What are mutual funds?
A mutual fund is a group of stocks, bonds and other investments that are owned by a large number of investors and managed by a professional investment company. The investor buys the units of a particular fund and becomes a part of the mutual fund and participates in the loss and profits.
As a rule, Investors should read the mutual fund prospectus clearly before investing. The reason being, the prospectus clearly defines a fund's investment objective, the investment style of the manager and the types of securities in which the fund will invest.
How does a Mutual Fund work?
When you invest in a mutual fund, you become the shareholder of the selected mutual fund. The fund manger takes the entire pool of money from all of the fund's investors and invests it in a carefully selected range of investments based on specific goals and procedures that are outlined in the fund’s prospectus
The fund's value keeps fluctuating from day to day. The NAVs of the funds don’t remain constant. The value of a fund's units i.e. NAVs are updated on a daily basis and are available on the AMC’s website.
Many factors like change in interest rates, economic trends influence the performance of a mutual fund. When you purchase units in a mutual fund, you agree to pay certain fees and expenses in the form of entry and exit load.
What are the different types of mutual funds?
Mutual Fund Schemes are generally classified into two types viz.
- Open-ended Fund/ Scheme: An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis.
- Close-ended Fund/ Scheme: A close-ended fund or scheme has a fixed maturity period. The fund is open for subscription only during a specified period at the time of launch of the scheme. During this period, investors can invest in the scheme at the time of the initial public issue.
What is Investment Objective?
1. Growth Schemes
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:
2. Income Schemes
- 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 Idea for:
3. Balanced Schemes
- 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:
4. Money Market/ Liquid Schemes
- Investors looking for a combination of income and moderate growth.
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 interbank call money.
5. Other Schemes
Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market. Ideal for:
6. Tax Saving schemes
- Corporates and individual investors as a means to park their surplus funds for short periods or awaiting more favourable investment alternative.
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.
The details of such tax saving schemes are provided in the relevant offer documents. Ideal for;
7. Special Schemes
- 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 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.
Why should you invest in mutual funds?
The advantages of investing in a Mutual Fund are:
- 1.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.
- 2.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 decline 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.
- 3.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.
- 4.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.
- 5.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.
- 6.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.
- 7.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.
- 8.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.
- 9.Choice of Schemes: Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
- 10.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 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 –
- 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 face 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?
Probably Answer: 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 required 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 strategy.
Choose the right Mutual Fund.
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 documents of the scheme tells you its objectives and provides supplementary details like the track record of other of other schemes managed by the same Fund Manager. Some factors to evaluate before choosing a particular Mutual Fund are:
- 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 Mutual Fund is organized to provide efficient, prompt and personalized service.
- Degree of transparency as reflected in frequency and quality of their communications.
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 units when 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.
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.
What is SIP?
An SIP is a facility offered by at all mutual funds (MFs) for investing in equity funds. It requires you to invest a fixed sum of money periodically, say monthly or quarterly, in an equity fund of your choice. The amount can be as low as Rs. 500 or Rs. 1000. Your SIP should last for a minimum of six months. So even if you do not have a lumpsum to commit at the start, you can make a small beginning using an SIP, and the continue to invest periodically. The approach here is similar to investing regularly, every month, in recurring deposits of banks and post offices. However, a SIP gives you the long-term benefits of equity investing.
How does SIP work?
You can enroll for an SIP directly without having to make a one-time investment. Suppose you enroll for a SIP of Rs. 100 per month for one year in January 2008. Your first investment will be for Rs. 1000 and units will be allotted. As It takes time for an SIP documents to be processed with banks, your SIP instalments may start latest by March.
You can use a SIP in two Ways:
- By issuing the required number of Post-dated cheques. OR
- By authorizing your banker to debit your account on a specific date of a month for the SIP period chosen by you, also known as the auto debit facility. This is a more convenient way to invest in a SIP.
Assume you invest Rs. 1000 every month for specific period and your SIP date is the 1st
of every month. On this date, every month, the appropriate number of units will be credited to your MF account. As your monthly contribution remains the same, if the market and, therefore, your funds N
goes up, you will get fewer units; if your fund’s NAV drops, you will get more units.
Features Of The SIP Investment Strategy
- Disciplined approach.
- Regular investing in equity.
- A fixed amount of investment every month become an integral part of your budget.
- No need to refer market conditions; no efforts to time the market.
- Buying equities through bullish and bearish phases
- No stocks calls or necessity to track the markets, as you have opted for a professional fund manager.
- Patience and a long-term approach
What question do i need to ask before i buy SIP?
Check the past performance of the fund and ascertain its risk factors. A SIP calls for a long-term commitment as you are going to be investing in it every month. It pays if the scheme has a good track record and is backed by a fund house with pedigree.
