Frequently Asked Questions  (FAQs)

Frequently Asked Questions

What is a Mutual Fund?

A mutual fund is a professionally managed fund that pools the savings from many investors (individuals, companies, trusts, etc.) who wish to save and grow their money. However, they want to invest in such a way that there money works harder for them. So, their money is pooled together and managed professionally. Now, this requires specialised skill’s.  To do this, some organisations create mutual fund schemes which are managed by professional fund managers. Fund Manager decides which stock or bond to buy and how much. A mutual fund then distributes the entire investment amount in small units (called units). Investors can buy these units instead of buying stocks directly.

Types of Mutual Funds

There are five types of mutual funds category as determined by capital market regulator Securities and Exchange Board of India (SEBI):

  • Equity Schemes – These mutual funds invest in equities and equity-related securities and offer comparatively highest returns but brings along a high degree of risk. The category is further divided based on portfolio composition such as multi-cap fund, large-cap fund, mid-cap fund etc.
  • Debt Schemes – This type of mutual fund invests in debt instruments of varying maturity and varied yield and risk level.
  • Hybrid Schemes – invest in a mix of stocks, bonds, and other securities.
  • Solution Oriented Schemes – These are schemes where there is a specific goal that is aimed at. For example Retirement fund, Children’s fund. In such schemes investment can be made in any asset class.
  • Other Schemes – This includes all funds which are not covered above. For example Exchange Traded Fund that seeks to replicate an index, hybrid funds that also invest in a group of other mutual funds and are popularly known as funds of funds etc.

Active vs. Passive

Irrespective of fees, category, an investment instrument, performance, each mutual fund is also classified into two categories namely – Active Funds and Passive Funds

  • Passive Funds – These funds invest as per pre-defined strategy and seek to match the performance of a specific market index. Thus these types of funds require little investment skill, little management, and low fees when compared to their counterparts actively managed funds.
  • Active Funds – These funds seek to outperform the market indices and have the potential to outperform the passively managed funds with high margins. These funds, however, comes with a cost i.e., management fees and is managed professionally by a team of analysts.
How does an investor earn by investing in mutual funds?

When an investor invests in a mutual fund, he/she can generate income that will be contributed by the following three sources:

  • Divided Payments – Fund house typically distributes dividend or interest when they receive dividend or interest on underlying securities. A proportionate amount is distributed to investors by way of dividend and/or interest.
  • Capital Gain – Whenever a fund manager sells securities, he/she books capital gain/capital loss depending on the type. Generally, some funds also distribute net capital gain to investors at regular intervals (typically annually).
  • Net Asset Value – When the net asset value ((NAV) of the fund increases, the investor gets the benefit while redemption. When purchasing shares in a mutual fund, you can choose to receive your distributions directly or have them reinvested in the fund.
Who can invest in mutual funds?

All Indian resident citizens are eligible to invest in mutual funds after fulfilling ‘Know Your Customer’ requirement. Non-resident Indians, person of Indian origin, Hindu undivided family as well as corporates can invest in mutual funds, subject to fulfilling ‘KYC’ requirements.

How can I find the best Mutual Funds to invest in?

You can have a look at ready-made mutual fund baskets created by experts or you can do your own research to find the best funds. You cal give us a call and we will advise you the best mutual fund to invest based on your risk profile.

How can I start investing in Mutual Funds?

Investing in Mutual Funds requires you to complete a few basic formalities. Such formalities may either be completed directly with an Asset Management Company (AMC) at their office, or authorized point of acceptance (PoA), or through an authorized intermediary such as an advisor, banker, distributor or broker.

Prior to investing in a Mutual Fund scheme, you need to complete the Know Your Customer (KYC) process. The completed KYC form may be submitted with the scheme application form (also known as Key Information Memorandum). The application form would have to be carefully filled as it would capture important details like names of all account holders, PAN numbers, bank account details etc. This would have to be signed by all account holders. Much of these can be done through online platforms too.

New investors may take help from their advisors, to make the entire process smooth and easy. And before investing, all investors are advised to read important scheme related documents and know the risks of their scheme choice.

What is the role of an investment advisor or a mutual fund distributor in selecting a scheme?

Usually, when people select a scheme themselves, they do so based on its performance. They don’t consider that past performances may not be sustained. Evaluation of schemes is a function of various attributes of the schemes, e.g. scheme objective, investment universe, the risks that the fund is taking, etc. This requires the investor to put in time and effort. The investor also needs to have the requisite expertise to be able to understand the features and nuances as well as the ability to analyse and compare from among many options. A distributor of mutual funds or an investment advisor would be qualified and trained for such a job.

Secondly, more important than investing in the best scheme, it’s important to invest in a scheme most appropriate or suitable to the investor’s current situation. Though the investor’s situation is best known to the investor, a good advisor or distributor would be able to ask the right questions and put things in perspective.

Once the portfolio is constructed, regular monitoring of the scheme characteristics and portfolio is required, which is an on-going job. An advisor/distributor helps you review these schemes too.

What are the kinds of financial goals I can fulfil with Mutual Funds?

The best part about Mutual Funds is that no matter what your financial goal is, you can find an appropriate scheme for it.

So if you have a long term financial goal like planning for your retirement or your child’s future education than equity funds could be a choice to consider.

If your endeavour is to potentially generate regular income, a fixed income fund could be considered.

You may have suddenly received a windfall of money and are yet to decide where you wish to invest, you can consider a liquid fund. A liquid fund is a good substitute to consider for a savings account or even a current account to park your working capital.

Mutual funds also offer investment options for saving tax. Equity Linked saving Schemes (ELSS) are specifically designed to do the same.

Mutual Funds are a one-stop shop for practically all investment needs.

Why do I need an investment advisor or mutual fund distributor to plan my financial goals?

“My son is in the 10th grade. He is not sure what his interests are or what stream in education he should pursue. Should he go for Science, Commerce or Arts? Can someone help?” Many students/parents have such concerns. That is where one may approach an education/career counsellor, who has evaluated various options available for youngsters and who can advise after discussing with the student.

An investor seeking help to plan for achievement of financial goals would be in a similar position as the parent in the above case. The investor has access to so much information these days, it is mind-boggling. Getting intimidated or making mistakes are highly possible.

This is when an investment advisor or a Mutual Fund distributor is advisable.

They assess the financial situation of the investor and look at one’s financial goals. Based on this, he or she would recommend various schemes to invest in. Now it is obvious that such a person would also need to understand a lot about the various Mutual Fund schemes and keep a regular watch both on the investor’s situation as well as the various recommended schemes. Such an approach helps the investor achieve the financial goals through investments in Mutual Funds.

What kind of support is provided by Arth Mantraa?

Arth Mantraa takes pride in providing the best customer support to our investors. It includes things like getting you KYC done, getting all your questions answered and giving you regular updates on your investments.

How much do you charge?

We are offering high quality services to you. For our services, we don’t charge our clients directly. We get remunerated from the mutual funds which ranges from 0.1% to 1%, depending on the type of funds. As we only recommend funds in which we ourselves invest, we believe that our interests are aligned.

Do you charge any transaction fee for mutual funds?

We do not charge any transaction fee for trading mutual funds, however the entry and exit loads apply as per the rules of the individual mutual funds.

Why should I invest in Mutual Funds?

You should never invest in Mutual Funds, but should invest through them.

To elaborate, we invest in various investment avenues based on our requirements, e.g. for capital growth – we invest in equity shares, for safety of capital and regular income – we buy fixed income products.

The concern for most investors is: how to know which instruments are best for them? One may not have enough abilities, time or interest to conduct the research.

To manage investments, one can outsource certain tasks one is unable to do. Anyone can outsource ‘managing one’s investments’ to a professional firm – the Mutual Fund company. Mutual Funds offer various avenues to fulfill different objectives, which investors can choose from based on one’s unique situation and objective.

Mutual Fund companies manage all administrative activities including paperwork. They also facilitate accounting and reporting the progress of the investment portfolios through a combination of Net Asset Values (NAVs) and the account statements.

