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    Mutual Funds

    A mutual fund is a financial instrument which draws money from a plethora of investors. This common fund is created with mutual contribution of multiple investors in a variety of assets and securities including debts, equities, government securities, liquid assets like funds, bonds, and others. Since all the gains, rewards, risks, profits, and losses resulting from or pertaining to this type of fund is shared by all the contributors according to their investment proportion, it is named as a mutual fund.

    In other words, a mutual fund can be described as a trust having its own sponsors. Such funds are registered with Securities Exchange Board of India (SEBI) that is responsible for approving the Asset Management Company (AMC) that manages the fund. The trustees ensure that the fund is compliant with all the regulations set by SEBI.

    Mutual Fund Types

    The mutual fund investors are blessed with different types of investment opportunities based on their asset class, investment objective, and structure. Here are the different types of mutual funds in India:

    Based on Asset Class

    Mutual funds can be segregated into the following types based on asset class:

    • Equity Funds- These funds capitalise the money in the equity shares and stocks of various companies. Though this sort of investment involves high risk, the possibility of getting a huge return in such funds is more.
    • Debt Funds- Debt funds invest in government bonds, company debentures, and other fixed income instruments with an objective of providing fixed returns to the investors. This is why these funds are considered to come with very low risk and fixed returns.
    • Money market funds- In this type of fund, the money will be invested in liquid assets like CPs, T-Bills etc. These investments are considered to be safe and best for investors who want a quick and moderate return from their investment.
    • Balanced or Hybrid Funds- These funds capitalise in a diverse range of high risk and low risk asset classes to balance the risk as well as the return. The proportion of equity is more than debt in certain cases while it is the opposite in others. By distributing your money among multiple securities, it creates a balance between the risk and the return.
    • Sector Funds- Such funds make investment only in one specific sector. Sector funds like the infrastructure funds capitalise only in the companies and instruments that are related to the infrastructure sector. As a result, the returns from this type of funds are limited to the performance of that particular sector. However, the associated risk in such schemes is dependent on the nature of the chosen sector.
    • Index Funds- The index funds are those funds that capitalise in assets to imitate the performance and the returns of any specific index. For example, purchasing the shares which represent the BSE Sensex.
    • Tax Saving Funds- These funds mainly invest in equity shares and all the investments made in this type of fund are eligible for tax benefits under the Income Tax Act. Though these funds come with high associated risk, if the performance of the fund is good then the chances of getting high returns is high as well.
    • Fund of Funds- These funds capitalise in other mutual funds and give good returns if the targeted fund does well in the stock market.

    Based on Structure

    Types of mutual funds based on the structure are detailed below:

    • Open-Ended funds: These funds are known as open-ended because these units can be purchased and redeemed at any given point of time. Investors prefer these type of funds because they can encash their unit in real money as per their wish and preferences.
    • Close-Ended Funds: These funds are called close-ended funds as these can be purchased only during the initial offer period. After that the units will be locked and can only be redeemed after a predetermined maturity date. These funds are often listed on the stock exchange to bring liquidity in the sector.

    Based on Investment Objective

    On the basis of the investment objectives, there are 5 different types of mutual funds which are as follows:

    • Aggressive growth funds
    • As the name suggests, this type of mutual fund comes with the optimum chance of achieving sudden growth compared to other types of funds. The growth of these funds is really aggressive and its value increases at a quick speed. Investors who are investing in a mutual fund with an intent of getting very high returns mostly invest in this type of fund. But the risk factor associated with such funds is immensely high as there is a sudden spur in their growth. Funds which have a sudden rise in their price appreciation also lose their value at a high speed when the economy faces any instability or downfall. Persons planning to invest their money for a short tenure of 5 years with a long-term investment objective are the ideal ones to invest in this type of mutual fund. This fund is not recommended for investors with an objective of conserving capital and those who are not capable of taking the loss of their investment value.

    • Growth Funds
    • In growth funds, upon investment, the growth receives higher returns. The investment portfolio will be a combination of small, medium, and large-sized corporations in the investment portfolio of the investor for making an investment in a big-scale stable corporation. But along with that, when you invest in a growth fund a small part of the funds will also be invested in a new small-scale startup. Also, since a growth fund is based on growth investment objective, the investment is made in the growth stocks. The profit derived from the fund’s growth is not paid to the investor as a dividend, instead, it is used to make further profits on the investment. Investors who hold on to the growth funds most often receive good returns on their investment.

