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What is an Asset Management Company?
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A firm that invests the pooled funds of retail investors in securities in line with
the stated investment objectives. For a fee, the investment company provides more
diversification, liquidity, and professional management service than is normally
available to individual investors.
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What is a Mutual Fund?
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Mutual Fund is a investment company that pools money from shareholders and invests
in a variety of securities, such as stocks, bonds and money market instruments.
In Simple Words, Mutual fund is a mechanism for pooling the resources by issuing
units to the investors and investing funds in securities in accordance with objectives
as disclosed in offer document.
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What is NAV?
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The Term Net Asset Value (NAV) is used by AMCs to measure net assets. It is calculated
by subtracting liabilities from the value of a fund's securities and other items
of value and dividing this by the number of outstanding units. Net asset value is
popularly used in newspaper mutual fund tables to designate the price per unit for
the fund. Calculating NAVs - Calculating mutual fund net asset values is easy. Simply
take the current market value of the fund's net assets (securities held by the fund
minus any liabilities) and divide by the number of units outstanding. So if a fund
had net assets of Rs.50 lakh and there are one lakh units of the fund, then the
price per share (or NAV) is Rs.50.00.
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How often is the NAV declared?
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The NAV of a scheme has to be declared at least once a week. However many Mutual
Fund declare NAV for their schemes on a daily basis. As per SEBI Regulations, the
NAV of a scheme shall be calculated and published at least in two daily newspapers
at intervals not exceeding one week. However, NAV of a close-ended scheme targeted
to a specific segment or any monthly income scheme (which are not mandatory required
to be listed on a stock exchange) may be published at monthly or quarterly intervals.
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What are the benefits of investing in Mutual Funds?
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The advantages of investing in a Mutual Fund are:
1. Professional Management: You avail of the services of experienced and skilled
professionals who are backed by a dedicated investment research team, which analyses
the performance and prospects of companies and selects suitable investments to achieve
the objectives of the scheme.
2. Diversification: Mutual Funds invest in a number of companies across a broad
cross-section of industries and sectors. This diversification reduces the risk because
seldom do all stocks decline at the same time and in the same proportion. You achieve
this diversification through a Mutual Fund with far less money than you can do on
your own.
3. Convenient Administration: Investing in a Mutual Fund reduces paperwork and helps
you avoid many problems such as bad deliveries, delayed payments and unnecessary
follow up with brokers and companies. Mutual Funds save your time and make investing
easy and convenient.
4. Return Potential: Over a medium to long-term, Mutual Funds have the potential
to provide a higher return as they invest in a diversified basket of selected securities.
5. Low Costs: Mutual Funds are a relatively less expensive way to invest compared
to directly investing in the capital markets because the benefits of scale in brokerage,
custodial and other fees translate into lower costs for investors.
6. Liquidity: In open-ended schemes, you can get your money back promptly at net
asset value related prices from the Mutual Fund itself. With close-ended schemes,
you can sell your units on a stock exchange at the prevailing market price or avail
of the facility of direct repurchase at NAV related prices which some close-ended
and interval schemes offer you periodically.
7. Transparency: You get regular information on the value of your investment in
addition to disclosure on the specific investments made by your scheme, the proportion
invested in each class of assets and the fund manager's investment strategy and
outlook.
8. Flexibility: Through features such as regular investment plans, regular withdrawal
plans and dividend reinvestment plans, you can systematically invest or withdraw
funds according to your needs and convenience.
9. Choice of Schemes: Mutual Funds offer a family of schemes to suit your varying
needs over a lifetime.
10. Well Regulated: All Mutual Funds are registered with SEBI and they function
within the provisions of strict regulations designed to protect the interests of
'investors. The operations of Mutual Funds are regularly monitored by SEBI.
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Are there any risks involved in investing in Mutual Funds?
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All investments whether in shares, debentures or deposits involve risk: share value
may go down depending upon the performance of the company, the industry, state of
capital markets and the economy; generally, however, longer the term, lesser the
risk; companies may default in payment of interest/ principal on their debentures/bonds/
deposits; the rate of interest on an investment may fall short of the rate of inflation
reducing the purchasing power. While risk cannot be eliminated, skillful management
can minimise risk. Mutual Funds help to reduce risk through diversification and
professional management. The experience and expertise of Mutual Fund managers in
selecting fundamentally sound securities and timing their purchases and sales help
them to build a diversified portfolio that minimises risk and maximises returns.
TYPES OF MUTUAL FUNDS - On the basis of Objective
Equity Funds/ Growth Funds
Funds that invest in equity shares are called equity funds. They carry the principal
objective of capital appreciation of the investment over the medium to long-term.