Mutual Fund is a great convenience for those who need to invest their money for future requirements. A team of professionals manages the money and the investors can enjoy the fruits of this expertise without getting involved in the mundane tasks.

What are the various types of funds?

Various types of Mutual Funds exist to cater to different needs of different people. Largely, they are of three types.

1- Equity or Growth Funds

  • These invest predominantly in equities i.e. shares of companies
  • The primary objective is wealth creationor capital appreciation.
  • They have the potential to generate higher return and are best for long term investments.
  • Examples would be
    • “Large Cap” funds which invest predominantly in companies that run large established business
    • “Mid Cap” funds which invest in mid-sized companies.
    • “Small Cap” funds that invest in small sized companies
    • “Multi Cap” funds that invest in a mix of large, mid and small sized companies.
    • “Sector” funds that invest in companies that are related to one type of business. For e.g. Technology funds that invest only in technology companies
    • “Thematic” funds that invest in a common theme. For e.g. Infrastructure funds that invest in companies that will benefit from the growth in the infrastructure segment
    • Tax-Saving Funds

2- Income or Bond or Fixed Income Funds

  • These invest in Fixed Income Securities, like Government Securities or Bonds, Commercial Papers and Debentures, Bank Certificates of Deposits and Money Market instruments like Treasury Bills, Commercial Paper, etc.
  • These are relatively safer investments and are suitable for Income Generation.
  • Examples would be Liquid, Short Term, Floating Rate, Corporate Debt, Dynamic Bond, Gilt Funds, etc.

3- Hybrid Funds

  • These invest in both Equities and Fixed Income, thus offering the best of both, Growth Potential as well as Income Generation.

Examples would be Aggressive Balanced Funds, Conservative Balanced Funds, Pension Plans, Child Plans and Monthly Income Plans, etc.

What are the advantages of mutual funds?

Mutual funds offer several advantages. Some of the main advantages are:

  • Professional fund management at low cost-While many of us have achieved professional excellence in our chosen are of work, we may not be an expert when it comes to investing. Mutual funds offer the advantage of a managing your money by a professional whose full time is to make prudent in investment choices.  Annual expenditure of most equity mutual fund is between 1.5% to 2.5%.  Now if you are buying stocks through broker like HDFC security or ICICI direct, one buy and sell transaction will cost more than 1% .
  • Flexibility – Mutual funds offer flexibility at three levels – first- depending on your risk appetite,  your can chose debt or equity mutual funds. Then they also offer the option to start your investing journey with any amount (more than 500rs in some cases) you are comfortable with. The third layer of flexibility comes from ability to invest or redeem as per your requirement. You can  invest on weekly, monthly or quarterly basis. Furthermore,  as and when you have reached your financial goals, you can redeem your investments.  You money will be in your bank account in 3 working days (at most).
  • Tax efficiency – If you hold equity funds for more than 1 year, you don’t have to pay any taxes . If you hold debt funds for more than 3 years, you get indexation benefit and pay less taxes than what you will pay in fixed deposit. If you invest equity linked tax saving funds (ELSS schemes),  you get tax exemption at the time of investing as well.
  • Transparency and tight regulation reduces fraud risk-In the last few years, people have lost lot of money through Ponzi schemes (remember Saradha scam). Mutual funds are market linked instruments and their values fluctuate but you are unlikely to lose money due to fraudulent practices.

Mutual funds are the most versatile, low cost and transparent instruments for all your financial goals, whether it’s planning for retirement or your kid’s future. Hence, they deserve place in your portfolio.

What are the benefits of investing in Mutual Funds?

Many of us dread the thought of managing our own investments. With a professional fund management company, people are put in charge of various functions based on their education, experience and skills.

As an investor, you can either manage your finances yourself, or hire a professional firm. You opt for the latter when:

  1. You do not know how to do the job best – many of us hire someone to file our income tax returns, or almost all of us get an architect to do our house.
  2. You do not have enough time or inclination. It’s like hiring drivers even though we know how to drive.
  3. When you are likely to save money by outsourcing the job instead of doing it yourself. Like going on a journey driving your own vehicle is far costlier than taking a train.
  4. You can spend your time for other activities of your choice / liking

Professional fund management is one of the best benefits of Mutual Funds. The infographic on the left highlights all the others. Given these benefits, there is no reason why one should look at any other investment avenue.

What return should I expect from mutual funds?

From large cap diversified equity funds: Between 12% to 15%

From mid and small cap equity funds: between 14% to 18%

From liquid/ultra short-term bond funds: between 6% to 7%

From dynamic bond funds: between 7% to 10%

The returns from long-term government debt fund will be less than 7%, in current environment.

Disclaimer: All returns mentioned above is annualized pre-tax return over medium term.Please remember, above return (in the case of equity funds) is based on assuming systematic investing in equity funds. This is based on our work but actual return may vary. As we all know, mutual funds are market-linked instruments and no one can guarantee any level of return but we can certainly make a guess about what to expect.

How long do I need to stay invested in a Mutual Fund?

One of the most important considerations before choosing an investment avenue is the expected “time horizon”, i.e. time in days, months or years that an investor intends to stay invested.

And why is this so important?

All investments should ideally result from a financial or investment plan. Such plans usually indicate how long it would take for a financial objective to be met.

Let’s consider an investor who just made ₹ 50 lacs in a real estate transaction. He is looking for a safe avenue to invest, before he takes a final decision on what to do with that money. An ideal scheme in this case would be a Liquid Fund, which is designed to provide liquidity with generally a high probability for capital protection. He can redeem whenever he has made up his mind.

Therefore, the decision on how long you need to stay invested, depends on investment objective. Investors need to periodically review investment status and progress, with their advisors. During such reviews, decisions to redeem, switch, invest or leave alone are usually made.

What is the minimum and maximum tenure that I can invest in Mutual Funds?

The minimum tenure for investment in Mutual Funds is a day and the maximum tenure is ‘perpetual’.

It may be easy to understand the minimum period of a day, i.e. getting units allotted at a particular NAV and then redeemed at the next day’s NAV. However, what is the ‘perpetual’ nature of the maximum tenure? There are open end schemes in India with daily NAV, in existence for more than 20 years. And there are investors too who have stayed invested for that tenure! As long as the schemes continue in operation and offer a NAV based sale and purchase price, investors can choose to continue to stay invested. An open end fund may continue in existence until the fund house decides to terminate it, after obtaining due approval of the trustees.

Are there funds that need me to stay invested for a stipulated time?

One of the biggest advantages in a Mutual Fund scheme is Liquidity, i.e. ease of converting investment into cash.

Equity Linked Savings Schemes (ELSS), which offer tax benefits under Sec 80C, are required by regulation to ‘lock-in’ units for a period of 3 years, after which, they are free to be redeemed.

There is another category of schemes popularly called as “Fixed Maturity Plans” (FMP’s) where investors need to stay invested for a stipulated period which is pre-defined in the offer document of the scheme. These schemes have an investment duration of anywhere between three months to a few years.

A few open end schemes may however, specify an exit load period. For instance, a scheme may specify that units redeemed with 6 months would attract an exit load of 0.50% at applicable NAV.

One should bear in mind that while there be may some rules and regulations on minimum time horizon, it is best to take the advice of an investment advisor to know the appropriate or ideal time horizons for every type of schemes.

When can I withdraw my investment?

An investment in an open end scheme can be redeemed at any time. Unless it is an investment in an Equity Linked Savings Scheme (ELSS), wherein there is a lock-in of 3 years from date of investment, there are no restrictions on investment redemption.

Investors need to keep in mind any applicable exit load on their investment. Exit loads are charges deducted at the time of redemption, only if applicable. AMCs usually impose an exit load to deter short term or speculative investors from entering a scheme.

Closed end schemes do not offer this, as all units are automatically redeemed on the date of maturity. However, units of closed end schemes are listed at a recognised stock exchange, and investors can sell their units to others only through the exchange.

Mutual funds are one of the most liquid investment avenues in India, and are an ideal asset class for every financial plan.

