|Types of Mutual Funds in India||Features of Mutual Funds||How to Invest in a Mutual Fund in India||Mutual Fund Fees & Charges||Objectives of Mutual Funds||Glossary of Mutual Funds Terms|
Mutual funds are basically investment vehicles that comprise the capital of different investors who share a mutual financial goal. A fund manager manages the pool of money that is collected from various investors and invests the money into a variety of investment options such as company stocks, bonds, and shares. Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI), and investing in mutual funds is considered to be the easiest way through which you can increase your wealth.
Mutual funds in India are classified into different categories based on certain characteristics such as asset class, structure, investment objectives, and risk. Here, we will help you understand in detail the various categories and the kinds of funds under each category.
Equity mutual funds are the most common types of mutual funds. They make investments mainly in stocks. The money collected from investors is put into shares of various companies, and the losses or returns generated by these funds is determined by the performance of the shares in which they have invested. Equity funds are the preferred investment options among the majority of investors due to the fact that they offer quick growth.
These funds make investments in fixed-income instruments such as securities, bonds, and treasury bills – liquid funds, fixed maturity plans, long-term bonds, short-term plans, gilt funds, etc. Debt funds come with a fixed maturity date and interest rate, making them ideal investment options for passive investors who seek income on a regular basis while undertaking minimal risk.
While some investors invest in stock markets, others invest in the money market which is also called the cash market or the capital market. Money markets are generally run by corporations, banks, and the government. These entities usually issue money market instruments such as certificate of deposits, dated securities, T-bills, etc., and the fund manager puts the money collected from a pool of investors into these securities and offers returns in the form of regular dividends. The risk involved with these funds are relatively low and they are ideal for the short term.
Balanced or hybrid funds are basically an optimum combination of stocks and bonds. They bridge the gap between debt and equity funds, and they can have a fixed or variable ratio. Essentially, these funds invest a certain amount of their capital into equity funds and the rest in debt funds. The risk involved with investment in balanced or hybrid funds is relatively high, but the returns on offer are also quite high.
Open-ended mutual funds have no constraints so far as the number of units that can be traded or the time period. Investors are allowed to trade funds whenever they want. They can also exit these funds at their convenience. Changes in unit capital occur constantly in open-ended mutual funds whenever there are new entries or exits.
The unit capital to be invested in closed-ended mutual funds is fixed and therefore, more than the predetermined number of units cannot be sold. Some funds are available with a New Fund Offer (NFO) period. In these cases, investors will have to purchase units before the set deadline. The maturity tenure of the scheme is fixed, and at the time of exiting the scheme, SEBI has regulated investors to either list their holdings on stock exchanges or repurchase them.
Interval funds come with the characteristics of both open-ended as well as closed-ended funds. These funds can be bought or exited only at certain intervals of time as determined by the fund house. They are open for investment for a certain period of time after which investors are not allowed to put their money into these funds. Interval funds usually require investors to stay invested for a minimum of two years, making them worthwhile investment options for those who wish to save a large amount for immediate short-term goals.
These funds invest a large part of their corpus into growth sectors and shares, making them ideal investment options for those who have extra funds that can be invested in riskier schemes. The returns offered by these schemes are relatively high, but the risk involved with them is also quite high.
Income funds are similar to debt funds in the sense that their corpus is invested in a combination of securities, certificate of deposits, bonds, etc. These funds can be profitable for those who are willing to take some risks in exchange for impressive returns over two to three years. Income funds tend to deliver returns higher than those offered by deposits as their portfolio is always in keeping with changes in rates.
Similar to income funds, liquid funds also make investments in money market and debt securities. However, the tenure of these funds usually extends to only 91 days, and the maximum amount that can be invested in these funds is Rs.10 lakh.
Equity-Linked Saving Schemes, or ELSS as they are called in their abbreviated form, are becoming increasingly popular as they offer dual benefits. These funds help in creating wealth and saving on taxes, and usually come with a three-year lock-in period. Tax-saving funds make investments mainly in equity and equity-related instruments, and are ideal for salaried investors who seek long-term returns.
These funds carry a relatively high level of risk and are designed to generate steep monetary returns. Although these funds are prone to market volatility, they have the potential to deliver impressive returns.
