| What
is a Mutual Fund ?
|
| A
mutual fund, is a corporation (trust) that pools the savings,
which are then invested in money market, debt market and capital
market instruments such as shares, debentures and other securities.
Thus the MF serves as a link between the public and the capital
markets so as to mobilise savings from the investors and invest
them in the capital markets to generate returns. |
The
following are some of the more popular definitions of a Mutual
Fund
A Mutual Fund is an investment tool that allows small investors
access to a well-diversified portfolio of equities, bonds and
other securities. Each shareholder participates in the gain
or loss of the fund. Units are issued and can be redeemed as
needed. The fund's Net Asset Value (NAV) is determined each
day. |
| Mutual
Funds are financial intermediaries. They are companies set up
to receive your money, and then having received it, make investments
with the money Via an AMC. It is an ideal tool for people who
want to invest but don't want to be bothered with deciphering
the numbers and deciding whether the stock is a good buy or
not. A mutual fund manager proceeds to buy a number of stocks
from various markets and industries. Depending on the amount
you invest, you own part of the overall fund. |
| The
beauty of mutual funds is that anyone with an investible surplus
of a few hundred rupees can invest and reap returns as high
as those provided by the equity markets or have a steady and
comparatively secure investment as offered by debt instruments. |
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|
| What
is an AMC ? |
| A
company formed under the Companies Act and registered with the
Securities and Exchange Board of India (SEBI) to manage investor's
funds collected through different schemes The trustee delegates
the task of floating schemes and managing the collected money
to a company of professionals, usually experts who are known
for smart stock picks. This is an asset management company (AMC).
AMC charges a fee for the services it renders to the MF trust.
Thus the AMC acts as the investment manager of the trust under
the broad supervision and direction of the trustees. |
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|
| What
is an Unit ? |
| A
unit in a mutual fund scheme means one share in the assets of
a particular scheme. So, a person holding units in a scheme
is referred to as a unit holder. |
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|
| What
is NAV ? |
| NAV
means Net Asset Value. This is the main performance indicator
of a fund, especially when viewed in terms of its appreciation
over time. The NAV breaks down the performance of a scheme in
terms of the market value of every outstanding unit of the scheme.
A fund's NAV is calculated as total assets minus all expenses
and divided by the number of its total outstanding units. |
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|
| What
is Sale Price ? |
| It
is the price paid by an investor when investing in a scheme
of a Mutual Fund. This price may include the sales or entry
load. |
|
|
| What
is Repurchase Price ?
|
Redemption
or Repurchase Price is the price at which an investor sells
back the units to the Mutual Fund. This price is NAV related
and may include the exit load.
When an investor chooses to withdraw money from his investment
in an open-ended fund at any point in time, the units are "sold"
at NAV (after deduction of Exit Load, if any) to the Fund. When
a closed-ended fund completes its tenure, it is redeemed at
the prevailing NAV and investors are paid the proceeds thereof. |
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|
| What
is Load & what are the types of Load ?
|
| Load
is a charge collected by a mutual fund on units. It can be either
entry load i.e., the charge is collected when an investor buys
the units or exit load i.e., the charge collected when the investor
sells back the units. |
| Types
of Load: |
| 1.
Entry Load: |
When
a charge is collected at the time of entering into the scheme
it is called an Entry load or Front-end load or Sales load.
The entry load percentage is added to the NAV at the time of
allotment of units. |
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| |
| 2.
Exit Load: |
An
Exit load or Back-end load or Repurchase load is a charge that
is collected at the time of redeeming or for transfer between
schemes (switch). The exit load percentage is deducted from
the NAV at the time of redemption or transfer between schemes. |
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| 3.Contingent
Deferred Sales Load (CDSL): |
The
load amounts charged to units when recovered at various period
of time is called a "deferred load". This load reduces
the redemption proceeds paid out to the outgoing investors.
Depending on how many years the investor stays with the fund,
some funds may charge different amount of loads to the investors-
the longer the investor stays with the fund, lesser the amount
of exit load charged to him. This is called the contingent deferred
sales charge (CDSC) and contingent deferred sales load (CDSL). |
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Some
schemes do not charge any load (i.e. Sell/repurchase at NAV)
and are called No Load Schemes. |
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|
| What
is Statement of Account ?
|
| A
Statement of Account is a document that serves as a record of
transactions between the fund and the investor. It contains
details of the investor with the various transactions executed
during the period, i.e., sales, repurchase, switch-over in,
switch-over out. The Statement of Account is issued every time
any transaction takes place. |
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| What
is a Fund Manager ?
|
| An
investment professional appointed by the AMC to invest money
in accordance with the stated objectives of the scheme. |
| |
| What
are the advantages of investing in Mutual Fund ?
|
Following
are the major advantages of investing in Mutual Fund :
Portfolio Diversification/Risk reduction: An investor
holds a diversified portfolio even with a small amount of investment,
which would otherwise require a big capital. Further, the fund
invests in diverse portfolios, hence reducing the riskiness
of the investments.
