|
Q. What is a Mutual Fund? |
|
Mutual fund is a mechanism for pooling the resources by issuing units to the investors
and investing funds in securities in accordance with objectives as disclosed in
offer document. Investments in securities are spread across a wide cross-section
of industries and sectors and thus the risk is reduced. Diversification reduces
the risk because all stocks may not move in the same direction in the same proportion
at the same time. Mutual fund issues units to the investors in accordance with quantum
of money invested by them. Investors of mutual funds are known as unitholders. The
profits or losses are shared by the investors in proportion to their investments.
The mutual funds normally come out with a number of schemes with different investment
objectives which are launched from time to time. A mutual fund is required to be
registered with Securities and Exchange Board of India (SEBI) which regulates securities
markets before it can collect funds from the public. |
|
Q. How is a mutual fund set up? |
|
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 unitholders. 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. However, Unit Trust of India (UTI) is not registered
with SEBI (as on January 15, 2002). |
|
Q. What is Net Asset Value (NAV) of a scheme? |
|
The performance of a particular scheme of a mutual fund is denoted by Net Asset
Value (NAV). Mutual funds invest the money collected from the investors in securities
markets. In simple words, Net Asset Value is the market value of the securities
held by the scheme. Since market value of securities changes every day, NAV of a
scheme also varies on day to day basis. The NAV per unit is the market value of
securities of a scheme divided by the total number of units of the scheme on any
particular date. For example, if the market value of securities of a mutual fund
scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each
to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to
be disclosed by the mutual funds on a regular basis - daily or weekly - depending
on the type of scheme. 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. |
|
Q. What are the different types of mutual fund schemes? |
|
Schemes according to Maturity Period: A mutual fund scheme can be classified into
open-ended scheme or close-ended scheme depending on its maturity period. Open-ended
Fund/ Scheme: An open-ended fund or scheme is one that is available for subscription
and repurchase on a continuous basis. These schemes do not have a fixed maturity
period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related
prices which are declared on a daily basis. The key feature of open-end schemes
is liquidity. Close-ended Fund/ Scheme : A close-ended fund or scheme has a stipulated
maturity period e.g. 5-7 years. The fund is open for subscription only during a
specified period at the time of launch of the scheme. Investors can invest in the
scheme at the time of the initial public issue and thereafter they can buy or sell
the units of the scheme on the stock exchanges where the units are listed. In order
to provide an exit route to the investors, some close-ended funds give an option
of selling back the units to the mutual fund through periodic repurchase at NAV
related prices. SEBI Regulations stipulate that at least one of the two exit routes
is provided to the investor i.e. either repurchase facility or through listing on
stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.
Schemes according to Investment Objective: A scheme can also be classified as growth
scheme, income scheme, or balanced scheme considering its investment objective.
Such schemes may be open-ended or close-ended schemes as described earlier. Such
schemes may be classified mainly as follows: Growth / Equity Oriented Scheme: The
aim of growth funds is to provide capital appreciation over the medium to long-
term. Such schemes normally invest a major part of their corpus in equities. Such
funds have comparatively high risks. These schemes provide different options to
the investors like dividend option, capital appreciation, etc. and the investors
may choose an option depending on their preferences. The investors must indicate
the option in the application form. The mutual funds also allow the investors to
change the options at a later date. Growth schemes are good for investors having
a long-term outlook seeking appreciation over a period of time. Income / Debt Oriented
Scheme : The aim of income funds is to provide regular and steady income to investors.