How do I withdraw my money from Mutual Funds?

One of the biggest advantages of Mutual Funds is liquidity – the ease of converting an investor’s units into cash.

Mutual Funds, being regulated by Securities and Exchange Board of India (SEBI), have well laid out norms to ensure liquidity. Open end schemes, which comprise of a large majority of schemes, offer liquidity as a major feature. Liquidity is ease of access or conversion of an asset into cash.

Once the redemption is complete, funds are transferred to the designated bank account of the investor, within 3 business days after the redemption was lodged.

However two issues need to be kept in mind. One, there may be an exit load period in certain schemes. In such cases, redemptions before a certain specified period, say 3 months, may attract a nominal load like 0.5% of Asset Value. Fund Managers impose such loads to deter short term investors. Secondly, AMCs may indicate what the minimum amount for redemption is. Investors are advised to read all scheme related documents carefully before investing.

How soon can I withdraw my money from Mutual Funds?

Unless there is a lock-in, like in schemes that offer benefits under section 80C; or by the nature of the scheme (Close Ended Schemes), almost any scheme can be redeemed without any waiting period. Once there are clear units in the account.

Mutual Funds are one of the most liquid assets, i.e. it is one of the easiest to convert into cash. In order to redeem funds through offline mode, the unit holder needs to submit a signed Redemption Request form to the AMC’s or the Registrar’s designated office. The form requires details like unit holder’s name, folio number, scheme name, and number of units to redeem. The proceeds from the redemption will be credited to the registered bank account of the first named unit holder.

Mutual Funds can also be purchased and redeemed on the concerned fund’s website. You simply have to log-on to the ‘Online Transaction’ page of the desired Mutual Fund and log-in using your Folio Number and/or the PAN, select the Scheme and the number of units (or the amount) you wish to redeem and confirm your transaction.

In addition, registrars like CAMS (Computer Age Management Services Pvt. Ltd.), Karvy, etc. offer the option of redeeming Mutual Fund bought from several AMCs. You can download the form online or visit the nearest office. Please note that these agencies might not service all the AMCs.

How much money can I withdraw from my investment?

An investor can redeem units from an open ended scheme without any restriction, as per their plan and objective. So, they can make a part redemption of say 10% of investment value or the entire amount in one go.

Majority of Mutual Fund schemes are open end schemes, which allow an investor to redeem the entire invested amount without any time restrictions.

Only under few instances  schemes impose a restriction on redemption, under extraordinary circumstances, as decided by the Board of Trustees.

All Equity Linked Savings Schemes (ELSS), that offer tax benefits under Sec 80C, are required to ‘lock-in’ investments for a period of 3 years. However, any dividend declared by these schemes during this period is available as a pay out without restrictions. No other category of schemes can impose such a lock-in. Some may impose an exit-load for premature redemptions, to prevent short term investments from entering a scheme. AMCs may specify minimum amounts that may be submitted. All such information is contained in scheme related documents which is important for an investor to read before investing.

Closed end schemes have a fixed tenure and the AMC does not fund or permit any redemption until termination/conclusion date. However, all closed end funds have their units listed in the stock exchange and an investor seeking liquidity needs to sell units to another buyer at a market determined rate.

Can I withdraw money on all days or only on particular days?

An open end fund permits redemptions on all business days. If a redemption request is handed over at an Investor Service Centre on a non-business day, or after a specified cut-off time, say 3:00 p.m., then it is processed on the next business day. Redemptions are processed at that particular day’s Net Asset Value (NAV). All redemption proceeds are credited to the investor’s bank account within a specified time, usually within 10 business days.

Redemptions may be done by handing over a signed redemption request clearly mentioning the scheme’s folio number. Redemptions may also be made on approved on-line platforms, where investors have the necessary security codes.

Investments made in Equity Linked Savings Schemes (ELSS), however have a lock-in of 3 years, after which they can be redeemed on any business day.

Redemptions may be restricted only in extraordinary circumstances. Under approval from the board of trustees, the AMC may impose restrictions when there is a liquidity issue, capital market closure, operational crisis or when directed by SEBI. It is important to note that these occurrences are extremely rare.

How often can I withdraw my money?

An investor has no restriction on redeeming money from an open ended scheme. While there may be an exit load in certain cases, which impacts final amount realised, all open end schemes offer liquidity as a great benefit.

The decision to redeem is totally at investor’s discretion. There are no restrictions on the number of redemptions, or on the amount to be redeemed. There have to be sufficient units in the account to fund redemptions. Scheme documents usually indicate minimum amount that can be redeemed.

Units under lien to a bank or institution cannot be redeemed, unless the lien is removed. Redemptions may be restricted only under extraordinary circumstances, as decided by the Board of Trustees.

Closed end schemes may be redeemed from the AMC only on maturity. However, they do provide a route to liquidity – any time before maturity – by selling units in a recognised exchange.

Redemptions can be made at;

  • Investor Service Centres (ISCs)
  • AMC offices
  • Official Points of Acceptance of Transaction (OPAT)
  • Through an authorised on-line platform.
Are there penalties if I choose to withdraw earlier?

Every open ended scheme offers liquidity with almost complete freedom, i.e. no restriction on time or amount of redemption. However, a few schemes may specify an Exit Load.

For example, a scheme specifies an exit load of 1%, if redeemed within 1 year. What it means is that, if an investor has invested on April 1, 2016, any redemption done on or before March 31, 2017 would attract a penalty of 1% on the NAV. If an investor redeems on February 1, 2017 with the NAV at ₹ 200, then ₹ 2 would be deducted and only ₹ 198 per unit would be returned to investor.

All information on exit loads are usually mentioned in relevant scheme related documents. For instance, a fund fact sheet or key information memorandum would contain such information.

Does the system recommend changing from one mutual fund to another?

Our system recommends a re-balancing plan for you every 3 months. During this plan it analyses the funds in your portfolio along with the switching cost and decides whether you should switch to another fund or not. The process is automated – all you have to do is click to approve the fund redemption, new subscriptions, and switches between funds of the same fund house.

What is the risk of investing in Mutual Funds?

We have all heard: “Mutual Fund investments are subject to market risks.” Ever wondered what are these risks?

The image on the left talks about the various types of risks.

Not all risks impact all the fund schemes. The Scheme Information Document (SID) helps understand which risks apply to your selected scheme.

So how does the fund management team manage these risks?

It all depends on what type of investments the Mutual Fund has invested in. Certain securities are more sensitive to certain risks and some are exposed to some other.

Professional help, diversification and SEBI’s regulations help mitigate risks in Mutual Funds.

Finally, and the most important question that many investors have asked: Can a Mutual Fund company run away with my money? This is just not possible given the structure of Mutual Funds as well as the strong regulations.

What are the various types of funds?

Various types of Mutual Funds exist to cater to different needs of different people. Largely, they are of three types.

1 – Equity or Growth Funds

  • These invest predominantly in equities i.e. shares of companies
  • The primary objective is wealth creation or capital appreciation.
  • They have the potential to generate higher return and are best for long term investments.
  • Examples would be
    • “Large Cap” funds which invest predominantly in companies that run large established business
    • “Mid Cap” funds which invest in mid-sized companies.
    • “Small Cap” funds that invest in small sized companies
    • “Multi Cap” funds that invest in a mix of large, mid and small sized companies.
    • “Sector” funds that invest in companies that are related to one type of business. For e.g. Technology funds that invest only in technology companies
    • “Thematic” funds that invest in a common theme. For e.g. Infrastructure funds that invest in companies that will benefit from the growth in the infrastructure segment
    • Tax-Saving Funds

2 – Income or Bond or Fixed Income Funds

  • These invest in Fixed Income Securities, like Government Securities or Bonds, Commercial Papers and Debentures, Bank Certificates of Deposits and Money Market instruments like Treasury Bills, Commercial Paper, etc.
  • These are relatively safer investments and are suitable for Income Generation.
  • Examples would be Liquid, Short Term, Floating Rate, Corporate Debt, Dynamic Bond, Gilt Funds, etc.

