Mutual Fund

What is a Mutual Fund?

A mutual fund is a pool of money managed by a professional Fund Manager.

It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities. And the income / gains generated from this collective investment is distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a schemes “Net Asset Value” or NAV. Simply put, the money pooled in by a large number of investors is what makes up a Mutual Fund.

Here a simple way to understand the concept of a Mutual Fund Unit.

Lets say that there is a box of 12 chocolates costing ?40. Four friends decide to buy the same, but they have only ?10 each and the shopkeeper only sells by the box. So the friends then decide to pool in ?10 each and buy the box of 12 chocolates. Now based on their contribution, they each receive 3 chocolates or 3 units, if equated with Mutual Funds.

And how do you calculate the cost of one unit? Simply divide the total amount with the total number of chocolates: 40/12 = 3.33. So if you were to multiply the number of units (3) with the cost per unit (3.33), you get the initial investment of ?10.

This results in each friend being a unit holder in the box of chocolates that is collectively owned by all of them, with each person being a part owner of the box.

Next, let us understand what is “Net Asset Value” or NAV. Just like an equity share has a traded price, a mutual fund unit has Net Asset Value per Unit. The NAV is the combined market value of the shares, bonds and securities held by a fund on any particular day (as reduced by permitted expenses and charges). NAV per Unit represents the market value of all the Units in a mutual fund scheme on a given day, net of all expenses and liabilities plus income accrued, divided by the outstanding number of Units in the scheme.

Mutual funds are ideal for investors who either lack large sums for investment, or for those who neither have the inclination nor the time to research the market, yet want to grow their wealth. The money collected in mutual funds is invested by professional fund managers in line with the schemes stated objective. In return, the fund house charges a small fee which is deducted from the investment. The fees charged by mutual funds are regulated and are subject to certain limits specified by the Securities and Exchange Board of India (SEBI)

India has one of the highest savings rate globally. This penchant for wealth creation makes it necessary for Indian investors to look beyond the traditionally favoured bank FDs and gold towards mutual funds. However, lack of awareness has made mutual funds a less preferred investment avenue.

Mutual funds offer multiple product choices for investment across the financial spectrum. As investment goals vary post-retirement expenses, money for childrens education or marriage, house purchase, etc. the products required to achieve these goals vary too. The Indian mutual fund industry offers a plethora of schemes and caters to all types of investor needs.

Mutual funds offer an excellent avenue for retail investors to participate and benefit from the uptrends in capital markets. While investing in mutual funds can be beneficial, selecting the right fund can be challenging. Hence, investors should do proper due diligence of the fund and take into consideration the risk-return trade-off and time horizon or consult a professional investment adviser. Further, in order to reap maximum benefit from mutual fund investments, it is important for investors to diversify across different categories of funds such as equity, debt and gold.

While investors of all categories can invest in securities market on their own, a mutual fund is a better choice for the only reason that all benefits come in a package.

A PLETHORA OF SCHEMES TO CHOOSE FROM

Mutual funds are favoured globally for the variety of investment options they offer. There is something for every profile and preference.

Chart 1: Risk/Return trade-off by mutual fund category

CALCULATING RETURNS ON MUTUAL FUND UNITS

There are many ways to calculate returns from mutual fund investments. Two of the most popular methods are Absolute returns and Annualised returns.

Absolute returns

Absolute return is the simple increase (or decrease) in your investment in terms of percentage. It does not take into account the time taken for this change.

So if an investments current market value is Rs. 5,25,000 and your invested amount was Rs. 2,75,000 then your absolute return will be: [(5,25,000-2,75,000)/2,75,000] = 90.9%

Notice how irrelevant the date of investment or date of redemption is. Ideally, you should use the absolute returns method if the tenure of your investment is less than 1 year.

For periods of more than 1 year, you need to annualise returns; which means you need to find out what the rate of return is per annum.

Annualised returns

A Compound Annual Growth Rate (CAGR) measures the rate of return over an investment period. It is a smoothened rate because it measures the growth of an investment as if it had grown at a steady rate, on an annually compounded basis.

CAGR = [(Current Value / Beginning Value) ^ (1/# of Years)]-1

How can I find the CAGR using the computer?

To calculate a CAGR, use the XIRR function in MS Excel.

8-Jan-06 1,00,000 Enter the date and the investment value

31-Dec-12 2,00,000 Enter the current value and the current date

XIRR formula 10.43%

Please remember to put a negative sign as the XIRR formula calculates the return on cash flows. Thus to find returns there has to be a cash inflow and cash outflow, which should be indicated with the use of positive and negative signs.

HISTORY OF MUTUAL FUNDS IN INDIA

A strong financial market with broad participation is essential for a developed economy. With this broad objective Indias first mutual fund was establishment in 1963, namely, Unit Trust of India (UTI), at the initiative of the Government of India and Reserve Bank of India with a view to encouraging saving and investment and participation in the income, profits and gains accruing to the Corporation from the acquisition, holding, management and disposal of securities.

In the last few years the MF Industry has grown significantly. The history of Mutual Funds in India can be broadly divided into five distinct phases as follows:

FIRST PHASE - 1964-1987

The Mutual Fund industry in India started in 1963 with formation of UTI in 1963 by an Act of Parliament and functioned under the Regulatory and administrative control of the Reserve Bank of India (RBI). In 1978, UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. Unit Scheme 1964 (US ’64) was the first scheme launched by UTI. At the end of 1988, UTI had ₹ 6,700 crores of Assets Under Management (AUM).

SECOND PHASE - 1987-1993 - ENTRY OF PUBLIC SECTOR MUTUAL FUNDS

The year 1987 marked the entry of public sector mutual funds set up by Public Sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first ‘non-UTI’ mutual fund established in June 1987, followed by Canbank Mutual Fund (Dec. 1987), Punjab National Bank Mutual Fund (Aug. 1989), Indian Bank Mutual Fund (Nov 1989), Bank of India (Jun 1990), Bank of Baroda Mutual Fund (Oct. 1992). LIC established its mutual fund in June 1989, while GIC had set up its mutual fund in December 1990. At the end of 1993, the MF industry had assets under management of ₹47,004 crores.

THIRD PHASE - 1993-2003 - ENTRY OF PRIVATE SECTOR MUTUAL FUNDS

The Indian securities market gained greater importance with the establishment of SEBI in April 1992 to protect the interests of the investors in securities market and to promote the development of, and to regulate, the securities market.

In the year 1993, the first set of SEBI Mutual Fund Regulations came into being for all mutual funds, except UTI. The erstwhile Kothari Pioneer (now merged with Franklin Templeton MF) was the first private sector MF registered in July 1993. With the entry of private sector funds in 1993, a new era began in the Indian MF industry, giving the Indian investors a wider choice of MF products. The initial SEBI MF Regulations were revised and replaced in 1996 with a comprehensive set of regulations, viz., SEBI (Mutual Fund) Regulations, 1996 which is currently applicable.

