To many people, Mutual Funds can seem complicated or intimidating. We are going to try and simplify it for you at its very basic level. Essentially, the money pooled in by a large number of people (or investors) is what makes up a Mutual Fund. This fund is managed by a professional fund manager.
It is a trust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities. Each investor owns units, which represent a portion of the holdings of the fund. The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value or NAV. Simply put, a Mutual Fund is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
Classification based on maturity period
Open-ended funds can be purchased or redeemed at any point of time at Net Asset Value (NAV) based prices. They are available for subscription throughout the year. These funds do not have a fixed maturity date. Liquidity is the key feature of open-ended funds.
Close-ended funds have a defined maturity period, usually between five to seven years. The units of closed-ended funds can be bought only during a specified period at the time of the initial launch. SEBI insists that all close-ended funds should provide a liquidity window to its investors. These funds are required to be either listed on a recognised stock exchange or provide periodic repurchase facility to investors.
Interval funds combine the features of open-ended and close-ended funds. These funds might trade on stock exchanges or be open for sale or redemption at predetermined intervals on the prevailing Net Asset Value (NAV).
The aim of Equity/Growth funds is to provide capital appreciation over the medium to long term. These funds invest a major part of their corpus in equity securities. These types of funds are suitable for investors with a long term outlook and higher risk appetite. They provide different options like growth option, dividend option etc. to investors.
The main objective of debt/income funds is to provide regular and steady income to investors. These funds invest in fixed income securities such as bonds, corporate debentures, government securities (G-Secs), money market instruments, etc. Debt funds are suitable for investors whose main objective is safety of capital with moderate growth. These funds are not affected by fluctuation in equity markets. However, the funds’ NAVs are affected because of change in the interest rate.
The aim of balanced funds is to provide both, regular income and capital appreciation to investors. This type of fund invests in equity and fixed income securities as per the proportion indicated in the fund’s offer document. Balanced funds are suitable for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds’ NAVs are also affected by fluctuations in share prices but are less volatile than those of the pure equity funds.
The aim of money market funds is to provide liquidity, preservation of capital and moderate income to investors. These funds invest in short-term maturity instruments such as treasury bills, certificate of deposit and commercial paper and call money market-based instruments. These funds are ideal for investors looking for moderate returns on their surplus funds. The returns on these funds do not fluctuate much with the changes in prevailing interest rate in the market.
Gilt funds invest exclusively in government securities. Although these funds carry no credit risk, changes in interest rates and other major macro-economic factors of a country have a significant impact on the NAV of these funds.
Index schemes replicate the performance of a particular index such as the BSE Sensex or the S&P CNX Nifty. The portfolio of these schemes consists of only those stocks that constitute the index and the weightage assigned to each stock is identical to the stock’s weightage on the index. Hence, the returns from these funds are more or less similar to those generated by the index and variations, if any, in the percentage change in NAV of the index fund to that of the Index, is measured by tracking error.
Exchange traded index funds are a variation of index funds. They trade on the stock exchanges just like equity securities and can be purchased or sold on the exchange at a quoted price just like any other equity security.
Sector funds invest in the securities of only those sectors or industries as specified in the offer document. The returns in these funds are dependent on the performance of the respective sector/industries. Sector funds are riskier as their performance is dependent on one or two particular sectors though the same is also responsible for higher returns generated by these funds.
Fund of funds (FoF) invest in other mutual funds. These schemes offer the investor an opportunity to diversify risk by distributing investments across assets. The underlying investments for FoF are the units of other mutual fund schemes either from the same mutual fund or other mutual fund houses.
Under the growth option, dividends are not paid to unit holders. Under this option, the income continues to remain invested in the scheme and is reflected in the NAV of the units. Investors can realise capital appreciation through an increase in NAV of their units by redeeming them.
Under this option, dividends are paid out to the unit holders. However, the NAV of the unit falls to the extent of the dividend paid out.