    • Income Fund
    • Income funds capitalise on various fixed income securities and this is why these give a consistent income to the shareholders. Retired persons willing to derive regular income are the most ideal investors for this fund as they will get dividends on a regular basis. The investments in this type of fund are made in fixed deposits of companies, debentures, and several other securities which the fund manager thinks to be perfect to get regular income for the investor. In spite of being a stable investment option, the income funds come with moderate risk as any kind of price fluctuation or instability is likely to affect the prices of its bonds and shares. Such funds are also vulnerable to the inflation rate.

    • Balanced Funds
    • An amalgamation of the growth and the income fund, the balance fund has multiple investment objectives to achieve. This fund pays equal attention to providing the investors with ongoing income while offering them immense growth opportunity. It specifically targets to materialise multiple goals that the investors usually want to attain their investment. While the stability of such funds is low to moderate, its growth and income potential are moderate.

    • Money Market Mutual Funds
    • The main objective of money market funds is to maintain capital prevention. As such you need to be watchful and alert after investing in this type of fund. There is little chance of gaining profits in this sort of fund even though the possibility of producing higher interest rate than bank deposits is more. The risk factor associated with such funds is minimal. Also, the money market funds due to their high liquidity factor allow the investors to modify their strategy of investment whenever they want.

    Mutual Funds

    Mutual Fund Advantages

    Investing in mutual funds is a very popular option in India and this investment channel is getting more and more popularity due to the new funds and schemes that are launched in the market on a regular basis. Here are some of the vital reasons why people these days are more inclined towards investing in mutual funds:

    • Professional management- Professional managers are the persons who manage and look after mutual funds in the asset management companies. Using their expertise and ability to manage risks, these managers not only reduce the risk of mutual fund investment but they also boost the returns for the investors. The investors receive great help from the managers to decide which type of asset classes they should invest in, which is otherwise very difficult for investors to understand as most of them have very little knowledge in fund investment.
    • Diversification of risks- The risk in mutual fund investment is diversified by investing in a combination of assets and securities. When an investor invests in a wide variety of securities and assets, there is rarely any chance that all the assets will perform badly. While an investor has some loss on a particular asset, his/her loss gets compensated by the profits made from the other stocks. As a result of this diversification of assets, the risks get reduced to a great extent.
    • Reasonable investment alternative- Contributing in mutual funds is a very good investment option for people from low-income groups as well as for those who are not in a position to invest a large sum of money in one go in direct equity or other securities requiring high preliminary payment. Moreover, as the cost of transaction is divided among multiple investors, the individual cost is relatively low.
    • Well-organised investment- As the mutual fund offer document clearly specifies the targeted investment assets, being an investor you clearly know in which assets your money is invested. This helps you to make contributions in a well-organised and focussed manner. Moreover, these types of funds give the investors access to some specific securities which are not otherwise available for direct investment. For example, foreign securities or sectors are barred for individuals.
    • Unlimited investment option- The investors are provided with the opportunity of investing their money in a wide range of secured options like regional funds, index funds, equity funds, money market funds, debt funds, sector funds, fund of funds, etc. This wide variety of assets not only help you to diversify your portfolio but saves you from the risk of depending on any particular type of asset class.
    • Quick purchase and sale option- If the investors are investing without any lock-in period, then they can sell the fund units anytime at the prevailing NAV or unit prices. This liquidity of mutual funds allows the investors to purchase and redeem their fund units whenever they want to.
    • Tax relief- Paying tax is a huge burden and keeping this under consideration certain mutual fund schemes are specially designed to offer tax benefits to the investors. For example, investments made in the equity-linked saving schemes or ELSS are eligible for tax deduction benefits.
    • Best return- Mutual fund schemes are specially designed to help the investors get maximum return on their investment. Investors can diversify their investment in medium to long-term plans and get the expected return keeping the risk factor within a manageable range.
    • Government regulated investment- Since SEBI (Securities Exchange Board of India) manages all the mutual funds and regulates their dealings, the investors can relax as their investment is under the purview of a government regulatory body.
    • Ease of tracking- It is not easy for the investors to track each and every investment portfolio individually. To make the process easier, a detailed and clear statement of the investments are provided to the investors so that they can keep track of their invested amount on a regular basis.
    • Small investment option- SIP (Systematic Investment Plans) allow the investors to contribute small sum at regular intervals. This is a very convenient option for people who cannot afford to do huge investments at one go. Due to the availability of this option, people from all income levels can invest in mutual funds at a minimum amount of Rs.500.
    • Fund switching facility- There are various funds which offer investors the flexibility of switching between funds or schemes for availing better schemes as well as better returns. This facility enables the investors to shift their investment wholly or partially whenever they want in order to avail the maximum output.