The number of MFs increased over the years, with many foreign sponsors setting up mutual funds in India. Also the MF Industry witnessed several mergers and acquisitions during this phase. As at the end of January 2003, there were 33 MFs with total AUM of ₹1,21,805 crores, out of which UTI alone had AUM of ₹44,541 crores.

FOURTH PHASE - SINCE FEBRUARY 2003 – APRIL 2014

In February 2003, following the repeal of the Unit Trust of India Act 1963, UTI was bifurcated into two separate entities, viz., the Specified Undertaking of the Unit Trust of India (SUUTI) and UTI Mutual Fund which functions under the SEBI MF Regulations. With the bifurcation of the erstwhile UTI and several mergers taking place among different private sector funds, the MF industry entered its fourth phase of consolidation.

Following the global melt-down in the year 2009, securities markets all over the world had tanked and so was the case in India. Most investors who had entered the capital market during the peak, had lost money and their faith in MF products was shaken greatly. The abolition of Entry Load by SEBI, coupled with the after-effects of the global financial crisis, deepened the adverse impact on the Indian MF Industry, which struggled to recover and remodel itself for over two years, in an attempt to maintain its economic viability which is evident from the sluggish growth in MF Industry AUM between 2010 to 2013.

FOURTH PHASE - SINCE FEBRUARY 2003 – APRIL 2014

FIFTH (CURRENT) PHASE – SINCE MAY 2014

Taking cognisance of the lack of penetration of MFs, especially in tier II and tier III cities, and the need for greater alignment of the interest of various stakeholders, SEBI introduced several progressive measures in September 2012 to "re-energize" the Indian Mutual Fund industry and increase MFs’ penetration.

In due course, the measures did succeed in reversing the negative trend that had set in after the global melt-down and improved significantly after the new Government was formed at the Center.

Since May 2014, the Industry has witnessed steady inflows and increase in the AUM as well as the number of investor folios (accounts).

The Industry’s AUM crossed the milestone of ₹10 Trillion (₹10 Lakh Crore) for the first time as on 31st May 2014 and in a short span of two years the AUM size has crossed ₹15 lakh crore in July 2016.

The overall size of the Indian MF Industry has grown from ₹ 3.26 trillion as on 31st March 2007 to ₹ 15.63 trillion as on 31st August 2016, the highest AUM ever and a five-fold increase in a span of less than 10 years !!

In fact, the MF Industry has more doubled its AUM in the last 4 years from ₹ 5.87 trillion as on 31st March, 2012 to ₹ 12.33 trillion as on 31st March, 2016 and further grown to ₹ 15.63 trillion as on 31st August 2016.

The no. of investor folios has gone up from 3.95 crore folios as on 31-03-2014 to 4.98 crore as on 31-08-2016.

On an average 3.38 lakh new folios are added every month in the last 2 years since Jun 2014.

The growth in the size of the Industry has been possible due to the twin effects of the regulatory measures taken by SEBI in re-energising the MF Industry in September 2012 and the support from mutual fund distributors in expanding the retail base.

MF Distributors have been providing the much needed last mile connect with investors, particularly in smaller towns and this is not limited to just enabling investors to invest in appropriate schemes, but also in helping investors stay on course through bouts of market volatility and thus experience the benefit of investing in mutual funds.

In fact, even though FY 2015-16 was not a very good year for the Indian securities market, the MF Industry witnessed steady positive net inflows month after month, even when the FIIs were pulling out in a big way. This was largely because of the ‘hand-holding’ of the investors by the MF distributors and convincing them to stay invested and/or invest at lower NAVs when the market had fallen.

MF distributors have also had a major role in popularising Systematic Investment Plans (SIP) over the years. In April 2016, the no. of SIP accounts has crossed 1 crore mark and currently each month retail investors contribute around ₹3,500 crore via SIPs.

The graph indicates the growth of assets over the last 10 years.

Do both open-ended and closed-ended funds come out with an initial offering?

Yes. But the only difference is that in case of open-ended funds, a month after the initial offer closes the continuous offer period starts when the investor can enter and exit the fund at a price linked to the NAV.

Is the purchase and redemption in case of open-ended funds done at the NAV?

Generally every fund levies either an entry load or an exit load or both to provide for administrative and other routine costs. The purchase price will be higher than the NAV to the extent of the entry load and the redemption price will be lower than the NAV to the extent of the exit load.

What is the investors exit route in case of a closed-ended fund?

According to Sebi regulations, all closed-ended funds have to be necessarily listed on a recognized stock exchange. Thus the secondary market provides an exit route in case of closed-ended funds.

How do I invest money in Mutual Funds?

One can invest by approaching a registered broker of Mutual funds or the respective offices of the Mutual funds in that particular town/city. An application form has to be filled up giving all the particulars along with the cheque or Demand Draft for the amount to be invested.

What are the parameters on which a Mutual Fund scheme should be evaluated?

Performance indicators like total returns given by the fund on different schemes, the returns on competing funds, the objective of the fund and the promoters image are some of the key factors to be considered while taking an investment decision regarding mutual funds.

As a lay investor, how do I go about analysing the mutual fund scheme?

As a service to the investing community, we do it for you. Our research team evaluates each scheme based on primary as well as secondary information and presents an unbiased report which will help you to take a decision on whether a fund is worth investing or not.

What are the different funds we currently have in India?

WHAT IS AN EQUITY FUND

An equity fund is a mutual fund scheme that invests predominantly in equity stocks.

In the Indian context, as per current SEBI Mutual Fund Regulations, an equity mutual fund scheme must invest at least 65% of the schemes assets in equities and equity related instruments.

Under the tax regime in India, equity funds enjoy certain tax advantages (such as, there is no incidence of long term capital gains tax on equity shares or equity funds which are held for at least 12 months from the date of acquisition). As per current Income Tax rules, an "Equity Oriented Fund" means a Mutual Fund Scheme where the investible funds are invested in equity shares in domestic companies to the extent of more than 65% of the total proceeds of such fund.

An Equity Fund can be actively managed or passively managed. Index funds and ETFs are passively managed.

Equity mutual funds are principally categorized according to company size, the investment style of the holdings in the portfolio and geography.

The size of an equity fund is determined by a market capitalization, while the investment style, reflected in the funds stock holdings, is also used to categorize equity mutual funds.

Equity funds are also categorized by whether they are domestic (investing in stocks of only Indian companies) or international (investing in stocks of overseas companies). These can be broad market, regional or single-country funds.

