What are Mutual Funds?

Mutual funds are a vehicle for pooling capital by issuing units to investors and investing those funds in securities in compliance with the objectives stated in the offer document.

Securities investments are distributed across a diverse range of industries and sectors, which reduces risk. Since all stocks cannot move in the same direction in the same proportion simultaneously, diversification reduces risk. Mutual funds issue units to investors based on the amount of money they have invested. Unitholders are the people who invest in mutual funds.

The investors share the gains or losses in proportion to their assets. Mutual funds usually have a range of schemes with various investment goals that are launched regularly. Before a mutual fund can raise funds from the public, it must be registered with the Securities and Exchange Board of India (SEBI), regulating securities markets.

 

How is a mutual fund set up?

A mutual fund is organized as a trust that includes a sponsor, trustees, asset management company (AMC), and custodian. A sponsor, or more than one sponsor, who acts as a company promoter, establishes trust. The trustees hold the mutual fund’s property for the benefit of the unitholders. SEBI-approved Asset Management Company (AMC) manages the funds by investing in different types of securities. The securities of the fund’s various schemes are kept in custody by the custodian, who is registered with SEBI. AMC is governed by the trustees, who have broad powers of supervision and guidance. They keep track of the MF’s success and compliance with SEBI regulations.

According to SEBI regulations, at least two-thirds of the directors of a trustee company or board of trustees must be autonomous, meaning they cannot be affiliated with the sponsors. In addition, 50% of AMC’s directors must be independent. Before launching any scheme, all mutual funds must be registered with SEBI.

 

What is the NAV of a scheme?

The success of a mutual fund scheme is measured by its Net Asset Value (NAV).

The scheme’s NAV is the market value of the shares it owns. Since the market value of shares fluctuates every day, the NAV of a scheme fluctuates as well.

The formula is as follows: Divide the present market value of the fund’s net assets (its securities minus any liabilities) by the number of outstanding units. The NAV is 20 per unit if a fund has cumulative net assets of 100 crores and 5 lakh units. (Fund liabilities include things like investment advisor fees.)

The NAV is declared at the end of each business day in open-ended schemes.

 

What is a folio number?

A folio number is an essential term in the Mutual Fund world. It’s a one-of-a-kind number that identifies your mutual fund shares, similar to a bank account number. The unique number varies from one fund house to the next. Only current investors, not new ones, are assigned a folio number. A new investor should disregard the folio number column when filling out the form since he will be given only after investing. Within the same Mutual Fund, an investor may make multiple purchases by using the same folio amount. This saves a lot of time and effort in the long run when tracking your investments.

The fund house can request a folio number from an investor to ensure the investor’s accuracy. The folio number and other information are always included in the account statements sent to the investor. The number is also advantageous to Mutual Funds, as it aids in maintaining a reliable record system for each investor.

 

What are sector-specific funds/schemes?

These are funds/schemes that invest solely in securities from the sectors or industries included in the offer documents. Pharmaceuticals, software, fast-moving consumer goods (FMCG), oil stocks, and so on are examples. The output of the respective sectors/industries determines the fund’s returns. These funds can have higher returns, but they are riskier than diversified funds. Investors must keep a close eye on the output of specific sectors/industries and exit when the time comes. They may also consult an expert.

 

How to invest in a mutual fund scheme?

The following are the two most popular methods:

The prospective unitholder fills out the appropriate Application Form, adds the required supporting documentation, and submits it to one of several pre-determined locations. For example, any qualified investor can apply for the Parag Parikh Flexi Cap Fund by completing and submitting the ‘Common Application Form’ found here.

On the internet:

Any qualified investor can invest directly on a mutual fund’s website or via a mobile app. This approach is gradually gaining popularity in the case of PPFAS Mutual Fund. Investors can also choose from the following options:

Direct Strategy:

Applicants/unitholders buy units without the assistance of a mutual fund distributor in this case.

Units are bought through a mutual fund distributor in the regular plan. When opposed to those who invest via the Regular Plan, those who choose the Do-It-Yourself option (Direct Plan) pay lower charges (a.k.a. Expense Ratio).

 

How to know the performance of a mutual fund scheme?