Such schemes generally invest in fixed income securities such as bonds, corporate
debentures, Government securities and money market instruments. Such funds are less
risky compared to equity schemes. These funds are not affected because of fluctuations
in equity markets. However, opportunities of capital appreciation are also limited
in such funds. The NAVs of such funds are affected because of change in interest
rates in the country. If the interest rates fall, NAVs of such funds are likely
to increase in the short run and vice versa. However, long term investors may not
bother about these fluctuations. Balanced Fund : The aim of balanced funds is to
provide both growth and regular income as such schemes invest both in equities and
fixed income securities in the proportion indicated in their offer documents. These
are appropriate for investors looking for moderate growth. They generally invest
40-60% in equity and debt instruments. These funds are also affected because of
fluctuations in share prices in the stock markets. However, NAVs of such funds are
likely to be less volatile compared to pure equity funds. Money Market or Liquid
Fund : These funds are also income funds and their aim is to provide easy liquidity,
preservation of capital and moderate income. These schemes invest exclusively in
safer short-term instruments such as treasury bills, certificates of deposit, commercial
paper and inter-bank call money, government securities, etc. Returns on these schemes
fluctuate much less compared to other funds. These funds are appropriate for corporate
and individual investors as a means to park their surplus funds for short periods.
Gilt Fund : These funds invest exclusively in government securities. Government
securities have no default risk. NAVs of these schemes also fluctuate due to change
in interest rates and other economic factors as is the case with income or debt
oriented schemes. Index Funds : Index Funds replicate the portfolio of a particular
index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes
invest in the securities in the same weightage comprising of an index. NAVs of such
schemes would rise or fall in accordance with the rise or fall in the index, though
not exactly by the same percentage due to some factors known as "tracking error"
in technical terms. Necessary disclosures in this regard are made in the offer document
of the mutual fund scheme. There are also exchange traded index funds launched by
the mutual funds which are traded on the stock exchanges. |
|
Q. Why should I choose to invest in a mutual fund? |
|
For retail investor who does not have the time and expertise to analyze and invest
in stocks and bonds, mutual funds offer a viable investment alternative. This is
because: Mutual Funds provide the benefit of cheap access to expensive stocks. Mutual
funds diversify the risk of the investor by investing in a basket of assets. A team
of professional fund managers manages them with in-depth research inputs from investment
analysts. Being institutions with good bargaining power in markets, mutual funds
have access to crucial corporate information which individual investors cannot access. |
|
Q. What are the risks involved in investing in mutual funds? |
|
A very important risk involved in mutual fund investments is the market risk. When
the market is in doldrums, most of the equity funds will also experience a downturn.
However, the company specific risks are largely eliminated due to professional fund
management. |
|
Q. How do mutual funds diversify their risks? |
|
Financial theory states that 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. |
|
Q. How are mutual funds different from portfolio management schemes? |
|
In case of mutual funds, the investments of different investors are pooled to form
a common investible corpus 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. |
|
Q. What are sector specific funds/schemes? |
|
These are the funds/schemes which invest in the securities of only those sectors
or industries as specified in the offer documents. e.g. Pharmaceuticals, Software,
Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds
are dependent on the performance of the respective sectors/industries. While these
funds may give higher returns, they are more risky compared to diversified funds.
Investors need to keep a watch on the performance of those sectors/industries and
must exit at an appropriate time. They may also seek advice of an expert. |
|
Q. Which plan should I choose? |
|
It depends on your investment object, which again depends on your income, age, financial
responsibilities, risk taking capacity and tax status. For example a retired government
employee is most likely to opt for monthly income plan while a high-income youngster
is most likely to opt for growth plan. |
|
Q. What is a Systematic Investment Plan and how does it operate? |
|
A systematic investment plan is one where an investor contributes a fixed amount
every month and at the prevailing NAV the units are credited to his account. Today
many funds are offering this facility |
|
Q. What are Tax Saving Schemes? |
|
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. |
|
Q. What is a Load or no-load Fund? |
|
A Load Fund is one that charges a percentage of NAV for entry or exit. That is,
each time one buys or sells units in the fund, a charge will be payable. This charge
is used by the mutual fund for marketing and distribution expenses. Suppose the
NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the
investors who buy would be required to pay Rs.10.10 and those who offer their units
for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors
should take the loads into consideration while making investment as these affect
their yields/returns. However, the investors should also consider the performance
track record and service standards of the mutual fund which are more important.