Capital protection funds, as the term implies, are those whose priority is to protect the capital of investors. The returns delivered by these funds are relatively low (usually not more than 12%). The corpus of these funds is invested mainly in debt securities and partly in equities. These funds never incur losses, but investors must remain invested for at least three years to ensure that their capital is safeguarded and they are eligible for tax benefits.
Pension funds are great investment options for those who wish to save for retirement. These funds offer regular income and are ideal for meeting contingency expenses such as a child’s wedding or medical emergencies.
Fixed maturity funds make investments in money markets, securities, bonds, etc. and are closed-ended plans that come with fixed maturity periods. The tenure of these funds could extend from a month to five years.
High-risk funds carry a high level of risk but also deliver impressive returns by way of dividends and interest. These funds require active management and their performance must be reviewed regularly as they are prone to market volatility. The returns offered by these funds are in the region of 15% on average, but they have the potential to earn as high as 20% to 30% as well.
The risk level associated with these funds is neither too high, nor too low. The corpus of medium-risk funds is invested partly in debt and partly in equities. The average returns offered by these funds range from 9% to 12%.
Low-risk funds are ideal for investors who wish to earn moderate returns with low risk. They are especially ideal in times of unexpected national crises or when the rupee depreciates in value. The corpus of these funds is spread across a combination of arbitrage funds, ultra-short-term funds, and liquid funds. The returns generated by these funds usually ranges between 6% and 8%.
These funds could be ultra-short-term funds or liquid funds whose maturity extends from a month to a year. They are virtually risk-free and the returns they offer are generally around 6% at best.
Index funds are good options for passive investors. The corpus of these funds is invested in an index, and rather than a fund manager managing the fund, these funds replicate the performance of the index. The stocks in which investments are made under these funds are the same as the stocks in which the corresponding index invests.
Sector funds invest their corpus in a certain sector. These are theme-based funds, and since they make investments only in a certain sector which has a limited number of stocks, they have a relatively high-risk profile. However, they also deliver impressive returns, especially sector-specific funds related to pharma, IT, and banking.
These funds invest in a diversified portfolio and the fund manager buys one fund that makes investments in several funds rather than investing in many funds as this helps in achieving diversification.
These funds are popular among investors who want to expand their investment to other nations. Foreign/international funds have the ability to deliver healthy returns at times when the Indian stock markets perform well. Investors have the option to choose a hybrid approach and invest a certain amount in domestic equities and the balance in foreign funds. The other approaches that can be used include theme-based allocation or the feeder approach.
Global funds are by no means similar to international funds. Global funds make investments primarily in markets across the world as well as in the investor’s home country. Global funds are universal and diverse in approach and carry a high level of risk due to the currency variations and different policies. However, they have a history of generating healthy long-term returns.
These funds, as their title suggests, make investments in developing markets. They are a risky investment option and have incurred losses in the past. Since India is also an emerging and dynamic market, these funds are susceptible to market volatilities. In the long run, however, emerging economies are expected to contribute significantly towards global growth, making these funds attractive for those who seek long-term returns.
Despite the fact that the real estate sector is performing quite well in India, a large number of investors are sceptical about making investments in such projects because of the risk they carry. However, these funds can be great investment options as you will only be an indirect participant by investing in established real estate trusts and companies instead of investing in certain projects. These funds offer long-term returns and are ideal for those who wish to negate the legal hassles and risks involved with buying a real estate property.
These funds are great options for those who want to be safe from unfavourable market tendencies and sustain healthy returns at the same time.
These funds make investments in equities, debt securities, and even gold and are highly flexible. These funds can regulate the distribution of funds into equities and debt instruments. They are similar to hybrid bunds, but the selection and allocation of stocks and bonds require a high level of expertise.
As the title suggests, these funds can be gifted to your family so that their financial future is secure.
These funds are sold and purchased on exchanges. They offer comprehensive exposure to overseas stock markets and specialised sectors. They may be traded in real-time, and the prices of these funds can increase or decrease several times in a day.