Reduction of transaction costs: -While investing through the
funds, an investor has the benefit of economies of scale; the
funds incur lesser costs because of larger volumes, a benefit
passed on to its investors. |
| Professional
Management: Mutual funds are managed by professional management
who has requisite skills and resources to analyze the various
investment options in this fast-moving, global and sophisticated
markets. |
| Liquidity:
Often, investors hold shares or bonds they cannot directly,
easily and quickly sell. If they invest in the units of a fund,
they can generally cash their investment any time, by selling
their units to the fund if open-end, or selling them in the
market if the fund is close-end. |
| Convenience
and flexibility: - Investors have the option of transferring
their holdings from one scheme to the other, get updated market
information and so on. |
| Tax
Benefits: Income tax benefits are granted to investors in
mutual funds, making it more tax efficient as compared to other
comparable investment avenues. There are various types of Tax
incentives for the investors of mutual funds. There are various
sections of the Income Tax Act that provide for the tax rebates
and exemptions on investments in mutual funds and the income
arising thereof. |
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|
| What
are Open ended & Close ended schemes ?
|
| Open-ended
schemes do not have a fixed maturity and are open for subscription
the whole year. One can buy and sell units at the NAV related
prices to the Mutual funds. These schemes are normally not listed
on the stock exchanges and can be redeemed directly to the Mutual
Fund. |
| Close-ended
Schemes can be bought and sold on the stock exchange subsequent
to the initial subscription through the public offer. One can
stay invested in the scheme for a stipulated period ranging
from 2 to 15 years. Generally, the close-ended schemes are traded
at a discount to their NAV in the stock exchange. |
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|
What are the other classifications of mutual funds schemes?
|
Geographical
classification
Domestic funds: Fund houses launch domestic funds, which
mobilize savings from a particular geographic locality, like
a country or region. Majority of schemes launched by Indian
MFs like UTI, GIC MF, LIC MF, SBI MF, Canbank MF, Bank of Baroda
MF, Bank of India MF, Morgan Stanley, Templeton, Alliance etc,
are the examples of such a fund.
Offshore Funds : The objective behind launching offshore funds
is to attract foreign capital for investment in the country
of the issuing company. These funds facilitate cross border
fund flow, which is a direct route for getting foreign currency.
From the investment point of view, offshore funds open up domestic
capital markets to the international investors and global portfolio
investments. |
Portfolio
classification
Growth Funds: Investment objectives of such funds are
capital appreciation through investment in equity shares. They
invest in the equity shares of companies with high growth potential.
The examples are software, services, brand value, contra, FMCG
etc.
Income Funds : Such funds have the objective of providing safety
of investments with regular income. The funds predominantly
invested in bonds, debentures and other debt related instruments
and to some extent in equity shares of companies with high dividend
payouts. E.g. Monthly income plans. |
Value
Funds: Such funds invest in the equities that are undervalued
today in anticipation of unlocking its value in the near future.
E.g. Master value unit fund.
Balanced Funds : Balanced Funds have an objective of providing
modest risk of investments with reasonable rate of return. The
funds are invested in a judicious mix of equity shares, preference
shares as well as bonds, debentures and other debt related instruments
E.g. US-95. |
| Money
Market Mutual Funds (MMMFs): Such funds have an objective
of taking advantage of the volatility in interest rates in the
money market instruments. The funds are invested in certificate
of deposits (CDs), interbank call money market, commercial papers,
T-bills and short-term securities with a maturity horizon of
less than one year. Investors can participate indirectly in
the money market through MMMFs. E.g. Money Market Fund. |
| Index
Funds:The investment Objective is to increase the value
of the portfolio in line with the benchmark index (for e.g.
BSE Sensex, SP CNX 50). These funds are invested in the shares
of companies as included in the benchmark index in the same
proportion.E.g. Nifty Index Fund, Master index fund etc. |
| Leveraged
Funds: These funds have an objective of increasing the value
of the portfolio and benefit the shareholders by gains exceeding
the cost of borrowed funds. The funds are invested in speculative
and risky investments like short sales to take advantage of
declining market. Such funds are yet not common in India. |
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|
| What
are the different plans that Mutual fund offers ?
|
Dividend
Plan: Under the Dividend Plan, the fund distributes a substantial
part of the surplus to investors in the form of dividend (income
distribution).