    Mutual Fund Eligibility:

    Mutual funds welcome every type of investor for investing in various schemes. Some of the entities that are eligible for investing include Partnership Firms, QFIs, Non-Banking Financial Institutions, registered FIIs, Cooperative Societies, NRIs, HUFs, and PIOs. This is not a complete list, rather these are some of the most common types of mutual fund investors in India.

    How to Invest in Mutual Funds?

    With so many mutual funds available in the market, it has become extremely easy for people to invest in such funds. The best thing is, there is no minimum limit in mutual fund investment. A person can invest as low as Rs.500 based on his/her financial condition and capability. Here is how you can invest in a mutual fund:

    • Agents: The mutual fund agents or brokers are specially trained professionals who know how to approach people and enrich them with all the details of the funds to help them take an informed decision. Apart from helping the investors with process application, such people also deal with other associated issues like fund cancellation, redemption, transfer of the units and several other dealings of the company. However, when you take help of the agents while making the investment, an extra agent commission of up to 6% gets added to the purchase price of the fund units.
    • Direct: If you have good investment knowledge and are confident about your investment skills, you can avoid taking the help of agents and invest directly with the mutual fund company. This can be done either by visiting the company or online through the company’s web portal. For investing directly, download/collect the form from the company’s website/office, duly fill it with all required information, and submit. Alternately, for conducting the process online, you need to submit the form along with all required documents online and continue with the proceedings.

    Applying Mutual Funds Online

    Due to several reasons, purchasing mutual funds online has become extremely easy these days. Here are the most vital reasons why the online method has become so popular among the mutual fund investors:

    • Easy and convenient- The mutual fund plans and schemes can be applied online anytime and anywhere based on your comfort. This ease and convenience of application is one of the vital reasons behind its popularity at present.
    • Easy to evaluate and compare- Apart from the website of the company, there are several other third-party websites where the investors can view and compare the various funds and schemes right before investing and can take an informed decision thereafter.
    • Inexpensive- Since online applications for mutual funds can be done directly by the investors, it costs them less, as they can cut off the cost that they would otherwise pay to agents or brokers for this purchase. In other words, when the commissions get deducted from the purchase cost, applying for the fund online turns out to be inexpensive for the borrowers.
    • Freedom of decision- When you apply to invest in a mutual fund online, you will get all the information and materials on the website of the insurance provider. This not only helps the investors to assess and evaluate their desired fund without any compulsion, there is very less chance of getting confused by the brokers and agents.

    Mutual Fund Fees & Structure

    The fees of mutual funds are categorised into two different classes namely the annual operating fees and the shareholder fees. The operating fees of annual funds generally range between 1-3% and are levied as an annual percentage of the funds which are under management. On the other hand, the shareholder fees are charged in the form of redemption fees and commissions and are directly paid by the investors while buying or selling their funds.

    The annual operation fees namely the management fee or the advisory fee along with its advisory costs are together known as the expense ratio. In other words, all these fees are summed up as the expense ratio of a fund. Apart from that, sales charge and commissions (also called a load of a mutual fund) is also calculated on the front-end or back-end. For example, fees for a mutual fund having front-end load are calculated after the purchase of the share, whereas, when the fund has a back-end load, the fees are calculated after the shares are sold by the investor or shareholder.

    However, sometimes no-load mutual funds without any sales charge or commission are also offered by the investment companies. The companies directly allot these funds instead of taking help of any secondary party for this purpose. There are a few funds which levy fees and penalties for withdrawing the amount early.

    Overall Understanding of Mutual Funds

    As already told, a mutual fund is one of the most popular means of investment at present. This is an investment scheme which is focussed on collecting money from the investors and capitalising that pool of money in various investment capitals, bonds, shares, and equities. The investors in mutual funds receive individual portfolios of bonds, equities, and several other types of securities. As such, each and every shareholder indirectly participates in the losses and gains of this type of fund.

    In mutual funds, investment is done in a number of securities which include bonds, stocks, financial market instruments and other assets. The funds are managed by professionals who skillfully plan the investments in order to generate income or capital gains for the investor. The portfolio of a mutual fund is designed to align with the investment purpose as mentioned in the fund prospectus.

