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Fqreuently Asked Questions- General

What is a Mutual Fund? Concept of Mutual Fund Why should I invest in mutual funds? What are the advantages of Mutual Fund? What are the disadvantages of Mutual Fund? What are the types of Mutual Funds? What should one keep in mind while choosing a good Mutual Fund? Who is the Regulatory Body for Mutual Funds? What are the broad guidelines issued for Mutual Funds? What are the rights of a unit holder in a Mutual Fund? Can mutual funds be viewed as risk-free investments? What are the types of risks involved in investing in mutual funds? How much return can I expect by investing in mutual funds ? What is an Asset Management Company (AMC)? What is NAV? What is Applicable NAV? What are the cut off timings? At what time is the NAV declared? What is a load? What is a Redemption/Repurchase Price? What is a Switching Facility? What is the applicable NAV for switch? What is Growth, Dividend Pay-out and Reinvestment? How do I choose between them? How can I track a Fund's performance? Who is a Custodian? Who is a Registrar? Am I eligible for rebate on income tax by investing in a MF? Do mutual fund investments attract wealth tax? If I gift mutual fund units, does it attract gift tax? Is income from mutual funds exempt from income tax? Is there any minimum lock-in period for my units? What is an Account Statement? What is a Systematic Investment Plan? What are the benefits of Systematic Investment Plan? What is a Systematic Withdrawal Plan? What are the benefits of Systematic Withdrawal Plan? What is a Systematic Transfer Plan?

What is a Mutual Fund?

A Mutual Fund is an intermediary that pools money from a number of investors and invests the same in a variety of different financial instruments. The income earned through these investments and the capital appreciation realized by the scheme is shared by the investors or Unit Holders, in proportion to the number of units owned by them. Mutual funds can thus be considered as financial intermediaries that collect funds from investors and invest it on their behalf. The losses and gains accrue to the investors only.

Concept of Mutual Fund

Why should I invest in mutual funds?

Most of us are not investment professionals nor well qualified to apply the theories of portfolio structuring to our holdings and nowadays investing is becoming more complex. Many of us do not have the time to make or monitor personal investment decisions on a regular basis. Hence would be better off leaving that to professionals. Mutual funds represent one such option.
Mutual Funds are investment vehicles managed by professional fund managers who are more regulated and hence offer investors the ability to analyze and evaluate their track record. Mutual funds provide an option of investing without getting lost in the complexities and most importantly, they provide risk diversification: Diversification of a portfolio is amongst the primary tenets of portfolio structuring which is necessary to reduce the level of risk. Mutual funds also vary in their investment objectives, thus provides the flexibility to create an investment plan based on individual financial goals.

What are the advantages of Mutual Fund?

  • Portfolio Diversification
  • Professional Management
  • Less Risk
  • Liquidity
  • Choice of Schemes
  • Transparency
  • Flexibility
  • Safety

What are the disadvantages of Mutual Fund?

  • Costs control not in the hands of an investor.
  • No Customized Portfolios.
  • Difficulty in selecting a suitable fund scheme.

What are the types of Mutual Funds?

What should one keep in mind while choosing a good Mutual Fund?

  • Performance.
  • Stability.
  • Expenses.
  • Risk profile and Investment objective.
  • Services offered by the mutual fund.

Who is the Regulatory Body for Mutual Funds?

Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds. All the mutual funds must get registered with SEBI. The only exception is the UTI, since it is a corporation formed under a separate Act of Parliament.

What are the broad guidelines issued for Mutual Funds?

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 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 that govern investment strategy, disclosure norms and advertising code for mutual funds.

What are the rights of a unit holder in a Mutual Fund?

Some of the 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.

Can mutual funds be viewed as risk-free investments?

No. Mutual fund investments are not totally risk free. Investing in mutual funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced.

What are the types of risks involved in investing in mutual funds?

A very important risk involved in mutual fund investments is the market risk. When the market is in doldrums, most of the equity funds will also experience a downturn. However, the company specific risks are largely eliminated due to professional fund management.