The dividends that accrue on funds are re-invested back into the fund and the investor is issued additional units proportional to the dividend amount.
Mutual funds provide the benefit of professional management as the investors money is managed by qualified fund managers. Investors who do not have the time or expertise to manage their own portfolio invest in mutual funds.
Mutual funds provide the benefit of diversification across different sectors and companies. They widen investments across various industries and asset classes. Thus, by investing in mutual funds, you can avail of the benefits of diversification and asset allocation without investing the large amount of money that would be required to create an individual portfolio.
Mutual funds are usually liquid investments. Unless they have a pre-specified lock-in, your money will be available to you anytime you want. Normally, funds take a few days to return your money. Since they are well integrated with the banking system, most funds can send money directly to your bank account.
Mutual funds offer a range of plans, such as regular investments, regular withdrawal and dividend reinvestment plans. Depending upon one’s preferences and expediency one can invest or withdraw funds, accordingly.
Since mutual funds have a number of investors, the fund’s transaction costs, commissions and other fees get reduced to a considerable extent. Thus, owing to the benefits of a larger scale, mutual funds are comparatively less expensive than direct investment in the capital markets.
Mutual Funds provide investors with updated information pertaining to the markets and schemes through fact-sheets, offer documents and annual reports.
Mutual funds in India are regulated and monitored by the Securities and Exchange Board of India (SEBI), which endeavours to protect the interests of investors. Mutual funds are required to provide investors with regular information about their investments, in addition to other disclosures like specific investments made by the scheme and the proportion of investment in each asset class.
These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.
A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset Management Company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.
SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme.
Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Now a days, the post offices and banks also distribute the units of mutual funds. However, the investors may please note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes and no assurance of returns is given by them. The only role of banks and post offices is to help in distribution of mutual funds schemes to the investors.
Investors should not be carried away by commission/gifts given by agents/distributors for investing in a particular scheme. On the other hand they must consider the track record of the mutual fund and should take objective decisions.non-resident Indians can also invest in mutual funds. Necessary details in this respect are given in the offer documents of the schemes.
The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published in newspapers. The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) www.amfiindia.com and thus the investors can access NAVs of all mutual funds at one place.
The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an effect on the yield and other useful information in the same half-yearly format.
The mutual funds are also required to send annual report or abridged annual report to the unit holders at the end of the year.
Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis. Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds.
Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc.
On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme.
Yes. The nomination can be made by individuals applying for / holding units on their own behalf singly or jointly. Non-individuals including society, trust, body corporate, partnership firm, Karta of Hindu Undivided Family, holder of Power of Attorney cannot nominate.
An SIP or a Systematic Investment Plan allows an investor to invest a fixed amount regularly in a mutual fund scheme, typically an equity mutual fund scheme.
One, it imparts financial discipline to your life. Two, it helps you to invest regularly without wrestling with market mood, index level, etc. For example, if you are supposed to put a fixed amount every month in a mutual fund scheme, you need to find time to do it. When you have the time, you might be worried about market conditions and think of postponing your investments. Or you might be thinking of investing more if the mood is optimistic. SIP puts an end to a ..
SIPs help you to average your purchase cost and maximise returns. When you invest regularly over a period irrespective of the market conditions, you would get more units when the market is low and fewer units when the market is high. This averages out the purchase cost of your mutual fund units.
You can start investing in a mutual fund scheme via SIP with a minimum of Rs 500.
Yes, you can. Though the most popular SIP is investing a fixed amount every month, investors can customise the way they put money via SIPs. Many fund houses allow investors to invest monthly, bi-monthly and fortnightly, according to their convenience.
Apart from this, Step-up SIPs allow investors to increase the SIP amount periodically. ‘Alert SIP’ is another form of the regular systematic investment plan which sends an alert to the investor to buy more when the markets are down.
In case of the ‘perpetual SIPs,’ investors don’t have to choose the end date of the SIP. Once the goal is met, the investors can stop the SIP by sending a written communication to the fund house.