Mutual Fund- FAQs
How do I invest in a mutual fund scheme?
Mutual funds usually issue advertisements in the newspapers, announcing the launch of new schemes. Investors can also contact the funds’ agents and distributors for information and application forms. Filled application forms may be deposited with the funds, through the agents or distributors. Of late, post offices and banks have also begun to distribute the units of mutual funds. However, these schemes are merely being marketed by the banks and post offices. The banks and post offices offer no assurance of returns.
What is a prospectus or offer document?
This is a document that all mutual funds are required to provide to investors. As an investor, you should read this document carefully before investing in these funds. Ensure that you are referring to the latest offer document. An offer document must be updated at least annually. The prospectus must contain the following:
· Date of issue: This is the start and end date of new fund offers.
· Minimum investment to be made: Mutual funds prescribe the minimum amount to be invested through new fund offers and multiple amounts in addition to the prescribed minimum.
· Investment objectives: This section details the broad criteria that the mutual fund will follow with regard to investing in a particular security.
· Investment policies: The offer document will also outline the general strategies the fund managers will implement, types of investments, and asset allocation pattern considered appropriate for the fund.
· Risk factors: The offer document is required to describe the risks associated with investing in the fund. You should be familiar with the differences between varieties of risk, why these risks are inherent in particular funds, and how these risks fit in with risks in the overall portfolio.
· Benchmarks used: Check the benchmarks chosen by the fund to ensure that its relative performance is appropriate. Be careful to read the fine print in these sections.
· Fees and expenses: Offer documents are also required to list the limits on fees, including entry and exit loads, switching charges, annual recurring expenses, management fees and investor servicing costs. The prospectus also indicates the impact these have had on fund investment.
· Key personnel: This section details the qualifications and professional experience of the top management in the fund company, including those of the chief executive officer (CEO) and fund managers.
· Tax benefits information: Mutual funds enjoy significant tax benefits. For example, equity funds enjoy no long term capital gains or dividend distribution tax benefits. Careful reading of the tax benefits is essential before you to plan tax benefits so as to enhance post-tax returns.
· Investor services: You have access to the services (such as automatic reinvestment of dividend and systematic investment/withdrawal plans) that are mentioned in the offer document.
Can investors appoint nominees for their investments in mutual fund units?
Yes. Nominations may be made by individuals applying for or holding units on their own behalf, either singly or jointly. Non-individuals including societies, trusts, corporate bodies, partnership firms, Kartas of Hindu undivided families, or holders of power of attorney cannot nominate.
Can non-resident Indians (NRIs) invest in mutual funds?
Yes. The offer documents of schemes provide information on how NRIs may subscribe to mutual fund schemes in India.
What should I look for in offer documents?
The mutual funds are required to provide an abridged version of the offer document to investors; this version contains useful information. Read this version carefully. The application form for subscribing to schemes is an integral part of the offer document. SEBI has prescribed minimum disclosures in the offer document. Due care must be given to portions relating to the scheme’s main features, risk factors, initial issue expenses and recurring expenses, entry and exit loads, sponsor’s track record, performance of other schemes launched by the fund, and the qualifications and experience of key personnel including fund managers.
How are mutual fund issues different from initial public offerings (IPOs) of companies?
Company IPOs may open at prices that are lower or higher price than the issue price, depending on market sentiment and investor perceptions. However, in the case of mutual funds, the par value of units is unlikely to rise or fall immediately after allotment. Mutual fund schemes require time to invest in securities. The value of securities in which the scheme deploys its funds will drive the scheme’s NAV.
How much should I invest in debt and equity-oriented schemes?
That is for you to decide. But remember to factor in your risk-taking capacity, age, and financial position before investing. Schemes invest in a variety of securities, as disclosed in the offer documents, and offer varying returns and risks.
What is the net asset value (NAV) of a scheme?
The NAV denotes the performance of a mutual fund scheme. NAV is the market value of the securities held by the scheme. Since market value changes every day, NAVs of schemes also vary on a daily basis. The NAV per unit is the market value of a scheme’s securities, divided by the total number of units on a given date. If the market value of securities is Rs.200 lakh and the mutual fund has issued 10 lakh units of Rs.10 each to investors, the NAV per unit of the fund is Rs.20. Mutual funds are required to disclose their NAVs on a daily or weekly basis, depending on the type of scheme.
