Frequently Asked Questions
General Questions
Asset Management Company (AMC) is a company that is responsible for managing mutual funds.
AMC is a professional money manager and has mutual fund schemes with different investment objectives. They hire professional fund managers who are responsible for buying and selling securities (debt + equity) in sync with the investment objective of the fund.
Based on the mutual fund’s investment objective, a mutual fund invests the money collected from the investors in different securities comprising equities, debts, money market instruments, etc. A mutual fund charges a nominal fee and invests the entire amount.
In proportion of the amount invested and Net Asset Value (NAV), units of mutual fund scheme are allocated to the investor. Capital appreciation & income earned is shared between investors in proportion to their unit holdings.
In mutual fund investments, investor funds are collected and pooled together to form a common investible fund. All the investors have same profit and loss. Investors cannot see individual investments made by fund managers.
Whereas in Portfolio management schemes (PMS) investors individual investment can be identified and each investor has a separate profit and loss.
In FDs, the bank gives investors a guaranteed fixed rate of interest for the period you specify, for example like 6% for 1 year. After one year you get the principal amount plus interest.
Returns on FDs are taxed as per the income bracket of the individual.
Where as in mutual funds, money is invested as per the scheme’s investment objective. The profit/ loss are variable and the same is distributed to investors based on the proportion of their unit holdings.
Mutual funds are taxed based on the asset class the funds are invested in.
Apart from investing in equities, mutual funds invest in a number of debt instruments such as bonds, debentures, commercial paper and government securities. In fact, mutual funds also invest in other mutual funds or metals like gold etc.
All mutual funds are regulated by Securities and Exchange Board of India (SEBI) and in case the AMC is promoted by a bank, then RBI.
Apart from this, the board of directors of an AMC also takes care of the interests of the investors.
1. Diversification: - Investors can spread out and minimize their risk up to a certain extent by purchasing units in a mutual fund instead of buying individual stocks or bonds. By investing in a large number of assets, the shortcomings of any particular investment are minimized by gains in others.
2. Economies of scale: - Mutual funds buy and sell large amounts of securities at a time, this helps reduce transaction costs and brings down the average cost of the unit for investors.
3. Professional management: - Mutual funds are managed by thorough professionals. Most investors either don’t have the time or the expertise to manage their own portfolio. Hence, mutual funds are a relatively less expensive way to invest and monitor their investments.
4. Liquidity: Investors always have the choice to easily liquidate their holdings as and when they want.
5. Simplicity: Investing in a mutual fund is considered to be easier as compared to other available instruments in the market. The minimum investment is also extremely small, where a SIP can be initiated at just Rs.500 per month basis.
Never put all your eggs in a single basket.
You should always look to minimize your risk by distributing your investments among various financial instruments, asset classes, industries and other categories. The intent is to maximize the return on investment by being invested in different areas which are unrelated to each other. This also gives you a buffer to reduce the impact of market downturns.
A portfolio of a mutual fund scheme is the list of securities and cash it holds at the moment. A diversified portfolio of different securities and asset classes helps reduce the overall risk.
NAV is the price per unit of a mutual fund. Just like shares have a share price, mutual funds have a NAV.
When you purchase a unit of a mutual fund, the purchasing price is the NAV. Unlike share price which changes in real time, the NAV is updated at the end of each trading day. Due to this, the investor never knows the exact NAV at the time of buying and selling.
The NAV is calculated as net assets minus net liabilities (expenses) of the mutual fund scheme on a given day & dividing it by the number of outstanding units.
Basics of Mutual Funds
A mutual fund is a professionally managed trust that pools funds of many investors and invests them in stocks, bonds, short-term money market instruments and commodities such as precious metals etc. Each mutual fund has a common financial goal and invests funds in different asset classes based on this investment objective.
Mutual funds are professionally managed and well diversified to offset potential losses. They offer an attractive way for savings with low fees or requiring constant attention from individual investors. Mutual funds investments are for investors who lack time or knowledge to make difficult investment decisions. In a mutual fund, the portfolio manager makes these essential decisions for you.
Mutual fund is set up as a trust which has trustees, sponsors and Asset Management Company (AMC) & custodian. A sponsor makes a trust and acts like promoter of a company and the said trust is registered with the Securities and Exchange Board of India (SEBI) as a Mutual Fund. The trustees hold its properties on behalf of the unit holders. AMC registered with SEBI manages the fund and makes investment decisions based on the objective of the fund.
The trustees have superintendence power and direction over the AMC. They also track mutual fund performance and compliance of SEBI regulations.
Mutual funds collect and invest the funds of pool of investors in securities like stocks, bonds, commodities etc. Mutual funds are professionally managed by a team who understands the market and make strategic investments based on the investment objective.
Investors are given units of the mutual funds based on the price and funds they have invested. The Asset Management Company is responsible for managing the investments, advisory services, financial consulting, customer service, accounting, marketing and sales functions for the schemes of the mutual fund.
Professional Management
Mutual fund investments give investors access to professional management for their funds. Professional management has many advantages like a clear investment objective, investment based research and prudent investment processes etc
Affordable Portfolio Diversification
Diversification helps reduce the risk of a portfolio and hence gives better risk adjusted returns. With even small investments say - of Rs 500, gives investors ownership of a portion of a diversified investment portfolio.
Economies of Scale
Investor’s together results in large sums of money which in turn gets investors access to professional managers to manage their funds which individual investors cannot do. Along with the higher transaction volume mutual fund investors get to negotiate better terms with brokers, bankers and other service providers. This is a distinct economic advantage to an investor in terms of cost saving.
