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What is a Mutual Fund? |
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Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. Each scheme of a mutual fund has a different objective. Mutual funds issue units to the investors, which represents an equitable right in the assets of the mutual fund. |
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| 2. |
What is the difference between an open ended and close ended scheme? |
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Open ended funds can issue and redeem units any time during the life of the scheme while close ended funds cannot issue new units except in case of bonus or rights issue. Hence, unit capital of open ended funds can fluctuate on daily basis while that is not the case for close ended schemes. Other way of explaining the difference is that new investors can join the scheme by directly applying to the mutual fund at applicable net asset value related prices in case of open ended schemes while that is not the case in case of close ended schemes. New investors can buy the units from secondary market only. |
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| 3. |
How are mutual funds different from portfolio management schemes? |
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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. |
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What does Net Asset Value (NAV) of a scheme signify and what is the basis of its calculation? |
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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. |
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| 5. |
Can I get fixed monthly income by investing in mutual fund units? |
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Yes, there are a number of mutual fund schemes which give you fixed monthly income. Further, you can also get monthly income by making a single investment in an open ended scheme and redeeming fix value of units at regular intervals. |
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| 6. |
Are my investments in mutual fund units safe? |
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No stock market related investments can be termed safe with certainty as they are inherently risky. However, different funds have different risk profile which is stated in its objective. Funds which categorize themselves as low risk, invest generally in debt which is less risky than equity. Anyway, as mutual funds have access to services of expert fund managers, they are always safer than direct investment in the stock markets. |
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| 7. |
What are the types of mutual fund schemes? |
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There are different ways to classify mutual fund schemes. Some of them are explained below. |
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A) By Structure |
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Open-Ended Schemes |
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These do not have a fixed maturity. You deal directly with the Mutual Fund for your investments and redemptions. The key feature is liquidity. You can conveniently buy and sell your units at net asset value ("NAV") related prices. |
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Close-Ended Schemes |
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Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called close-ended schemes. You can invest directly in the scheme at the time of the initial issue and thereafter you can buy or sell the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchange could vary from the scheme's NAV on account of demand and supply situation, unitholders' expectations and other market factors. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but closer to maturity, the discount narrows. Some close-ended schemes give you an additional option of selling your units directly to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations ensure that at least one of the two exit routes are provided to the investor. |
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Interval Schemes |
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These combine the features of open-ended and close- ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices. |
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B) By Investment Objective |
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Growth Schemes |
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Aim to provide capital appreciation over the medium to long term. These schemes normally invest a majority of their funds in equities and are willing to bear short- term decline in value for possible future appreciation. |
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Investors in their prime earning years. |
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Investors seeking growth over the long-term |
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Income Schemes |
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Aim to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. Ideal for: |
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Retired people and others with a need for capital stability and regular income. |
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Investors who need some income to supplement their earnings. |
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Balanced Schemes |
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Aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest in both shares and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. Ideal for: |
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Investors looking for a combination of income and moderate growth. |
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Money Market Schemes |
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Aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter- bank call money. Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market. Ideal for: |
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Corporations and individuals as a means to park their surplus funds for short periods or awaiting a more favorable investment alternative. |
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C) Other Schemes |
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Tax Saving Schemes |
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These schemes offer tax rebates to the investors under tax laws as prescribed from time to time. This is made possible because the Government offers tax incentives for investment in specified avenues. For example, Equity Linked Savings Schemes (ELSS) and Pension Schemes. Recent amendments to the Income Tax Act provide further opportunities to investors to save capital gains by investing in Mutual Funds. The details of such tax savings are provided in the relevant offer documents. Ideal for: |
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Investors seeking tax rebates. |
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Special Schemes |
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This category includes index schemes that attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50, or industry specific schemes (which invest in specific industries) or sectoral schemes (which invest exclusively in segments such as 'A' Group shares or initial public offerings). Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index. Sectoral fund schemes are ideal for investors who have already decided to invest in a particular sector or segment. Keep in mind that any one scheme may not meet all your requirements for all time. You need to place your money judiciously in different schemes to be able to get the combination of growth, income and stability that is right for you. |
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| 8. |
Why Should I Invest In Mutual Funds? |
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The advantages of investing in a Mutual Fund are: |
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Professional Management: You avail of the services of experienced and skilled professionals who are backed by a dedicated investment research team which analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme. |
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Diversification: Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks declare at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. |
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Convenient Administration: Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient. |
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Return Potential: Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities. |
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Low Costs: Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors. |
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Liquidity: In open-ended schemes, you can get your money back promptly at net asset value related prices from the Mutual Fund itself. With close-ended schemes, you can sell your units on a stock exchange at the prevailing market price or avail of the facility of direct repurchase at NAV related prices which some close-ended and interval schemes offer you periodically. |
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Transparency: You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook. |
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Flexibility: Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience. |
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Choice of Schemes: Mutual Funds offer a family of schemes to suit your varying needs over a lifetime. |
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Well Regulated: All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI. |
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