Some specialty equity funds target business sectors, such as health care, commodities and real estate and are known as Sectoral Funds.

IDEAL INVESTMENT VEHICLE

In many ways, equity funds are ideal investment vehicles for investors that are not as well-versed in financial investing or do not possess a large amount of capital with which to invest. Equity funds are practical investments for most people.

The attributes that make equity funds most suitable for small individual investors are the reduction of risk resulting from a funds portfolio diversification and the relatively small amount of capital required to acquire shares of an equity fund. A large amount of investment capital would be required for an individual investor to achieve a similar degree of risk reduction through diversification of a portfolio of direct stock holdings. Pooling small investors capital allows an equity fund to diversify effectively without burdening each investor with large capital requirements.

The price of the equity fund is based on the funds net asset value (NAV) less its liabilities. A more diversified fund means that there is less negative effect of an individual stocks adverse price movement on the overall portfolio and on the share price of the equity fund.

Equity funds are managed by experienced professional portfolio managers, and their past performance is a matter of public record. Transparency and reporting requirements for equity funds are heavily regulated by the federal government.

A FUND FOR EVERYONE

Equity funds are very popular amongst the retail investors among various categories of mutual fund products. Whether its a particular market sector (technology, financial, pharmaceutical), a specific stock exchange (such as the BSE or NSE), foreign or domestic markets, income or growth stocks, high or low risk, or a specific interest group (political, religious, brand), there are equity funds of every type and characteristic available to match every risk profile and investment objective that investors may have.

WHAT ARE DIFFERENT CATEGORIES OF EQUITY FUNDS

There are different types of equity mutual fund schemes and each offers a different type of underlying portfolio that have different levels of market risk.

Large Cap Equity Funds invest a large portion of their corpus in companies with large market capitalization are called large-cap funds. This type of fund is known to offer stability and sustainable returns, over a period of time.

Large Cap companies are generally very stable and dominate their industry. Large-cap stocks tend to hold up better in recessions, but they also tend to underperform small-cap stocks when the economy emerges from a recession. Large-cap tend to be less volatile than mid-cap and small-cap stocks and are therefore considered less risky.

Mid-Cap Equity Funds invest in stocks of mid-size companies, which are still considered developing companies. Mid-cap stocks tend to be riskier than large-cap stocks but less risky than small-cap stocks. Mid-cap stocks, however, tend to offer more growth potential than large-cap stocks.

Small Cap Funds invest in stocks of smaller-sized companies. Small cap is a term used to classify companies with a relatively small market capitalization. However, the definition of small cap can vary among market intermediaries, but it is generally regarded as a company with a market capitalization of less than ₹ 100 crores. Many small caps are young companies with significant growth potential. However, the risk of failure is greater with small-cap stocks than with large-cap and mid-cap stocks. As a result, small-cap stocks tend to be the more volatile (and therefore riskier) than large-cap and mid-cap stocks. Historically, small-cap stocks have typically underperformed large-cap stocks during recessions but have outperformed large-cap stocks as the economy has emerged from recessions.

The smallest stocks of the small caps are called micro-cap stocks. While the opportunity for these companies to experience extreme growth is great, the risk to lose a large amount of money is also possible

Multi Cap Equity Funds or Diversified Equity Funds invests in stocks of companies across the stock market regardless of size and sector. These funds provide the benefit of diversification by investing in companies spread across sectors and market capitalisation. They are generally meant for investors who seek exposure across the market and do not want to be restricted to any particular sector. They invest in companies across different market caps and hence reduce the amount of risk in the fund. Diversification helps prevent events that could affect a single sector for affecting the fund, and hence reduce risk.

Market capitalization (commonly known as market cap) is calculated by multiplying a company’s outstanding shares by its stock price per share. A company’s stock price by itself does not tell much about the total value or size of a company; a company whose stock price is say ₹500 is not necessarily worth more than a company whose stock price is say, ₹250. For example, a company with a stock price of ₹500 and 10 million shares outstanding (a market cap of ₹5 billion) is actually smaller in size than a company with a stock price of ₹250 and 50 million shares outstanding (a market cap of ₹12.5 billion).

Thematic Equity Funds: These funds invest in securities of specific sectors such as Information Technology, Banking, Service and pharma sector etc., which is specified in their scheme information documents. So, the performance of these schemes depends on the performance of the respective sector. These funds may give higher returns, but they also come with increased risks.

EQUITY LINKED SAVINGS SCHEME (ELSS):

Equity-Linked Savings Scheme (ELSS) is an equity mutual fund investment that invests at least 80 per cent of its assets in equity and equity-related instruments. ELSS can be open-ended or close ended. Investments in an ELSS qualify for tax deductions under Section 80C of the Income Tax Act within the overall limit of ₹1.5 lakh. The amount you invest in ELSS is deducted from your taxable income, which helps you lower the amount of income tax you are liable to pay. Investments in ELSS are subject to a three-year lock-in period and the returns from the scheme, i.e. dividends and capital gains, are tax-free

Investing in equity mutual funds comes at slightly higher risk as compared to debt mutual funds, but they also give your money a chance to earn higher returns. Now that you know more about different types of equity mutual funds, what are you waiting for? Contact your investment advisor today.

DEBT FUNDS

IF YOU WANT TO AVOID THE MARKET FLUCTUATIONS OF EQUITY STOCKS AND ARE RISK-AVERSE, CONSIDER INVESTING IN DEBT-ORIENTED MUTUAL FUND SCHEMES.

WHAT IS DEBT FUND?

A debt fund is a mutual fund scheme that invests in fixed income instruments, such as Corporate and Government Bonds, corporate debt securities, and money market instruments etc. that offer capital appreciation. Debt funds are also referred to as Income Funds or Bond Funds.

WHO SHOULD INVEST IN A DEBT FUND?

Debt funds are ideal for investors who want regular income, but are risk-averse. Debt funds are less volatile and, hence, are less risky than equity funds. If you have been saving in traditional fixed income products like Term Deposits, and looking for steady returns with low volatility, debt mutual funds could be a better option, as they help you achieve your financial goals in a more tax efficient manner and therefore earn better returns.

HOW DEBT FUNDS WORK?

Debt funds invest in either listed or unlisted debt instruments, such as Corporate and Government Bonds at a certain price and later sell them at a margin. The difference between the cost and sale price accounts for the appreciation or depreciation in the funds net asset value (NAV). Debt funds also receive periodic interest from the underlying debt instruments in which they invest. In terms of return, debt funds that earn regular interest from the fixed income instruments during the funds tenure are similar to bank fixed deposits that earn interest. This interest income gets added to a debt fund on a daily basis. If the interest payment is received, say, once every year, it is divided by 365 and the debt funds NAV goes up daily by this small amount. Thus, a debt schemes NAV also depends on the interest rates of its underlying assets and also on any upgrade or downgrade in the credit rating of its holdings.