Investors can accumulate a significant amount of wealth through investment in a diversified portfolio that comprises high-performing schemes. However, there are so many different fund houses and schemes to choose from that it can be overwhelming to select the right portfolio. This is when a professional fund manager can come to your rescue and ensure that your money is invested in the funds that will offer maximum returns. Here are some of the key features of mutual funds:
Fund houses have professional fund managers who manage the schemes. As such, they decide where to invest the pool of money collected from investors. They assess the best sectors, stocks, and shares that can help in generating returns before making investments in them. All decisions made by the fund managers are in the best interest of the investors. So, even if you have no idea about how mutual funds work or how returns are generated, you can rest assured that your finances are in safe hands.
Most investors tend to go for mutual funds whose expense ratios are relatively low, but low expenses are not synonymous with poor performance. Some funds levy fees that are more than the industry average, and the performance of the fund is usually the reason for the higher fees.
A large number of investors who put their money into mutual funds tend to do so when they plan their retirement. As such, the long-term performance of a fund must be considered before investing in it. The fund manager’s performance over the past few years can also give you a clue regarding the future performance of the fund. The average returns offered by a fund over the long term, say, a period of 15 to 20 years, must be considered rather than its performance in recent years. Some of the best funds out there tend to generate moderate returns in the short to medium term, but perform exceptionally in the long run as they have the ability to minimise losses when there are downturns in the industry or when economic periods are difficult.
Almost all mutual funds that perform well do so because of the adoption of a solid investment strategy. The investment objective of the fund along with the investment strategy chosen by the fund manager will say all you need to know about how a scheme aims to generate returns as well as the kind of returns it aims to generate.
Fund managers are aware of the importance of switching from one fund to another to remain ahead of the market. Several mutual fund schemes allow for such flexibility, thereby assuring you that there is always potential for growth. Fund managers tend to keep a keen eye on the market as it helps them make the right decision at the right time. Furthermore, most schemes have no time constraints. Equity-linked savings schemes are the only kinds of mutual funds that have a minimum three-year lock-in period. All the other funds are quite flexible so far as their financial objectives and tenure are concerned.
Investments in mutual funds are made across various shares, company sizes, and assets, thereby distributing the risk evenly. In case one of the stocks underperforms, the losses can be evened out by the other gains. Mutual funds are highly diverse in this sense, but it is advised that you invest in no more than five stocks as monitoring all of them could be slightly difficult.
One of the main benefits of investing in mutual funds is that your investment can be redeemed at your convenience. Whenever you need the money, all you have to do is request the mutual fund company for an exit and your money will be sent to your account in two to three working days.
Investors have ample number of choices when it comes to investing in mutual funds as they are categorised based on their risk appetite, their investment goals, the size of the fund, etc. As such, investors and fund managers can assess the performance of a variety of funds before choosing the best ones to invest in.
Purchasing mutual fund schemes, redeeming them or selling them is as easy as it gets. You simply have to raise a request with the mutual fund house and your fund manager will do the rest. Mutual funds have become like emergency funds for many investors due to the ease with which they can be traded.
Equity-linked savings schemes are kinds of mutual funds that have a history for generating good returns in comparison with the other investment options under Section 80C of the Income Tax Act, like Provident Fund, Fixed Deposits, etc. Not only do they help you accumulate wealth but also offer tax benefits.
Investments in mutual funds can be made by a variety of investors such as individuals, partnership firms, Qualified Foreign Investors (QFIs), registered Foreign Institutional Investors (FIIs), Persons of Indian Origin (PIOs), Non-Resident Indians (NRIs), cooperative societies, Hindu Undivided Families (HUFs), etc. To invest in mutual funds, applicants are required to be KYC compliant.
An increasing number of individuals in India have taken to investing in mutual funds, but a good percentage of the investors have no idea how to go about it. Here are some tips to help you kick-start your investment in mutual funds:
Before you put your money into an investment vehicle, it is important to identify your financial goals. You must know how much money you wish to invest in order to achieve your goals. In case you have short-term goals and require funds in say, two to three years, debt schemes would be the way to go. In case you have long-term goals and require funds after say, five years or so, equity schemes can help you achieve your goals. Once you identify your goals, choosing the right funds becomes much easier.