Efficient funds may give higher returns in spite of loads. A no-load fund is one
that does not charge for entry or exit. It means the investors can enter the fund/scheme
at NAV and no additional charges are payable on purchase or sale of units. |
|
Q. Can a mutual fund impose fresh load or increase the load beyond the level mentioned
in the offer documents? |
|
Mutual funds cannot increase the load beyond the level mentioned in the offer document.
Any change in the load will be applicable only to prospective investments and not
to the original investments. In case of imposition of fresh loads or increase in
existing loads, the mutual funds are required to amend their offer documents so
that the new investors are aware of loads at the time of investments. |
|
Q. What is a sales or repurchase/redemption price? |
|
The price or NAV a unitholder is charged while investing in an open-ended scheme
is called sales price. It may include sales load, if applicable. Repurchase or redemption
price is the price or NAV at which an open-ended scheme purchases or redeems its
units from the unitholders. It may include exit load, if applicable. |
|
Q. What is an assured return scheme? |
|
Assured return schemes are those schemes that assure a specific return to the unitholders
irrespective of performance of the scheme. A scheme cannot promise returns unless
such returns are fully guaranteed by the sponsor or AMC and this is required to
be disclosed in the offer document. Investors should carefully read the offer document
whether return is assured for the entire period of the scheme or only for a certain
period. Some schemes assure returns one year at a time and they review and change
it at the beginning of the next year. |
|
Q. Can a mutual fund change the asset allocation while deploying funds of investors? |
|
Considering the market trends, any prudent fund managers can change the asset allocation
i.e. he can invest higher or lower percentage of the fund in equity or debt instruments
compared to what is disclosed in the offer document. It can be done on a short term
basis on defensive considerations i.e. to protect the NAV. Hence the fund managers
are allowed certain flexibility in altering the asset allocation considering the
interest of the investors. In case the mutual fund wants to change the asset allocation
on a permanent basis, they are required to inform the unitholders and giving them
option to exit the scheme at prevailing NAV without any load. |
|
Q. Can non-resident Indians (NRIs) invest in mutual funds? |
|
Yes, non-resident Indians can also invest in mutual funds. Necessary details in
this respect are given in the offer documents of the schemes. |
|
Q. How much should one invest in debt or equity oriented schemes? |
|
An investor should take into account his risk taking capacity, age factor, financial
position, etc. As already mentioned, the schemes invest in different type of securities
as disclosed in the offer documents and offer different returns and risks. Investors
may also consult financial experts before taking decisions. Agents and distributors
may also help in this regard. |
|
Q. How to fill up the application form of a mutual fund scheme? |
|
An investor must mention clearly his name, address, number of units applied for
and such other information as required in the application form. He must give his
bank account number so as to avoid any fraudulent encashment of any cheque/draft
issued by the mutual fund at a later date for the purpose of dividend or repurchase.