Growth Plan : Under the Growth Plan, an investor realises only
the capital appreciation on the investment (by an increase in
NAV) and normally does not get any income in the form of income
distribution. |
| Re-investment
Plan: Here the income distribution accrued on a mutual fund
scheme is automatically re-invested in purchasing additional
units under the scheme. In most cases mutual funds offer the
investors an option of collecting income distribution or re-invest
in the same scheme at scheme NAV/NAV based price. |
| Systematic
Investment Plan (SIP): Here the investor is given the option
of managing his investments on a periodic basis and thus inculcates
a regular saving habit. He may issue a pre-determined number
of post-dated cheques in favour of the fund. He will get units
on the date of the cheque at the NAV of that date. For instance,
if on 25th March, he has given a post-dated cheque for June
25th, he will get units on at NAV of 25th June. |
| Systematic
Withdrawal Plan: As opposed to the Systematic Investment
Plan, the Systematic Withdrawal Plan allows an investor the
facility to withdraw a pre-determined amount/units from his
fund at a pre-determined interval. The investor's units will
be redeemed at the NAV as on that day. This would tantamount
to a tax efficient mode of withdrawal, if planned well. |
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|
| What
is Equity Scheme ? |
| Equity
schemes are those that invest predominantly in equity shares
of companies. Although an equity scheme seeks to provide returns
by way of capital appreciation, these schemes are exposed to
higher risks and hence the returns may fluctuate. They invest
only in stocks, and hence, are the riskiest among mutual fund
schemes. However, these funds offer the possibility of superior
returns since equities have historically outperformed all other
asset classes. At present, there are four types of equity funds
available in the market. |
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|
| What
is Debt Scheme ?
|
| Debt
schemes invest mainly in income-bearing instruments like bonds,
debentures, government securities, commercial paper, etc. These
instruments are much less volatile than equity schemes. Their
volatility depends essentially on the health of the economy
e.g., rupee depreciation, fiscal deficit, and inflationary pressure.
Performance of such schemes also depends on bond ratings. These
schemes provide returns generally between 7 to 12% per annum.
These funds invest in fixed-income securities like bonds, Government
of India securities, debentures, commercial paper, call money,
etc. There are three types of debt funds. |
|
|
| What
is Balanced Schemes ?
|
| Balanced
schemes invest both in equity shares and in income-bearing instruments
in such a proportion that the portfolio is balanced. They aim
to reduce the risks of investing in stocks by having a stake
in the debt markets.Thus debt and balanced schemes offer a reasonable
return with a moderate risk exposure. |
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|
| What
is Sector fund ?
|
| They
are the riskiest among equity funds, as they invest only in
specific sectors or industries. The performance of sector funds
is married to the fortunes of the specific sector or industry.
This can work both ways for sector funds. One way to maximize
your returns from sector funds is to get into the sector when
it is expected to zoom and get out before it falls. However,
it is easier said than done. Since you have managed a nodding
acquaintance with various equity funds, how do you choose the
right one for you? First, identify the category of equity funds
you want to invest in. Next, evaluate the performance record
of the fund. Find out how it has performed over the years compared
to its competitors. Also, check out the reputation, transparency
in operations, etc. |
| Make
sure your fund has a diversified portfolio. Avoid funds that
have exposure to a few sectors or stocks, as the performance
of the fund will be tied to the performance of only these stocks
and not to the entire market performance. Also make sure that
the fund has a diversified investor base. A fund with a few
large investors will be forced to take orders from them, which
may not be in your interest. |
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|
What is Gilt fund ?
|
| Funds
that invest only in government securities and treasury bills.
Such funds generally provide marginally higher returns than
a money market fund, and are a good option for investors who
seek protection of principal. Gilt funds can also be volatile
due to increase or decrease in interest rates. Gilt schemes
invest in government bonds, money market securities or some
combination of these. They have medium to long-term maturities,
typically of over one year and have moderate returns. Since
the issuer is the central or state Governments, these funds
have reduced risk of default and hence offer better protection
of principal. |
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|
| What
is index fund ?
|
| These
funds track a key stock market index, like the Bombay Stock
Exchange Sensex or the National Stock Exchange S & P CNX
Nifty. They invest only in stocks that form the market index,
as per the individual stock weightages. The idea is to replicate
the performance of the benchmarked index to near accuracy. Index
funds are considered a passive investment vehicle, as the performance
of the fund will be almost the same as the index concerned,
except for few minor points. |
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|
| What
is MIPs ?