As you already know, there is a wide variety of mutual fund schemes within the equity and debt fund universe. In order to choose the right scheme, you will have to take into consideration your risk appetite, your investment horizon, and your financial goals. Compare different schemes to find the ones that are in line with your risk profile and your investment horizon.
If you are investing in mutual funds directly by yourself, a fund advisor can be of great aid in helping you achieve your financial goals. Experienced advisors not only help in taking care of the formalities, but they also suggest schemes that can help you generate returns. Many advisors also tend to keep track of your investments, thereby enabling you to switch in case one of your investments is underperforming.
All transactions made in the mutual funds domain must be well documented. It is necessary to be KYC compliant when transacting with mutual funds, which is just a due diligence of certain personal information such as furnishing your photograph, address proof, PAN, and DOB certificate. Ensure that you have a PAN card as it is one of the requirements for investing in mutual funds.
Considering the wide variety of mutual funds on offer, make sure you pick only those that cater to your risk appetite. The higher the returns offered by a scheme, the higher the risk associated with it, therefore, making it important to ensure that you choose your funds wisely.
Most mutual fund schemes come with options such as growth and dividend. When choosing a scheme and the options under it, it is essential to consider your financial objectives to get the most out of your investment. Growth options are ideal for those who want a large amount of money to meet their financial objectives. Dividend options, on the other hand, are ideal for those who require profits at regular intervals of time.
The time-frame for achieving your investment objective must be finalised before you invest in mutual funds. As you grow older and approach retirement age, your exposure to stocks must be limited as it will ensure that your capital is preserved. A professional fund manager can help you better understand where to invest your money.
The past performance of funds does not necessarily give you an insight into how it will perform in the future. For example, IT and pharma funds were known for generating attractive returns over the past five to ten years, but have been underperforming over the past year or so. The returns accrued by funds in the past does not guarantee their excellent performance in the future. However, their performance can be assessed when choosing a scheme as schemes that have performed well in the past have better potential to generate healthy returns in comparison with other funds. Studying a scheme’s performance over different market cycles will help you better understand which ones could help you achieve profits.
Mutual funds are managed by Asset Management Companies that employ fund managers to handle each scheme. Fund managers are assisted by a team of market experts and financial analysts. Managing the expenses of these professionals whilst working towards overcoming market risks can be a difficult task. It is for this reason that mutual fund houses charge fees to investors.
Asset Management Companies and fund managers grow in terms of reputation based on the fees or expense ratios charged by fund houses to investors. The better the performance of schemes managed by Asset Management Companies and fund managers, the better their reputation. The ultimate goal of Asset Management Companies and fund managers is to maximise returns and satisfy investors as doing so will help them acquire steady investments in the future. At the same time, their performance can attract new investors, thus increasing the company’s Assets Under Management. However, to achieve these feats, operational costs are incurred by fund houses, and to cover these costs, fees and charges are levied to investors. The following are the different mutual fund fees and charges in India:
An entry load is basically the fee charged by a fund house to an investor when he/she buys units of a mutual fund. In August 2009, however, entry load was deferred by the Securities and Exchange Board of India.
An exit load is charged to an investor by a fund house when he/she redeems the units of a mutual fund. Exit loads are not fixed and can vary from scheme to scheme. Generally speaking, exit loads range from 0.25% to 4% based on the kind of scheme in which you invest. The fee is determined by the fund house, and the main reason for the levy of an exit load is to ensure that investors remain invested in the scheme for a certain period of time.
These fees are collected from investors to pay off fund managers for the services they render to manage the scheme.
Account fees are sometimes charged by Asset Management Companies when investors fail to meet the minimum balance requirement. These fees are subtracted from the investor’s portfolio.
These fees are collected by Asset Management Companies for the printing, mailing, and marketing expenses incurred by them.
A number of mutual fund schemes allow investors to switch their investments from one scheme to another. The fee charged for this service is called the switch fee.
There are three primary ways through which investment is made in mutual funds, they are as follows:
Investors have the option to invest on their own by contacting mutual fund companies and applying for schemes. Direct investment helps in saving of brokerage fees, and the investment process is fairly simple. All you have to do is visit a branch of the mutual fund company or download the form online from the website of the Asset Management Company. If you wish to invest directly, make sure you read through the fine print carefully and resolve all your queries before investing.