Market prices of debt securities change with movements in interest rates. Lets assume, your debt fund owns a security that yields 10 % interest. If the interest rate in the economy falls, new instruments issued in the market would offer this lower rate. To match this lower rate, there would be an increase in the prices your funds underlying instruments as they have a higher coupon (interest) rate. As a result of the increase in the debt instruments value, your funds NAV, too, would increase.

HOW DEBT FUNDS ARE DIFFERENT FROM OTHER MUTUAL FUND SCHEMES?

In terms of operation, debt funds are not entirely different from other mutual fund schemes. However, in terms of safety, they score higher than equity mutual funds. For instance, when the market falls, the NAVs of your equity funds fall sharply, whereas in case of debt funds, the fall is not as sharp. Having said that, debt funds can offer only moderate returns, while equity funds, which are highly risky, offer high returns over longer time horizon.

WHY INVEST IN DEBT MUTUAL FUNDS?

A few major advantages of investing in debt funds are low cost structure, stable returns, high liquidity and reasonablesafety. Debt funds also score on post-tax return. Dividends from debt funds are exempt from tax in the hands of investors.The mutual fund, however, has to pay a Dividend Distribution Tax, which is currently 28.325 per cent in case of individuals or Hindu undivided families. While long-term capital gains from debt funds are taxed at 10 per cent without indexation and 20 per cent with indexation, short-term capital gains taxes are levied according to the income-tax bracket one belongs to. Thus, debt funds can be a good alternative to investors for achieving their financial goals if they do not intend to bear risk involved in equity investments.

Growth Option vs. Dividend Option

As mentioned above, dividend from mutual funds is tax free in the hands of the investors, but the same is subject to Dividend Distribution Tax (currently 28.325 %), which indirectly decreases the net returns. Hence, dividend payment or dividend reinvestment option gives better post-tax returns, to those who are in the highest tax bracket. However, for those in lower tax slabs, growth option could be more tax-efficient. In short, one should choose the appropriate option depending on the tax bracket.

WHO SHOULD INVEST IN DEBT MUTUAL FUNDS?

There’s no fixed rule as to who should invest in debt funds. It depends on the requirement of investors. Different types of investors invest in different types of debt funds. For instance, if someone wants to park his emergency funds, he can go for liquid funds.

As a thumb rule, 3-6 months household expenses can be one’s emergency fund depending on the age. Roughly the amount that gives you the confidence to combat emergencies in your household should be enough. Anything more can actually affect your investment portfolio. Those in their 20s and 30s might need more, so garner funds for about six months expenses, whereas those nearing retirement might not need much as they would have built up their reserves. The amount you save for an emergency depends ultimately on what makes you comfortable.

If you are the risk-averse type, then you might prefer a large fund of, say, a years salary. If, however, you are the living on-the-edge type, then six months salary might suffice.

For those planning to buy a home after 2-3 years, investing in a combination of both long- and short-term debt funds might be a good idea. Also, a debt fund can be used in the overall portfolio for diversification across asset classes. Debt Funds can also be used for portfolio de-risking when you are nearing your financial goals.

Liquid & Money Market Funds

Savings bank deposits have been the retail investors preferred investment option to park surplus cash. Most investors regard these as the only avenue while some believe parking surplus cash elsewhere can erode their capital and does not provide liquidity. CRISILs recent study draws attention to a more attractive option – Liquid Fund / Money Market Mutual Funds. The analysis underlines that surplus cash invested in money market mutual funds earns high post-tax returns with a reasonable degree of safety of the principal invested and liquidity.

Liquid Funds, as the name suggests, invest predominantly in highly liquid money market instruments and debt securities very short tenure and hence provide high liquidity. They invest in very short-term instruments such as Treasury Bills (T-bills), Commercial Paper (CP), Certificates Of Deposit (CD) and Collateralized Lending & Borrowing Obligations (CBLO) that have residual maturities of up to 91 days to generate optimal returns while maintaining safety and high liquidity. Redemption requests in these funds are processed within one working (T+1) day.

Income funds

They invest primarily in debt instruments of various maturities in line with the objective of the funds and any remaining funds in short-term instruments such as Money Market instruments. These funds generally invest in instruments with medium- to long-term maturities.

Short-Term funds

Short-term debt funds primarily invest in debt instruments with shorter maturity or duration. These primarily consist of debt and money market instruments and government securities. The investment horizon of these funds is longer than those of liquid funds, but shorter than those of medium-term income funds.

Floating Rate funds (FRF)

While income funds invest in fixed income debt instruments such as bonds, debentures and government securities, FRFs are a variant of income funds with the primary aim of minimising the volatility of investment returns that is usually associated with an income fund. FRFs invest primarily in instruments that offer floating interest rates. Floating rate securities are generally linked to the Mumbai Inter-Bank Offer Rate (MIBOR), i.e., the benchmark rate for debt instruments. The interest rate is reset periodically based on the interest rate movement. The objective of FRFs is to offer steady returns to investors in line with the prevailing market interest rates.

Gilt Funds

The word ‘Gilt’ implies Government securities. A gilt fund invests in government securities of various tenures issued by central and state governments. These funds generally do not have the risk of default, since the issuer of the instruments is the government. Gilt funds invest in Gilts which have both short-term and/or long-term maturities. Gilt funds have a high degree of interest rate risk, depending on their maturity profile. The longer the maturity profiles of the instruments, the higher the interest rate risk. (Interest rate risk implies that there is an effect on the market price of debt instruments when interest rates increase and decrease. Market prices of debt instruments rise when interest rates fall and vice-versa.)

Interval Funds

Interval fund is a mutual fund scheme that combines the features of open-ended and closed-ended schemes, wherein the fund is open for subscription and redemption only during specified transaction periods (STPs) at pre-determined intervals. In other words, Interval funds allow redemption of Units only during STPs. Thus between two STPs they are akin to closed-ended schemes and therefore, compulsorily listed on Stock Exchanges. However, unlike typical closed-ended funds, interval funds do not have a maturity date and hence open-ended in nature. Hence, one may remain invested in an Interval Fund as long as one wishes to like any open ended schemes. Hence, in a sense, interval funds are akin to Fixed Maturity Plans (FMPs) with roll-over facility, as they allow roll over of investments from one specified period to another.

Interval funds are typically debt oriented products , but may invest in equities as well as per the schemes investment objective and asset allocation specified in the Scheme Information Document.

Interval funds are taxed like any other mutual fund, depending on whether the underlying portfolio is pre-dominantly invested in equities or debt securities. If the fund invests 65% or more of its corpus in debt securities, it is taxed like a non-equity fund. Likewise, if the fund invests 65% or more in equities, it is taxed like an equity fund.

