Investor Education

Mutual funds are packed with a bundle of benefits. A few are mentioned below:

• Managed by experts: Mutual Funds are managed by qualified and experienced professionals. Investors may have reasonable capability but to assess a financial instrument, a professional analytical approach is required. Access to research, information, time and methodology also helps them to make sound investment decisions.
• Reduced risk with diversification: Mutual Funds invest in a number of stocks reducing the risk. It provides small investors with an opportunity to invest in a larger basket of securities.
• Time-efficient option: Investors save their time and effort of tracking investments, collecting income and more from various issuers.
• Small investments: It helps investors to invest in small amounts as and when they have surplus funds to invest.
• Transparent dealings: Mutual Funds are well regulated & governed by SEBI (Mutual Funds) Regulations, 1996 thereby ensuring transparency of investments.
• Easy liquidation: Funds like open-ended funds can be redeemed (liquidated) on any business day (when the stock markets and/or banks are open), so investor have easy access to their money.

Mutual funds are pooled investments. A common pool of money invested by many investors is managed by fund investment managers. The fund managers have in-depth knowledge about how the market works and they use their skills and judgment in investing the total amount, which is called corpus. The corpus is invested in securities like shares, debentures and money market instruments. Profit generated through these investments is then distributed amongst investors in proportion to their investments made.

The risk in Mutual Funds investment is mainly refers to the possibility of returns being different from what was originally expected. In other words risk indicates volatility of returns. Generally higher the return higher would be the risk associated with the investment. This relationship of risk and return is central to investing, which all investors should be aware of. Mutual funds are known best for minimizing the risks involved in market investments through its diverse and professional management. Yet, the risks led by price fluctuation, liquidity, credit risks, etc. cannot be avoided. An investor may select schemes prudently depending on his risk taking capability, keep a track of market happenings and take proactive actions if needed.

Investment in Mutual Fund Units involves investment risks such as trading volumes, settlement risk, liquidity risk, default risk including the possible loss of principal.

Equity based funds generally have high risk profile compared to debt funds.

Mutual Funds are among the most transparent collective investment vehicles in India. They are regulated by the capital market regulator Securities and Exchange Board of India (SEBI). SEBI protects the interest of the capital market investors and ensures prudent functioning of mutual funds.

SEBI has mandated elaborate investment guidelines and reporting requirements to ensure that mutual fund investments are under its regulatory purview. It also stipulates the investment of money by the investors and their valuation on an ongoing basis.

Association of Mutual Funds in India (AMFI), a trade body of mutual funds in India also involves itself in devising compliance and best practices guidelines in the industry to ensure professional ethics.

Yes, non-resident Indians can also invest in mutual funds. NRIs will get all the details pertaining to this in the offer documents of the schemes.

Asset Management Company (AMC) is essentially a Mutual Fund company that invests the funds collected by its mutual fund schemes into securities as specified in the investment objective of each particular scheme. They provide the investors with more diversification and investing options than they would have by themselves.

NAV or Net Asset Value is the per unit market value of the mutual fund. It is the price at which investors purchase or sell fund units. It is calculated by dividing the total value of all the assets in a portfolio, minus the liabilities by the total number of units of the scheme. Since market value of underlying holdings changes every day, the NAV of a scheme also varies on a day to day basis. For example, if the market value of securities of a mutual fund scheme is Rs 100 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.10. NAV is required to be disclosed by the mutual funds on daily basis.

NAVs of mutual fund schemes are published on respective mutual funds’ websites as well as AMFI’s website daily - www.amfiindia.com.

NAV (in Rs terms) = Market or Fair Value of Scheme's investments + Current Assets - Current Liabilities and Provision / Number of Units outstanding under Scheme on the Valuation Date

Schemes are defined as per the Maturity Period:

• Open-ended Fund/ Scheme: An open ended fund or scheme is available for subscription and repurchase on a continuous basis and does not have a fixed maturity period. Investors can buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. One of the key features of open-end schemes is liquidity.
• Close-ended Fund/ Scheme: With a stipulated maturity period e.g. 5-7 years, the fund is open for subscription only during a specified period at the time of launch of the scheme. It is open for investments at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed.
  
