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What is a Mutual Fund?

A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI) that pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders in Equity Shares, Government Securities, Bonds, Call Money Markets etc., and distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets.

Why should I choose to invest in a mutual fund?

For retail investors who do not have the time and expertise to analyze and invest in stocks and bonds, mutual funds offer a viable investment alternative. This is because:

  • Mutual Funds provide the benefit of cheap access to expensive stocks.
  • Mutual funds minimize the risk of investor by diversifying through investing in a basket of assets.
  • A team of professional fund managers manages them with in-depth research inputs from investment analysts.
  • Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information which individual investors cannot access.

Can mutual funds be viewed as risk-free investments?

No. Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds, the controllable risks are reduced to a great extent.

What are the risks involved in investing in mutual funds?

A very important risk involved in mutual fund investments is the market risk. When the market is in doldrums, most of the equity funds will also experience a downturn. However, the company specific risks are largely eliminated due to professional fund management.

What are open-ended and closed-ended mutual funds?

In an open-ended mutual fund, there are no limits on the total size of the corpus. Investors are permitted to enter and exit the open-ended mutual fund at any point of time at a price that is linked to the net asset value (NAV). In case of closed-ended funds, the total size of the corpus is limited by the size of the initial offer. No purchases could be made after the issue closes.

What is the investor's exit route in case of a closed-ended fund?

According to SEBI regulations, all closed-ended funds have to be necessarily listed on a recognized stock exchange. Thus the secondary market provides an exit route in case of closed-ended funds. These days, most of the mutual funds are launching close-ended funds with an interval period. Redemptions from such funds can be made once in week, once in a month or once in 6 months depending upon individual fund.

What are the parameters on which a Mutual Fund scheme should be evaluated?

Performance indicators like past returns given by the fund, peer comparison, the objective of the fund and fund manager's track record are some of the key factors to be considered while taking an investment decision regarding mutual funds.

As a lay investor, how do I go about analyzing the mutual fund scheme?

Karvy Value gives you a helping hand in this aspect. Our dedicated financial advisors help you evaluate schemes based on primary as well as secondary information. Apart from that, you can use our valueable mutual fund tools which will help you to take a decision on whether a fund is worth investing or not.

What are the different types of plans that any mutual fund scheme offers?

It depends on the strategy of the concerned scheme. But generally there are 3 broad categories. A dividend plan entails a regular payment of dividend to the investors. A reinvestment plan is a plan where these dividends are reinvested in the scheme itself. A growth plan is one where no dividends are declared and the investor only gains through capital appreciation in the NAV of the fund.

What is a Systematic Investment Plan and how does it operate?

A systematic investment plan or SIP is one where an investor contributes a fixed amount every month and at the prevailing NAV the units are credited to his account.

What are the benefits of a Systematic Investment Plan?

A systematic investment plan (SIP) offers 2 major benefits to an investor:

  • It gives you the flexibility to invest in gradually rather than lump sum investment at one point of time.
  • By participating in various market cycles, you get to invest both at higher as well as lower levels. Hence, the cost of your investment would be average of these levels. This is known as 'Rupee Cost Averaging'.

What is NAV and how is it calculated?

NAV is the net asset value of the fund. Simply put it reflects the number of units held by an investor at current market prices. It is calculated by dividing the current market value of the fund's net assets by number of shares outstanding.

What proportion of my investment should be invested in mutual funds?

This decision will depend on factors like your income, financial objectives, value of assets, investment horizon, risk taking ability, tax status, etc. Karvy Value's expert advisors will help you on the proportion you need to allocate to mutual funds and suitable schemes.

What is the difference between mutual funds and portfolio management schemes?

While the concept remains the same of collecting money from investors, pooling them and investing the funds, the focus is different. While Mutual Funds invest the money according to their investment objectives, Portfolio Management Services (PMS) are investor centric in the sense that they are tailor-made to suit investment needs of investors, guiding through various investment options and offering advisory services. PMS has been designed for high end investors with ticket size more than Rs. 25 lakhs.

How does the concept of exit load work in case of unit redemptions?

An exit load is levy that an investor pays at the point of exit. This is levied to dissuade investors from exiting the fund. Assume that the current NAV of the fund is Rs.12.00 and that the exit load is Rs.0.12. Now if you sell 100 units then you stand to receive 100x11.88=Rs.1188.

If schemes in the same category of different mutual funds are available, should one choose a scheme with lower NAV?

Some of the investors have the tendency to prefer a scheme that is available at lower NAV compared to the one available at higher NAV. Sometimes, they prefer a new scheme which is issuing units at Rs.10 whereas the existing schemes in the same category are available at higher NAVs. It should be noted that in case of mutual funds, lower or higher NAVs of similar type schemes of different mutual funds have no relevance. Consider the example below.
Suppose scheme A is available at a NAV of Rs.15 and scheme B at Rs.90. Both schemes are diversified equity oriented schemes. Investor has put Rs.9,000 in each of the two schemes. He would get 600 units (9000/15) in scheme A and 100 units (9000/90) in scheme B. Assuming that the markets go up by 10 per cent and both the schemes perform equally well which is reflected in their NAVs. NAV of scheme A would go up to Rs.16.50 (10% of Rs.15) and that of scheme B to Rs.99 (10% of Rs.90). Thus, the market value of investments would be Rs.9,900 (600* 16.50) in scheme A and it would be the same amount of Rs.9900 in scheme B (100*99). So, the return on investment in both the cases is same. Hence, investors should choose a scheme based on its merit considering performance track record of the mutual fund, service standards, professional management, etc. rather than NAV value.

Do investments in mutual funds offer tax benefit on capital gains?

Yes. If you redeem your investments from an equity-oriented fund after a period of 1 year, your capital gains are exempt from tax. However, short term capital gains (redeemed before 1 year) in equity funds are taxed at 15%. Debt funds if redeemed before 3 years are taxed as per individual tax bracket and if redeemed after 3 years are taxed at 20% with indexation.

Am I eligible for tax benefit by investing in a MF?

Yes, in case of Equity Linked Saving Schemes (ELSS), tax benefits are available under Section 80C of the Income Tax Act 1961, where contribution up to Rs. 1,50,000 is exempt from tax. In such cases, the fund prospectus explicitly states that it is a tax saving fund. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like equity-oriented schemes.



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