|
| MONTHLY
INCOME PLANS are basically debt schemes, which make marginal
investments in the range of 10-25 percent in equity to boost
the scheme's returns. MIP schemes are ideal for investors who
seek a slightly higher return than pure long-term debt scheme
at a marginally higher risk. Declining returns from income funds
and improved equity market performance are two main reasons,
which have given an opportunity to launch these funds. |
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| What
is ELSS ?
|
|
According
to the central government's Equity Linked Saving Schemes (ELSS)
guideline, 1992 and the amendment in 1998, these schemes offer
tax rebates to the investor under section 88 of the Income
tax act, 1961. Under Section 88 of the I.T. Act, 1961, one
gets a tax rebate of upto 20% of the amount contributed to
ELSS schemes subject to a maximum investment of Rs. 10000/-
within the allowable limit under section 88. Also these schemes
generally diversify the equity risk by investing in a wider
array of stocks across sectors.
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| How
can one invest in Mutual Fund schemes ?
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|
One
can invest by approaching the Asset Management Companies/a
Registrar of Mutual Funds or the respective offices of the
Mutual funds in a particular town/city. An application form
has to be filled in giving all the particulars along with
the cheque or Demand Draft for the amount to be invested.
The application form is accompanied with Key information Memorandum
(which gives the highlights of the scheme), as per SEBI guidelines.
An investor has the option to use brokers' or agents' services
with respect to filling in the application form etc.
|
| Investor
should always know the risk factors before investing. |
Risk
Factors:
1. Mutual funds and securities investments are subject
to market risks and there is
no assurance or guarantee that the objective of the Mutual fund
will be achieved.
2. As with any investment in securities, the NAV of the
units issued under the schemes can go up or down depending on
the factors and forces affecting the securities markets.
3. Past performance of the Sponsor / AMC / Mutual Fund
does not indicate the future performance of the schemes of the
Mutual fund |
|
|
| What
is Money Market Fund ? |
| Money
Market Mutual Funds (MMMFs) : Such funds have an objective of
taking advantage of the volatility in interest rates in the
money market instruments. The funds are invested in certificate
of deposits (CDs), interbank call money market, commercial papers,
T-bills and short-term securities with a maturity horizon of
less than one year. Investors can participate indirectly in
the money market through MMMFs. E.g. Money Market Fund. Its
objective is to preserve principal while yielding a moderate
return. MMMF's are favoured by investors seeking low-risk investment
avenues that offer instant liquidity. |
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|
|
What is SIP ? |
|
Systematic
Investment Plan (SIP) Here the investor is given the option
of managing his investments on a periodic basis and thus inculcates
a regular saving habit. He may issue a pre-determined number
of post-dated cheques in favour of the fund. He will get units
on the date of the cheque at the NAV of that date. For instance,
if on 25th March, he has given a post-dated cheque for June
25th, he will get units on at NAV of 25th June.
|
| Based
on the concept of rupee cost averaging. SIP's allow an investor
to invest a prefixed amount with a scheme at set intervals,
and derive the benefit of fluctuating share prices and NAV's.
So, when the share price drops, the investor get more units
and when the share price moves up, he gets less. Finally, if
the NAV is high, his entire investment is valued at the existing
higher level, while his cost of purchase averages out. |
|
|
| What
is SWP ? |
| Systematic
Withdrawal Plan As opposed to the Systematic Investment Plan,
the Systematic Withdrawal Plan allows an investor the facility
to withdraw a pre-determined amount/units from his fund at a
pre-determined interval. The investor's units will be redeemed
at the NAV as on that day. This would tantamount to a tax efficient
mode of withdrawal, if planned well. |
| A
plan that allows you to withdraw pre-decided amounts from your
investments in a scheme at periodic intervals. It is advisable
to apply for SWP under Income Funds to save on TDS (Tax Deducted
at Source). |
|
The
following example illustrates how the SWAP Option in the HDFC
Income Fund - Growth Plan, is more tax efficient as compared
to the Dividend Plan in the HDFC Income Fund.
|
|
|
| What
is Switch-over ? |
| Switching
facility provides investors with an option to transfer the funds
amongst different types of schemes or plans. |
| Investors
can opt to switch units between Dividend Plan and Growth Plan
at NAV based prices. Switching is also allowed into/from other
select open-ended schemes currently within the Fund family or
schemes that may be launched in the future at NAV based prices. |
| While
switching between Debt and Equity Schemes, one has to take care
of exit and entry loads. Switching from a Debt Scheme to Equity
scheme involves an entry load while the vice versa does not
involve an entry load. Exiting a Debt scheme before 6 months
involves an exit load. Switching within Debt and Equity schemes
does not involve loads. |
| Switch
requests are effected the day the request for switch is received.
The Applicable NAV for the switch will be the NAV on the day
that the request for switch is received. |
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