Any changes in the address, bank account number, etc at a later date should be informed
to the mutual fund immediately. |
|
Q. What should an investor look into an offer document? |
|
An abridged offer document, which contains very useful information, is required
to be given to the prospective investor by the mutual fund. The application form
for subscription to a scheme is an integral part of the offer document. SEBI has
prescribed minimum disclosures in the offer document. An investor, before investing
in a scheme, should carefully read the offer document. Due care must be given to
portions relating to main features of the scheme, risk factors, initial issue expenses
and recurring expenses to be charged to the scheme, entry or exit loads, sponsor’s
track record, educational qualification and work experience of key personnel including
fund managers, performance of other schemes launched by the mutual fund in the past,
pending litigations and penalties imposed, etc. |
|
Q. When will the investor get certificate or statement of account after investing
in a mutual fund? |
|
Mutual funds are required to despatch certificates or statements of accounts within
six weeks from the date of closure of the initial subscription of the scheme. In
case of close-ended schemes, the investors would get either a demat account statement
or unit certificates as these are traded in the stock exchanges. In case of open-ended
schemes, a statement of account is issued by the mutual fund within 30 days from
the date of closure of initial public offer of the scheme. The procedure of repurchase
is mentioned in the offer document. |
|
Q. How long will it take for transfer of units after purchase from stock markets
in case of close-ended schemes? |
|
According to SEBI Regulations, transfer of units is required to be done within thirty
days from the date of lodgment of certificates with the mutual fund. |
|
Q. As a unitholder, how much time will it take to receive dividends/repurchase proceeds? |
|
A mutual fund is required to despatch to the unitholders the dividend warrants within
30 days of the declaration of the dividend and the redemption or repurchase proceeds
within 10 working days from the date of redemption or repurchase request made by
the unitholder. In case of failures to despatch the redemption/repurchase proceeds
within the stipulated time period, Asset Management Company is liable to pay interest
as specified by SEBI from time to time (15% at present). |
|
Q. Can a mutual fund change the nature of the scheme from the one specified in the
offer document? |
|
Yes. However, no change in the nature or terms of the scheme, known as fundamental
attributes of the scheme e.g.structure, investment pattern, etc. can be carried
out unless a written communication is sent to each unitholder and an advertisement
is given in one English daily having nationwide circulation and in a newspaper published
in the language of the region where the head office of the mutual fund is situated.
The unitholders have the right to exit the scheme at the prevailing NAV without
any exit load if they do not want to continue with the scheme. The mutual funds
are also required to follow similar procedure while converting the scheme form close-ended
to open-ended scheme and in case of change in sponsor. |
|
Q. How will an investor come to know about the changes, if any, which may occur
in the mutual fund? |
|
There may be changes from time to time in a mutual fund. The mutual funds are required
to inform any material changes to their unitholders. Apart from it, many mutual
funds send quarterly newsletters to their investors. At present, offer documents
are required to be revised and updated at least once in two years. In the meantime,
new investors are informed about the material changes by way of addendum to the
offer document till the time offer document is revised and reprinted. |
|
Q. How to know the performance of a mutual fund scheme? |
|
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 affect 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 unitholders 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. |
|
Q. How to know where the mutual fund scheme has invested money mobilised from the
investors? |
|
The mutual funds are required to disclose full portfolios of all of their schemes
on half-yearly basis which are published in the newspapers. Some mutual funds send
the portfolios to their unitholders. The scheme portfolio shows investment made
in each security i.e. equity, debentures, money market instruments, government securities,
etc. and their quantity, market value and % to NAV. These portfolio statements also
required to disclose illiquid securities in the portfolio, investment made in rated
and unrated debt securities, non-performing assets (NPAs), etc. Some of the mutual
funds send newsletters to the unitholders on quarterly basis which also contain
portfolios of the schemes. |
|
Q. Is there any difference between investing in a mutual fund and in an initial
public offering (IPO) of a company? |
|
Yes, there is a difference. IPOs of companies may open at lower or higher price
than the issue price depending on market sentiment and perception of investors.
However, in the case of mutual funds, the par value of the units may not rise or
fall immediately after allotment. A mutual fund scheme takes some time to make investment
in securities. NAV of the scheme depends on the value of securities in which the
funds have been deployed. |
|
Q. If schemes in the same category of different mutual funds are available, should
one choose a scheme with lower NAV? |
|
Some of the investors have the tendency to prefer a scheme that is available at
lower NAV compared to the one available at higher NAV. Sometimes, they prefer a
new scheme which is issuing units at Rs. 10 whereas the existing schemes in the
same category are available at much higher NAVs. Investors may please note that
in case of mutual funds schemes, lower or higher NAVs of similar type schemes of
different mutual funds have no relevance. On the other hand, investors should choose
a scheme based on its merit considering performance track record of the mutual fund,
service standards, professional management, etc. This is explained in an example
given below. Suppose scheme A is available at a NAV of Rs.15 and another scheme
B at Rs.90. Both schemes are diversified equity oriented schemes. Investor has put
Rs. 9,000 in each of the two schemes. He would get 600 units (9000/15) in scheme
A and 100 units (9000/90) in scheme B. Assuming that the markets go up by 10 per
cent and both the schemes perform equally good and it is reflected in their NAVs.