Multiple Yield Funds

Multiple yield funds (MYFs) are hybrid debt-oriented funds that invest predominantly in debt instruments and to some extent in dividend-yielding equities.

The debt instruments assist in generating returns with minimum risk and equities assist in long-term capital appreciation.MYFs invest predominantly in debt and money market instruments of short-to-medium-term residual maturities.

Dynamic Bond Funds

DBFs invest in debt securities of different maturity profiles. These funds are actively managed and the portfolio varies dynamically according to the interest rate view of the fund managers. Such funds give the fund manager the flexibility to invest in short- or longer-term instruments based on his view on the interest rate movement. DBFs follow an active portfolio duration management strategy by keeping a close watch on various domestic and global macro-economic variables and interest rate outlook.

Fixed Maturity Plans (FMPs)

FMPs, as the name indicates, have a pre-determined maturity date (like a term deposit) and are close-ended debt mutual fund schemes. FMPs invest in debt instruments with a specific date of maturity, lesser than or equal to the maturity date of the scheme, also enjoy the status of debt funds. After the date of maturity, the investment is redeemed at current NAV and the maturity proceeds are paid back to the investors.

The tenure of an FMP may range from as low as 30 days to 60 months. Since the maturity date and the amount are known beforehand, the fund manager can invest with reasonable confidence, in securities that have a similar maturity as that of the scheme. Thus, if the tenure of the scheme is one year then the fund manager would invest in debt securities that mature just before a year. Unlike in other open ended funds, where one can buy and sell units from the mutual funds on an ongoing basis), no pre-mature redemptions are permitted in FMPs. Hence, the units of FMPs (being close ended schemes) are compulsorily listed on a stock exchange/s so that the investors may sell the units through stock exchange route in case of urgent liquidity needs.

Monthly Income Plans (MIPs)

MIPs are hybrid schemes that invest in a combination of debt and equity securities, but are typically debt oriented mutual fund schemes, as they invest pre-dominantly in debt securities and a small portion (15-25 per cent) in equities.

MIPs offer regular income in the form of periodic (monthly, quarterly, half-yearly) dividend pay-outs. Hence MIPs are preferred option for investors seeking steady income flows. Under MIPs, monthly income or regular dividend is neither assured nor is it mandatory for mutual funds to pay at stated intervals, because in a mutual fund scheme, the dividend is paid at the discretion of the mutual fund and is subject to availability of distributable surplus from realised gains.

Due to the equity exposure, MIP returns can be volatile and may suffer losses, making dividend pay-outs irregular - both in quantum and frequency or even skip dividend payment. In spite of this, MIPs have a history of providing higher returns after adjusting for tax and hence can be a better option.

Investors wary of fluctuating income from MIPs dividend option can opt for Growth Option and a systematic withdrawal plan, or SWP, which allows regular redemption of a pre-determined amount. An SWP under an MIP can work as a regular source of income for investors. SWP works better when a person invests a large sum.

Capital Protection-Oriented Funds

As the name suggests, Capital Protection-Oriented Funds (CaPrOF) are mutual fund schemes that aim to protect at least the capital, i.e., the initial investment, providing an opportunity to make additional gains, as per the investment objectives of the fund. In short, a CaPrOF aims to safeguard the principal amount while offering a potential equity-linked capital appreciation. However, it is important to note that there is no guarantee of returns or guaranteed capital protection.

CaPrOF are closed-ended debt funds that typically invest a major portion (say 80%) of the corpus in AAA-rated bonds, and the remaining amount in riskier securities like equity. Some funds may even take exposure to equity derivatives to protect against the downside risk.

It is this very structure that is oriented towards protecting the principal. By the end of the stipulated term, the debt portion of the fund grows to give you back the principal, while the equity portion brings the potential upside. Thus, even if the equity market crashes, the principal amount is protected. Hence, CaPrOF are preferred over regular FMPs. CaPrOF are ideal for investors who wish to protect their capital against the downside risk and also participate in the equity market.

LIQUID FUNDS

Liquid Funds, as the name suggests, invest predominantly in highly liquid money market instruments and debt securities of very short tenure and hence provide high liquidity. They invest in very short-term instruments such as Treasury Bills (T-bills), Commercial Paper (CP), Certificates Of Deposit (CD) and Collateralized Lending & Borrowing Obligations (CBLO) that have residual maturities of up to 91 days to generate optimal returns while maintaining safety and high liquidity. Redemption requests in these Liquid funds are processed within one working (T+1) day.

The aim of the fund manager of a Liquid Fund is to invest only into liquid investments with good credit rating with very low possibility of a default. The returns typically take the back seat as protection of capital remains of utmost importance. Control over expenses in the form of low expense ratio, good overall credit quality of the portfolio and a disciplined approach to investing are some of the key ingredients of a good liquid fund.

Most retail customers prefer to keep their surplus cash in Savings Bank deposits as they consider the same to be safest and they could withdraw the money at any time. Liquid Funds and Money Market Mutual Funds provide a more attractive option. Surplus cash invested in money market mutual funds earns higher post-tax returns with a reasonable degree of safety of the principal invested and liquidity.

Liquid funds are preferred by investors to park their money for short periods of time typically 1 day to 3 months. Wealth managers suggest liquid funds as an ideal parking ground when you have a sudden influx of cash, which could be a huge bonus, sale of real estate and so on and you are undecided about where to deploy that money. Investors looking out for opportunities in equities and long-term fixed income instruments can also park their money in the liquid funds in the meantime. Many equity investors use liquid funds to stagger their investments into equity mutual funds using the Systematic Transfer Plan (STP), as they believe this method could yield higher returns.

Liquid Funds typically do not charge any exit loads. Investors are offered growth and dividend options. Within dividend option, investors can choose daily, weekly or monthly dividends depending on their investment horizon and investment amount. Redemption payment is typically made within one working day of placing the redemption request. With mutual funds going online, individual investors with small sums can look at Liquid funds as an effective short-term investment option over their savings bank account.

BALANCED FUNDS

WHAT IS A BALANCED FUND

A balanced fund combines equity stock component, a bond component and sometimes a money market component in a single portfolio. Generally, these hybrid funds stick to a relatively fixed mix of stocks and bonds that reflects either a moderate, or higher equity, component, or conservative, or higher fixed-income, component orientation

These funds invest in a mix of equities and debt, giving the investor the best of both worlds. Balanced funds gain from a healthy dose of equities but the debt portion fortifies them against any downturn.

Balanced funds are suitable for a medium-term horizon and are ideal for investors who are looking for a mixture of safety, income and modest capital appreciation. The amounts this type of mutual fund invests into each asset class usually must remain within a set minimum and maximum.