Most investors take the online route to make investments in mutual funds. Not only does this help in saving time but also makes it very simple to compare various schemes before you make an informed investment decision. BankBazaar is one of the many portals in India that offer some of the best mutual funds in India. All you have to do is enter a few details and your investment process will be complete in a matter of minutes.
Professional agents can be hired to make informed investment decisions. Agents have comprehensive knowledge about mutual funds and know the best schemes to invest in to achieve your investment objectives. They invest your money based on your risk profile, investment goals, and your income. They take care of everything and charge a fee for the services they render.
The objectives of mutual funds vary based on their type. Different funds have different objectives. Here, we will look at some of the common kinds of mutual funds and their objectives.
As the term suggests, growth funds aim to achieve growth. All growth funds have the same primary objective, which is to achieve capital appreciation between the medium and long term. The corpus of these funds is usually invested in small to large-cap stocks.
Income funds aim at generating income at regular intervals of time. They do not seek capital appreciation in the long run, and are ideal for those who seek regular cash flow to meet their financial requirements. The corpus of these funds is invested mainly in income instruments such as bonds, fixed interest debentures, dividend paying stocks, preference stocks, etc.
The main objective of value funds is to make investments in undervalued stocks and achieve profits when the inefficiencies are corrected.
There are four common approaches to invest in mutual funds. They are as follows:
Case Study on Mutual Fund Investment
Suppose a girl of 24 years having a secured job with one dependant and monthly take-home salary of Rs.30,000 - Rs.40,000 with no knowledge of financial planning/investment wants to invest in a mutual fund. Before taking the final investment decision she has to know her investment objective, estimate her risk-taking capacity and understand her level of risk tolerance. The risk-assessment and asset allocation tools available online will help her in this process.
- Risk profiling
The tool will conduct the risk profiling on the basis of her age, current income, dependants, present job/career/business, accommodation status, overall income status, money-saving practices, level of investment knowledge, and risk-taking capacity.
- Risk analysing
On the basis of all the information provided, a girl of her age with given income and family status will be assessed to have a moderate level of risk-taking capacity and risk tolerance. This means she can invest in shares or securities with moderate associated risk.
- Asset allocation
Based on her risk profile, debt funds are likely to be the most secured and profitable asset classes to spread her investment. Both private sector and government debt funds will be suitable to bring some significant profit over a particular time period. Equity funds will also make a good choice for her provided that she capitalises in Equity Index mutual funds and Blue Chip Shares.
Mutual funds offer investors a wide range of benefits. The investor can choose to invest in desirable funds and derive profits as per his/her own requirements. However, the investor is responsible for making a wise investment strategy. He/she should try to minimise the risk especially by avoiding faulty investment practices and simple errors.
Investing with an expectation of unreasonable returns, investing in funds declaring dividends, and investing without knowing the underlying aspects are some of the investment errors, which if avoided, can lower the risk to a great extent. If you are patient, avoid making hasty decisions, and take calculated risks, mutual fund investment can bring you significant profit.
Some of the common terms related to mutual funds are as follows:
Here are the benefits of investing in mutual funds:
Drawback 1: No guaranteed returns
Similar to other investment options which don't assure a guaranteed return, there is always a risk of value depreciation in mutual funds. Price fluctuations are often experienced by equity mutual funds along with the stocks of the fund. Since mutual funds are not backed up by any insurance scheme, the performance of the funds are not guaranteed. It is thus extremely important for the mutual fund investors to understand that their investments will be subject to market risks.
For reducing the overall risk of investing in a mutual fund the investors need to be careful when picking the funds. It is better to capitalise on big well-diversified equity funds which come under low-risk mutual fund products. To reduce further risk, the investors can make a switch from equity funds to hybrid funds and balanced funds which have potentially low-risk margin. The risk can even out up to some extent by investing in funds capitalising on diverse asset classes like equity, debt, and gold. Moreover, investors who want to contribute money to any specific industry or in small or mid-cap funds should be cautious and must take the proper assistance of the fund managers who are capable of managing the risk.