3 – Hybrid Funds

  • These invest in both Equities and Fixed Income, thus offering the best of both, Growth Potential as well as Income Generation.
  • Examples would be Aggressive Balanced Funds, Conservative Balanced Funds, Pension Plans, Child Plans and Monthly Income Plans, etc.
How do I choose a Mutual Fund?

Imagine asking a travel agent, “How should I choose my mode of transport?” The first thing he/she will say is, “Depends on where you want to go.” If I were to travel to a distance of 5 kms, an auto rickshaw might be the best option, while for a journey from New Delhi to Kochi, a flight might be the best. A flight would not be available for a short distance and an auto rickshaw would be highly uncomfortable and slow for a long-distance journey.

In Mutual Funds too, the starting point must be- What are your requirements?

It begins with your financial goals and risk appetite.

You’ve got to identify your financial goals, first. Some Mutual Fund schemes are suitable for short term requirements or goals, whereas some might be better for long term goals.

Next comes your risk appetite. Different people would have different risk appetite. Even husband and wife may have joint finances but different risk profiles. Some are comfortable with high risk products, whereas some are just not.

You can get help from financial planners or investment advisers or Mutual Fund distributors to assess your risk appetite.

How do I know which fund is right for me?

We can help you to understand and decide the best fund to invest by understanding your:

  1. Investment objective
  2. Ideal investment horizon
  3. Risk Appetite

Once an investor has decided to invest in Mutual Funds, he has to make a decision of which scheme to invest in – Fixed Income, Equity or Balanced and which Asset Management Company (AMC) to invest with?

Firstly, discuss freely with your advisor what your objective is, what time period you’re comfortable with, and what your risk appetite is.

Decisions on which fund to invest in would be made based on this information.

  1. If you have a long term objective – say, retirement planning, and are willing to assume some risk, then an Equity or Balanced Fund would be ideal.
  2. If you have a very short term objective – say, money to be kept aside for a couple of months; a Liquid Fund would be ideal.
  3. If the idea is to generate regular income, then a Monthly Income Plan or an Income Fund would be recommended.

After deciding on the type of fund to invest in, a decision on the specific scheme from an AMC would have to be made. These decisions are usually made after ascertaining the AMC’s track record, suitability of scheme, portfolio details, etc.

Scheme Fact sheets and Key Information Memorandum are two documents that every investor needs to peruse before investing. If one needs detailed information then one should look at Scheme Information Document. All of these are easily accessible at every Mutual Fund’s website.

How will I evaluate my risk profile?

Every individual investor is unique. Not only with regards to investment objectives but even in approach and view of risk. This is what makes Risk Profiling absolutely crucial before investing.

A Risk Profiler is essentially a questionnaire that seeks an investor’s answers to questions about both “ability” and “willingness”.

It is highly recommended that investors contact their Mutual Fund distributor or an investment advisor to complete this task and get to know their Risk Profile.

What is the co-relation between risk and return?

In Mutual Funds, one often hears, ‘more the risk, more the return’. Is there truth in this?

If ‘risk’ is measured as either, probability of loss of capital or as swings and fluctuations in investment value, then asset classes like equity are undoubtedly the riskiest, and money in a savings bank account or in a government bond is of course least risky.

In the Mutual Fund universe, a liquid fund is least risky and an equity fund is most risky.

So, the only reason to invest in equity would be an expectation of higher reward. However, higher returns come to those who invest in equity after careful study and adopting a patient, long term time horizon. In fact, risk in equity can be mitigated by adopting diversification as well having a longer term time horizon.

Every category of mutual fund schemes have different types of risks – credit risk, interest rate risk, liquidity risk, market/price risk, business risk, event risk, regulatory risk, etc. Your investment advisor and fund manager’s expertise, and diversification, can help mitigate them.

How do Mutual Funds help manage risk?

Risks appear in many forms. For example, if you own a share of a company, there is a Price Risk or a Market Risk or a Company Specific Risk. The share of just that company may dip or even crash due to any of the above reasons or even a combination of these reasons.

However, in a Mutual Fund, a typical portfolio holds many securities, thus offering “diversification”. In fact, diversification is one of the biggest benefits of investing in a Mutual Fund. It ensures that the dip in price of one or even a few securities does not affect portfolio performance alarmingly.

Another important risk to bear in mind is Liquidity Risk. What is liquidity? It is the ease in converting an asset into cash. Suppose an investor has an investment that is locked in for say 10 years, and she requires money in the 3rd year. This presents a typical liquidity problem. Her priority at this point is access to cash and not returns. Mutual Funds by regulation and structure, offer tremendous liquidity. Portfolios are designed to offer an investor, ease of investing and redemption.

When should I start investing in Mutual Funds?

There is a beautiful Chinese proverb, “The best time to plant a tree was 20 years ago. The second best time is now.”

There is no reason why one should delay one’s investments, except, of course, when there is no money to invest. Within that, it is always better to use Mutual Funds than to do-it-oneself.

There is no minimum age when one can start investing. The moment one starts earning and saving, one can start investing in Mutual Funds. In fact, even kids can open their investment accounts with Mutual Funds out of the money they receive once in a while in form of gifts during their birthdays or festivals. Similarly, there is no upper age for investing in Mutual Funds.

Mutual Funds have many different schemes suitable for different purposes. Some are suitable for growth over long periods, whereas some may be for those in need of safety with regular income, and some provide liquidity in the short term, too.

You see, whatever stage of life one is in, or whatever one’s requirements, Mutual Funds may have solutions for each one.

Are all Mutual Funds risky?

Every investment we make involves a risk, only its nature and degree varies. The same applies to Mutual Funds too.

All Mutual Fund schemes do not carry the same risk when it comes to returns on investment.

Equity schemes have the potential to deliver superior returns over the long term that can create wealth. Remember, inflation is a risk, and equities are the best asset class to beat inflation. So, in a sense, there are some risks that are worth taking.

On the other hand, the risk associated with liquid funds is significantly low when compared to equity funds. A liquid fund focuses on the protection of capital by taking lower risk and generating returns in line with the risk taken.

It is also important to remember that the risk on returns is not the only risk you need to consider. There are other risks – liquidity risk for instance. Liquidity risk measures the ease in converting your investment into cash. This risk is lowest in Mutual Funds.

In the end, the nature and extent of risk is best understood through proper understanding and evaluation of the scheme and by taking the guidance of a Mutual Fund distributor or an investment advisor.

What are some mistakes people make when investing in Mutual Funds?

Making a mistake while investing happens across all investments, and Mutual Funds are no different.

Some of the common mistakes while investing in Mutual Funds are:

  1. Investing without understanding the product: For example, equity funds are meant for the long term, but investors look for easy returns in the short term.
  2. Investing without knowing the risk factors: All Mutual Fund schemes have certain risk factors. Investors need to understand them before making an investment.
  3. Not investing the right amount:  Sometimes people invest randomly, often without a goal or plan. In such cases, the amount invested may not yield the desired result.
  4. Redeeming too early: Investors sometimes lose patience or do not give the requisite time for an investment to provide the desired rate of return, and hence redeem prematurely.
  5. Joining the herd: Very often, investors do not exercise individual judgement and get carried away by the buzz in the ‘market’ or ‘media’, and thus make the wrong choice.
  6. Investing without a plan: This is perhaps the biggest mistake. Every single rupee invested needs to have a plan or goal.
What are the kinds of financial goals I can fulfil with Mutual Funds?

The best part about Mutual Funds is that no matter what your financial goal is, you can find an appropriate scheme for it.

So if you have a long term financial goal like planning for your retirement or your child’s future education than equity funds could be a choice to consider

If your endeavour is to potentially generate regular income, a fixed income fund could be considered.

You may have suddenly received a windfall of money and are yet to decide where you wish to invest, you can consider a liquid fund. A liquid fund is a good substitute to consider for a savings account or even a current account to park your working capital.

Mutual funds also offer investment options for saving tax. Equity Linked saving Schemes (ELSS) are specifically designed to do the same

Mutual Funds are a one-stop shop for practically all investment needs.