  

  Mutual Fund Schemes would be broadly classified in the following groups:

  • Equity Schemes
  • Debt Schemes
  • Hybrid Schemes
  • Solution Oriented Schemes
  • Other Schemes such as Exchange Traded Funds/ Index Funds

It is a good practice to monitor the performance of the mutual fund schemes one has invested in at fixed intervals. This helps to take timely decisions in case they need to exit from the investment.

The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis. The mutual funds are also required to publish their performance in the form of halfyearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an affect on the yield and other useful information in the same half-yearly format. The mutual funds are also required to send annual report or abridged annual report to the unitholders at the end of the year.

Investors can monitor their investments with:

• A fund fact sheet: It is like a report card that indicates the health of the scheme. Published by a fund house, it enlists details of each of the schemes managed by the fund house. It usually consists of details of the portfolio which depicts the investments made by the scheme, performance of the scheme and size and investment details of the scheme.
• Analysts’ reports: Investors can also get the performance of mutual fund scheme in the analysts’ reports in the media.
• Websites: There are a number of websites that offer in-depth analysis of mutual fund schemes in terms of comparable schemes, the benchmark index and average performance of all schemes in the category the scheme falls in.

If investors are investing in schemes like ETFs, then they must have a Demat account as these schemes are compulsorily allotted in Demat mode. For allotment in physical mode there is no need for a Demat account. Units of all mutual funds schemes can be allotted in both the modes i.e. Physical as well as in Demat. Also, the depositories have allowed the DPs to facilitate holding of mutual funds in Demat account.

In a Direct Plan a mutual fund scheme allows investors to invest in it by directly i.e. without involving or routing the investment through any distributor/agent.

The option of investing in a scheme through direct plan is mandatory by the SEBI Circular no. CIR/IMD/DF/21/2012, dated September 13, 2012.

Yes. All categories and types of investors can invest in Direct Plans as per the needs of the portfolio.

Investor may choose to invest in mutual funds with the help of a Mutual Fund distributor/agent in what is termed as a ‘Regular Plan’

The most important difference between a Regular Plan and Direct Plan is the involvement of a broker and brokerage in the transaction. Direct Plan has lower expense ratio than the Regular Plan, as there is no distributor/agent involved, and hence there is saving in terms of distribution cost/commissions paid out to the distributor/agent, which is added back to the returns of the scheme. Hence, a Direct Plan has a separate NAV, which is higher than the “Regular” Plan’s NAV.

A New Fund Offer or NFO is either an offer for a new mutual fund scheme being launched by a company or the launch of additional units of existing close-ended funds that are available for investing.

‘IDCW’ is abbreviation of ‘Income Distribution cum Capital Withdrawal’. SEBI changed the term “Dividend Option” in mutual funds to “IDCW” in April 2021. The objective behind this was to use the correct nomenclature. Many investors misunderstood dividends declared by mutual funds as a bonus over and above the returns delivered by a scheme. This was quite misleading and could affect an investor's investment plan. Therefore, SEBI decided to rename the Dividend plan to IDCW to explain the differences clearly, avoid misconceptions, and promote transparency.

The dividend declared by a mutual fund is, in fact, the income arising from the investors’ invested capital. This is why the NAV of the scheme falls to the extent of the dividend paid by the scheme under the IDCW plan. The resulting reduced NAV after the payment of the dividend is called ex-dividend NAV.

It is important to note that IDCW declared by mutual fund schemes are subject to distributable surplus, which is a function of market conditions and the performance of the scheme. Distribution of scheme profit by way of IDCW is declared at the discretion of the fund manager. IDCW may include dividends paid by the underlying stocks and capital gains made by selling such stocks from the scheme’s portfolio.

The growth option declares no dividend, which means there are no re-investment options either. The dividend distribution tax is also not applicable on these funds. This is why the NAV would capture the full value of portfolio gains in the growth option.