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 an Asset Management Company (AMC)?

The company that manages a mutual fund is called an AMC. It is an investment management firm that invests the pooled funds of investors in line with the stated investment objectives for a fee.
An AMC may have several mutual fund schemes with similar or varied investment objectives.

What is NAV?

Net Asset Value (NAV) is the actual value of one unit of a given scheme on any given business day. The NAV reflects the liquidation value of the fund's investments on that particular day after accounting for all expenses. It is calculated by deducting all liabilities (except unit capital) of the fund from the realizable value of all assets and dividing it by number of units outstanding.

What is NAV?

For the purpose of purchase, redemption & switches, the applicable NAV is the Net Asset Value per Unit at the close of the Working day on which a request, complete in all respects is accepted and received before the cut-off time for the particular scheme. Otherwise, the applicable NAV would be the one for the next business day.

What are the cut off timings?

Cutoff timing is the time before which an investor has to submit / lodge his / her application form for the date of submission / redemption to be considered as the transaction date. For applications submitted / lodged after the cut off time the applicable transaction date is the next business day. Depending on the transaction date the NAV is applicable.

At what time is the NAV declared?

On all business days, depending on the scheme type, NAV is declared in the evening on or before 9 p.m

What is a load?

The charge collected by a Mutual Fund from an investor for selling the units or investing in it.

When a charge is collected at the time of entering into the scheme it is called an Entry load or Front-end load or Sales load. The entry load percentage is added to the NAV at the time of allotment of units.

An Exit load or Back-end load or Repurchase load is a charge that is collected at the time of redeeming or for transfer between schemes (switch). The exit load percentage is deducted from the NAV at the time of redemption or transfer between schemes.

Some schemes do not charge any load and are called "No Load Schemes"

What is a Redemption/Repurchase Price?

Redemption or Repurchase Price is the price at which an investor sells back the units to the Mutual Fund. This price is NAV related and may include the exit load.

What is a Redemption/Repurchase Price?

Redemption or Repurchase Price is the price at which an investor sells back the units to the Mutual Fund. This price is NAV related and may include the exit load.

What is a Redemption/Repurchase Price?

Redemption or Repurchase Price is the price at which an investor sells back the units to the Mutual Fund. This price is NAV related and may include the exit load.

What is a Switching Facility?

Switching facility provides investors with an option to transfer the funds amongst different types of schemes or plans. Investors can opt to switch units between Dividend Plan and Growth Plan at NAV based prices. Switching is also allowed into/from other select open-ended schemes currently within the Fund family or schemes that may be launched in the future at NAV based prices.

What is the applicable NAV for switch?

Switch requests are effected the day the request for switch is received. The Applicable NAV for the switch will be the NAV on the day that the request for switch is received.

What is Growth, Dividend Pay-out and Reinvestment? How do I choose between them?

  • Growth, Dividend Pay-out and Dividend Re-investment are the methods by which you can get paid the returns. The fundamental difference between the three options is the method in which the returns are distributed to the investor. Rest of the factors remaining the same, investors in these three options would get their returns distributed differently.
  • If you invest in the Growth / Appreciation option, the returns that your investment earns would continue to work for you in the market. It would reflect as appreciation in the fund's Net Asset Value (NAV)
  • If you choose to invest in dividend payout option, the returns generated by your investment are disbursed on a regular basis as dividends.
  • If your investment is in the dividend reinvestment option, then it means that you have authorized the fund house to reinvest the dividends declared by the fund house to buy more units. In terms of returns, dividend reinvestment is similar to that of the growth option.
  • To choose between them consider these factors:

    • If your investments and liquidity are not linked (i.e. your investment does not hamper your regular cash flow), the best option would be growth / appreciation.
    • If you are keen on receiving regular income from time-to-time, then you should opt for the dividend option.
    • If tax efficiency is the key parameter in your decision process, then Dividend reinvestment may turn out to be the best. Should there be a need for liquidity; one can always sell units worth the required amount at NAV.

