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Mutual Fund - FAQs

    IndianMoney.com Research Team | Wednesday, April 08,2009, 03:40 PM
 

1. What is a Mutual Fund?


Mutual Fund is a vehicle for investing in stocks and bonds. It pools the money of several investors and invests this in stocks, bonds, money market instruments and other types of securities.

Buying a mutual fund is like buying a small slice of a big pizza. The owner of a mutual fund unit gets a proportional share of the fund. gains, losses, income and expenses. Each mutual fund has a specific stated objective, which is specified in the fund's prospectus, which is the legal document that contains information about the fund, its history, its officers and its performance.

2. Explain concept of mutual fund and how it works?


A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund.

3. Describe the organization of mutual fund industry?


The organization of mutual fund industry could be explained in the following manner :
In a mutual fund industry, we can find the following players:
  • Unit holders
  • Sponsors
  • Trustees
  • Mutual Funds
  • Custodian
  • AMC
  • AMFI
  • Transfer Agent
  • Custodian

4. What are the different types of Mutual funds by asset class?


Funds can be classified by the kind of asset classes invested in :

Fund Objective

What the fund will invest in

Equity (Growth)

Only in stocks

Debt (Income)

Only in fixed-income securities

Money Market (including Gilt)

In short-term money market instruments (including government securities)

Balanced

Partly in stocks and partly in fixed-income security

5. What are the options available across Mutual Funds in terms of time horizons and liquidity?


Mutual Funds can be across the following types :

Open Ended: These are funds that you can buy and sell anytime throughout the year.

Close Ended: These are funds that are open only for a specific period after which you'd have to buy them from the secondary market. For e.g. NFOs.

Interval schemes: These schemes combine the features of open ended and close ended schemes and are available for purchase or sale during a select period

6. What are the different kinds of Investment objectives in MF Schemes?


Growth: These are highly aggressive schemes and invest mainly in equities.

Income: Income funds invest in medium to long-term debt instruments. These are low risk and aim at a fixed current income.

Money market schemes: These schemes invest in short term debt instruments and are highly liquid.

Balanced: Also called Hybrid funds, these are a combination of growth, debt and money market funds.

Tax saving: These are equity linked saving schemes that offer tax benefits under Section 80 C and have a compulsory lock in period of three years.

Special schemes: These are select funds that aim at replicating the performance of an index.

7. Which was the First Mutual Fund to be set up in India?


Unit Trust of India is the first Mutual Fund set up under a separate act, UTI Act in 1963, and started its operations in 1964 with the issue of units under the scheme US-64.

8. Which are the various types of mutual funds?


The characteristics of Mutual Fund Schemes are divided in to two broad categories, Structure Based and Investment Objective Based and/or combination of both. Structure Based Schemes are those funds that invest in specific sectors that fall under this category.

9. What are the advantages of Mutual Funds?


The advantages of Mutual Funds can be briefly described with the below mentioned points :
  • Portfolio diversification
  • Professional Management
  • Reduction/Diversification
  • Reduction of transaction costs
  • Liquidity
  • Convenience and flexibility
  • Safety
  • Tax Benefits
  • Choice of schemes
  • Well regulated

10. What is an AMC?


Asset Management Company (AMC) is the company that manages funds and assets acquired from these funds on behalf of the investors/ unit holders of mutual funds schemes.

11. How different are mutual funds from other investment avenues?


In case of other investment avenues such as fixed deposits, post office savings, PPF you're almost certain about the amount you would be receiving on maturity. The risk is low and you receive returns accordingly.

But with mutual funds the returns are not assured since they are linked to the stock market. Stock market investments would mean taking on high risk. But since mutual funds spread the risk among several investors like you, individually you would take on low risk and rake in stock market related returns Also since the AMCs are managed by professionals equipped the best of research and capital market related tools the risk on your investment in the Mutual funds is minimized to a great extent.

12. What is NAV?


Net Asset Value (NAV) is the market value of the assets per unit after deducting the liabilities. It is calculate at the end of every business day.

13. What does an Applicable NAV indicate?


The applicable NAV is the Net Asset Value per Unit at the close of the Working day on which a request, complete in all respects is accepted and received before the cut-off time for the particular scheme. Otherwise, the applicable NAV would be the one for the next business day.