Although they are in the asset allocation family, balanced fund portfolios do not materially change their asset mix. This is unlike life-cycle, target-date and actively managed asset-allocation funds, which make changes in response to an investors changing risk-return appetite and age or overall investment market conditions.

EQUITIES AND INFLATION

Investors who have dual investment objectives favour Balanced Funds. Typically, retirees or investors with low risk tolerance prefer these funds for growth that outpaces inflation and income that supplements current needs. While retirees generally scale back risk as age advances, many individuals recognize the need for equity exposure as life expectancies increase. Equities prevent erosion of purchasing power and help ensure long-term preservation of retirement corpus

INCOME NEEDS

The bond component of a balanced fund serves two purposes: creating an income stream and moderating portfolio volatility. Investment-grade bonds such as AAA corporate bonds and Money market instruments interest income from periodic payments, while large-company stocks offer dividend payouts to enhance yield. Retired investors may take distributions in cash to bolster income from pensions and personal savings.

Secondarily, bonds hold much less volatility than stocks. Bondholders have a claim against assets of a company while stocks represent ownership, bearing all inherent risk if bankruptcy occurs. Hence, debt security prices do not move in lockstep with equities, and their stability prevents wild swings in the share price of a balanced fund.

TAXATION

Equity-oriented Balanced funds have a larger portion of their corpus (at least 65%) invested in stocks and qualify for the same tax treatment as equity funds. This means any capital gains are tax-free, if the investment is held for more than one year. However, these funds are more volatile due to the higher allocation to stocks.

Debt-oriented balanced funds are less volatile and suit those with a lower risk appetite. However, they offer lower returns and the gains are not eligible for tax exemption. If the investment is held for less than three years, the capital gains are treated as short term and taxed at the normal rates. But if the holding period exceeds three years, the gains are considered as long term and are taxed at 20% after indexation benefit, which can significantly reduce the tax.

EXCHANGE TRADED FUNDS (ETFS)

WHAT IS AN ETF?

An ETF, or exchange traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund.

In the simple terms, ETFs are funds that track indexes such as CNX Nifty or BSE Sensex, etc. When you buy shares/units of an ETF, you are buying shares/units of a portfolio that tracks the yield and return of its native index. The main difference between ETFs and other types of index funds is that ETFs dont try to outperform their corresponding index, but simply replicate the performance of the Index. They dont try to beat the market, they try to be the market.

Unlike regular mutual funds, an ETF trades like a common stock on a stock exchange. The traded price of an ETF changes throughout the day like any other stock, as it is bought and sold on the stock exchange. The trading value of an ETF is based on the net asset value of the underlying stocks that an ETF represents. ETFs typically have higher daily liquidity and lower fees than mutual fund schemes, making them an attractive alternative for individual investors.

Passive Management

ETFs are passively managed. The purpose of an ETF is to match a particular market index, leading to a fund management style known as passive management. Passive management is the chief distinguishing feature of ETFs, and it brings a number of advantages for investors in index funds. Essentially, passive management means the fund manager makes only minor, periodic adjustments to keep the fund in line with its index. An investor in an ETF do not want fund managers to manage their money i.e., decide which stocks to buy/sell/ hold), but simply want the returns to mimic those from the benchmark index. Since buying all scrips that are part of say, the Nifty (which has 50 scrips) is not possible, one could invest in an ETF that tracks Nifty.

This is quite different from an actively managed fund, like most mutual funds, where the fund manager actively manages the fund and continually trades assets in an effort to outperform the market.

Because they are tied to a particular index, ETFs tend to cover a discrete number of stocks, as opposed to a mutual fund whose scope of investment is subject to continual change. For these reasons, ETFs mitigate the element of "managerial risk" that can make choosing the right fund difficult. Rather than investing in an active fund managed by a fund manager, when you buy shares of an ETF youre harnessing the power of the market itself.

ETFs are cost-efficient

Because an ETF tracks an index without trying to outperform it, it incurs lower administrative costs than actively managed portfolios. Typical ETF administrative costs are lower than an actively managed fund, coming in less than 0.20% per annum, as opposed to the over 1% yearly cost of some actively managed mutual fund schemes. Because they have lower expense ratio, there are fewer recurring costs to diminish ETF returns.

WHAT ARE THE COSTS OF INVESTING IN ETFS?

While the Expense Ratio of ETFs is lower, there are certain costs that are unique to ETFs. Since ETFs are bought traded on stock exchange through a stock broker, every time an investor makes a purchase or sale, he/she pays a brokerage for the transaction . In addition, an investor may also incur STT and the usual costs of trading in stocks, including differences in the ask-bid spread etc. Of course, traditional Mutual Fund investors are also subjected to the same trading costs indirectly, as the Fund in turn pays for these costs.

Flexibility of ETFs

ETF shares trade exactly like stocks. Unlike index funds, which are priced only after market closings, ETFs are priced and traded continuously throughout the trading day. They can be bought on margin, sold short, or held for the long-term, exactly like common stock.

Yet because their value is based on an underlying index scrips, ETFs enjoy the additional benefits of broader diversification than shares in single companies, as well as what many investors perceive as the greater flexibility that goes with investing in entire markets, sectors, regions, or asset types. Because they represent baskets of stocks, ETFs typically trade at much higher volumes than individual stocks. High trading volumes mean high liquidity, enabling investors to get into and out of investment positions with minimum risk and expense.

ARE ETFS ONLY FOR STOCKS?

No. Any asset class that has a published index and is liquid enough to be traded daily can be made into an ETF. Bonds, real estate, commodities, currencies, and multi-asset funds are all available in an ETF format. For instance, Mutual Funds in India offer Gold ETFs, where the underlying investment is in physical gold.

HOW DOES THE IN-KIND CREATION / REDEMPTION MECHANISM WORK IN ETFS?

ETFs can either be purchased on the exchange or directly from the Fund. The Fund creates / redeems units only in predefined lot sizes in exchange for a predefined underlying portfolio basket (called “creation unit”). Once the underlying portfolio basket is deposited with the Fund together with a cash component, the investor is allotted the units.

This is in-kind creation / redemption of units, unique to ETFs. Alternatively, investors can follow the "Cash Subscription" route in which they can pay cash directly to the Fund for purchasing the underlying portfolio in creation units size.

HOW DO ETFS DERIVE THEIR LIQUIDITY?

ETFs derive their liquidity first from trading of the units in the secondary market and secondly through the in-kind creation / redemption process with the fund in creation unit size.

Due to the unique in-kind creation / redemption process of ETFs, the liquidity of an ETF is actually the liquidity of the underlying shares.