How can I track a Fund's performance?

A Fund's performance can be tracked by the Net Asset Value of the Company. NAVs of a Fund are calculated on a day-to-day basis. A funds performance can either be measured against its benchmark, which is a stock market index such as Sensex, Nifty 50, BSE 200 etc, or against schemes from other fund houses which have a similar investment objective.

Every scheme must have a benchmark, as per the regulations. A fund house will select a benchmark which has a similar composition compared to the scheme.

The NAVs are published in financial newspapers and are also available on the AMFI website on a daily basis.

Who is a Custodian?

A Custodian is an independent agency who holds the physical custody of the Financial Securities owned by a client. SEBI has registered a few agencies as Custodians who can provide these services. SEBI also requires that Mutual Funds appoint such registered Custodian for maintaining their securities.

The Custodian ensures that:

  • all Securities are maintained systematically
  • the Sales and Purchases are carried out properly
  • Bad deliveries are cleared by the broker
  • Dividends or Interest or Redemption proceeds are collected on the due date
  • Any benefits, such as Bonus or Rights are accrued

Who is a Registrar?

A Registrar holds and maintains the details of the transactions carried out by each Unit holder in a Mutual Fund scheme. He is appointed by the AMC to serve the Unit holder for the purchases, sales or switching of Units that he may carry out. The dividend distribution, recording of nominations or transfers are some other services rendered by the Registrar. He may also have Investor Service Centers in various cities, where an investor can get over-the-counter service.

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 under Section 88 of the Income Tax Act. In such cases the fund prospectus explicitly states that it is a tax saving fund. In such cases 20 percent of your contribution will qualify for rebate under Section 88 of the Income Tax Act.

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.

If I gift mutual fund units, does it attract gift tax?

No. With effect from 1st October 1998, units of a mutual fund gifted by unit holders are no longer chargeable to Gift Tax.

Is income from mutual funds exempt from income tax?

Yes. 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 50 percent of the portfolio is invested in equities.

Please note that in the current Union Budget 2000, the tax on debt funds has been increased from 10 percent to 20 percent.

Is there any minimum lock-in period for my units?

There is no lock-in period in the case of open-ended funds. However in the case of tax saving funds a minimum lock-in period is applicable. The lock-in period for different tax saving schemes are as follows:

section          minimum lock-in period
U/s 88           3 yrs.
U/s 54EA       3 yrs.
U/s 54EB       7 yrs.

What is an Account Statement?

An Account Statement is a non-transferable document that serves as a record of transactions between the fund and the investor. It contains details of the investor, the units allotted or redeemed and the date of transaction. The Account Statement is issued every time any transaction takes place.

What is a Systematic Investment Plan?

A systematic investment plan is one where an investor contributes a fixed amount regularly into the mutual fund scheme (every month or quarter as per convenience) at the then prevailing NAV (Net Asset Value).

What are the benefits of Systematic Investment Plan?

  • It avoids lump sum investment at one point of time.
  • In a scenario of falling prices, it reduces overall cost of acquisition by a process of
           rupee cost averaging i.e. at a lower prices investor ends up getting more unit for
          the  same investment.

What is a Systematic Withdrawal Plan?

A systematic withdrawal plan is a financial plan that allows a shareholder to withdraw money from an existing mutual fund portfolio at predetermined intervals.

What are the benefits of Systematic Withdrawal Plan?

  • Systematic Withdrawal Plans allow account holders to access their money at
        regular   intervals as they need it. This makes it easier for investors to carry out
        their   financial plans and help meet their goals.

    Systematic withdrawal plans allow investors a certain level of independence
        from market fluctuations and may reduce the single period price risk associated
        with withdrawing large amounts at once.

What is a Systematic Transfer Plan?

Systematic Transfer Plan is a financial plan where in an investor invests a lump sum amount in one scheme and regularly transfers (i.e. switches) a pre-defined amount into another scheme. Every month on a specified date an amount you choose is transferred from one mutual fund scheme to another of your choice.