The returns in such funds are volatile since they are directly linked to the stock
markets. They are best suited for investors who are seeking capital appreciation.
There are different types of equity funds such as Diversified funds, Sector specific
funds and Index based funds. Diversified funds
These funds invest in companies spread across sectors. These funds are generally
meant for risk-taking investors who are not bullish about any particular sector.
Sector funds
These funds invest primarily in equity shares of companies in a particular business
sector or industry. These funds are targeted at investors who are extremely bullish
about a particular sector.
Index funds
These funds invest in the same pattern as popular market indices like S&P 500 and
BSE Index. The value of the index fund varies in proportion to the benchmark index.
Tax Saving Funds
These funds offer tax benefits to investors under the Income Tax Act. Opportunities
provided under this scheme are in the form of tax rebates U/s 88 as well saving
in Capital Gains U/s 54EA and 54EB. They are best suited for investors seeking tax
concessions.
Debt / Income Funds
These Funds invest predominantly in high-rated fixed-income-bearing instruments
like bonds, debentures, government securities, commercial paper and other money
market instruments. They are best suited for the medium to long-term investors who
are averse to risk and seek capital preservation. They provide regular income and
safety to the investor.
Liquid Funds / Money Market Funds
These funds invest in highly liquid money market instruments. The period of investment
could be as short as a day. They provide easy liquidity. They have emerged as an
alternative for savings and short-term fixed deposit accounts with comparatively
higher returns. These funds are ideal for Corporates, institutional investors and
business houses who invest their funds for very short periods.
Gilt Funds
These funds invest in Central and State Government securities. Since they are Government
backed bonds they give a secured return and also ensure safety of the principal
amount. They are best suited for the medium to long-term investors who are averse
to risk.
Balanced Funds
These funds invest both in equity shares and fixed-income-bearing instruments (debt)
in some proportion. They provide a steady return and reduce the volatility of the
fund while providing some upside for capital appreciation. They are ideal for medium-
to long-term investors willing to take moderate risks.
Hedge Funds
These funds adopt highly speculative trading strategies. They hedge risks in order
to increase the value of the portfolio.
TYPES OF MUTUAL FUNDS - On the basis of Flexibility
Open-ended Funds
These funds do not have a fixed date of redemption. Generally they are open for
subscription and redemption throughout the year. Their prices are linked to the
daily net asset value (NAV). From the investors' perspective, they are much more
liquid than closed-ended funds. Investors are permitted to join or withdraw from
the fund after an initial lock-in period.
Close-ended Funds
These funds are open initially for entry during the Initial Public Offering (IPO)
and thereafter closed for entry as well as exit. These funds have a fixed date of
redemption. One of the characteristics of the close-ended schemes is that they are
generally traded at a discount to NAV; but the discount narrows as maturity nears.
These funds are open for subscription only once and can be redeemed only on the
fixed date of redemption. The units of these funds are listed (with certain exceptions),
are tradable and the subscribers to the fund would be able to exit from the fund
at any time through the secondary market.
Interval funds
These funds combine the features of both open–ended and close-ended funds wherein
the fund is close-ended for the first couple of years and open-ended thereafter.
Some funds allow fresh subscriptions and redemption at fixed times every year (say
every six months) in order to reduce the administrative aspects of daily entry or
exit, yet providing reasonable liquidity.
TYPES OF MUTUAL FUNDS - On the basis of
geographic location Domestic funds
These funds mobilise the savings of nationals within the country.
Offshore Funds
These funds facilitate cross border fund flow. They invest in securities of foreign
companies. They attract foreign capital for investment.
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What are the different plans that Mutual Funds offer?
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Growth Plan and Dividend Plan
A growth plan is a plan under a scheme wherein the returns from investments are
reinvested and very few income distributions, if any, are made. The investor thus
only realises capital appreciation on the investment. This plan appeals to investors
in the high income bracket. Under the dividend plan, income is distributed from
time to time. This plan is ideal to those investors requiring regular income.
Dividend Reinvestment Plan
Dividend plans of schemes carry an additional option for reinvestment of income
distribution. This is referred to as the dividend reinvestment plan. Under this
plan, dividends declared by a fund are reinvested on behalf of the investor, thus
increasing the number of units held by the investors.
Automatic Investment Plan
Under the Automatic Investment Plan (AIP) also called Systematic Investment Plan
(SIP), the investor is given the option for investing in a specified frequency of
months in a specified scheme of the Mutual Fund for a constant sum of investment.
AIP allows the investors to plan their savings through a structured regular monthly
savings program.
Automatic Withdrawal Plan
Under the Automatic Withdrawal Plan (AWP) also called Systematic Withdrawal Plan
(SWP), a facility is provided to the investor to withdraw a pre-determined amount
from his fund at a pre-determined interval.
