equity Funds

Equity fund can be further categorized depending on market capitalization and

sectors.

A. Based on Market Capitalization

Large-cap Equity Funds – Invest in shares of large-cap companies that are well-
established with a track record of performing consistently over a longer time
period. These companies have sound fundamentals and are least affected by
business cycles.

Mid-cap Equity funds – Invest in shares of mid-cap companies. Mid-sized

companies have relatively lower stability in terms of performance. But have the
potential to grow more than the large-cap companies.

Small-cap Funds – Invest in shares of small-cap companies. Small-cap companies

have the highest potential to grow or fail. Thus, small-cap funds have a high-risk
exposure but also offer an opportunity to generate the highest returns.

Multi-cap funds – Invest in a defined proportion across all market caps. Based on
cues and trend analysis, the fund manager allocates aggressively to capitalize on
the volatility.

B. Sector Based Equity Funds

Sector-based equity funds invest in stocks of a specific sector. For example, sectors
like FMCG, technology, and pharma. Sector funds are prone to business cycle risk
and sector getting out of focus.

#2. Debt Mutual Fund

A debt mutual fund invests a major portion of the pooled corpus in debt
instruments like government securities, corporate bonds, debentures, and money-
market instruments.

The bond issuers “borrow” from investors by giving an assurance of steady and
regular interest income. Thus, debt funds are less risky compared to equity funds.

The debt fund manager ensures that the fund is invested in the highest-rated
securities. The best credit rating signifies the creditworthiness of the issuer in terms
of regular interest payments and principal repayment.
Who Should Invest in Debt Funds?
Debt funds have less volatility and range bound returns as compared to equity
funds. Thus, debt funds are safer for conservative investors who are looking to
grow wealth with minimal risk.

In fact, the interest income and maturity amount are known beforehand. Thus, debt
funds are best for short-term (3 to 12 months) and medium-term (3 to 5 years)
investment horizon.

Type of Debt Funds

Following are the debt funds available in India:

Dynamic Bond Funds

Dynamic bond fund investment basket comprises of both shorter and longer
maturities.

The debt fund manager aggressively tweaks the portfolio composition based on
changing interest rate regime. This aggressiveness makes the debt fund dynamic,
hence the name.

Liquid Funds
The short maturity of the underlying securities (not more than 91 days) makes the
liquid funds almost risk-free. It is better than parking funds in saving bank
accounts as it gives better returns with much-needed liquidity. You can redeem
liquid funds almost instantly.

If you are short-term investors then debt funds like liquid funds could be better as
you get returns in the range of 6.5 to 8%. Liquid funds are an effective tool to meet
emergency fund needs.
Income Funds
Fund managers invest majorly in securities with longer maturities to have more
stability and regular interest income flow. Most of the income funds have an
average maturity of 5 to 6 years.

Short-Term and Ultra Short-Term Debt Funds

There is another category in the maturity range of 1 to 3 years. The fund manager
takes a call on interest rate regime and invests in securities with maturity of the
said range. This is suitable for those investors who are risk-averse and looking for
interest rate movement safety.

Gilt Funds
Gilt funds invest only in high-rated government securities. Since the government
rarely defaults, it has zero risks. You can park your money in this instrument to
have assured returns in longer maturity range.

Credit Opportunities Funds

Credit Opportunities Funds are a relatively riskier instrument that focuses more on
higher returns by holding low-rated bonds or taking a call on credit risks. The fund
manager of credit opportunity funds relies more on interest rate volatility to earn
higher returns.

Fixed Maturity Plans

These closed-ended debt funds invest in fixed income securities like government
bonds and corporate bonds. You invest only during the initial offer period and your
money remains locked-in for a fixed tenure, which could be months or years.

Different Types of Mutual Fund Based on Investment Objectives

Since mutual funds are all about the mutuality of common goals, mutual fund
schemes are also categorized based on the objectives of investors.
Here are some popular types of mutual funds based on investor objectives:

#1. Growth Oriented Scheme

As the name suggests the primary goal of this type of mutual fund is to ensure
wealth creation in the medium and long-term.

Aligned with the objective, the fund manager allocates the corpus predominantly
(over 65%) in equities. With a focus on higher returns, the manager aggressively
shuffles the portfolio to reap the benefits of market movements.

#2. Income Oriented Scheme

The objective of the regular income could be achieved only when the underlying
assets assure a steady return.

To meet the objective, fund manager of income funds allocate a major portion of
the corpus in fixed income securities such as government securities, bonds,
corporate debentures, and money market instruments.

