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Mutual Funds

Introduction

To many people, Mutual Funds can seem complicated or intimidating. We are going to try and simplify it for you at its very basic level. Essentially, the money pooled in by a large number of people (or investors) is what makes up a Mutual Fund. This fund is managed by a professional fund manager.

It is a trust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities. Each investor owns units, which represent a portion of the holdings of the fund. The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value or NAV. Simply put, a Mutual Fund is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

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.

How do I know which fund is right for me?

Once an investor has decided to invest in Mutual Funds, he has to make a decision of which scheme to invest in– Fixed Income FundEquity Fund 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 Factsheets 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.

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.

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 much of my investment can I withdraw?

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 remove 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.