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What is Entry/Exit Load?
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A Load is a charge, which the AMC may collect on entry and/or exit from a fund.
A load is levied to cover the up-front cost incurred by the AMC for selling the
fund. It also covers one time processing costs. Some funds do not charge any entry
or exit load. These funds are referred to as ‘No Load Fund’.
Funds usually charge an entry load ranging between 1.00% and 2.00%. Exit loads vary
between 0.25% and 2.00%. For eg. Let us assume an investor invests Rs. 10,000/-
and the current NAV is Rs.13/-. If the entry load levied is 1.00%, the price at
which the investor invests is Rs.13.13 per unit. The investor receives 10000/13.13
= 761.6146 units. (Note that units are allotted to an investor based on the amount
invested and not on the basis of no. of units purchased). Let us now assume that
the same investor decides to redeem his 761.6146 units. Let us also assume that
the NAV is Rs 15/- and the exit load is 0.50%. Therefore the redemption price per
unit works out to Rs. 14.925. The investor therefore receives 761.6146 x 14.925
= Rs.11367.10.
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What is Sales/Purchase price?
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Sales/Purchase price is the price paid to purchase a unit of the fund. If the fund
has no entry load, then the sales price is the same as the NAV. If the fund levies
an entry load, then the sales price would be higher than the NAV to the extent of
the entry load levied.
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What is redemption price?
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Redemption price is the price received on selling units of open-ended scheme. If
the fund does not levy an exit load, the redemption price will be same as the NAV.
The redemption price will be lower than the NAV in case the fund levies an exit
load.
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What is repurchase price?
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Repurchase price is the price at which a close-ended scheme repurchases its units.
Repurchase can either be at NAV or can have an exit load.
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What is a Switch?
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Some Mutual Funds provide the investor with an option to shift his investment from
one scheme to another within that fund. For this option the fund may levy a switching
fee. Switching allows the Investor to alter the allocation of their investment among
the schemes in order to meet their changed investment needs, risk profiles or changing
circumstances during their lifetime.
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What is Shut-Out Period?
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After the closure of the Initial Offer Period, on an ongoing basis, the Trustee
reserves a right to declare Shut-Out period not exceeding 5 days at the end of each
month/quarter/half-year, as the case may be, for the investors opting for payment
of dividend under the respective Dividends Plans. The declaration of the Shut-Out
period is envisaged to facilitate the AMC/the Registrar to determine the Units of
the unitholders eligible for receipt of dividend under the various Dividend Options.
Further, the Shut-Out period will also help in expeditious processing and dispatch
of dividend warrants.
During the Shut-Out period investors may make purchases into the Scheme but the
Purchase Price for subscription of units will be calculated using the NAV as at
the end of the first Business Day in the following month/quarter/half-year as the
case may be, depending on the Dividend Plan chosen by the investor. Therefore, if
investments are made during the Shut –Out period, Units to the credit of the Unitholder’s
account will be created only on the first Business Day of the following month/ quarter/half
year, as the case may be, depending on the dividend plan chosen by the investor.
The Shut-Out period applies to new investors in the Scheme as well as to Unitholders
making additional purchases of Units into an existing folio. The Trustee reserves
the right to change the Shut-Out period and prescribe new Shut- Out period, from
time to time.
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What are the factors that influence the performance of Mutual Funds?
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The performances of Mutual funds are influenced by the performance of the stock
market as well as the economy as a whole. Equity Funds are influenced to a large
extent by the stock market. The stock market in turn is influenced by the performance
of the companies as well as the economy as a whole. The performance of the sector
funds depends to a large extent on the companies within that sector. Bond-funds
are influenced by interest rates and credit quality. As interest rates rise, bond
prices fall, and vice versa. Similarly, bond funds with higher credit ratings are
less influenced by changes in the economy.
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Who are the issuers of Mutual funds in India?
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Unit Trust of India(UTI) was the first mutual fund which began operations in 1964.
Other issuers of Mutual funds are Public sector banks like SBI, Institutions like
HDFC & ICICI, Foreign Institutions like Fidelity, ABN Amro, Deutsche and Private
financial companies like DSP Merrill Lynch, Sundaram, Kotak Mahindra, Cholamandalam
etc.
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As a new investor how do I invest in Mutual Funds?
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1.Identify your investment needs : Your financial goals will vary, based on your
age, lifestyle, financial independence, family commitments, level of income and
expenses among many other factors. Therefore, the first step is to assess your needs.