Lesser risks and assured return makes it safe for regular income as dividends.
However, these products have very limited potential for wealth creation in the
defined period.

#3. Balanced Fund

The name comes from the asset allocation as the fund is allocated in both equities
and debt instruments in defined proportions. The objective of the balanced fund is
to have reasonable growth and regular income with the lowest possible risk.

Fund managers of these funds normally allocated approx 60% in equities and rest
on debt instruments. NAV of balanced funds is less volatile as compared to equity
funds.
The balanced objective is suitable for those who want to have advantages of
market movements and the safety of the debt market.

#4. Liquid Fund

The objective of these schemes is to ensure liquidity, capital protection, and

reasonable income in the short-term.

Most of the pooled fund is invested in short-term safe instruments like government
securities, treasury bills, certificates of deposit, commercial paper, and inter-bank
call money.

Since there isn’t much volatility, these funds are suitable for investors who want to
park money for short-term and earn better returns compared to savings bank
accounts.

Advantages of Investing in Mutual Funds

There are over 8000 mutual funds in different categories to meet the objectives of
all types of investors. The right mix of growth, income, and safety makes mutual
funds suitable for everyone.

Below are the advantages of investing in mutual funds:

#1. Expert Money Management

Your pooled money is managed by a team of experts. So, you have the advantage
of expert guidance in creating wealth. The fund manager does meticulous research
in deciding equities, sectors, allocation, and of course the buy and sell.

#2. Low Cost

If you calculate the benefits of expertise, diversity, and other options of return,
then mutual funds are definitely a very cost-effective instrument of investment.
There is a regulatory cap of 2.5% on the expense ratio.

#3. SIP Option

Systematic Investment Plan (SIP) gives you the flexibility to invest at an agreed

interval which could be weekly, monthly, quarterly. You can start investing in
mutual funds with an amount as low as Rs. 500.

#4. Switch Funds

If you are not happy with the performance of a particular mutual fund scheme, then
some mutual funds do offer you an option to switch funds. However, you need to
be very cautious while opting to switch.

#5. Diversification

Mutual funds offer you the benefit of diversification in such asset class which
otherwise isn’t possible for an individual investor. You reap the dividend of
maximum exposure with minimum risk.

#6. Ease of Investing and Redemption

Now, it is pretty easy to buy, sell, and redeem fund units at NAV. Just place the
redemption request and you will get your money in the desired bank account
within a few days.

#7. Tax Benefit

Under the ELSS, tax-saving mutual fund you have the double benefit of tax saving
and wealth creation. Under Section 80C of the Income Tax Act, you can have a
deduction of a maximum of Rs. 1,50,000 a year.

#8. Lock-in Period

Close-ended mutual funds have a lock-in period, meaning as an investor you are
not allowed to redeem the fund before a certain period.

You get benefits in terms of long-term capital gain tax.

Ways to Invest in Mutual Funds

Thanks to the fast adoption of internet technology, now your MF units are just a
few clicks away. Depending on your resources, you have several options to start
investing in mutual funds.

#1. Direct Investment

You can visit the branch of the concerned mutual fund company and deposit the
duly filled form. Alternately, you can download the form and fill it carefully.

You should read the document carefully before handing over the cheque.

#2. Online Mutual Fund Investment Platform

For investing online, all you need is your mobile phone and internet connection.
There are several platforms that help you in choosing the right mutual fund based
on defined objectives, risk appetite, and other factors.

Scripbox is an online investment platform that helps you save your time and
energy. The step-by-step process from selection to payment and redemption makes
it simple for even a beginner to start investing without any assistance.

All you need is your PAN Card details, Identity details, and an active bank account
to link with the mutual fund house.

#3. Using a Demat Account

Your existing Demat account and bank account can be used for investing and
transacting in the mutual fund. Your stockbroker needs to be a registered mutual
fund distributor providing the facility.

For investing, you need to log-in to your Demat account and look for the option to
invest in the mutual fund.

In the next step, you need to choose the fund in which you want to invest. Then
you need to complete the investment by transferring the amount online.

#4. Through Karvy and CAMS

You can invest online and offline in mutual funds through registrars like Karvy
and CAMS.

In Online Method – You need to visit the website of CAMS or Karvy, create an
account, provide folio number, select the scheme and make payment.

In Offline Method – You can invest by visiting the local office and complete the
application form, hand over the canceled cheque and the copy of KYC documents.

#5. Mutual Fund Agents

Investing through agents is a time consuming and costly method that should be
avoided. You can call an agent to help you choose and fill the requisite form.
Nowadays, agents come with digital devices to help you fill form digitally and
activate your account instantly.