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 mutual funds?
What are your rights as a mutual fund unitholder?
What 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
* 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
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
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 Load'
Repurchase or 'Back-end' Load Is a charge collected by a scheme when it buys
back the units from the unitholders.
Why Should 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 selected securities.
- 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
- 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.
- 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 convenience.
- 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 by SEBI.
How Do 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 personalized service.
- degree of transparency as reflected in frequency and quality
of their communications.
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
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.
What Are 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
- 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 your investments);
- 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 Funds:
- To publish their NAV, in accordance with the regulations:
daily, in case of most open ended schemes and periodically, in case of close-ended
- 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
- To adhere to a Code of Ethics which require that investment
decisions are taken in the best interests of the unitholders.