14. How is NAV calculated?


{(Market Value of the Scheme's Investments) + Other Assets (including accrued interest) + Un amortised Issue Expenses (only in case of schemes launched on a load basis) - All Liabilities except unit capital and reserves)} Divided by, the number of units outstanding at the end of the day.

15. What does Net Asset Value (NAV) of a scheme denote and what is the basis of its calculation?


Net asset value on a particular date reflects the realisable value that the investor will get for each unit that he his holding if the scheme is liquidated on that date. It is calculated by deducting all liabilities (except unit capital) of the fund from the realisable value of all assets and dividing by number of units outstanding.

16. How often is the NAV announced?


In case of Open-ended funds the NAVs are announced daily but in case of close-ended funds they are announced on a weekly basis.

17. What is Sales/Purchase price?


Sales/Purchase price is the price paid to purchase a unit of the fund. If the fund has no entry load, then the sales price is the same as the NAV. If the fund levies an entry load, then the sales price would be higher than the NAV to the extent of the entry load levied.

18. What is redemption price?


Redemption price is the price received on selling units of open-ended scheme. If the fund does not levy an exit load, the redemption price will be same as the NAV. The redemption price will be lower than the NAV in case the fund levies an exit load.

19. What is a repurchase price?


Repurchase price is the price at which a close-ended scheme repurchases its units. Repurchase can either be at NAV or can have an exit load.

20. What are NFOs?


New Fund Offerings (NFO) are new schemes introduced by mutual fund companies from time to time. During the launch period the fund unit is available for Rs.10 with the relevant loads.

21. What are loads and its types?


Loads are the fee charged by the mutual fund company for entering or exiting a fund.

There are 3 types:
Entry load: this is paid when an investment is made in a scheme
Exit load: this is paid when a redemption is carried out from a scheme and
Contingent Deferred Sales Charge (CDSC): this is an Exit charge payable by the Investor for a no load scheme
A Fund Scheme is the fund itself and based upon the investment objectives. It may have several plans pertaining to growth or distribution of dividends.As per SEBI rules mutual funds cannot guarantee you assured returns.

22. What are Investment Plans?


The term 'investment plans' generally refers to the portfolio flexibility that the funds provide to investors, offering different ways to invest or reinvest. The different investment options are an important consideration in the investment decision, because they determine the flexibility available to the investor.

Some of the investment plans offered by mutual funds in India are :
  • Dividend Reinvestment Plan
  • Systematic Investment Plan (SIP)
  • Systematic Withdrawal Plan (SRP)
  • Systematic Transfer Plan (STP)
  • Growth Plan and Dividend Plan

23. What is SIP?


Systematic Investment Plan (SIP) enables an investor to invest a fixed sum periodically, thereby letting the investor save in a disciplined and phased manner. Through SIP you are able to get more or less units of a fund over a period of time with the investment amount remaining constant.

For instance, let us say you decide to invest Rs 500 every month in a mutual fund scheme. You could receive 25, 24 or 22 units each month respectively depending on the highs and lows of the market. This turns out to be beneficial in the long run as your per unit cost gets averaged out.

If you're planning a SIP note that the minimum amount you can invest is Rs 500. Off late with the change in rules mutual fund companies also allow you to invest Rs.100 or Rs. 50 (micro SIP) but for a minimum lock in period of three years.

24. What is SWP?


Systematic Withdrawal Plan (SWP) allows the investor to make systematic withdrawals from his fund investment account on a periodic basis, thereby providing the same benefit as regular income. The investor is usually required to maintain a minimum account in his fund account under this plan.

25. Are SWP different from Monthly Income Plans?


The basic difference between SWPs and Monthly Income Plans is that, SWPs allow investors to get back the principal amounts invested while Monthly Income Plans allows paying only the income part on a regular basis.

26. What is a STP?


Systematic Transfer Plans allow the investor to transfer on a periodic basis a specified amount from one scheme to another within the same fund family - meaning two schemes managed by the same AMC and belonging to the same mutual fund family.

27. What is a Growth and Dividend Plan?


A growth plan is a plan under a scheme wherein the returns from investments are reinvested and very few income distributions, if any, are made. The investor thus only realizes capital appreciation on the investment. This plan appeals to investors in the high income bracket. Under the dividend plan, income is distributed from time to time. This plan is ideal to those investors requiring regular income.