SIPs help in investing a fixed amount at specified periods in various mutual funds scheme. It is a great way to bring discipline in investment habits and helps investors plan for their future. 3 prime benefits of investing in SIP:

• Disciplined investment: SIPs ensures that investments are done at a pre-determined schedule, regularly
• Smaller investments: SIP lets investors invest in small amounts. Thus, investments are not burdensome yet rewarding in the long run with its returns.
• Average investment cost: In an equity mutual fund, investors can earn more units when prices are falling and fewer units when the prices are rising, which helps them in averaging the investment cost.

SWP is an investment that allows investors to withdraw money from their existing mutual fund account at predetermined intervals. If the investor wants a steady stream of cash inflows from the investments, opting for SWP serves is the best choice.

To balance the risk factor involved in investing lump sum of investment money in equity fund or debt fund, Systematic Transfer Plan is the best option. STP could be seen as a combination of SIP and SWP, wherein the investor transfers a fixed amount of money from one scheme to another, usually between debt fund and equity fund. The investor here can avoid the risk of investing all of capital in equity mutual fund as this investment could be risky subject to markets’ volatility and its relative impact on returns in equity fund. On the other hand, investment only in debt fund will create moderate income. An STP thus helps to strike a balance between risk and return. It helps average the risk and returns involved in investments. If investors already have investment in equity scheme but want to exit, they can avoid the risk of a sharp fall in equity markets on the date of lump sum withdrawal by using STP. Investing in STP will help in gradually pulling out money from equity funds.

STP invests a specific amount at specific intervals in an equity fund. This helps in averaging the cost of equity investment as more units are received when prices are falling and lesser units are received when prices are rising. STP rebalances the portfolio by reallocating investments from debt to equity or vice versa. If investment in debt increases, the money can be reallocated to equity funds through systematic transfer plan and if investment in equity goes up, money can be conveniently switched from equity to debt fund.

There are two types of STPs:

• Fixed STPs: A fixed sum will be transferred to the selected transferee scheme under various plans/options.
• Capital Appreciation STP: The amount of capital that is appreciated gets transferred to the selected transferee scheme under various plans/options. The original lump sum amount invested in the Transferor scheme remains unchanged.

The option offered to investors to shift their investment from one scheme to another within that fund is called a Switch. The process of switching involves a fee. Switching is a good way for the investors to allocate their investment among the schemes in order to match their altering investment needs, risk profiles or changing circumstances during their lifetime.

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) 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.

Know Your Customer (KYC) is a process of to identify and verify the identity of a company’s clients. In order of make the process uniform and to avoid duplication in the process across the intermediaries in the securities market; SEBI vide Circular No. MIRSD/SE/Cir-21/2011 dated October 5, 2011, SEBI (KYC Registration Agency) Regulations, 2011 and Circular No. MIRSD/ Cir-26/ 2011 dated December 23, 2011 introduced the concept of KYC Registration Agency (KRA) effective January 01, 2012.

A standard Account Opening form (AOF) 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).

The duly completed KYC form along with supporting documents such as proof of identity and proof of address and the Account Opening Form may be submitted at any of the Points of Service (POS)/Investor Service Centre (ISC) of any mutual fund. The In Person Verification (IPV) also needs to be completed and certified by an uthorized person on the KYC form itself. Your distributor/financial advisor will be able to assist you in this regard.

In case of mutual funds, the IPV can be performed by an authorised official of a mutual fund, AMFI registered Distributor or an authorised officer of a Scheduled Commercial Bank.

If PAN and KYC details of the investors are already updated in the company’s records then they don’t need to repeat the formalities. In case any further details are required as per new regulations, the investor will be notified. They can then submit the details at any of the mentioned Service Centers. New investors who have not completed their KYC process need to complete formalities as per SEBI’s KRA regulations.

When an investor redeems or transfers his units between schemes of mutual fund, a non refundable fee is deducted from the NAV at the time of such transaction by the Asset Management Company. This fee is known as exit load.

When investors sell units of open-ended scheme, the redemption price at that time is called redemption price. The redemption price is same as NAV, unless the fund levies an exit load in which case the redemption price will be lower than NAV.

The price at which a close-ended scheme repurchases its units is called repurchase price. Repurchase can be at NAV as well as have an exit load.