What is a load or no-load fund?
A load fund is one that charges a percentage of the NAV for entry or exit. That is, each time you buy or sell units in the fund, you pay a charge. The fund uses this charge to meet its marketing and distribution expenses. Let’s say the NAV per unit is Rs.10: if the entry and exit load charged is 1 per cent, you would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund get only Rs.9.90 per unit. You should, therefore, take the loads into consideration while investing, as these affect your returns. You also need to factor in the fund’s performance track record and service standards. The efficient funds often offer high returns despite the loads.
A no-load fund is one that does not charge for entry or exit. This means that you can enter the fund or scheme at NAV and no additional charges are payable on purchase or sale of units.
Can mutual funds impose fresh loads or increase loads beyond levels mentioned in offer documents?
No. Changes in load are applicable only to prospective investments and not to original investments. In case of imposition of fresh loads or increase in existing loads, the funds are required to amend their offer documents so that new investors are aware of the loads while investing.
What is a contingent deferred sales charge (CDSC)?
Some funds charge varying loads, depending on the extent of time the investor has stayed with the fund; the longer the investor stays with the fund, the lesser the exit load is likely to be. This is called CDSC.
What do I get as proof of my holdings?
You get an account statement, which is similar to a bank passbook. This is a non-transferable document, which includes details of all purchases and sales, along with the price at which the purchase or sale was made. It also indicates the amount invested and redeemed to date, and the number of units held, helping you track investments.
Fresh account statements will be sent to you reflecting your updated holdings after every transaction. Generally, account statements are sent within three working days on receipt of purchase or redemption request at an investor service centre. The AMC may also issue a non-transferable unit certificate to you within six weeks of the receipt of request for the certificate.
Will I have facilities to switch between funds?
You may switch all or part of your investments in one fund to another available fund. AMCs do not charge fees for such switches. To process a switch, you need to provide clear instructions, by completing a form and submitting it on any business day at an investor service centre, or the office of registrar or transfer agent. The form may also be sent by post. An account statement reflecting the new holdings will be sent to you within three days of completion of transaction.
Who is the custodian?
The custodian is the company responsible for the possession, handling and safekeeping of all securities purchased by the mutual fund.
How can I find out where the mutual fund scheme has invested the money mobilised from investors?
Mutual funds are required to disclose the full portfolios of all of their schemes on a half-yearly basis; these disclosures are published in the newspapers. Some mutual funds even send these disclosures to unit holders.The portfolio disclosures indicate the levels of investment made in each security such as equity, debentures, money market instruments and G-Secs, and their quantity, market value and per cent to NAV. They also disclose the extent of illiquid securities in the portfolio, investments made in rated and unrated debt securities and non-performing assets (NPAs). Some mutual funds also send newsletters to unit holders on a quarterly basis, disclosing these data.
Are mutual funds allowed to indulge in speculation/day trading?
No, they are not. SEBI mandates that all trades done by mutual funds be settled by delivery. The latest budget has allowed mutual funds to short sell, but only when backed by delivery after a lending/borrowing mechanism is in place.
How do I evaluate the performance of mutual fund schemes?
The NAV, disclosed on a daily basis in the case of open-end schemes, and weekly basis in the case of close-end schemes, will help you evaluate performance. The funds are required to publish NAVs in the newspapers. The NAVs are also available on the funds’ web sites. In addition, the funds are required to disclose their NAVs on the AMFI web site (www.amfiindia.com), where you can access the NAVs of all mutual funds. The funds also publish half-yearly results, which include the returns over periods of time; these half-yearly results also provide details such as the percentage of expenses of total assets, which affects yield. You will also receive annual reports or abridged versions of the annual report from the fund at the end of the year.
Studies relating to mutual fund schemes are published by the financial newspapers on a regular basis. Research agencies also publish reports on the performance of mutual funds and rankings of schemes in terms of performance. Such reports and analyses will also help you keep abreast of developments. Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity-oriented schemes with benchmarks such as the BSE Sensitive Index and S&P CNX Nifty. Monitoring the performance of funds will help you decide when to enter or exit a scheme.