    Since a mutual fund makes investments in numerous securities, its performance is assessed on the basis of the alterations in its total market capital. This means the total cap of the fund is usually based on the overall performance of its internal elements. The units/shares of a fund can be bought or redeemed as per requirement at NAV or NAVPS (the net asset value per share). The total market value of the securities present in the portfolio is divided by the total amount of the outstanding shares to gather the NAV of any particular fund.

    A mutual fund is not just an investment but it is actually like buying shares of an actual company. When an investor is investing in a mutual fund, he or she is actually purchasing a part of the company and its assets.

    Mutual funds derive money from the investors and later make use of that money to purchase securities in the form of stocks and bonds. It is on the basis of the performance of the securities that the value of the company is decided. Hence, in other terms, it can be said that an investor, while buying a share of a mutual fund, is actually purchasing the portfolio performance as everything depends on the performance of the securities. Since a majority of the mutual funds contribute to a number of securities, the shareholders or investors get the benefit of diversification at an extremely low price.

    For example, if you are an investor investing in just one particular stock right before the concerned company’s bad quarter, you are at a risk of losing all your money as your investments are made only in this single company. Whereas, if you plan to invest in the shares of a fund which owns a small part of a particular company then during the bad time of the company, you will lose only a fraction as the company that you have invested in is just a very meager part of the fund’s portfolio.

    Objectives of Mutual Funds Investment

    Mutual funds come with a set of specific goals and you can choose the funds based on your investment objectives. Your mutual fund investment objectives are taken into consideration by the manager of the fund while designing a fund portfolio and these objects act as the goals of the specific fund. Based on the purpose of investment the managers decide which bond and funds should be included in the fund portfolio and which should not be.

    For example, an investor having the objective of gaining long-term capital appreciation along with fulfilling other economic targets including retirement and child's education in foreign institutes will be suggested to invest in the equity market.

    How do the Mutual Fund Companies Function?

    The mutual fund companies are not real companies. Most of them have a virtual presence. These companies purchase plenty of stocks or bonds as suggested by the money manager or investment advisor. An expert firm or individual manages the portfolio of securities of an investor and is known as a fund manager. This person is hired by a board of directors and is responsible for allocating and managing the investments for deriving the best benefits for people who have purchased the shares. He or she also employs other persons having different skills and expertise to monitor the assets and decide the right time to sell them and gain profit. While some of the fund managers are the owners of the funds, some of them are not the owners.

    Direct vs. Regular Mutual Funds

    has been mandated by SEBI from 1 January 2013 that each and every mutual fund should be divided into two broad categories namely, the direct mutual fund and the regular mutual fund. Though these funds encompass the same scheme and are managed by the same fund manager in the same bonds and stocks, these have some differences which are as follows:

    • Direct scheme Direct mutual fund gives no commission to the broker or distributor from the investment of the shareholder. This kind of fund offers higher returns on the same fund.
    • Regular scheme The regular mutual fund offers commissions to the advisor, distributor, or broker from the investment amount. Hence, the investor receives lower returns on this type of mutual fund scheme.

    How to Overcome Mutual Fund Drawbacks?

      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.

      Solution:

      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.

      Solution:

      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.

      Solution:

      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.

      Solution:

      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.

      Solution:

      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 Fund Key Pointers

    The market is flooded with a wide variety of mutual funds each having its unique investment goals, growth as well as performance track. Hence, it is not easy to dip into the mutual fund ocean and pick out the gem that will make all your investment dreams come true. Before taking the decision of investing in any particular mutual fund, it is of utmost importance to check the attributes and benefits of all types of funds, compare them, monitor their performance, and then pick the most ideal one as per your requirement to gain the highest returns. Moreover, it is recommended that the investors should mix and match their investment options such as bonds, stocks, equities, etc. as per their individual preferences.

    Here are some of the key points that you being an investor must be careful about while strategising your mutual fund investment:

    • Diversify your fund portfolio
    • Diversification in a mutual fund is considered as a very important aspect, it is not only the key to fund investment but it minimises the risk as well. Dividing the investment between funds which deal with a wide variety of bond, stocks, money market securities, and equities is an ideal thing to do as a sudden change in the market will not drastically affect the investment value then. This will not only keep the risk at bay but will bring a variety in your investment and increase the chances of getting higher returns. It is always good to diversify in the same kind of securities as after a long duration it is likely to bring good returns for the investor. In case any of the sectors where you have made your investments are going through a rough patch, diversification will reduce the loss.

