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What is Mutual Fund?
What is a fund house/family?
What is an Asset Management Company
(AMC)?
What is the Net asset value
(NAV)?
What happens to the income received by the mutual
fund?
What are a fund's net assets?
What is a fund portfolio?
What is the portfolio turnover of a fund supposed
to mean?
What are the different plans that mutual funds offer?
What are the advantages of investing in a mutual
fund?
What is load?
What is an ex-dividend date?
How can I purchase Mutual funds units?
What documentation will I receive?
What is Mutual Fund?
A
mutual fund pools the money of people with similar investment
goals. The money in turn is invested in various securities depending
on the objectives of the mutual fund scheme, and the profits (or
loss) are shared among investors in proportion to their investments.
Mutual fund schemes are usually open end (perpetually open for
investments and redemptions) or closed end (with a fixed term).
A mutual fund scheme issues units that are normally priced at
Rs.10 during the initial offer. Thus the number of units you own
as against the total number of units issued by the mutual fund
scheme determines your share in the profits or loss of a scheme.
In the case of open-end schemes, units can be purchased from
or sold back to the fund at a Net Asset Value (NAV) based price
on all working days.
What are the types of mutual funds?
Mutual funds can be classified based on their objectives as:
Equity Funds:
Equity funds seek to provide maximum growth of capital with secondary
emphasis on dividend or interest income. They invest in common
stocks with a high potential for rapid growth and capital appreciation.
An equity fund gives an exposure to the stock market. The fund
would have long-term growth potential but provide low current
income. They are not suitable for investors who are risk averse
and are focused on maximizing current income or conserving principal.
The funds offered under this category
The overriding objective of the AMC in managing its investments
is to produce a consistently above average long-term performance.
The AMC believes in a bottom-up approach to stock picking. This
means that the focus is on the fundamental quality of companies
as opposed to a focus on favoured sectors and market movements.
The AMC will follow a structured investment process in order
to identify the best stocks for inclusion in the portfolio. This
would involve consistently examining all stocks under an internally
developed research framework. A stock would be considered or inclusion
in the portfolio when the valuation does not adequately capture
its underlying fundamental value in the AMC's opinion based on
the above factors.
The AMC's portfolio management style is conducive to a low portfolio
turnover rate. However, the AMC will take advantage of the opportunities
that present themselves from time to time because of inefficiencies
of the securities markets. The AMC will endevour to balance the
increased cost on account of higher portfolio turnover with the
benefits derived therefrom.
Balanced Funds:
Balanced funds are more evenly invested in equities and income
securities. Balanced and equity-income funds are suitable for
conservative investors who want high current yield with some growth.
If you seek to generate long-term capital appreciation and current
income, an investment in the balanced fund would be ideal. It
gives you an exposure to the stock market without the entire risk
of the stock market. The AMC proposes to invest in a mix of equities
and fixed income securities with the aim of generating capital
appreciation, while at the same time minimizing the volatility
inherent in pure equity schemes. With this aim, the AMC would
allocate the assets between equity and fixed income instruments
within the limits laid down for each scheme.
Debt Funds:
The goal of fixed income funds is to provide high current income
consistent with the preservation of capital. Growth of capital
is of secondary importance. These funds invest in corporate bonds
or government securities that have a fixed rate of return. The
funds are suitable for investors who want to maximize current
income and who do not wish to assume a high degree of capital
risk in order to do so. Since bond prices fluctuate with changing
interest rates, there is some principal risk involved despite
the fund's conservative nature.
The AMC aims to identify securities, which offer superior levels
of yield at lower levels of risks. With the aim of controlling
risks, rigorous in-depth credit evaluation of the securities proposed
to be invested in will be carried out by the investment team of
the AMC. The credit evaluation includes a study of the operating
environment of the company, the past track record as well as the
future prospects of the issuer, the short as well as longer-term
financial health of the issuer. Rated debt instruments in which
the Scheme invests will be of investment grade as rated by a credit
rating agency. In case a debt instrument is not rated, specific
approval of the Board of the AMC will be obtained for such an
investment. In addition, the investment team of the AMC studies
the macro economic conditions, including the politico-economic
environment and factors affecting liquidity and interest rates.
The AMC would use this analysis to attempt to predict the likely
direction of interest rates and position the portfolio appropriately
to take advantage of the same.
What is a fund house/family?
A group of funds managed under one umbrella. The most basic fund
family would include a stock, bond and money market-portfolio,
although many funds have variants like sector funds, balanced
funds.
For instance, Zurich India Mutual Fund is a fund house with
several funds under it.
What is an Asset Management Company (AMC)?
A highly regulated organisation that pools money from many people
into a portfolio structured to achieve certain objectives. Hence
it is termed as an Asset Management Company. Typically an AMC
manages several funds - open-end /closed-end across several categories
- growth, income, balanced. Every mutual fund has an AMC associated
with it.