How do I choose a scheme for investment from a number of available schemes?
You need to read the offer document of the mutual fund schemes carefully. Remember to evaluate the past performance of the schemes you wish to choose from, provided these schemes have similar investment objectives. Though past performance is not always an indicator of future performance, it is nevertheless an important factor that needs to be considered while making investment decisions. In the case of debt-oriented schemes, you should also evaluate the quality of instruments, as reflected in their ratings. Schemes with lower rates of return, but with investments in higher-rated instruments are safer than those with higher yields, but with investments in lower-rated instruments. In equity schemes too, you will do well to look for the quality of the portfolio. Also, remember to seek the advice of experts you can trust.
If a variety of mutual funds offer schemes in the same category, should I choose the scheme with the lowest NAV?
Some investors prefer schemes that are available at low NAVs. However, remember that in the case of mutual funds schemes, low or high NAVs have little or no relevance. You should choose schemes based on factors such as the fund’s past performance, service standards and level of professional management.
Consider the following example: Scheme A is available at an NAV of Rs.15, while Scheme B is available at Rs.90; both are diversified equity-oriented schemes. You have invested Rs.9000 in each of the two schemes. You would get 600 units (9000/15) in Scheme A and 100 units (9000/90) in Scheme B. If the markets go up by 10 per cent and both schemes perform equally well, the NAV of Scheme A would increase to Rs.16.50, while that of Scheme B would increase to Rs.99. Thus, the market value of both investments would be Rs.9900, and on both investments, you would get identical returns of 10 per cent. Thus, low or high NAVs have little relevance when you are making investment decisions. Likewise, if a new equity oriented scheme is being offered at Rs.10 and an existing scheme is available for Rs.90, their NAVs should not be the overriding factor that influences your investment decision.
It is likely that the better-managed scheme with a higher NAV may give better returns than a scheme that has a lower NAV, but is not managed efficiently. Efficiently managed schemes with high NAVs are unlikely to fall as much as inefficiently managed schemes with low NAVs. Therefore, you will do well to give more weightage to professional management, rather than to the NAV.
How significant are fund costs while choosing schemes?
The costs of investing through mutual funds are not insignificant, and deserve due consideration, especially when you are considering to invest in fixed income funds. Factors such as management fees, and the fund’s annual expenses and sales loads can eat into significant portions of your returns. Also, carefully consider the fees charged by funds for entering or exiting a scheme.
What are”Fundamental attributes” of a scheme?
The following are classified as “fundamental attributes” as per clause (d) of sub-regulation (15) of regulation 18:
· Type of a scheme
· Open ended/Close ended/Interval scheme
· Sectoral Fund/Equity Fund/Balance Fund/Income Fund/Index Fund/Any other type of Fund
· Investment Objective
· Main Objective – Growth/Income/Both.
· Investment pattern – The tentative Equity/Debt/Money Market portfolio break-up with minimum and maximum asset allocation, while retaining the option to alter the asset allocation for a short term period on defensive considerations.
· Terms of Issue
· Liquidity provisions such as listing, repurchase, redemption.
· Aggregate fees and expenses charged to the scheme.
· Any safety net or guarantee provided.
Can mutual funds alter asset allocations (investment pattern) while deploying the investors’ funds?
Considering the market trends, any prudent fund managers can alter the asset allocation (investment pattern) i.e. he can invest higher or lower percentage of the fund in equity or debt instruments compared to what is disclosed in the offer document. It can be done on a short term basis on defensive considerations i.e. to protect the NAV. Hence the fund managers are allowed certain flexibility in altering the asset allocation considering the interest of the investors.
However the trustees shall ensure that no change in the fundamental attributes of any scheme or the trust or fees and expenses payable or any other change which would modify the scheme and affects the interest of unitholders, shall be carried out unless,—
· A written communication about the proposed change is sent to each unitholder and an advertisement is given in one English daily newspaper having nationwide circulation as well as in a newspaper published in the language of region where the Head Office of the mutual fund is situated; and
· The unit-holders are given an option to exit at the prevailing Net Asset Value without any exit load.