Liquidity
Investments like real estate, venture capital, PPF where the investor cannot easily sell his investment in the market or get immediate access to funds as per their needs, are technically called illiquid investments and may result in losses for the investor.
Depending on the type of mutual fund, they can be liquidated, either at any time, or during specific intervals, or at times only on the closure of the scheme.
Tax Deferral
Mutual fund investors can let their investment grow in a scheme for several years and with this, they can defer their tax liability. This helps investors to legally build wealth faster than would have been the case, if you were to pay tax on the income each year.
Tax benefits
Tax saving mutual funds (ELSS) give the benefit of deduction of the amount subscribed (up to Rs. 150,000), from the income that is liable to tax.
Dividend received from mutual fund schemes is tax-free in the hands of investors. However, dividends from certain categories of schemes are subject to dividend distribution tax, which is paid by the scheme before the dividend is distributed to the investors.
Long term capital gains is 10% and short term capital gain is 15% and gives mutual funds a definite advantage over other asset classes like real estate, debt etc.
Investment Comfort
Investment in mutual funds can be made very easily and additional purchases need minimal paperwork. In today’s world mutual fund investments can be made completely online.
Regulatory Comfort
Mutual funds are regulated by Securities & Exchange Board of India (SEBI). SEBI has mandated strict checks and balances in the structure of mutual funds and their activities.
Systematic Approach to Investments
Mutual funds let investor invest regularly with a Systematic Investment Plan (SIP); or withdraw regularly with a Systematic Withdrawal Plan (SWP); or move money between two schemes with a Systematic Transfer Plan (STP). These approaches promote investment discipline and are extremely useful in long-term wealth creation and protection.
Mutual funds can be classified based on when they are open for subscription or redemption and based on investment objectives
Based on Subscription and Redemption
a) Open-ended Mutual Funds.
Mutual funds which can be purchased and redeemed at all times are called open ended mutual fund. Investors can buy and sell units of these mutual funds at the NAV price, hence are very liquid.
b) Close-ended Mutual Funds
Mutual funds that can be bought for a specified period at the time of initial launch are called close ended mutual funds. These funds are listed on a recognized stock exchange and are sold on the secondary market and hence are not very liquid.
c) Interval Funds
Interval funds combine the features of open and close-ended funds. They trade on stock exchanges and can be sold at predetermined intervals on the prevailing NAV.
Based on Investment Objectives
a) Equity Funds
Equity funds invest primarily in stocks with the investment objective of long-term capital growth. Minimum 65% of its funds should be in equity and equity related securities. The mutual fund investments can be across a wide range of industries or focus on one or more industry sectors or based on market cap. Investors with a long-term outlook and higher risk appetite look for equity funds.
b) Debt/Income Funds
Debt / Income funds invest in securities such as bonds, corporate debentures, government securities (gilts) and money market instruments. At least 65% of its corpus has to be in fixed income securities. They provide low risk and stable income to investors with capital preservation. These mutual funds are less volatile and produce regular income. They are suitable for investors who are looking for capital safety and moderate growth.
c) Balanced Funds
Balanced funds invest in both equities and fixed income instruments in line with the pre-determined investment objective of the scheme. These funds provide both stability of returns and capital appreciation.
Liquid Funds
Liquid funds invest in instruments with very little risk like FDs such as Treasury Bills, Certificates of Deposit and Commercial Paper for a period of less than 91 days. These are ideally suited for investors looking to park their funds for short durations with minimal risk.
Gilt Funds
Gilt funds invest exclusively in government securities and only have interest rate risk. They have no or very little credit risk as they are backed by government.
Different types of Mutual Funds & what they typically invest in:
| Type of Fund | Typical Investment |
|---|---|
| Equity or Growth Fund | Equities like stocks |
| Fixed Income Fund | Fixed income securities like government and corporate bonds |
| Money Market Fund | Short-term fixed income securities like treasury bills |
| Balanced Fund | A mix of equities and fixed income securities |
| Sector-Specific Fund | Sectors like IT, Pharma, Auto etc. |
| Index Fund | Equities or Fixed income securities chosen to replicate a specific Index for example S&P CNX Nifty |
| Fund of funds | Other mutual funds |
KYC Questions
Know your customer ('KYC') is the process mandated to ensure that customer of a financial services firm is real and his identity details, address, contact details and demographic information like age and place of birth is verified and collected as per standard format prescribed by SEBI Guidelines.
SEBI (Securities and Exchange Board of India) is the regulator for all investment activities in securities in India.
When you make a mutual fund investment, or open an investment account, the financial service providing firm which is a SEBI registered intermediary has to ensure that your KYC information is collected, verified and updated.
The Information is collected and stored in a standardized format. Once collected, your information is stored with national KRA (KYC Registration Agency). Once the information is stored with a KRA, you do not need to resubmit whenever you invest next time.
If your KYC status is registered, it means your information is stored and available with KRA and there is no need for you to submit your details again. However, if your KYC status is under process, on hold, incomplete, rejected, old or not available etc. you will have to again complete a fresh KYC process.
You can check your KYC status with the KRA website like NDML website (one of the largest KRA in India). By entering your PAN card number, you will know if you are registered and the date of last modification.
You need to submit a fresh application along with a self-attested photo. You also need to submit a copy for identity proof such as:-
a). Passport
b).Driving licence
c).Voters' identity card
d).PAN card
e). Aadhaar Card issued by UIDAI and NREGA Card for address proof
f).Latest bank statement
g).Voter identity card
h).Ration Card
i).Registered lease/sale agreement of residence
j).Latest landline telephone bill
k).Latest electricity bill
l).Gas bill
m).Aadhaar
It helps financial firms identify if the clients and their details are real and helps to prevent and catch instances of fraud and siphoning of funds.