Drawback 2: Non-invested cash
Since mutual funds collect money from a plethora of investors for their business, people keep on investing and withdrawing money from the funds on an everyday basis. Hence, to retain the ability to meet the withdrawal requirements of the investors, the mutual funds hold a huge amount of cash in their portfolios. Even though static cash is good for bringing more liquidity in the system, non-investment of a part of their money is not beneficial for the investors.
Though there are no ways of deriving profit from the non-invested cash in the mutual funds, the investors can make the best use of their money by making smart investment strategies. Capitalising in the right kind of mutual fund that will match their investment goals and bring good returns in future with low-risk margin is the best way to mitigate this mutual fund investment drawback.
Drawback 3: Mutual fund fees
Even though mutual funds give the investors/shareholders an opportunity of getting good returns, they have to pay the mutual fund fees which, in the long run, decrease the average payout of their fund. Regardless of whether the fund performed or not, these fees are levied on the fund investors. In cases where the fund doesn't derive any profit, these fees just increase the extent of the loss for the shareholders.
The investors must evaluate the fee structure of different funds before investing. It is extremely important to check the total cost of a particular fund prior to investing. If an investor is willing to invest in a fund with high annual fees, he/she must assess the justifiability of the fees first. New investors should invest in a low-cost company in the beginning before starting on a larger scale. Choosing funds with no-load, no/less annual fees or waivable fees, low MER index funds and ETFs can minimise the loss.
Drawback 4: Diversification versus Diworsification
Investors who acquire multiple related funds are not able to get benefitted by the risk-reducing factors of diversification. Rather, by investing in a large number of related funds the investors sometimes fall victim to the diworsification syndrome. Moreover, people investing in a fund which capitalise on one specific industry or sector is equally vulnerable and exposed to risk.
The investors need to be careful and well-informed while choosing the funds. They should focus on investing in a diversified mix of mutual funds instead of the mutually related ones to be on the safer side. The more diverse a fund would be, the risk of loss will be less. Furthermore, the investors should only invest in funds which capitalise on multiple sectors instead of investing in one single industry.
Drawback 5: Less clarity
Sometimes the purpose of a mutual fund might not be clear and transparent. Even in certain cases, the advertisements of the funds can be misleading. A mutual fund might try to attract the potential investors through its title. For example, it might promote itself at a grand scale but in reality, it might be investing in small-scale stocks.
It is important to read through the prospectus carefully and understand the intricacies of the fine print. There have been revamping of several schemes in the recent past and this was aimed at simplifying investing. Investors should be fully aware of the schemes they are getting into and have a clear idea of the role the fund will play in his/her portfolio.
Mutual funds are set up as trusts that have a sponsor, an Asset Management Company, trustees, and custodians. Sponsors establish the trust and serve as the company’s promoters. The property of the mutual fund is held by the trustees for the unitholders’ benefits. The Asset Management Company has to be approved by the Securities and Exchange Board of India before it manages the funds and invests in different kinds of securities. Custodians are also required to be registered with the Securities and Exchange Board of India, and hold the instruments of different schemes of the fund. The general power of direction and superintendence over the Asset Management Company is vested with the trustees, and they keep track of the mutual fund with regard to its performance and its compliance with the regulations established by the Securities and Exchange Board of India. As per the regulations of the Securities and Exchange Board of India, a minimum of 66% of the directors of the trustees must have no association with the sponsors. In addition, half of the directors of the Asset Management Company must also be independent.
The Net Asset Value of a scheme, or the NAV as it is called in its abbreviated form, is the performance of the scheme. Mutual funds make investments in instruments with the funds they collect from the investors. Basically, the NAV of the scheme is the market value of the instruments that the scheme holds, divided by the overall number of units under the scheme.
Sector-specific funds are those that make investments in the instruments of companies that fall under certain sectors. The sectors in which mutual fund investments are made in India include pharmaceuticals, FMCG, software, IT, petroleum, banks, etc. The performance of the industries or sectors and the companies in which investments are made will determine the performance of these funds. Although the returns generated by these funds are quite high, they are also quite risky in comparison with diversified funds.