    • Be aware of inflation
    • People investing in mutual funds need to be careful about inflation as the performance of a fund is vulnerable to the rate of inflation. The money that you invest in the fund at present should be kept on hold and will be used by the money manager later whenever he/she will think it to be the right time to invest. But inflation is unpredictable and it can start rising high anytime without giving any prior notice. Hence, it is very important to keep the consequences of inflation under consideration while capitalising money in these types of funds. Even though several mutual funds in the recent past have gained popularity for retaining their value, due to inflation the profit outcome can be quite low.

    • Keep patience and wait for the right time
    • The rise and fall of shares or stocks are unpredictable and there is no surety which stock will be rising tomorrow and which will fall day after. As such it is of extreme importance for all the mutual fund investors to maintain their patience and keep themselves ready to confront any loss caused due to market fluctuations. If you are not in need of quick money, don't worry in case the value of the funds go down. Understand that the stock market which is low today will be up again and at that time you can make a high profit from your investment. It is not necessary that an under-performing stock will remain the same always, the value can suddenly go high as well. So, keep calm and give the stocks enough time to recuperate the loss.

    • Keep age under consideration
    • Investing in mutual funds brings a lot of profit when the investment is done for a very long period of time. This is the reason why young investors usually fetch a lot of profit from their investment. Contrarily, people who start investing at a relatively late age don't get much time to capitalise their investment resulting in lower profit margin. Moreover, investors who are nearing their retirement invest with an aim to safeguard their money from price drop due to market fluctuations. Hence, it is very important for the investors to keep their age under consideration while investing in the money market. There are various types and bonds and equities which the investor need to choose wisely while starting the investment.

      To know how much you should invest in the fund stocks more precisely, you can deduct your age from 100 and kickstart your investment with the final figure. While you are supposed to allocate the resulting number in equities, the rest of the amount will go to the debt asset class. As the age of the investor will keep on increasing, the final allocation in equities will also decline to reduce the risk factor associated with such investments. Even though this rule works really well for the beginners, you should also consider your financial goals, the age of retirement, life expectancy, and risk profile while capitalising your money in mutual funds.

    • Keep in mind your risk-taking capability
    • When you are deciding on the mutual fund that you want to invest in, you should consider your risk-taking ability as well. While investing don’t compromise with your capacity in the lure of profit gain as that might result in a loss in future. Moreover, if you are an investor nearing retirement first assess your capacity of bearing the cost of investment or loss if caused and then invest in the fund. Don’t be hasty in taking a decision, instead take a calculative decision. However, investors who are young in age have a lot of time in hand and can explore the market by taking risky investment decisions.

    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.

    1. Risk profiling
    2. 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.

    3. Risk analysing
    4. 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.

    5. Asset allocation
    6. 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.

    Mutual Funds - Related Terms

    Some of the common terms related to mutual funds are as follows:

    • Fund Units or Shares - The investors of a mutual fund make investments by buying the units or shares of the particular fund in which they are willing to invest. The more the number of units bought by the investors, the higher the investment is for them.
    • Net Asset Value - This is the value/price of a unit or price per share of the fund. It is actually the prime indicator of the performance of a mutual fund. Based on the performance of the fund, its NAV changes from time to time. During the purchase or sale of the fund units, the prevailing NAV is considered and the units are bought/sold/redeemed at the current value per unit.
    • Entry Load- This is the total amount that an investor has to pay at the time of purchasing the units of a mutual fund scheme. This is basically the entry fee that is charged by the fund management company when a person makes investments in a mutual fund.
    • Exit Load- The exit load is the penalty fee charged by the company for making an untimely exit from a mutual fund scheme. In other words, it is the amount that an investor is required to pay before selling the units or assets prior to the pre-decided time frame.
    • Offer document - The official document that formally summarises all the basic features and rules and regulations of a mutual fund is the offer document. The investment objective of a particular fund along with all the details of investments made in securities and asset classes are elaborated in the offer document. Apart from the terms and conditions, it contains information about its managing authority, the associated risks, performance history, and other financial matters. It is very important for an investor to go through the offer document carefully prior to the investment.
    • Assets Under Management (AUM): AUM is the overall market value of funds that are managed and handled by a particular mutual fund company.
    • Expense Ratio: As the word suggests, the expense ratio of a mutual fund is the total expense incurred by the fund when compared to the total assets that it acquires.
    • New Fund Offer (NFO): NFOs are the latest fund offers and schemes that are introduced in the market by the AMC. Since these new funds are launched at a special offer price, the investors can purchase these units at a relatively low price compared to that of the usual market price.
    • Redemption: When the fund units are sold or transferred or canceled, it is known as redemption.
    • SIP Investment- SIP or Systematic Investment Planning is a method of investing money in mutual funds in a small amount in periodic installments. By opting for this recurring investment vehicle, people can invest small amounts instead of a lump sum in the mutual fund on a weekly, quarterly, and monthly basis. This investment method is particularly beneficial for investors who want to invest small amounts on a regular basis for a long term.
    • Lump sum Investment: Lump sum mutual fund investment is the method of contributing a fixed amount of one-time money in a mutual fund. This type of investment is specially opted by people having huge money to invest. Retired persons or business entrepreneurs with massive capital usually choose such investments.
    • Equity Funds- Equity funds are growth funds which invest in the shares and stocks of companies particularly. Also known as stock funds, these funds have a mix of stocks and shares of diverse companies in their portfolio.
    • Debt Funds- This type of fund invest in a combination of fixed income securities such as government securities, treasury bills, money market instruments, corporate bonds and other types of debt securities. Such securities have a fixed date of maturity and pay a fixed interest rate. These are mostly opted by investors who don’t want to take much risk and are satisfied with a steady income.
    • Lock-in period- This is the period during which an investor is not allowed to sell a particular investment. In other words, during the lock-in-period, the investment of a person remains locked.
    • Index fund- An index fund specifically focuses on the purchase of securities matching or representing a particular index. The portfolio of such fund is designed in order to mimic or track the components of a specific market index.
    • Liquid Fund- This category of a liquid mutual fund is similar to the money market funds but doesn't have any lock-in-periods. It predominantly invests in money market instruments such as a certificate of deposits, commercial papers, treasury bills, and term deposits.
    • Income fund- Income fund is a type of mutual fund which essentially aims at providing current income instead of capital growth. The tendency of income fund is to contribute to stocks and bonds which collect high interest and dividends.
    • Floating rate debt- Type of bond or debt whose coupon rate undergoes changes based on the change in the market conditions.
    • Holding period- This is the duration or period for which an investor holds an asset. In other words, it is the time between the initial date of purchase of a security and the date of its sale.
    • Long-term capital gain- Profits derived from the sale of assets such as shares and securities which are kept on hold for a period of more than 12 months.
    • Short-term capital gain- Profits that an investor earns from the sale of assets like shares, stocks, and securities which were owned for less than a year.
    • Portfolio turnover rate- It is the rate levied on the change of the mutual fund portfolio every year.
    • Money Market fund- Mutual funds which capitalise especially in money markets like commercial bills, commercial papers, treasury bills certificate of deposit, and other RBI instruments. The lock-in period for this type of funds is a minimum of 15 days.
    • Switch- Certain mutual funds allow the investors to shift or switch from one investment scheme to another within that particular fund. However, the mutual fund companies charge a switching fee for making a switch within funds. An investor can either shift his whole investment from one scheme to another or can transfer it partially depending on his investment goals, risk profile, and other circumstances.
    • Interval Schemes- Interval schemes combine the features of both open-ended and closed-ended mutual funds. The units of these schemes can be traded either on the stock exchange or can be kept open for sale or redemption during the prefixed intervals at the NAV (Net Asset Value) related prices.
    • Offshore funds- These funds focus in making investments in offshore.foreign companies or corporations. The investors of such funds are NRIs and these are regulated as per the provisions of the offshore countries where these funds are registered. Such funds are regulated as per the directives of the Reserve Bank of India (RBI).
    • Systematic Withdrawal Plan- Systematic Withdrawal Plan or SWP in funds permit the investor to take out a fixed/variable amount from his/her fund scheme monthly, quarterly, semi-annually, or annually on a predetermined date. Such funds not only offer consistent income to the investors but these also provide good returns on the remaining amount.

    Mutual Fund - FAQs

    1. Why should I go for a mutual fund?
    2. A mutual fund gives better returns even with small investment plans. Compared to banks and other investment options the possibilities of making a profit is more in such funds. Moreover, with mutual funds, you will get the flexibility to increase or withdraw the fund at any given time.

    3. Is it profitable to invest in a mutual fund?
    4. Mutual funds are subject to market risk. As your money is invested in various stocks, drop in the price of one or two stocks won’t affect you that much. Hence, the chances of deriving profit from mutual funds are quite high compared to other types of investments.