For instance, Alliance Capital Mutual Fund is associated with
Alliance Capital Asset Management Company Ltd.
What is the Net asset value (NAV)?
The price or value of one unit of a fund. It is calculated by
summing the current market values of all securities held by the
fund, adding in cash and any accrued income, then subtracting
liabilities and dividing the result by the number of units outstanding.
Most open-ended funds companies compute NAVs once a day based
on closing market prices.
What happens to the income received by the
mutual fund?
The income received is credited to the scheme and constitutes
part of the NAV.
What are a fund's net assets?
The total value of a fund's cash and securities less its liabilities
or obligations
What is a fund portfolio?
A group of securities held by the mutual fund. A portfolio could
be a mixture of stocks, bonds and cash.
What is the portfolio turnover of a fund
supposed to mean?
A measure of the amount of buying and selling activity in a
fund. Turnover is defined as the lesser of securities sold or
purchased during a year divided by the average of monthly net
assets. A turnover of 100 percent, for example, implies positions
are held on average for about a year.
What are the different plans that mutual funds
offer?
Mutual Funds in order to cater to a range of investors have various
investment plans. Some of the important investment plans include:
Growth Plan
Under the Growth Plan, the investor realises only the capital
appreciation on the investment (by an increase in NAV) and does
not get any income in the form of dividend.
Income Plan
Under the Income Plan, the investor realises income in the
form of dividend. However his NAV will fall to the extent of
the dividend.
Dividend Re-investment Plan
Here the dividend accrued on mutual funds is automatically
re-invested in purchasing additional units in open-ended funds.
In most cases mutual funds offer the investor an option of collecting
dividends or re-investing the same.
Systematic Investment Plan (SIP)
Here the investor is given the option of preparing a pre-determined
number of post-dated cheques in favour of the fund. He will
get units on the date of the cheque at the existing NAV. For
instance, if on 25th March, he has given a post-dated cheque
for June 25th, he will get units on 25th June at existing NAV.
Systematic Withdrawal Plan
As opposed to the Systematic Investment Plan, the Systematic
Withdrawal Plan allows the investor the facility to withdraw
a pre-determined amount/units from his fund at a pre-determined
interval. The investor's units will be redeemed at the existing
NAV as on that day.
Retirement Pension Plan
Some schemes are linked with retirement pension. Individuals
participate in these plans for themselves, and corporate for
their employees.
Insurance Plan
Some schemes launched by UTI and LIC offer insurance cover
to investors.
What are the advantages of investing in
a mutual fund?
Mutual funds are superior to other comparable investment avenues
because of the following reasons:
Limited Risk
Investors are exposed to reduced investment risk due to portfolio
diversification, economies of scale in transaction cost and
professional management.
Diversified investment
Small investors can participate in larger basket of securities
and share the benefits of efficiently managed portfolio by experts,
and are freed from maintaining records of company share certificates,
and tracking tax rules. Mutual fund investments are less risky
due to portfolio diversification, which is possible mainly due
to large funds available at their disposal. Small investors
can never spread their risks across such a wide portfolio, as
can mutual funds.
Freedom from tracking investments
Investors do not have to track their investments regularly,
as the tracking is done by experts who buy and sell securities
for them. Investors are only required to track the performance
of the mutual fund.
Professional management
Mutual funds are run by professionals, with experience in
portfolio management. Analysts employed by mutual funds analayse
data and information available in a manner that cannot be matched
by the lay investor.
Tax benefits
Income tax benefits are granted to investors in mutual funds,
making it more tax efficient as compared to other comparable
investment avenues.
What is load?
It is a charge collected by a mutual fund when it sells units.
It can be either front-end load (i.e., the charge is collected
when an investor buys the units) or back-end load (i.e., the charge
collected when the investor sells back the units). Some schemes
do not charge any load and are called No Load Schemes.
What is an ex-dividend date?
Normally, one business day after the record date. Investors
purchasing unit on or after the ex-dividend date are not entitled
to collect dividends or bonus units. The NAV falls by the amount
of the dividend distributed and/or bonus issued. The terms ex-bonus
and ex-dividend often are used synonymously.
For instance, if the record date for dividend is October 15th,
then investors, who don't have their names in the list of unit
holders as on that day, will not receive dividend. This works
very similar to dividend and bonus declarations in the case of
stocks.
How can I purchase Mutual funds units?
Through
Intermidiary: You could get in touch with us through
phone or visiting at our site. Our sales executive would provide
you with the application form and assistance in applying for any
of schemes.
Direct to customer care center of AMC: You can directly deposit
filled application form at customer care center of AMC house.
Online purchasing: Through online filling of application form.
What documentation will I receive?
If you invest during the Initial Offer Period: An Account Statement
is sent to you by post stating the number of units allotted, not
normally later than 45 days from the close of the initial offer
period.
If you invest in an open-ended fund: An Account Statements/Transaction
confirmation is normally sent to you within 7 days from the date
of the transaction.
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