Reducing risk. optimizing returns
- You could choose to do an SIP for Six or Twelve months.
- You will be better served by continuing the SIP for longer periods.
- As you extend the SIP to longer periods, the risk of loss declines significantly.
- For optimum benefits, do an SIP for at least five years but review the chosen funds at least once a year or every two years to make a change, if needed.
- Even as risk of loss declines, the power of compounding takes effect.
SIP is a great way to channelise your savings regularly. If you are earning a regular or a monthly income, a SIP is the best mechanism for you to invest a defined part of your income in MFs.
What is NRI in Mutual Fund?
Investing in mutual funds has become the new rage among investors. There are countless new funds that are launched on a regular basis. A variety of funds, each focusing on short and long- term period are easily available. There are plentiful funds obtainable in the market that can find a perfect match to suit your risk.
A mutual fund is an investment, which is operated by an investment company that raises money from shareholders and invests it in stocks, bonds, options, commodities, or money market securities. These funds offer investors the advantages of diversification and professional management.
Can NRIs invest in Mutual Funds in India?
Investments by NRIs in Mutual Funds can be made on a repatriable or on a non-repatriable basis, as preferred by the investor
- 1. Repatriable Basis: To invest on a repatriable basis, you must have an NRE or FCNR Bank Account in India. The Reserve Bank of India (RBI) has granted a general permission to Mutual Funds to offer mutual fund schemes on repatriation basis, subject to the following conditions:
- 1. The mutual fund should comply with the terms and conditions stipulated by SEBI.
- 2. The amount representing investment should be received by inward remittance through normal banking channels, or by debit to an NRE / FCNR account of the non-resident investor.
- 3. The net amount representing the dividend / interest and maturity proceeds of units may be remitted through normal banking channels or credited to NRE / FCNR account of the investor, as desired by him subject to payment of applicable tax.
- 2. Non-Repatriable Basis: The Reserve Bank of India (RBI) has granted a general permission to Mutual Funds to offer mutual fund schemes on non-repatriation basis, subject to the following conditions:
- 1. Funds for investment should be provided by debit to NRO account of the NRI investor. Alternatively, funds may be invested by inward remittance or by debit to NRE / FCNR Account.
- 2. The current income in the form of dividends is allowed to be repatriated.
No permission of Reserve Bank either by the Mutual Fund or the NRI investor is necessary.
Does an NRI need any approvals from the Reserve Bank of India to invest in mutual fund schemes?
No. As an NRI, one does not need any specific approval from the RBI for investing or redeeming from Mutual Funds. Only OCBs and FIIs require prior approvals before investing in Mutual Funds.
Are bank account details mandatory?
In order to protect unit holder interest from fraudulent encashment of cheques, the current SEBI Regulations, has made it mandatory for investors to mention in their application/repurchase-redemption request, the bank name and account number of the unit holders .The AMC will not be responsible for any loss arising out of fraudulent encashment of cheques and or any delay /loss in transit. In the absence of these details, applications are liable for rejection.
What are the risks involved?
Investment in Mutual Fund are subject to market risks. The following risks are mentioned below:
- Mutual funds and securities are subject to market risks and there is no assurance and no guarantee that the objectives of the mutual fund will be achieved.
- The NAV of the units issued under the scheme may go up or down depending on the factors and forces affecting capital markets.
- Past performance of the Sponsor/AMC/Mutual fund does not indicate the future performance of the schemes of the Mutual Fund.
- Investors in the scheme are not guaranteed of any assured /guaranteed returns.
Is permanent Account Number (PAN) necessary for transaction?
Yes, according to the rules, every investor should have a Permanent Account Number (PAN), which is why it is now gaining grounds with NRIs too. Although, Non Resident Indians are not required to provide a Permanent Account Number in their Mutual Funds, shares, stocks and other related investments till now, the Securities and Exchange Board of India has directed the depositories to make PAN compulsory for all demat accounts that are started off after April, 2003. After 30th September 2006 existing demat account holders will not be allowed to operate their accounts unless their PAN card is submitted.
The procedures for availing a PAN are quite simple but, for NRIs not having their own residences and / or residential proofs can be a bit discomforting. Hence, before the procedure of acquiring a PAN becomes rigid, NRI can choose an easier alternate by providing proof of residence of his representative assessee.
Such representative assessee can be resident parents, brothers, close relatives or even friends. Details regarding PAN are mentioned herein. An NRI can avail a PAN by making an application to the Income Tax office or Office of Unit Trust of India. An NRI is required to submit the following:
- Copy of passport
- Copy of Visa in case of an Indian citizen
- Details and photograph of representative assessee i.e. say, parents or brothers or even a friend's details and
- Proof of residence of representative assessee being any one of the documents be that telephone bill, electricity bill, ration card, bank statement or driving licence, showing the address of representative assessee