What is SIP?

Systematic Investment Plan (SIP) is an investment route offered by Mutual Funds wherein one can invest a fixed amount in a Mutual Fund scheme at regular intervals– say once a month or once a quarter, instead of making a lump-sum investment. The installment amount could be as little as INR 500 a month and is similar to a recurring deposit. It’s convenient as you can give your bank standing instructions to debit the amount every month.

SIP has been gaining popularity among Indian MF investors, as it helps in investing in a disciplined manner without worrying about market volatility and timing the market. Systematic Investment Plans offered by Mutual Funds are easily the best way to enter the world of investments for the long term. It is very important to invest for the long-term, which means that you should start investing early, in order to maximize the end returns. So your mantra should be – Start Early, Invest Regularly to get the best out of your investments.

How do I start/stop a SIP? What happens if I miss an instalment?

Before you make any Mutual Fund investment, you need to complete a KYC process. This is done through submission of certain documents as proof of identity and proof of address. The process of starting or stopping an SIP is extremely convenient and easy. How to start an SIP is explained in the graphics on the left.

What happens when you skip an instalment or two?

SIP is just a convenient mode of investing and not a contractual obligation, there is no penalty even if you miss an installment or two. At most, the Mutual Fund Company would stop the SIP, which means further installments would not get debited from your bank account. At the same time, you can always start another SIP, even in the same folio, even after the earlier SIP was stopped. Please keep in mind, this would be treated as a fresh SIP and hence there could be some time taken to set up the SIP all over again.

Contact us today and start enjoying the benefits of Mutual Funds!

Can I start with ₹ 500, and keep adding?

The popular investment concept for creating wealth is ‘Start Early. Invest Regularly. Stay invested for Long Term’. Even if the investment is as low as ₹ 500, it is important as it marks the beginning of a journey.

There are several ways to increase investments amounts as you go. In a mutual fund scheme, you can always make additional purchases in the same fund/account. In many fund houses, this can be for amounts as low as ₹ 100 or money can be transferred or switched in from other schemes. You can start a Systematic Investment Plan (SIP), which enables a regular investment into a scheme, much like a bank recurring deposit. Also, many AMCs allow their investors to increase their SIP contribution gradually every year, so as to account for an annual salary or income rise.

Mutual Funds, with their flexibility and convenience are the ideal investment vehicles in today’s busy world.

What returns can I expect with only ₹ 500?

Whether you invest ₹ 500 or ₹ 5 crores, the returns are the same. Confused?

Not if you consider the returns on a percentage basis. For example, if a scheme has returns of 12% per annum, then an investment of ₹ 500 would grow to ₹ 627.20 in two years. An investment of ₹ 100,000 in the same scheme would be ₹ 1,25,440 during the same period. While the rate of appreciation is the same in both cases, only the final amounts differ because of difference in initial investments.

We need to bear two things in mind here. Returns in percentage terms is the same for any amount invested. However, a larger amount invested at the start would result in larger absolute gains.

All of this should not distract an investor from making a start. That is the most important act in investing.

Is it possible to change SIP amount every month?

SIP in Mutual Fund is like running a marathon. Marathon runners practice throughout the year but keep stepping-up their targets every year starting from dream run, moving to half marathon and finally a full marathon. The same goes with SIPs.

Systematic Investment Plans (SIPs) are a disciplined way of investing in Mutual Funds that offer you twin benefits of managing market fluctuations through rupee cost averaging and power of compounding over long-term. SIPs have become a popular way of investing in Mutual Funds as they allow small and regular investments over many years. Does this mean you’ll be stuck forever with the initial SIP amount you started with? The answer is NO.

Suppose you started with INR 3000 p.m. in Equity Mutual Fund and continued investing for two years. If you want to commit more money towards this SIP, go for SIP top-up that lets you automatically increase the SIP amount by a pre-defined percentage (say 50%) or amount (say INR 1500) at regular intervals/every year. While you can’t increase your SIP amounts automatically every month, you can increase it at specific intervals like quarterly or annually through top-ups. You can also make additional purchases in your SIP account folio whenever you want to invest more money.

How do I start/stop a SIP? What happens if I miss an instalment?

Before you make any Mutual Fund investment, you need to complete a KYC process. This is done through submission of certain documents as proof of identity and proof of address. The process of starting or stopping an SIP is extremely convenient and easy. How to start an SIP is explained in the graphics on the left.

What happens when you skip an instalment or two?

SIP is just a convenient mode of investing and not a contractual obligation, there is no penalty even if you miss an installment or two. At most, the Mutual Fund Company would stop the SIP, which means further installments would not get debited from your bank account. At the same time, you can always start another SIP, even in the same folio, even after the earlier SIP was stopped. Please keep in mind, this would be treated as a fresh SIP and hence there could be some time taken to set up the SIP all over again.

Contact us today and start enjoying the benefits of Mutual Funds!

What will the Mutual Funds do, if two or more instalments are missed?

You can invest in Mutual Funds through regular periodic investments and/or lump sum investments. In the 1st case, you can choose the frequency at which you want to invest. For daily/weekly/monthly frequency, you can automate your investments through SIP.

This automation can be through post-dated cheques, or electronic debit from bank accounts. Electronic debits can be set up through “direct debit” facility or through NACH (National Automated Clearing House). Application forms are available at respective Mutual Funds, for the process.

This reduces your efforts as you do not have to fill up a fresh form every month or think about which scheme to invest in. Just select the scheme, amount and date and your transactions will happen automatically, for the period you choose. You can set up an SIP for six months or more. Just ensure there is sufficient balance in your bank account.

Your question becomes relevant here. If you miss two or three consecutive instalments, the fund house may stop depositing the post-dated cheques and return all the unused cheques, or stop debiting your account. No penalty is levied and neither is there a forfeiture.

You can restart your SIP, in the same account, at any point of time.

How should I choose whether to go for SIP or Lumpsum amount?

Invest in SIP or a one-time investment (lumpsum)? Choosing one depends on your familiarity with Mutual Funds, the fund you want to invest in and your goal. If you want to invest regularly to accumulate sufficient capital for a goal, invest in a suitable equity scheme through SIP. Like, if you want to save from your monthly income and put it in an option where you can grow your money significantly so that in the long run it’ll be sufficient to fund your child’s higher education, SIP is the answer. Seek help from a fund adviser if needed.

If you have surplus cash now, like – bonus, proceeds from property sale or retirement corpus, but unsure how to use it, go for lumpsum investment in a debt or liquid fund. SIPs are advisable for investing in equity-oriented schemes while lumpsums are better suited for debt funds. If you are new to investing in Mutual Funds, SIPs are meant for you. SIPs need sufficiently long-time horizons to prove beneficial. You may invest in lumpsum if the market has been following an upward trend and you think it’ll continue for long. SIPs are best suited for a widely fluctuating market phase.

Do I need an account in a Bank to invest in its Mutual Fund?

If you are wondering how to invest in a Mutual Fund, remember it is mandatory to have an account with any bank, KYC / CKYC, PAN and Aadhaar cards. This has been made mandatory to ensure Mutual Funds are not used for money laundering purposes by few unscrupulous investors. Some Mutual Funds and banks have a common parent company i.e. they belong to the same corporate conglomerate. However, banks are governed by the RBI and Mutual Fund businesses are regulated by SEBI. While you may come across a Mutual Fund company that carries the same brand name as a well-established bank, remember that they are two different companies which are being run independently. You don’t need to have a savings account with the bank to invest in the funds of its sister concern, i.e. the Mutual Fund company in this case.

Banks also work as distributors of various Mutual Funds and cross-sell these funds to their customers. While they may not sell all the Mutual Funds available in the market, they’ll pitch funds from those Mutual Funds with whom they have a distribution tie-up. You can invest in these Mutual Funds which are not related to the bank selling them, i.e. your bank where you have an account.

Can minors invest in Mutual Funds?