    5. Can I invest in a mutual fund at any point in time?
    6. Yes, you can invest in a mutual fund any time without considering the state or condition of the market. The right time for investment should be based on your investment goals and not on the market condition.

    7. Is it safe to invest in mutual funds?
    8. Mutual funds are subject to market risk. But compared to all other types of investment plans mutual funds come with less associated risk with better returns.

    9. Is KYC required to initiate mutual fund investment?
    10. Yes, updating KYC for your mutual fund is absolutely necessary for creating your portfolio. It is one of the basic requisites that you need to fulfill before starting the investment.

    11. Do I need to update KYC for every mutual fund?
    12. Once you fill your KYC form it gets stored in the system. Hence, you needn’t do KYC updation formality for each of your mutual funds.

    13. Can I update KYC free of cost?
    14. Yes, you can update the KYC free of cost if you are doing it on your own. But if you approach any broker or agent for the same they might charge some amount to complete the process.

    15. Does mutual fund investment via a broker cost a lot?
    16. If you are investing directly then it will be free of cost. However, if you take the help of an agent then in most of the cases you have to pay a certain amount. But, there are some investment companies that allow investment in mutual funds free of cost as well.

    17. How to select the best mutual fund scheme?
    18. Mutual fund schemes are different for each individual on the basis of the following vital parameters:

      • Age
      • The amount of money you can invest
      • Duration
      • The time when you need the returns
      • Whether you want to save tax or not

      Depending on these 5 vital factors you need to choose the best mutual fund scheme for yourself.

    19. SIP vs lump sum which one is best for mutual fund investment?
    20. Investing in a lump sum plan is a long-term option. If you have a substantial amount of money in hand then is better to opt for the lump sum investment method. Contrarily, if you are willing to invest less amount of money, then it will be better to go for a SIP. In other words, you should decide the best one on the basis of your financial status. However, SIP investment is the most popular and recommended method in mutual fund investment.

    21. What is the maximum amount I can invest in SIP?
    22. The good news is that there is no maximum amount fixed for SIP investment plans. This means you can contribute any amount to SIP plans of mutual funds and enjoy the best return in future.

    23. What if I miss my SIP installment?
    24. Don’t worry even if you miss you SIP payment for a month. Your mutual fund account will still remain active. Just pay the missing month SIP installment along with that of the current month in the following month.

    25. Do all the mutual funds have SIP facility?
    26. Yes, each and every mutual fund comes with SIP facility. You can either start with small amount SIP plan or contribute a lump sum amount in one shot. The SIP amount can also be increased whenever you want to.

    27. How to minimise the SIP maturity period?
    28. Most of the mutual fund companies allow SIP starting from 6 months. So, you can plan accordingly and go for 6 months initially. For shortening the SIP maturity period you need to write to the company to stop the SIP before the next month SIP payment date. Post 6 months if you are contented with the outcome you can think about extending the period.

    29. How to renew the SIP maturity period?
    30. You just need to write to mutual fund company expressing your request to extend your maturity duration. It is better to go for the short duration of 6 months to 1 year in the beginning and when you are satisfied with the outcome you can go for an extension.

    31. How to know the status of my investment?
    32. Investors can track the status of their investments online. Concerned experts will not only let you know the status of your investment but will also study the scope of your investment.

    33. Is it possible to invest in mutual funds for 3-6 months?
    34. Yes, you can invest in mutual funds for a short duration of 3 to 6 months. For such short periods, you can either capitalise on liquid mutual funds or in ultra-short debt funds.

    35. Do I need to pay fees for all types of mutual funds?
    36. Yes, all mutual funds come with associated fees and charges. While there are some funds which don’t have any entry or exit load, an annual amount including distribution and service fees, management fees, and other administrative expenses are charged by all types of mutual funds.

    37. How to withdraw money or redeem your mutual fund unit?
    38. Redemption of mutual funds can be done both online and offline. For redeeming your fund offline, you need to submit a duly filled Redemption Request Form along with the desired redemption amount to the office of the AMC or Registrar. The form also needs to be duly signed by all the other holders. Once done, the redemption amount will get credited to your bank account.

      To redeem it online, log on to the 'Online Transaction' page of the mutual fund that you want to redeem and log into the same through your Folio/PAN number. Next choose the scheme, number of units or the desired amount and proceed with the transaction.

    39. How will I receive my redemption amount/proceeds?
    40. The redemption amount/proceeds will be sent to your registered bank account provided that you have given the IFSC code of the bank account. Moreover, the bank and the branch must have RTGS/NEFT facility to perform the transaction online. In case the fund house doesn't have complete details of your bank, you will receive the money in form of cheques.