Tax saving mutual funds provide investors with tax rebates under certain provisions of the Income Tax Act. Investment in certain avenues such as Rajiv Gandhi Equity Saving Scheme and Equity-Linked Savings Schemes can help in availing tax benefits under Section 80CCG and Section 80C of the Income Tax Act, respectively.
Let’s say a mutual fund collects Rs.1,000 from an investor and puts Rs.800 into fixed income instruments and the remaining Rs.200 into equities. The investment will happen in a manner such that the majority of the investment, i.e. Rs.800, is forecast to grow and turn into Rs.1,000 by the time the scheme matures. Therefore, the scheme aims to protect the Rs.1,000 (initial investment) until the scheme matures.
Load funds are those that levy a certain percentage of the Net Asset Value when an investor enters or exits a scheme. The load structure is almost always mentioned in the scheme information document. For instance, let’s say that the Net Asset Value of a unit is Rs.20. In case the scheme charges an entry load as well as an exit load that is charged at 1%, investors who purchase these units will have to pay Rs.20.20 per unit of the scheme when purchasing them. Similarly, at the time of selling the units back to the mutual fund, investors can redeem them at Rs.19.80 per unit. The service standards as well as the past performance of a scheme must be considered when investing in mutual funds.
No. Mutual fund houses cannot raise the exit load over and above the level specified in the scheme information document. If any changes are made in the exit load, they will not be applicable to the initial investments, but only to prospective investments. As for entry load, the Securities and Exchange Board of India has done away with the same so no schemes can charge them.
Mutual fund houses are not allowed to charge an entry load to investors. However, distributors can be paid for their services. When a distributor makes investments in mutual funds, the Asset Management Company pays the commission directly to the distributor in a way that the investor’s total expense ratio is less than the expense ratio limits mentioned under regulation 51 of the mutual fund regulations established by the Securities and Exchange Board of India.
Keeping market trends in mind, fund managers have the option to change the asset allocation strategy of a scheme. For instance, he/she is allowed to invest a higher percentage of the funds, or a lower percentage of the funds in debt instruments or equities than what is mentioned in the scheme information document. Fund managers usually change the asset allocation strategy of a scheme only when it is necessary for the protection of the Net Asset Value.
The Securities and Exchange Board of India has made it mandatory for fund houses to offer direct plans to investors. Direct investments are basically those that are made without the help of a distributor. The expense ratios of direct plans are relatively lower in comparison with regular plans as they do not have commissions or distribution expenses. The NAV of these plans is also different and unique.
Yes. Investors are allowed to pay for their investments in mutual funds using cash. However, the limit on cash investments is set at Rs.50,000 per financial year.
Yes. Non-residents of India (NRIs) are allowed to make investments in Indian mutual funds. The scheme information document of each scheme will contain the information regarding the same.
Investors are required to take into consideration their risk appetite, their financial position, their age, etc. when making investments in debt or equity-oriented schemes. While equity funds are ideal for the long-term, debt schemes can be profitable for the short-term.
Mutual fund houses are mandated to dispatch the dividend warrants to unitholders within 30 days from the date on which the dividend is declared. Repurchase or redemption proceeds, on the other hand, are required to be dispatched within 10 working days from the date on which the request for repurchase was made.
Mutual funds are subject to certain changes once in a while. In case of any changes, fund houses must inform the unitholders regarding the same. Besides, quarterly newsletters are sent by most fund houses to their unitholders. Even the scheme information document for each mutual fund scheme must be revised once per year.
The Net Asset Value of a scheme reveals how well a scheme is doing. It is disclosed every day on the website of the Asset Management Company as well as the website of the Association of Mutual Funds in India. The NAV of all schemes can be accessed by investors on these platforms. Furthermore, the performance of schemes is published by way of semi-annual results that include the returns generated by the scheme over the past three months, six months, one year, three years, and five years. All these details can help in assessing the performance of a mutual fund scheme.
Investors are allowed to appoint a nominee. However, only individual investors can appoint nominees, and not societies, body corporates, HUFs, trusts or partnership firms.
The offer document of each scheme has a contact person’s name for queries, grievances, or complaints. Your complaints can also be sent to the Securities and Exchange Board of India, Office of Investor Assistance and Education, Plot No. C4-A, “G” Block, 1st Floor, Bandra-Kurla Complex, Bandra (E), Mumbai – 400051. Complaints can also be lodged on scores.gov.in.