Anyone under the age of 18 (minor) can invest in Mutual Funds, with the help of parents/legal guardians until the age of 18. The minor must be the sole account holder represented by the parent/guardian. Joint holding is not allowed in a minor’s Mutual Fund folio. One should have an investment goal for the minor that needs to be achieved by investing in Mutual Funds like say funding higher education.

Once a child attains the age of 18 and becomes a major, the first thing you as a parent/guardian need to do is change the status of the sole account holder from Minor to Major else all transactions would be stopped in the account. The tax implications will now have to be borne by the sole account holder as applicable to any investor above the age of 18 years. Until the child is a minor, all incomes and gains from the child’s portfolio is clubbed under the parent’s income and the parent pays the applicable taxes. In the year the child turns major, he/she will be treated as a separate entity and will pay taxes for the number of months for which he/she is a major in that year.

What is “Know Your Customer” or KYC requirements?

Mutual fund companies need to ensure that the person in whose name investments are being made is the beneficial owner. Hence, regulators have mandated fulfilling KYC as prerequisite for mutual fund investments. KYC is one time activity and once KYC is done, it is valid across all mutual funds. Write to us contact@arthmantraa.com to let us help you in completing KYC.

What is KYC Process?

KYC is an acronym for “Know Your Customer” and is a term used for Customer Identification Process as a part of Account Opening process with any financial entity. KYC establishes an investor’s identity & address through relevant supporting documents such as prescribed photo id (e.g., PAN card, Aadhar card) and address proof and In-Person Verification (IPV). KYC compliance is mandatory under the Prevention of Money Laundering Act, 2002 and Rules framed there under, read with the SEBI Master Circular on Anti Money Laundering (AML) Standards/ Combating the Financing of Terrorism (CFT) /Obligations of Securities Market Intermediaries.

A Know Your Customer (KYC) is generally divided in 2 parts:

 Part I contains the basic and uniform KYC details of the investor as prescribed by the Central KYC registry (Uniform KYC) to be used by all registered financial intermediaries and

Part II additional KYC information as may be sought separately by the financial intermediary such as a Mutual Fund, stock broker, depository participant opening the investor’s account (Additional KYC).

How to become KYC compliant?

For KYC requirement, you need to provide

  1. Address proof– normally passport, bank statement, updated pass book, driving license etc
  2. Identity proof- PAN card

Along with these you need to fill the appropriate application form (CKYC-Individual Form or CAMSKRA Non Individual Form) and submit it at the nearest office of CAMS. Please carry original as well as xerox of above documents. Registered mutual fund advisors can also do KYC after verifying your documents. Send us an  email (contact@arthmantraa.com) for help in this regard.

A Know Your Customer (KYC) is generally divided in 2 parts:

Part I contains the basic and uniform KYC details of the investor as prescribed by the Central KYC registry (Uniform KYC) to be used by all registered financial intermediaries and

Part II additional KYC information as may be sought separately by the financial intermediary such as a Mutual Fund, stock broker, depository participant opening the investor’s account (Additional KYC).

Can I do KYC online and whats e-KYC?

Some mutual fund companies offer the facility on online KYC. If you have aadhar card and the have the same phone number that was given at the time of aadhar application, you can do e-KYC. We can help with that. However, in aadhar based e-KYC, you can annually invest only upto Rs 50,000 per mutual fund company.

Do I need demat account for investing in mutual funds?

No, you don’t need demat account for investing in mutual funds.

What documents are provided as proof of my investment in Mutual Funds?

Once you invest in a Mutual Fund scheme, you will get an account statement with details like the date of the transaction, the amount invested, and the price at which the units are bought and the number of units allotted to you.

You can do multiple transactions in the same account, wherein the statement will keep getting updated. A typical account statement will list out the last few (10 in most cases) transactions – whether purchase or redemption; dividends, if any; or even non-commercial transactions. The account statement would also give you a count of your latest unit balance, the NAV of a recent date and the current value of your investments.

If you lose one statement, you can always get another one without hassles. Loss of account statement would not prevent you from future transactions, including taking your money out of the account.

What are the Scheme Related Documents? What information do these documents provide?

All mutual fund ads contain a message: “Read all scheme related documents carefully.” What are these documents?

There are 3 important documents: Key Information Memorandum (KIM), Scheme Information Document (SID) and Statement of Additional Information (SAI).

These are prepared by the Asset Management Company (AMC) about a particular scheme, and submitted to the Securities and Exchange Board of India (SEBI) for approval.

The SID has information like:

All Fundamental Attributes like Investment Objective and Policies, Asset Allocation Pattern, Fees and Liquidity Provisions.

Fund Management Team details

All Risk Factors in the scheme as well as risk mitigation mechanisms.

Scheme details like load, plans and options, past performance, benchmark.

General Unitholder information.

Other details like list of AMC branches, Investor Service Centres, Official Points of Acceptance.

The SAI has information like:

The constitution of the Mutual Fund – Sponsors, Asset Management Company and Trustees.

All information on key personnel of the AMC and associates such as Registrars, Custodians, Bankers, Auditors and Legal Counsel.

All Financial and Legal issues.

The concise version of SID is the KIM, that is attached with the application form. As the name suggests, it contains all the Key Information that an investor must know before investing in the scheme. The KIM must be made available with every application form.

What are Equity Funds?

An Equity Fund is a Mutual Fund Scheme that invests predominantly in shares/stocks of companies. They are also known as Growth Funds.

Equity Funds are either Active or Passive.  In an Active Fund, a fund manager scans the market, conducts research on companies, examines performance and looks for the best stocks to invest. In a Passive Fund, the fund manager builds a portfolio that mirrors a popular market index, say Sensex or Nifty Fifty.

Furthermore, Equity Funds can also be divided as per Market Capitalisation, i.e. how much the capital market values an entire company’s equity. There can be Large Cap, Mid Cap, Small or Micro Cap Funds.

Also there can be a further classification as Diversified or Sectoral / Thematic. In the former, the scheme invests in stocks across the entire market spectrum, while in the latter it is restricted to only a particular sector or theme, say, Infotech or Infrastructure.

Thus, an equity fund essentially invests in company shares, and aims to provide the benefit of professional management and diversification to ordinary investors.

Are there different kinds of equity funds available?

There are different equity funds catering to various needs of investors. The broad objective of all is to generate appreciation over long periods.

To understand it better let us look at the contingent we send to the Olympic Games. There is a large group of players, and then there are teams for various sports. One of the major events at the Olympic Games is the “track and field” event. We send a group for these events, as well. Within that, there are some races – right from a 100-meter sprint to long distance races, including marathon. Though, the whole contingent has gone to compete in the Olympic Games, there would be different players with different strengths.

It is the same with Mutual Funds. If all the Mutual Fund schemes are equivalent to the entire Olympic contingent, equity funds may be similar to a group within, which participates in, various track and field events. As we saw, there are various sub-categories even within track and field, similarly, there are different schemes within equity funds.

What are Debt Funds?

A debt fund is a Mutual Fund scheme that invests in fixed income instruments, such as Corporate and Government Bonds, corporate debt securities, and money market instruments etc. that offer capital appreciation. Debt funds are also referred to as Income Funds or Bond Funds.

A few major advantages of investing in debt funds are low cost structure, relatively stable returns, relatively high liquidity and reasonable safety.

Debt funds are ideal for investors who aim for regular income, but are risk-averse. Debt funds are less volatile and, hence, are less risky than equity funds. If you have been saving in traditional fixed income products like Bank Deposits, and looking for steady returns with low volatility, debt Mutual Funds could be a better option, as they help you achieve your financial goals in a more tax efficient manner and therefore earn better returns.

In terms of operation, debt funds are not entirely different from other Mutual Fund schemes. However, in terms of safety of capital, they score higher than equity Mutual Funds.

What are the various type of debt funds?

Debt funds are for investors who seek safety of capital or regular income from investment and/or want to park money for short periods.

But debt funds are of various types.