WHAT IS THE DIFFERENCE BETWEEN AN ETF AND AN INDEX FUND?

While both are passively managed, the biggest difference is that Index Funds operate in the way all mutual funds do, in that they are priced at the close of the trading day based on the NAV of the underlying securities, whereas ETFs are priced to the market throughout the trading day. That means they are easier to buy and sell quickly, if need be. Secondly, ETFs are available only on stock exchanges. Hence, you need a demat account to invest in an ETF, whereas for an Index Fund, you dont need a demat account and you may buy or sell the Units of an Index Fund directly from the mutual fund in small amounts.

WHAT ARE THE BENEFITS OF INVESTING IN ETFS?

ETFs combine the range of a diversified portfolio with the simplicity of trading a single stock. Investors can purchase ETF shares on margin, short sell shares, or hold for the long term. ETFs can be bought / sold easily like any other stock on the exchange through terminals across the country.

Asset Allocation: Managing asset allocation can be difficult for individual investors given the costs and assets required to achieve proper levels of diversification. ETFs provide investors with exposure to broad segments of the equity markets. They cover a range of style and size spectrums, enabling investors to build customized investment portfolios consistent with their financial needs, risk tolerance, and investment horizon. Both institutional and individual investors use ETFs to conveniently, efficiently, and cost effectively allocate their assets.

Cash Equitisation:

Investors typically seek exposure to equity markets, but often need time to make investment decisions. ETFs provide a "Parking Place" for cash that is designated for equity investment. Because ETFs are liquid, investors can participate in the market while deciding where to invest the funds for the longer-term, thus avoiding potential opportunity costs. Historically, investors have relied heavily on derivatives to achieve temporary exposure. However, derivatives are not always a practical solution. The large denomination of most derivative contracts can preclude investors, both institutional and individual, from using them to gain market exposure. In this case and in those where derivative use may be restricted, ETFs are a practical alternative.

Hedging Risks:

ETFs are an excellent hedging vehicle because they can be borrowed and sold short. The smaller denominations in which ETFs trade relative to most derivative contracts provides a more accurate risk exposure match, particularly for small investment portfolios.

Arbitrage (cash vs futures) and covered option strategies:

ETFs can be used to arbitrage between the cash and futures market, as they are very easy to trade. ETFs can also be used for cover option strategies on the index.

FUND OF FUNDS (FOF)

A Fund Of Funds (FOF) is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. An FOF Scheme of a primarily invests in the units of another Mutual Fund scheme. This type of investing is often referred to as multi-manager investment

These schemes offer the investor an opportunity to diversify risk by spreading investments across multiple funds. The underlying investments for a FoF are the units of other mutual fund schemes either from the same mutual fund or other mutual fund houses.

Experts believe fund of funds are generally better suited for smaller investors that want to gain access to a range of different asset classes or for those whose advisers do not have the expertise to make single manager recommendations.

Under current Income Tax regime in India, a FOF is treated as a non-Equity fund and consequently taxed accordingly. In other words, even though a FOF may be investing in equity oriented funds, the FOF itself is not regarded as an equity oriented fund, and consequently, the tax benefits currently available to an equity fund are not available to an FOF. Consequently, in case of FOFs investing in equity securities of domestic companies via EOFs, there is dual levy of Dividend Distribution Tax (DDT), viz., when the domestic companies distribute dividends to their shareholders and again, when the FOF distributes the dividends to its unit-holders.

GOLD ETF

A Gold ETF is an exchange-traded fund (ETF) that aims to track the domestic physical gold price. They are passive investment instruments that are based on gold prices and invest in gold bullion.

In short, Gold ETFs are units representing physical gold which may be in paper or dematerialised form. One Gold ETF unit is equal to 1 gram of gold and is backed by physical gold of very high purity. Gold ETFs combine the flexibility of stock investment and the simplicity of gold investments.

Gold ETFs are listed and traded on the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE) like a stock of any company. Gold ETFs trade on the cash segment of BSE & NSE, like any other company stock, and can be bought and sold continuously at market prices.

Buying Gold ETFs means you are purchasing gold in an electronic form. You can buy and sell gold ETFs just as you would trade in stocks. When you actually redeem Gold ETF, you don’t get physical gold, but receive the cash equivalent. Trading of gold ETFs takes place through a dematerialised account (Demat) and a broker, which makes it an extremely convenient way of electronically investing in gold.

Because of its direct gold pricing, there is a complete transparency on the holdings of a Gold ETF. Further due to its unique structure and creation mechanism, the ETFs have much lower expenses as compared to physical gold investments.

WHO SHOULD INVEST IN GOLD ETF?

Gold ETFs are ideal for investors who wish to invest in gold but do not want to invest in physical gold due to the storage hassles / doubt about purity of gold and are also looking to get tax benefits. There is no premium or making charge, so investors stand to save money if their investment is substantial. What’s more, one can purchase as low as one unit (which is 1 gram)

ADVANTAGES OF BUYING GOLD ETF UNITS?

Purity of the gold is guaranteed and each unit is backed by physical gold of high purity.

Transparent and real time gold prices.

Listed and traded on stock exchange.

A tax efficient way to hold gold as the income earned from them is treated as long term capital gain.

No wealth tax, no security transaction tax, no VAT and no sales tax.

No fear of theft - Safe and secure as units held in Demat. One also saves on safe deposit locker charges.

ETFs are accepted as collateral for loans.

No entry and exit load.

What are the different types of plans that any mutual fund scheme offers?

That depends on the strategy of the concerned scheme. But generally there are 3 broad categories. A dividend plan entails a regular payment of dividend to the investors. A reinvestment plan is a plan where these dividends are reinvested in the scheme itself. A growth plan is one where no dividends are declared and the investor only gains through capital appreciation in the NAV of the fund.

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.

What is a Systematic Investment Plan and how does it operate?

Systematic Investment Plan (SIP) is an investment plan (methodology) offered by Mutual Funds wherein one could invest a fixed amount in a mutual fund scheme periodically, at fixed intervals – say once a month, instead of making a lump-sum investment.

The SIP instalment amount could be as little as ₹500 per month. SIP is similar to a recurring deposit where you deposit a small /fixed amount every month.

SIP is a very convenient method of investing in mutual funds through standing instructions to debit your bank account every month, without the hassle of having to write out a cheque each time.

SIP has been gaining popularity among Indian MF investors, as it helps in Rupee Cost Averaging and also in investing in a disciplined manner without worrying about market volatility and timing the market. Systematic Investment Plans offered by mutual funds are easily the best way to enter the world of investments over the long term.

Common sense suggests that “Buying low and selling high” is perhaps the best way to get good returns on your investments. But this is easier said than done, even for the most experienced investors. There are many factors at play when it comes to any market - debt or equity, and all of them are inextricably linked.