    41. How much time will it take to get the redemption amount?
    42. The redemption amount for debt-oriented and liquid units will be paid to you within 1-2 working days, whereas for equity funds it will take up to 4-5 working days.

    43. Do I need to pay a penalty for early withdrawal of money from a mutual fund?
    44. Mutual funds charge a type of fee referred to as the exit load when the investor redeems units from the scheme. This penalty is levied only until a certain holding is attained in the scheme. The exit load for equity schemes extends for longer durations (in comparison to that of debt funds and liquid funds), as such schemes are suited for long-term investments. Exit load is usually charged as a percentage of NAV, flat or even on a pro rata basis for various holding periods. It is advisable for investors to plan the redemption in such a way that they do not lose out on a major chunk of the returns through exit load.

    45. Will my entire investment be at risk in a mutual fund?
    46. The money that you will contribute to a mutual fund will be invested in various stocks. Hence, there are almost zero chances that the price of all the stocks will crash down at the same time unless a countrywide economic crisis arises. To minimise the investment risk it is recommended that you invest in a diverse mix of stocks and equities.

    47. What is the procedure to invest in mutual fund?
    48. Investing in a mutual fund is simple. You first need to make your portfolio along with authentic KYC documents. In the next step, you have to buy the share or stock either from the company where you want to invest or from a broker/agent.

    49. What is the minimum rate of interest levied on a mutual fund?
    50. The rate of interest of a mutual fund depends on various factors. But, on an average, it ranges between 10% - 12%.

    51. Is there any investment limit in a mutual fund?
    52. The mutual fund SIPs start from as low as Rs.100 and can extend to any amount of your choice. The amount is also based on the share you invest in.

    53. How many different mutual fund schemes should I invest in?
    54. In order to reduce the risk of being extremely dependent on one single fund, it is suggested that you spread your investment across two or three preferable mutual funds matching your investment goals. It is better to make a 60:40 split if you are investing in 2 funds and a 40:30:39 split if you have planned to invest in 3 funds.

    55. I am a non-resident Indian. Can I invest in mutual funds?
    56. Yes, you can invest in mutual funds even if you are an NRI. You will get all the details related to the fund in the offer document of the particular scheme that you are going to invest in.

    57. Can I appoint a nominee for my mutual fund investments?
    58. Yes, you can make a nomination for your investments in mutual funds. The nominee can be appointed both singly and jointly. However, non-individuals such as trust, society, partnership firms, body corporate, power of attorney holders, and Karta of Hindu Undivided Family are not allowed to make a nomination for their units of a mutual fund.

    59. What will happen to my money if the mutual fund scheme is wound up?
    60. If the mutual fund scheme is wound up, you will receive an amount based on the prevailing NAV after deduction of the expenses. A report containing all the necessary details about the winding process will be provided to you by the company before initiating the procedure.

    61. When can I expect to receive dividends or repurchase proceeds from my investment?
    62. A mutual fund despatches the dividend warrants to the unitholders within 30 days of the declaration of the dividend and the repurchase proceeds/redemption within 10 days from the day when the repurchase/redemption request was made by the investor.

      If the Asset Management Company fails to pay the redemption/repurchase proceeds within the specified time period, it has to pay the interest(15% currently) according to the rule of SEBI at regular intervals.

    63. What should I do if my fund is persistently performing bad?
    64. If the poor result of a fund persists, you must consider replacing it with another fund. The poor performance of a fund doesn’t necessarily reflect the expertise and management skill of an AMC. Rather it implies that the individual performance of the fund is poor.

    65. Can I redeem my mutual fund units anytime any day?
    66. Yes, if you have invested in open-ended mutual fund schemes, you can redeem the units on any business day and collect an amount pertaining to the prevailing market value within 3-5 days. However, if you have invested in a close-ended scheme you can redeem the units only after the predetermined date of maturity. After redeeming you can sell the units like stocks in the secondary market.

    67. When should I change my mutual fund investment plan?
    68. You should consider changing your mutual fund investment plan with the advancement of age. When you grow old it is recommended that you opt for a more conservative investment approach removing some of the riskier funds from your investment portfolio.

    69. Whom should I contact for complaint redressal?

    Latest picks on mutual funds 2018

    • What is a Money Market?

      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

    • What is a Mutual Fund?

      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

    • SEBI Guidelines for KYC Registration Agencies in India

      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

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