Like in banks, you can open a savings account, where you can put and remove money whenever you want.  However, it doesn’t make sense to keep money idle, if you are not likely to use it for some time. You may, in such a case, open a fixed deposit – where the money is locked for a certain period allowing you to earn a higher rate of interest. You may also opt for a recurring deposit, wherein you keep investing a fixed amount every month for a pre-defined period of time. All these products help you with different requirements.

Similarly, among Mutual Funds too there are variants available in the debt fund category to fulfil various needs of investors, like – Liquid Funds, Income Funds, Government Securities and Fixed Maturity Plans.

An investor would be advised to select schemes based on one’s unique requirements.

What is the difference between Equity and Debt fund?

“Aren’t all Mutual Funds the same? After all, it’s a Mutual Fund, isn’t it?” Asked Arjun. His friend Krishna, a Mutual Fund distributor, smiled. He was all too familiar with such a remark coming from many.

A large number of people carry the misconception that all Mutual Funds are the same. There are various types of funds, chief among these are equity funds and debt funds. The difference between the two comes from where the money is invested. While debt funds invest in fixed income securities, equity funds invest predominantly in equity share and related securities. Both equity and fixed income securities have different characteristics that determine how the respective schemes would behave.

Different investors have different requirements. Some need high returns to achieve their goals, whereas some cannot afford to take high risks. Some investors may have long term goals, whereas some may have short to medium term goals. An investor must choose an equity fund for long term goals and debt funds for short to medium term goals.  Equity funds have the potential to offer higher returns, but with risk, whereas debt funds offer relatively stable but moderate to low returns.

What are Mid Cap Funds?

Market capitalisation is the average of full market capitalisation of the stock on all recognised stock exchanges where it’s listed, or the full market capitalisation of the stock on the single exchange where it’s listed. Fund managers invest in companies as per the fund’s investment objective and investors know what they are investing in. For instance, mid cap growth funds are supposed to have asset allocation to mid-cap segment with a growth-oriented investment style and their portfolio must reflect this. This helps investors compare funds with similar mandate. Portfolio balancing must be done regularly since market capitalisation changes with stock price movement on the exchange.

Mid Cap Mutual Funds invest in the mid cap companies with higher growth potential, but don’t exhibit risks associated with small caps since these companies have attained certain scale and stability. Mid Cap Mutual Funds offer higher returns than large caps without being risky like small cap funds.

While choosing best mid cap Mutual Funds, look beyond the recent 3-5 year returns for consistency of performance over longer periods and compare it with suitable benchmark returns.

What are Liquid Funds?

A liquid fund is a debt mutual fund scheme. You use it if you have excess cash and think you might need the cash in a few days or weeks or months. If you wish to invest a large sum in an equity fund, but want to stagger the investments over a period, put your money in a liquid fund and enrol for a systematic transfer plan (STP) whereby you invest a fixed sum from your liquid fund to an equity fund each month.

What is a Hybrid Fund?

Our choice of meals when we dine depend largely on the time at hand, the occasion and of course, our mood. If we’re in a hurry, say during an office lunch or eating before boarding a bus/train, we may opt for a combo meal. Or if we know a combo meal is famous, we may not bother to go through the menu. A leisurely meal would mean ordering individual items from the menu, as many as we’d like.

Similarly, an investor in a Mutual Fund can select and invest individually in various schemes, e.g. equity fund , debt fund , gold fund , liquid fund , etc. At the same time, there are schemes like a combo meal – known as hybrid schemes. These hybrid schemes, earlier known as Balanced Funds, invest in two or more asset categories so that the investor can avail the benefit of both. There are various types of hybrid funds in the Indian Mutual Fund industry. There are schemes that invest in two assets, viz., equity and debt, or debt and gold. There are also schemes that invest in equity, debt and gold. However, most of the popular hybrid schemes invest in equity and debt assets.

Different types of hybrid funds follow different asset allocation strategies. Remember to have your objectives clear before you invest.

Why should I invest in gold funds when I can invest in gold itself?

A Gold ETF is an exchange-traded fund (ETF) that aims to track the domestic physical gold price. They are passive investment instruments that are based on gold prices and invest in gold bullion. In India, Gold is usually held in ornament form, which has a certain making and wastage component (usually more than 10% of bill value). This is eliminated when investing in a Gold Fund.

Buying gold ETFs means you are purchasing gold in an electronic form. You can buy and sell gold ETFs just as you would trade in stocks. When you actually redeem Gold ETF, you don’t get physical gold, but receive the cash equivalent. Trading of gold ETFs takes place through a dematerialised account (Demat) and a broker, which makes it an extremely convenient way of electronically investing in gold.

Because of its direct gold pricing, there is a complete transparency on the holdings of a Gold ETF. Further due to its unique structure and creation mechanism, the ETFs have much lower expenses as compared to physical gold investments.

Which Mutual Fund should I choose for mid-term investment?

4-6 years is considered medium-term in savings and investment decisions and hence capital appreciation should be your objective here. Corporate bond funds and hybrid funds are best suited for capital appreciation as they are less volatile compared to equity funds which are ideal for wealth creation over long-term. Corporate bond funds invest in high quality bonds with 3-5 years average maturity, becoming less sensitive to interest rate changes. Hybrid funds invest predominantly in debt with some equity exposure thus providing a safer investment option with potential for capital appreciation.

While evaluating funds for medium-term investments, look beyond the recent 3-5 years returns for the fund’s long-term performance. See if it has been a consistent performer through all phases of a market cycle. Most funds will perform well during a secular bull run i.e. when markets are trending upwards, but a fund giving superior return during market downturn will exhibit consistent returns over time. Since you want to invest for 3-5 years and if the market happens to be in a bearish mood during this time, you would benefit from investing in the consistent performers. Choose a fund from a trusted fund house with good pedigree or seek help from an investment adviser to choose the right fund.

Should retired people invest in Mutual Funds?

Retired people usually have their savings and investments locked up in bank FDs, PPFs, gold, real estate, insurance, pension plans etc. Most of these options are difficult to convert to cash immediately. This may lead to undue stress in case of medical or other emergencies. Mutual Funds provide the much-needed liquidity to retirees as they are easy to withdraw and offer better post-tax returns.

Most retired people fear the volatility or fluctuation in returns of Mutual Funds and stay away from them. They should put some part of their retirement corpus in Debt Mutual Funds and go for a Systematic Withdraw Plan (SWP). This will help them earn a regular monthly income from such investments. Debt funds are relatively safer than equity funds as they invest in bonds issued by banks, companies, government bodies and money market instruments (bank CDs, T-bills, Commercial Papers).

SWP in debt funds provides tax efficient returns as compared to bank FDs. Income from FDs/pension plans are taxed at higher effective rates compared to withdrawals under SWP. You can easily stop a SWP or change the withdrawal amount anytime depending on your need unlike in a pension plan. Thus, retirees should include Mutual Funds in their financial plans.

Are there funds that give quarterly payouts?

If you are looking for a regular income inflow to manage your monthly household expenses, you should go for Systematic Withdrawal Plans(SWPs)in a Mutual Fund. All you need to do is invest a large lump sum amount in a suitable scheme and then start a SWP after a year, so that short-term capital gains tax doesn’t apply. You can decide the payout amount and frequency as per your need and change them whenever you like.

SWP is better than opting for dividend option in a Mutual Fund scheme because dividend payments are not guaranteed. They are subject to profits made by the companies in which the Mutual Fund has invested your money. If the market goes down and your fund makes losses in its portfolio, you may not receive any dividends. In case of SWP, even if the scheme is making losses it will still pay the amount opted for, by digging into the principal. Hence, you should have a lump sum amount to begin with in case of a SWP. You can set a withdrawal amount as a proportion (%) of your lump sum investment that will be slightly less than the returns you expect from the fund, so that your principal remains intact most of the times.

What is Systematic Withdrawal Plan (SWP)?

Some people invest in Mutual Funds for a regular income, and they usually look at options of getting a dividend. Thus many schemes, especially debt oriented schemes, have monthly or quarterly dividend options. It is important to note that dividends are distributed from the profits or gains made by the scheme and are in no way guaranteed every month. Though the fund house endeavors to give consistent dividends, the distributable surplus is determined by market movements and fund performance.