SIP is a simpler approach to long term investing is disciplining and committing to a fixed sum for a fixed period and sticking to this schedule regardless of the conditions of the market.

What are the benefits of Systematic Investment Plan?

RUPEE COST AVERAGING

Rupee cost averaging, as this practice is called, in a way ensures that you automatically buy more units when the NAV is low and fewer when the NAV is high…e.g., an SIP of ₹1000 gets you 50 units when the NAV is Rs. 20, but gets you 100 units when the NAV is Rs.10. The average cost for buying those 150 units would be Rs. 2000/150 units i.e. ₹ 13.33.

However, please remember that the Rupee cost averaging does not assure profit, nor does it protect one against investment losses in declining markets. It merely ensures disciplined & regular investment in stock markets, which helps overcome the natural impulse to stop investing in a falling or a depressed market or investing a lot, when markets are buoyant and euphoric.

THE POWER OF COMPOUNDING

There is a great advantage with long-term investments, namely, compounding which is considered one of the greatest mathematical discovery.

To put it in simple words, compounding is when the interest (or income) you earn is reinvested in the original corpus and accumulated corpus continues to earn (& grow). Every time this happens, your investment keeps growing, paving the way for a systematic accumulation of money, multiplying over time.

To illustrate, a small amount of ₹1000 invested every month at an interest rate of 8% for 25 years would give you ₹ 9.57 Lakh! That means your investment of just ₹ 3 Lakh would have grown three times over!

Here is a graph that represents the same for a time period of 15 years.

STARTING EARLY PAYS WELL

To get the best out of your investments, it is very important to invest for the long-term, which means that you should start investing early, in order to maximize the end returns.

Lets understand this better through an illustration –

Lets assume that two friends, both aged 25, decide to invest ₹ 2000 every month for a period of 5 years and earn 8% p.a. on a monthly compounding basis. The only difference is that while one starts investing promptly at the age of 25 itself, the other starts investing 10 years later at the age of 35 years. Both decide to hold on to their investments till they turn 60. So while both of them would accumulate principal investment of ₹1.2 Lakh over a period of 5 years, the investment of the person who started early at the age of 25 appreciates to over ₹ 14 Lakh, the investment of the second person who started later grows to only about ₹ 6 Lakh.

Thus, you can clearly see the difference between the two and the clear advantage of investing early. So go ahead. Start investing through SIP today itself.

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.

What is NAV and how it is calculated?

NAV is the net asset value of the fund. Simply put it reflects what the unit held by an investor is worth at current market prices. For details on calculation methodology and formulae, please click on our mutual fund glossary

What proportion of my investment should be invested in mutual funds

Once again this decision will depend on factors like your income, savings, risk aversion and tax status.

Like IPOs, can there be any situation wherein I am not allotted the units applied for in the initial offer?

In case of closed-ended funds there is a target amount and the funds are permitted a green-shoe option to retain over-subscriptions up to a certain limit. In case of open-ended funds there are no such limits and all applications are honored.

How do I get the information regarding the forthcoming schemes of different mutual funds?

For the guidance of the investors our web site is giving a detailed analyses of the forthcoming schemes of different mutual funds .You can visit our website to get such information on forthcoming scheme openings.

Can a Mutual Fund assure fixed returns?

As per Sebi Regulations, mutual funds are not allowed to assure returns. However, funds floated by AMCs of public sector banks and financial institutions were permitted to assure returns to the unitholders provided the parent sponsor was willing to give an explicit guarantee to honor such a commitment. But in general, mutual funds cannot assure fixed returns to their investors.

How much return can I expect by investing in mutual funds?

Investors need to be clear that mutual funds are essentially medium to long term investments. Hence, short-term abnormal profits will not be sustainable in the long run. But in the medium to long run the mutual funds tend to outperform most other avenues of investments at the same time avoiding the risk of direct investment accompanied with professional fund management.

What is the difference between mutual funds and portfolio management schemes?

While the concept remains the same of collecting money from investors, pooling them and investing the funds, the target investors are different. In the case of portfolio management the target investors are high networth investors while in case of mutual funds the target investors are the retail investors.

How does the concept of exit load work in case of unit redemptions?

An exit load is levy that an investor pays at the point of exit. This is levied to dissuade investors from exiting the fund. Assume that the current NAV of the fund is Rs.12.00 and that the exit load is Rs.0.50. Now if you sell 800 units then you stand to receive 800X11.5 = Rs. 9200. For detailed explanation of exit load, refer our mutual fund glossary.

Can an investor redeem part of the units?

Yes. One can redeem part units also.

Say I redeem and buy and do likewise several times then, how do I keep track of my portfolio?

The moment you buy or get allotted the units, a passbook will be given to you mentioning the number of units allotted/bought and redeemed by you. The recording of entries would be similar to your pass book entries in the bank. In mutual fund terminology it is called Account Statement.

What are the broad guidelines issued for a MF?

SEBI is the regulatory authority of MFs. SEBI has the following broad guidelines pertaining to mutual funds :

MFs should be formed as a Trust under Indian Trust Act and should be operated by Asset Management Companies (AMCs).

MFs need to set up a Board of Trustees and Trustee Companies. They should also have their Board of Directors.

The net worth of the AMCs should be at least Rs.5 crore.

AMCs and Trustees of a MF should be two separate and distinct legal entities.

The AMC or any of its companies cannot act as managers for any other fund.

AMCs have to get the approval of SEBI for its Articles and Memorandum of Association.

All MF schemes should be registered with SEBI.

MFs should distribute minimum of 90% of their profits among the investors.

There are other guidelines also that govern investment strategy, disclosure norms and advertising code for mutual funds.

Am I eligible for rebate on income tax by investing in a MF?

Yes in case of certain specific Equity Linked Saving Schemes, tax benefits are available.

Do mutual fund investments attract wealth tax?

No. Under the Wealth Tax Act, all financial assets, including mutual fund units are exempt totally from Wealth Tax.

What are my major rights as a unitholder in a mutual fund?

Some important rights are mentioned below:

Unit holders have a proportionate right in the beneficial ownership of the assets of the scheme and to the dividend declared.

They are entitled to receive dividend warrants within 42 days of the date of declaration of the dividend.

They are entitled to receive redemption cheques within 10 working days from the date of redemption.

75% of the unit holders with the prior approval of SEBI can terminate AMC of the fund.

75% of the unit holders can pass a resolution to wind-up the scheme.

Is my income from mutual funds exempt from income tax?

Yes. Your income from mutual funds in the form of dividends is entirely exempt from income tax provided the fund in question is a equity/growth fund where more than 65 percent of the portfolio is invested in Indianequities.