A scheme’s success is expressed in its net asset value (NAV), which is disclosed regularly for open-ended schemes and weekly for closed-ended schemes. Mutual funds must report their net asset values (NAVs) in newspapers. The NAVs are also available on mutual fund websites. All mutual funds must also post their NAVs on the Association of Mutual Funds in India (AMFI) website, www.amfiindia.com, to see the NAVs of all mutual funds in one location.

Mutual funds must also publish their output in the form of half-yearly reports, which provide returns/yields over some time, such as the previous six months, one year, three years, five years, and since the scheme’s inception. In the same half-yearly format, investors should look at other specifics such as the percentage of total assets with expenditures, as these impact the yield and additional helpful information.

Mutual funds are also expected to give unitholders an annual report or an abridged annual report at the end of the year.

Every week, financial newspapers publish various reports on mutual fund schemes, including yields of multiple schemes. Aside from these, several research organizations publish research reports on mutual fund results, including rankings of various schemes based on their performance. Investors should read these reports and keep themselves updated on the products of different mutual fund schemes.

Investors may equate their schemes’ performance to that of other mutual funds in the same group. They may also equate equity-oriented schemes’ results to benchmarks such as the BSE Sensitive Index, S&P CNX Nifty, etc.

Investors should decide when to join or leave a mutual fund scheme based on the performance of the mutual funds.

If a mutual fund scheme is wound up, what happens to money invested?

When a mutual fund closes a scheme, it pays an amount based on the current NAV after deducted expenses. Unitholders have the right to submit a winding-up report from mutual funds that includes all relevant information.

What are tax saving schemes?

These schemes provide tax benefits to investors under particular provisions of the Income Tax Act of 1961. The government provides tax incentives for investing in such avenues, such as Equity Linked Savings Schemes (ELSS). Tax advantages are also available via mutual fund pension plans. These funds are growth-oriented and primarily invest in inequities. Their growth prospects and risks are similar to those of any equity-oriented investment strategy.

 

What is the FoF scheme?

An FoF scheme is a mutual fund that invests solely in other mutual fund schemes or other mutual funds. An FoF scheme allows investors to diversify their portfolios more efficiently with only one investment. It disperses risks over a larger area.

 

What is a load or no-load fund?

A load fund charges a percentage of its net asset value (NAV) as a fee for entering or exiting. A fee will be charged each time a unit in the fund is purchased or sold. The mutual fund uses this fee to cover marketing and distribution costs. Assume the NAV is Rs.10 per unit. If the entry and exit loads are both 1%, investors who buy will have to pay Rs.10.10, while those who sell their units to the mutual fund for repurchase will only receive Rs.9.90 per unit. When making investments, investors should remember the loads because they impact their yields/returns. Investors can, however, take into account the mutual fund’s track record and service quality, which are more relevant. Despite the loads, efficient funds can provide higher returns.

A no-load fund does not charge an entrance or exit fee. It means investors can invest in the fund/scheme at NAV and pay no extra fees on unit purchases or sales.

 

What is a sales or repurchase/redemption price?

When investing in an open-ended scheme, the price or NAV paid to a unitholder is referred to as the purchase price. If applicable, it may also include a sales load.

The price or NAV at which an open-ended scheme purchase or redeems its units from unitholders is known as the repurchase or redemption price. If necessary, it may also include exit load.

Can non-resident Indians (NRIs) invest in mutual funds?

Non-resident Indians residing in most countries can invest in Indian mutual funds. However, certain restrictions apply in the case of ‘restricted persons.’

 

As a unitholder, how much time will it take to receive dividends/repurchase proceeds?

The dividend warrants must be delivered to unitholders within 30 days of the dividend announcement. The redemption or repurchase proceeds must be returned within ten working days of the unitholder’s redemption or repurchase order. Asset Management Company is liable to pay interest as provided by SEBI from time to time if the redemption/repurchase proceeds are not delivered within the specified period (15 percent at present).

How to know where the mutual fund scheme has invested money mobilized from the investors?

Mutual funds are expected to publish complete portfolios of all of their schemes in newspapers every half-year. Portfolios are sent to unitholders for certain mutual funds.

The scheme portfolio shows the amount, market value, and percent of NAV invested in each security, such as bonds, debentures, money market instruments, government securities, and so on. Illiquid securities in the portfolio, investments in classified and unrated debt securities, non-performing assets (NPAs), and other information were also needed to be disclosed in these portfolio statements.

Quarterly, certain mutual funds send out newsletters to unitholders that provide portfolios of the schemes.