Can mutual funds change the nature of schemes from the one specified in the offer document?
Yes. However, no change in the nature or terms of the scheme, known as fundamental attributes such as structure or investment pattern is allowed unless a written communication is sent to each unit holder and an advertisement is published in an English daily with a nationwide circulation and in a newspaper published in the language of the region where the head office of the mutual fund is situated. Unit holders have the right to exit the scheme at the prevailing NAV without any exit load if they do not want to continue with the scheme. The funds are required to follow a similar procedure while converting schemes from close-ended to open-ended or while changing the sponsor.
Offer documents are required to be revised and updated at least once in two years. New investors are informed of material changes by way of addendum to the offer document till the offer document is revised and reprinted.
Are investments in mutual fund units safe?
No stock market related investments can be termed safe with certainty; they are inherently risky. However, funds have varying risk profiles, as stated in their objective. Funds, which categorise themselves as low risk, invest generally in debt, which is less risky than equity. Mutual funds are, however, always safer than direct investments in the stock markets as they have access to the services of expert fund managers.
What are the risks inherent in mutual funds?
Equity Funds are open to market risks; the price of the stocks in which the fund has invested may reduce. Conversely, the prices may go up, enabling the funds to earn profits.
Debts Funds are open to credit and interest rate risks. Credit risks refer to the possibility that the company that has issued the bond or debenture in which the fund has invested may default on interest or on principal payments. Debt fund managers take care of this by investing in bonds with a strong credit rating. Interest rate risks refer to the possibility that the price of the bond in which the fund has invested may go down, because of an increase in interest rates in the economy. In general, it is useful to remember that this is an inverse relationship – bond prices (and therefore, NAVs) go up when interest rates drop, and drop when interest rates rise.
Are mutual fund schemes suitable for small investors?
Mutual funds are meant specifically for small investors. Although small investors may not be able to carefully monitor and analyse investments in the stock markets, the mutual funds are usually equipped to carry out thorough analysis and thus, ensure superior returns to investors.
Is the higher net worth of the sponsor a guarantee for better returns?
The offer documents of mutual fund schemes mention financial performance and net worth of the sponsor for a period of three years. This helps the investor evaluate the track record of the company that has sponsored the mutual fund. However, the sponsor’s high net worth does not mean that the scheme would offer better returns or that the sponsor would compensate investors if the NAV falls.
Are mutual funds insured?
No. Unlike certain types of savings accounts and certificates of deposit, mutual fund units are not insured by the government, or any government agency, and do not have any other type of insurance. There is no guarantee that when you sell your shares, you will receive what you paid for them.
How long will it take for the transfer of units after purchase from the stock markets in the case of close-ended schemes?
According to SEBI Regulations, transfer of units has to be done within 30 days from the date of lodgement of certificates with the mutual fund.
How long will it take for investors to receive dividends/repurchase proceeds?
A mutual fund is required to despatch to the unit holders the dividend warrants within 30 days of the declaration of dividends; redemption or repurchase proceeds are to be sent within 10 working days from the date of redemption or repurchase request made by the unit holder.
In case of failures to despatch the redemption/repurchase proceeds within the stipulated time period, the AMC is liable to pay interest as specified by SEBI from time to time (15 per cent at present).
If mutual fund schemes are wound up, what happens to the money I have invested in them?
If a scheme winds up, the mutual funds pays a sum based on the prevailing NAV, after adjustment of expenses. Unit holders are entitled to receive a report on the wind up from the mutual funds, which provides all the necessary details.
Are ‘mutual benefit’ companies the same as mutual funds?
No. Companies with the tag, ‘mutual benefit,’ in their names are not mutual funds. These companies do not come under the purview of SEBI. Mutual funds, however, can mobilise funds from investors only after getting registered with SEBI.
How do I get my grievances redressed?
The name of the person to contact for redressal of grievances is mentioned in the offer document. Trustees of mutual funds monitor the activities of the funds. The names of the directors of the AMC and trustees are also provided in the offer documents. You can also approach SEBI for redressal of complaints. On receipt of complaints, SEBI takes up the matter with the concerned mutual fund and follows up on these till the matter is resolved.