28. What is Rupee Cost Averaging?


Rupee Cost Averaging reducing market risk through systematic purchase of a given security. In other words instead of investing a lump sum in a mutual fund scheme you adopt a disciplined approach to investing a certain fixed amount every month at pre-determined intervals. That way your investment amount remains fixed while the number of units you receive would be more or less depending on the fluctuations of the market. And that brings down your average cost. Such a methodology insulates you against market risks.

29. What are the factors that influence the performance of mutual funds?


The performances of Mutual funds are influenced by the performance of the stock market as well as the economy as a whole. Equity Funds are influenced to a large extent by the stock market. The stock market in turn is influenced by the performance of the companies as well as the economy as a whole. The performance of the sector funds depends to a large extent on the companies within that sector. Bond-funds are influenced by interest rates and credit quality. As interest rates rise, bond prices fall, and vice versa. Similarly, bond funds with higher credit ratings are less influenced by changes in the economy.

30. Who is a Fund Manager?


Fund managers are experts who have their pulse on the market and decide on the right pick of stocks, debentures, debt instruments, government securities among others to maximize gains on your investment.

31. What is ELSS?


Equity Linked Saving Schemes (ELSS) are tax saving mutual fund schemes that enable the investor to get tax benefits under Section 80C of the Income Tax Act but with a lock in period of three years.

32. What is an offer document?


An offer document provides details about a new mutual fund scheme entering the market. It provides information on the features of the scheme, risk factors, loads - entry or exit load, the track record of the mutual fund company among others

33. What is KIM?


KIM or Key Information Memorandum provides detailed performance related information on the several schemes of a mutual fund company. So before you invest in any scheme you can have a look at the various scheme performances and take an informed decision. But always remember that a fund's past performance is no guarantee of its future success.

34. What is the basis for choosing the right fund?


The right fund can be chosen by you on the basis of;
  • Age
  • Time horizon: The amount of time you plan to remain invested)
  • Risk profile: The amount of risk you are comfortable taking with your investments)
  • Asset allocation: Diversifying your investments to bring down the inherent risk in each asset class for instance equities, debt, bonds to name a few
  • Background of the mutual fund company
  • The track record of the scheme over a period of time.

35. What is the turnaround time for NAV and redemption proceeds?


If your mutual fund purchase request is made before 12 noon you get the NAV of the same day. After 12.00 pm the NAV applicable would be that of the next day. Expect your redemption proceeds to hit your bank account in around four to five days.

36. Within how much time will I receive mutual fund statement?


You'll receive the mutual fund statement from the respective AMC as an email in around three days. Expect a physical copy of the same in about 10 to 15 working days.

37. Can I switch from one mutual fund scheme to another? How often can I do that?


Yes. You can switch over from one Mutual Fund Scheme to another. In other word you can sell one scheme and buy another scheme online. You may make any number of switches from one mutual fund to another. But take into account the entry and exit loads.

38. Will I get a portfolio of what the mutual fund company is buying and selling?


Information on portfolio details is send to investors on a regular basis by Mutual Fund Companies. In case you've not received the same, you may access the portfolio details on the respective mutual fund website.

39. How do mutual funds diversify their risks?


An investor can reduce his total risk by holding a portfolio of assets instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced.

40. What is the difference between an open ended and close ended scheme?


Open ended funds can issue and redeem units any time during the life of the scheme while close ended funds cannot issue new units except in case of bonus or rights issue. Hence, unit capital of open ended funds can fluctuate on daily basis while that is not the case for close ended schemes. Other way of explaining the difference is that new investors can join the scheme by directly applying to the mutual fund at applicable net asset value related prices in case of open ended schemes while that is not the case in case of close ended schemes. New investors can buy the units from secondary market only.

41. What is the difference between mutual fund schemes and portfolio management schemes?


In mutual funds, the investments of different investors are pooled to form a common investible amount and gain/loss to all investors during a given period are same for all investors while in case of portfolio management scheme, the investments of a particular investor remains identifiable to him. Here the gain or loss of all the investors will be different from each other.

42. Can mutual fund investments assumed to be risk-free?

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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