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Worldwide, the Mutual Fund, or Unit Trust as it is called in some parts
of the world, has a long and successful history. The popularity of the Mutual
Fund has increased manifold. In developed financial markets, like the United
States, Mutual Funds have almost overtaken bank deposits and total assets of
insurance funds. As of date, in the US alone there are over 5,000 Mutual Funds
with total assets of over US $ 3 trillion (Rs. 100 lakh crores). In India,the
Mutual Fund industry started with the setting up of Unit Trust of India in
1964. Public sector banks and financial institutions began to establish Mutual
Funds in 1987. The private sector and foreign institutions were allowed to set
up Mutual Funds in 1993. Today, there are 36 Mutual Funds and over 200 schemes
with total assets of approximately Rs. 81,000 crores. This fast growing
industry is regulated by the Securities and Exchange Board of India (SEBI).
What is a mutual fund?
| What are the types
of mutual fund schemes?
| Why should you
invest in mutual funds?
| How do you
understand and manage risk?
| How to invest in
| What are your rights
as a mutual fund unitholder?
Is a Mutual Fund ?
A Mutual Fund is a trust that pools the savings of a number of investors who
share a common financial goal. Anybody with an investable surplus of as little
as a few thousand rupees can invest in Mutual Funds. These investors buy units
of a particular Mutual Fund scheme that has a defined investment objective and
strategy The money thus collected is then invested by the fund manager in
different types of securities. These could range from shares to debentures to
money market instruments, depending upon the scheme's stated objectives. The
income earned through these investments and the capital appreciation realized
by the scheme are shared by its unit holders in proportion to the number of
units owned by them. Thus a Mutual Fund is the most suitable investment for the
common man as it offers an opportunity to invest in a diversified,
professionally managed basket of securities at a relatively low cost.
| What Are The
Types of Mutual Fund Schemes?
There are a wide variety of Mutual Fund schemes that cater to your needs,
whatever your age, financial position, risk tolerance and return expectations.
Whether as the foundation of your investment program or as a supplement, Mutual
Fund schemes can help you meet your financial goals.
A) By Structure
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.
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.
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.
(B) By Investment Objective
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.
These schemes are not for investors seeking regular income or needing their
money back in the short-term. Ideal for:
Investors in their prime earning years.
Investors seeking growth over the long-term
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:
Retired people and others with a need for capital stability and regular income.
Investors who need some income to supplement their earnings.
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:
*Investors looking for a combination of income and moderate growth.
Money Market Schemes
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:
* Corporate and individual investors as a means to park their surplus funds for
short periods or awaiting a more favourable investment alternative.
Tax Saving Schemes
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:
* Investors seeking tax rebates.
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. Remember, as always, higher the return you
seek higher the risk you should be prepared to take. A few frequently used
terms are explained here below:
Net Asset Value ("NAV")
Net Asset Value is the market value of the assets of the scheme minus its
liabilities. The per unit NAV is the net asset value of the scheme divided by
the number of units outstanding on the Valuation Date.
Sale Price Is the price you pay when you invest in a scheme. Also called
Offer Price. It may include a sales load.
Repurchase Price Is the price at which a close-ended scheme repurchases
its units and it may include a back-end load. This is also called Bid Price.
Redemption Price Is the price at which open-ended schemes repurchase
their units and close-ended schemes redeem their units on maturity. Such prices
are NAV related.
Sales Load Is a charge collected by a scheme when it sells the units.
Also called, 'Front-end' load. Schemes that do not charge a load are called 'No
Repurchase or 'Back-end' Load Is a charge collected by a scheme when it
buys back the units from the unitholders.
You Invest In Mutual Fund ?
The advantages of investing in a Mutual Fund are:
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.
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.
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.
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
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.
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
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.
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
Choice of Schemes. Mutual Funds offer a family of schemes to suit
your varying needs over a lifetime.
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
You Understand And Manage Risk?
All investments whether in shares, debentures or deposits involve risk: share
value may go down depending upon the performance of the company, the industry,
state of capital markets and the economy; generally, however, longer the term,
lesser the risk; companies may default in payment of interest/ principal on
their debentures/bonds/deposits; the rate of interest on an investment may fall
short of the rate of inflation reducing the purchasing power. While risk cannot
be eliminated, skillful management can minimize risk. Mutual Funds help to
reduce risk through diversification and professional management. The experience
and expertise of Mutual Fund managers in selecting fundamentally sound
securities and timing their purchases and sales, help them to build a
diversified portfolio that Minimizes risk and maximizes returns.
|How To Invest
In Mutual Funds?