Investments in mutual funds are exposed to market risks. However, the returns offered by mutual funds are quite attractive, making them worth the risk.
Yes. It is necessary to update your KYC before investing in mutual funds. Once your KYC form has been filled up, the system stores it and you won’t have to update it each time you buy new units. KYC updation is free of cost.
There are four crucial factors that must be kept in mind prior to selecting a mutual fund scheme. They are your age, the finances at your disposal, the tenure for which you wish to remain invested, and whether or not you want tax savings.
It depends on how much money you have at your disposal. If you have a relatively large amount, a lump sum investment is advised, but if you have limited income or would like to start saving a part of your salary on a regular basis, SIPs are the way to go. Basically, it’s your financial status that must determine which route you take to invest in mutual funds.
No. There is no limit on the amount of money that can be invested in mutual funds through a Systematic Investment Plan. You can choose any amount you wish to invest.
Missing your SIP payment will not mean that your mutual fund account will be closed. You will simply have to pay two months’ SIP amount at one go in the next month.
Yes. Investments in mutual funds can be made for a short period of three to six months. Ultra-short-term debt funds or liquid funds are the best options for investment in the short term.
You can redeem units of your mutual fund online or offline. If you wish to redeem your units offline, you will have to furnish a Redemption Request Form in addition to the fee charged for redemption to the Registrar or the Asset Management Company. Once you submit these documents, the amount shall be credited to your bank account. If you wish to redeem the units of your mutual fund online, you will have to visit the website of the fund house and enter the ‘Online Transaction’ page, use your PAN or portfolio number to log in and choose how many units you wish to withdraw from each scheme.
Yes. Mutual fund companies usually charge a fee called ‘exit load’ at the time of exiting from the scheme. The exit load charged by each company for each scheme can be different. However, most schemes have an exit load of 1% of the applicable NAV. This means that you will have to pay 1% of the NAV of the number of units you wish to withdraw.
In such a situation, the prevailing NAV of the scheme will be paid to you after expenses have been deducted. The Asset Management Company will send a detailed report that comprises all the necessary information regarding the winding process prior to the initiation of the procedure.
The Reserve Bank of India (RBI) defines a money market as a marketplace for the trading of short-term financial assets. Short-term financial assets are basically like substitutes for actual money. They facilitate borrowing and lending of short-term funds whose duration is less than a year. The instruments that are traded in such markets usually have high liquidity in addition to short maturity periods. Institutions such as non-banking financial corporations (NBFCs) and commercial banks as well as acceptance houses comprise money markets. Transactions in money markets are carried out in alternative instruments to cash or money, such as promissory notes, government papers, trade bills, etc. Moreover, transactions in money markets are done through media such as written or oral communication and formal documentation and not via brokers.For more information visit: money-market-instruments
Mutual funds have become increasingly popular in recent times because of the returns they offer in comparison with other traditional investment options. Mutual funds are basically, as the term suggests, an investment option that pool together the finances of investors who have mutual financial goals. Among the main benefits of investing in mutual funds is that investors have plenty of options to choose from and put their money in the instruments that can help them generate returns over a period of time. Investments in mutual funds are subject to market risks, but doing it through a reliable fund manager will ensure that you generate healthy returns.Planning to invest in mutual funds? check: Tips to invest in mutual funds
The Securities and Exchange Board of India (SEBI), has established a variety of guidelines to regulate investments in mutual funds. Operations in the mutual funds industry are expected to be carried out in compliance with these guidelines. KYC, or Know Your Client, as it is known in its extended form, has garnered much importance in recent years, especially in the mutual funds industry. Investors who wish to put their money into a fund or scheme will have to go through an identification process before making the investment. Financial institutions and intermediaries alike will obtain the information of potential investors, and verify their personal and contact details in accordance with the norms established by SEBI. KYC, under SEBI’s regulations, is required for new purchases, additional purchases, SIP (Systematic Investment Plan) registration, switching, and STP (Systematic Transfer Plan) registration.For detailed guidelines visit: SEBI guidelines for KYC registration agencies in India