NAV of scheme A would go up to Rs. 16.50 and that of scheme B to Rs. 99. Thus, the
market value of investments would be Rs. 9,900 (600* 16.50) in scheme A and it would
be the same amount of Rs. 9900 in scheme B (100*99). The investor would get the
same return of 10% on his investment in each of the schemes. Thus, lower or higher
NAV of the schemes and allotment of higher or lower number of units within the amount
an investor is willing to invest, should not be the factors for making investment
decision. Likewise, if a new equity oriented scheme is being offered at Rs.10 and
an existing scheme is available for Rs. 90, should not be a factor for decision
making by the investor. Similar is the case with income or debt-oriented schemes.
On the other hand, it is likely that the better managed scheme with higher NAV may
give higher returns compared to a scheme which is available at lower NAV but is
not managed efficiently. Similar is the case of fall in NAVs. Efficiently managed
scheme at higher NAV may not fall as much as inefficiently managed scheme with lower
NAV. Therefore, the investor should give more weightage to the professional management
of a scheme instead of lower NAV of any scheme. He may get much higher number of
units at lower NAV, but the scheme may not give higher returns if it is not managed
efficiently. |
|
Q. How to choose a scheme for investment from a number of schemes available? |
|
As already mentioned, the investors must read the offer document of the mutual fund
scheme very carefully. They may also look into the past track record of performance
of the scheme or other schemes of the same mutual fund. They may also compare the
performance with other schemes having similar investment objectives. Though past
performance of a scheme is not an indicator of its future performance and good performance
in the past may or may not be sustained in the future, this is one of the important
factors for making investment decision. In case of debt oriented schemes, apart
from looking into past returns, the investors should also see the quality of debt
instruments which is reflected in their rating. A scheme with lower rate of return
but having investments in better rated instruments may be safer. Similarly, in equities
schemes also, investors may look for quality of portfolio. They may also seek advice
of experts. |
|
Q. Are the companies having names like mutual benefit the same as mutual funds schemes? |
|
Investors should not assume some companies having the name "mutual benefit" as mutual
funds. These companies do not come under the purview of SEBI. On the other hand,
mutual funds can mobilise funds from the investors by launching schemes only after
getting registered with SEBI as mutual funds. |
|
Q. Is the higher net worth of the sponsor a guarantee for better returns? |
|
In the offer document of any mutual fund scheme, financial performance including
the net worth of the sponsor for a period of three years is required to be given.
The only purpose is that the investors should know the track record of the company
which has sponsored the mutual fund. However, higher net worth of the sponsor does
not mean that the scheme would give better returns or the sponsor would compensate
in case the NAV falls. |
|
Q. Where can an investor look out for information on mutual funds? |
|
Almost all the mutual funds have their own web sites. Investors can also access
the NAVs, half-yearly results and portfolios of all mutual funds at the web site
of Association of mutual funds in India (AMFI) www.amfiindia.com. AMFI has also
published useful literature for the investors. Investors can log on to the web site
of SEBI www.sebi.gov.in and go to "Mutual Funds" section for information on SEBI
regulations and guidelines, data on mutual funds, draft offer documents filed by
mutual funds, addresses of mutual funds, etc. Also, in the annual reports of SEBI
available on the web site, a lot of information on mutual funds is given. There
are a number of other web sites which give a lot of information of various schemes
of mutual funds including yields over a period of time. Many newspapers also publish
useful information on mutual funds on daily and weekly basis. Investors may approach
their agents and distributors to guide them in this regard. |