Step One - Identify your investment needs.
Your financial goals will vary, based on your age, lifestyle, financial
independence, family commitments, level of income and expenses among many other
factors. Therefore, the first step is to assess your needs. Begin by asking
yourself these questions:
Step Two - Choose the right Mutual Fund.
What are my investment objectives and needs?Probable Answers: I need regular
income or need to buy a home or finance a wedding or educate my children or a
combination of all these needs.
How much risk am I willing to take? Probable Answers: I can only take a minimum
amount of risk or I am willing to accept the fact that my investment value may
fluctuate or that there may be a short-term loss in order to achieve a
long-term potential gain.
What are my cash flow requirements? Probable Answers: I need a regular cash
flow or I need a lump sum amount to meet a specific need after a certain period
or I don't require a current cash flow but I want to build my assets for the
future. By going through such an exercise, you will know what you want out of
your investment and can set the foundation for a sound Mutual Fund investment
Once you have a clear strategy in mind, you now have to choose which Mutual
Fund and scheme you want to invest in. The offer document of the scheme tells
you its objectives and provides supplementary details like the track record of
other schemes managed by the same Fund Manager. Some factors to evaluate before
choosing a particular Mutual Fund are:
Step Three - Select the ideal mix of Schemes.
the track record of performance over the last few years in relation to the
appropriate yardstick and similar funds in the same category.
how well the Mutual Fund is organized to provide efficient, prompt and
degree of transparency as reflected in frequency and quality of their
Investing in just one Mutual Fund scheme may not meet all your investment
needs. You may consider investing in a combination of schemes to achieve your
specific goals. The charts could prove useful in selecting a combination of
schemes that satisfy your needs.
Step Four - Invest regularly
For most of us, the approach that works best is to invest a fixed amount at
specific intervals, say every month. By investing a fixed sum each month, you
buy fewer units when the price is higher and more unitswhen the price is low,
thus bringing down your average cost per unit. This is called rupee cost
averaging and is a disciplined investment strategy followed by investors all
over the world. With many open-ended schemes offering systematic investment
plans, this regular investing habit is made easy for you.
Step Five - Keep your taxes in mind
If you are in a high tax bracket and have utilized fully the exemptions under
Section 80L of the Income Tax Act, investing in growth funds that do not pay
dividends might be more tax efficient and improve your post-tax return. If you
are in a low tax bracket and have not utilised fully the exemption available
under Section 80L, selecting funds paying regular income could be more tax
efficient. Further, there are other benefits available for investment in Mutual
Funds under the provisions of the prevailing tax laws. You may therefore
consult your tax advisor or Chartered Accountant for specific advice.
Step Six - Start early
It is desirable to start investing early and stick to a regular investment
plan. If you start now, you will make more than if you wait and invest later.
The power of compounding lets you earn income on income and your money
multiplies at a compounded rate of return.
Step Seven - The final step
All you need to do now is to get in touch with a Mutual Fund or your
agent/broker and start investing. Reap the rewards in the years to come. Mutual
Funds are suitable for every kind of investor-whether starting a career or
retiring, conservative or risk taking, growth oriented or income seeking.
Yours Rights As A Mutual Fund Unitholder?
As a unitholder in a Mutual Fund scheme coming under the SEBI (Mutual Funds)
Regulations, ("Regulations") you are entitled to:
Receive unit certificates or statements of accounts confirming your title
within 6 weeks from the date of closure of the subscription or within 6 weeks
from the date your request for a unit certificate is received by the Mutual
Receive information about the investment policies,investment objectives,
financial position and general affairs of the scheme;
Receive dividend within 42 days of their declaration and receive the redemption
or repurchase proceeds within 10 days from the date of redemption or
Vote in accordance with the Regulations to:
Either approve or disapprove any change in the fundamental investment policies
of the scheme which are likely to modify the scheme or affect your interest in
the Mutual Fund; (as a dissenting unitholder, you would have a right to redeem
Change the asset management company;
Wind up the schemes.
Inspect the documents of the Mutual Funds specified in the scheme's offer
document. In addition to your rights, you can expect the following from Mutual
To publish their NAV, in accordance with the regulations: daily, in case of
most open ended schemes and periodically, in case of close-ended schemes;
To disclose your schemes' portfolio holdings, expenses, policy on asset
allocation, the Report of the Trustees on the operations of your schemes and
their future outlook through periodic newsletters, half- yearly and annual
To adhere to a Code of Ethics which require that investment decisions are taken
in the best interests of the unitholders.