There is another method to get a monthly income: using the Systematic Withdrawal Plan (SWP). Here, you need to invest in the growth plan of a scheme and specify a certain fixed amount required as a monthly payout. Then on a designated date, units amounting to that fixed amount would be redeemed. For example, an investor could invest Rs. 10 lacs and request that Rs. 10,000 be paid on the 1st of every month. Then, units worth Rs. 10,000 would be redeemed on the 1st of every month.

It is important to note that the tax treatment for both, dividend and SWPs, vary, and investors need to plan accordingly.

*Monthly Income is not assured and should not be construed as guarantee of future returns.

What are the taxation rules and implications in Mutual Funds?

Mutual Fund investments are subject to capital gains tax. It’s paid on the profit we make while redeeming / selling our Mutual Fund holdings (units). The gain is the difference in NAV of scheme on the date of sale and date of purchase (Selling Price-Purchase Price). Capital gains tax is further classified depending on period of holding. For equity funds (funds with equity exposure > =65%), holding period of one year or more is considered long-term and subjected to Long-Term Capital Gains (LTCG) tax.

LTCG tax of 10% is applicable on equity funds if the cumulative capital gain in a financial year exceeds INR 1 lakh. While doing financial planning remember your gains remain tax-free up to INR 1 lakh. It’s applicable for all investments made after 31st Jan 2018. Profits on holdings of less than a year are subject to 15% Short-Term Capital Gains (STCG) tax in equity funds.

Long-term is defined as holding period of 3 years or more in case of non-equity funds (debt funds) and 20% LTCG tax is applicable on such holdings with indexation i.e. purchase price is adjusted upwards for inflation, while computing capital gains. Profits on holdings of less than 3 years are subject to STCG tax, which is the highest income tax slab individuals fall into.

What is the difference between Mutual Funds and Shares?

From where do you get the vegetables for dinner? Do you grow them in your backyard, or purchase it from the nearest mandi/supermarket depending on what you need? Growing your own veggies is a great way of eating healthy food, but effort is spent on seed selection, manuring, watering, pest control, etc. The latter option allows you to choose from a wide variety without the hard work.

Similarly, you can create wealth by investing directly in shares of good companies or invest in them through Mutual Funds. Wealth can be created when we buy company stocks which use our money to grow their business, creating value for us.

Direct investment in shares carries a relatively higher risk element. You need to pick stocks by researching the company and sector. It’s a humongous task to choose few companies from thousands of them listed on the stock exchange. Once done, you need to keep a track of every stock’s performance.

In Mutual Funds, the stock picking is done by expert fund managers. You need to keep track of the performance of the fund and not individual stocks within the fund. They also allow investment flexibility unlike stocks, with growth/dividend options, top-ups, systematic withdrawals/transfer, etc. besides helping to ride over volatility by investing smaller amounts regularly through SIPs.

What is Net Asset value (NAV)?

The performance of a particular scheme of a Mutual Fund is denoted by Net Asset Value (NAV). In simple words, NAV is the market value of the securities held by the scheme. Mutual Funds invest the money collected from investors in securities markets. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date.

The NAVs of all Mutual Fund schemes are declared at the end of the trading day after markets are closed, in accordance with SEBI Mutual Fund Regulations.

What is an ELSS?

An ELSS is an Equity Linked Savings Scheme, that allows an individual or HUF a deduction from total income of up to Rs. 1.5 lacs under Sec 80C of Income Tax Act 1961.

Thus if an investor was to invest Rs. 50,000 in an ELSS, then this amount would be deducted from the total taxable income, thus reducing her tax burden.

These schemes have a lock-in period of three years from date of units allotment. After the lock-in period is over, the units are free to be redeemed or switched. ELSS offer both growth and dividend options. Investors can also invest through Systematic Investment Plans (SIP), and investments up to  ₹ 1.5 lakhs, made in a financial year are eligible for tax deduction

What is an ETF?

An ETF is an Exchange Traded Fund, which unlike regular Mutual Funds trades like a common stock on a stock exchange.

The units of an ETF are usually bought and sold through a registered broker of a recognised stock exchange. The units of an ETF are listed in stock exchanges and the NAV varies as per market movements. Since units of an ETF are listed in the stock exchange only, they are not bought and sold like any normal open end equity fund. An investor can buy as many units as she wishes without any restriction through the exchange.

In the simple terms, ETFs are funds that track indexes such as CNX Nifty or BSE Sensex, etc. When you buy shares/units of an ETF, you are buying shares/units of a portfolio that tracks the yield and return of its native index. The main difference between ETFs and other types of index funds is that ETFs don’t try to outperform their corresponding index, but simply replicate the performance of the Index. They don’t try to beat the market, they try to be the market.

ETFs typically have higher daily liquidity and lower fees than Mutual Fund schemes, making them an attractive alternative for individual investors.

What is a CAN?

CAN stands for Common Account number and is issued by MF Utilities (Mutual Fund Utilities) that enables you to invest across 26 mutual fund houses and covers over 94% of the AUM of mutual funds available in the country.

How long does it take to get a Common Account Number (CAN)?

You can get your CAN immediately once you enter your details but it takes 1 business day to activate the CAN for investments if your KYC is completed in CKYC Registry and a SEBI registered KRA. If we have to process your KYC in CKYC and a KRA, it takes about a week.

Who keeps a record of my investments?

All Mutual Funds in India are regulated by the Securities and Exchange Board of India (SEBI). Mutual Fund regulations clearly define the roles and responsibilities of Asset Management Companies (AMC) and Custodians. It’s vital to remember that every investor has to complete an effective KYC process before investing. Therefore, only bonafide investors with a valid PAN card can invest in Mutual Fund schemes. Such investors also provide bank details so that all redemption proceeds are directly credited to an investors own account.

SEBI also ensures that all AMCs are supervised by a board of trustees, some of whom, have to necessarily be independent individuals. These trustees ensure one more level of safeguards and compliance.

Regulations and safeguards ensure that it can never ever be misappropriated and diverted, and that, no one will run with your money.

Is it safe to invest in Mutual Funds Online?

Remember the first time you boarded a flight? Did you have butterflies in your stomach or a queasy feeling? Finally, when the flight was air-borne, didn’t you feel reassured? Flying at 30,000 ft, seat belt fastened and a warm cabin crew along with an able pilot to take care of you.

Investing in Mutual Funds online is no different from that first flight. While you may be initially worried about where your money is going and if it has reached the intended recipient, online mode of investment is as safe as any other mode. Online payment platforms are secured with necessary encryption protocols so that your personal and financial data can’t be tapped during data transmission.

The online process is far more convenient because you can access all your transactions, buy or sell at any time and see how your portfolio is doing. When you invest online, your money is credited directly into the Mutual Fund’s account and it allots your units which you can see by logging into your account. So apart from safety and convenience, online mode offers you transparency too similar to offline mode.. Your money is safe in the system!

What happens when a Mutual Fund company shuts down / gets sold off?

If a Mutual fund shuts shop, your investment remains safe and will be remitted back to you. Or, in the case of merger/acquisition, it will be transferred to another mutual fund company by the trustee.

When a Mutual Fund Company shuts down or gets sold off, it is a serious matter to note for any existing investor. However, as Mutual Funds are regulated by SEBI, events of such kind have a prescribed process.

In the case of a Mutual Fund company shutting down, either the trustees of the fund have to approach SEBI for approval to close or SEBI by itself can direct a fund to shut. In such cases, all investors are returned their funds based on the last available net asset value, before winding up.

If a Mutual Fund is acquired by another fund house, then there are usually two options. One, the schemes continue in their original format, albeit with a new fund house overseeing it. Or, the acquired schemes are merged with schemes in the new fund house. SEBI approval is required for all Asset Management Company (AMC) Mergers and Acquisitions, as well as scheme level mergers too.

In all such cases, investors are given an option to exit the schemes with no load being levied. Any action by investor or fund house is ALWAYS done at prevailing Net Asset Value.

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