Mutual Fund

What is a Mutual Fund?

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. It is essentially a diversified portfolio of financial instruments - these could be equities, debentures / bonds or money market instruments. The corpus of the fund is then deployed in investment alternatives that help to meet predefined investment objectives. 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.

What are the benefits of investing in a mutual fund?

A Mutual Fund is a 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 benefits of investing in mutual funds are as follows –
  • Access to professional money managers
  • Diversification
  • Liquidity
  • Tax Efficiency
  • Low transaction costs
  • Transparency
  • Well-regulated industry

What are the benefits of investing in Mutual Funds?

Mutual fund schemes may be classified on the basis of their structure and their investment objective
  1. By Structure
    • Open-ended Funds
    • Close-ended Funds
  2. By Investment Objective
    • Growth Funds
    • Income Funds
    • Balanced Funds
    • Money Market Funds
  3. Other Equity Related Schemes
    • Tax Saving Schemes
    • Index Schemes
    • Sectoral Schemes

What is a Systematic Investment Plan (SIP)?

Here the investor is given the option of preparing a pre-determined number of post-dated cheques (or a direct debit of the bank account) in favour of the fund. The investor is allotted units on a pre-determined date specified in the Offer Document at the applicable NAV.

What is Net Asset Value (NAV)?

Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.

Typically, NAV is calculated by summing the current market values of all securities held by the fund, adding in cash and any accrued income, then subtracting liabilities and dividing the result by the number of units outstanding.

For example:
 
                        Total Value of Securities (Equity, Bonds, Debentures etc.)	        INR1,000
                        Cash	                                                                                INR1,500
                        Liabilities	                                                                                INR500
                        Total outstanding units	                                                        100
                        NAV [(1000+1500-500)/100]	                                                INR20 per unit
                        

What are loads?

Load is a charge collected by a mutual fund when it sells units. It can be levied as an exit load (i.e., the charge is collected when the investor sells back the units). * In accordance with the SEBI circular no. SEBI/IMD/CIR No.4/168230/09 dated June 30, 2009, no entry load will be charged for purchase / additional purchase / switch-in accepted by the Fund with effect from August 1, 2009. Similarly, no entry load will be charged with respect to applications for registrations under Systematic Investment Plan/ Systematic Transfer Plan / Systematic Investment Plan Plus accepted by the Fund with effect from August 1, 2009. Schemes that do not charge any load are called No Load Schemes.

Can the sell price be different from the NAV?

The sell price of schemes can be different from the NAV due to exit loads. For example, if the current NAV of a scheme is Rs. 10 and the exit load is 1.5per cent then the effective sale price will be INR9.85.

What is a switch?

Some Mutual Funds provide the investor with an option to shift his investment from one scheme to another within that fund. For this option the fund may levy a switching fee. Switching allows the Investor to move his investment wholly or partly from one scheme to another to meet his changed investment needs, changed risk profile or changing circumstances during his lifetime.

What are the regulations that govern a mutual fund?

The process of setting up a Mutual Fund is initiated by a sponsor. The sponsor creates a Trust (the fund) under the Indian Trust Act. The Trust in turn appoints an Asset Management Company (AMC). The trustees are responsible for safeguarding the interests of the investors in the Mutual Fund by ensuring that the operations of the fund comply with the relevant regulations. The fund also has to be approved by the market regulator, which is the Securities and Exchange Board of India (SEBI).

What is an Asset Management Company (AMC)?

Every Mutual Fund has an Asset Management Company (AMC) associated with it. The AMC is responsible for managing the investments for the various schemes operated by the Mutual Fund. The Trust oversees the performance of the AMC. The AMC employs professionals to manage the funds. The AMC may be assisted by a custodian and a registrar. The service of AMCs are obliged to make investments in compliance with SEBI regulations.

Who is a custodian?

The custodian is responsible for the possession, handling and safekeeping of all securities purchased by the Mutual Fund.

How are mutual funds different from Portfolio Management Schemes?

In Mutual Funds, the investments of investors are pooled to form a common investible corpus and the gain/loss to all investors during a given period are same for all investors. In the case of portfolio management schemes, the investments of a particular investor remain identifiable to him. Here the gain or loss of investors will be different from each other.