2.Choose the right Mutual Fund : Once you have a clear strategy in mind, you now
have to choose which Mutual Fund and scheme you want to invest in.The offer document
of the scheme tells you its objectives and provides supplementary details like the
track record of other schemes managed by the same Fund Manager. Some factors to
evaluate before choosing a particular Mutual Fund are:
the track record of performance over the last few years in relation to the
appropriate yardstick and similar funds in the same category.
how well the Mutual Fund is organised to provide efficient, prompt and personalised
service.
degree of transparency as reflected in frequency and quality of their communications.
3.Select the ideal mix of Schemes : Investing in just one Mutual Fund scheme may
not meet all your investment needs. You may consider investing in a combination
of schemes to achieve your specific goals.
4.Invest regularly : For most of US,the approach that works best is to invest a
fixed amount at specific intervals, say every month. By investing a fixed sum each
month, you buy fewer units when the price is higher and more units when the price
is low, thus bringing down your average cost per unit. This is called rupee cost
averaging and is a disciplined investment strategy followed by investors all over
the world. With many open-ended schemes offering systematic investment plans, this
regular investing habit is made easy for you.
5.Keep your taxes in mind : As per the current tax laws, Dividend/Income Distribution
made by mutual funds is exempt from Income Tax in the hands of investor. Further,
there are other benefits available for investment in Mutual Funds under the provisions
of the prevailing tax laws. You may therefore consult your tax advisor or Chartered
Accountant for specific advice to achieve maximum tax efficiency by investing in
Mutual Funds.
6.Start early : It is desirable to start investing early and stick to a regular
investment plan. If you start now, you will make more than if you wait and invest
later. The power of compounding lets you earn income on income and your money multiplies
at a compounded rate of return.
7. The final step : All you need to do now is to get in touch with a Mutual Fund
or your agent/broker and start investing. Reap the rewards in the years to come.
Mutual Funds are suitable for every kind of investor-whether starting a career or
retiring, conservative or risk taking, growth oriented or income seeking.
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What are the rights that are available to a Mutual Fund holder?
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As a unitholder in a Mutual Fund scheme coming under the SEBI (Mutual Funds) Regulations,
you are entitled to: 1. Receive unit certificates or statements of accounts confirming
your title within 30 days from the date of closure of the subscription under open-end
schemes or within 6 weeks from the date your request for a unit certificate is received
by the Mutual Fund
2. Receive information about the investment policies, investment objectives, financial
position and general affairs of the scheme;
3. Receive dividend within 30 days of their declaration and receive the redemption
or repurchase proceeds within 10 days from the date of redemption or repurchase
4. Vote in accordance with the Regulations to:
a. change the Asset Management Company; b. wind up the schemes.
5. To receive communication from the Trustee about change in the fundamental attributes
of any scheme or any other changes which would modify the scheme and affect the
interest of the unitholders and to have option to exit at prevailing Net Asset Value
without any exit load in such cases.
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It is very often said that Mutual Funds have performed badly. Please explain?
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The performance of Mutual Funds is evaluated on the basis of absolute increase or
decrease in its Net Asset Value (NAV). However a fund’s performance should be evaluated
on the basis of a comparison with the relevant indices and alternative instruments.
The NAV varies from fund to fund. Therefore this argument is not entirely true.
However some funds have performed poorly with their NAV quoting well below their
original NFO price.
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What is forward and historical pricing?
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Forward pricing is the price arrived at after the closing hours of a Working day,
which the Investor is not aware of. Historical pricing is a price which an Investor
knows before transacting, typically transactions allowed on the basis of the previous
day’s NAV.
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How are monies transferred in the event of Unit holder’s death ?
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The following procedure needs to be adopted in case of transmission and in the absence
of any nomination:-
A. In case of Joint-holding and demise of the First holder :-
§ Original / Attested ( in original ) Death Certificate
§ Letter from any of the other holders requesting the change in the ownership of
holding
§ Units are transferred to the joint-holder’s name
B. In case of Joint-holding and demise of the joint-holder :-
§ Original / Attested ( in original ) Death Certificate
§ Letter from First / Joint-holder requesting us to change according to the Mode
of holding
§ Deletion of deceased person’s name
C. In case of Single Holding :-
§ Original / Attested ( in original ) Death Certificate
§ Request letter for Transmission of Units to the legal heir.
§ List of legal heirs of the deceased person, if more than one.
§ No objection letter from other legal heirs, in favour of the named legal heir
in the request.
§ Letter of Indemnity from all legal heirs Notarized Affidavit by the Successor(s),
if required.
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What is an Account Statement?
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An Account Statement is a non-transferable document that serves as a record of transactions
between the fund and the investor. It contains details of the investor, the units
allotted or redeemed and the date of transaction. The Account Statement is issued
every time any transaction takes place.
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