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FREQUENTLY ASKED QUESTIONS(FAQs) |
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1. What is a Mutual Fund? |
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Ans. A Mutual Fund is
a body corporate that pools the savings of a number of investors and invests the
same in a variety of different financial instruments, or securities. The income
earned through these investments and the capital appreciation realised by the scheme
are shared by its unit holders in proportion to the number of units owned by them.
Mutual funds can thus be considered as financial intermediaries in the investment
business who collect funds from the public and invest on behalf of the investors.
The losses and gains accrue to the investors only. The Investment objectives outlined
by a Mutual Fund in its prospectus are binding on the Mutual Fund scheme. The investment
objectives specify the class of securities a Mutual Fund can invest in. Mutual Funds
invest in various asset classes like equity, bonds, debentures, commercial paper
and government securities.
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2. What is an Asset Management Company? |
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Ans. An Asset Management Company (AMC) is a highly regulated
organisation that pools money from investors and invests the same in a portfolio. They
charge a small management fee, which is normally 1.5 per cent of the total funds managed.
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3. What is NAV? |
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Ans. NAV or Net Asset Value of the fund is the cumulative
market value of the assets of the fund net of its liabilities. NAV per unit is simply
the net value of assets divided by the number of units outstanding. Buying and selling
into funds is done on the basis of NAV-related prices. NAV is calculated as follows:
NAV= (Market value of the fund's investments+Receivables+Accrued Income-
Liabilities-Accrued Expenses)/Number of Outstanding units
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4. How often is the NAV declared? |
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Ans. The NAV of a scheme has to be declared at least once
a week. However many Mutual Fund declare NAV for their schemes on a daily basis. As
per SEBI Regulations, the NAV of a scheme shall be calculated and published at least
in two daily newspapers at intervals not exceeding one week. However, NAV of a
close-ended scheme targeted to a specific segment or any monthly income scheme
(which are not mandatorily required to be listed on a stock exchange) may be published
at monthly or quarterly intervals.
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5. What are the benefits of investing in Mutual Funds? |
Ans.
1. Qualified and experienced professionals manage Mutual Funds. Generally, investors, by themselves, may
have reasonable capability, but to assess a financial instrument a professional analytical approach is
required in addition to access to research and information and time and methodology to make sound
investment decisions and keep monitoring them.
2. Since Mutual Funds make investments in a number of stocks, the resultant diversification reduces risk.
They provide the small investors with an opportunity to invest in a larger basket of securities.
3. The investor is spared the time and effort of tracking investments, collecting income, etc. from various
issuers, etc.
4. It is possible to invest in small amounts as and when the investor has surplus funds to invest.
5. Mutual Funds are registered with SEBI. SEBI monitors the activities of Mutual Funds.
6. In case of open-ended funds, the investment is very liquid as it can be redeemed at any time with the fund
unlike direct investment in stocks/bonds.
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6. Are there any risks involved in investing in Mutual Funds? |
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Ans. Mutual Funds do not provide assured returns. Their returns are
linked to their performance. They invest in shares, debentures and deposits. All these investments
involve an element of risk. The unit value may vary depending upon the performance of the company
and companies may default in payment of interest/principal on their debentures/bonds/deposits.
Besides this, the government may come up with new regulation which may affect a particular industry
or class of industries. All these factors influence the performance of Mutual Funds.
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7. What are the different types of Mutual funds?
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Ans. (a) On the basis of Objective
• Equity Funds/ Growth Funds Funds that invest in equity shares are called equity funds.They carry the
principal objective of capital appreciation of the investment over the medium to long-term. The returns
in such funds are volatile since they are directly linked to the stock markets. They are best suited for
investors who are seeking capital appreciation. There are different types of equity funds such as
Diversified funds, Sector specific funds and Index based funds.
• Diversified funds These funds invest in companies spread across sectors. These funds are generally
meant for risk-taking investors who are not bullish about any particular sector.
• Sector funds These funds invest primarily in equity shares of companies in a particular business sector
or industry. These funds are targeted at investors who are extremely bullish about a particular sector.
• Index funds These funds invest in the same pattern as popular market indices like S&P 500 and BSE
Index. The value of the index fund varies in proportion to the benchmark index.
• Tax Saving Funds These funds offer tax benefits to investors under the Income Tax Act.Opportunities
provided under this scheme are in the form of tax rebates U/s 88 as well saving in Capital Gains U/s
54EA and 54EB. They are best suited for investors seeking tax concessions.
• Debt / Income Funds These Funds invest predominantly in high-rated fixed-income-bearing ]
instruments like bonds, debentures, government securities, commercial paper and other money
market instruments. They are best suited for the medium to long-term investors who are averse to risk
and seek capital preservation. They provide regular income and safety to the investor.
• Liquid Funds / Money Market Funds These funds invest in highly liquid money market instruments. The
period of investment could be as short as a day. They provide easy liquidity. They have emerged as an
alternative for savings and short-term fixed deposit accounts with comparatively higher returns. These
funds are ideal for Corporates, institutional investors and business houses who invest their funds for
very short periods.
• Gilt Funds These funds invest in Central and State Government securities. Since they are Government
backed bonds they give a secured return and also ensure safety of the principal amount. They are best
suited for the medium to long-term investors who are averse to risk.
• Balanced Funds These funds invest both in equity shares and fixed-income-bearing instruments (debt)
in some proportion. They provide a steady return and reduce the volatility of the fund while providing
some upside for capital appreciation. They are ideal for medium to long-term investors willing to take
moderate risks.
• Hedge Funds These funds adopt highly speculative trading strategies. They hedge risks in order to
increase the value of the portfolio.
(b) On the basis of Flexibility
• Open-ended Funds These funds do not have a fixed date of redemption. Generally they are open for
subscription and redemption throughout the year. Their prices are linked to the daily net asset value
(NAV). From the investors' perspective, they are much more liquid than closed-ended funds. Investors
are permitted to join or withdraw from the fund after an initial lock-in period.
• Close-ended Funds These funds are open initially for entry during the Initial Public Offering (IPO) and
thereafter closed for entry as well as exit. These funds have a fixed date of redemption. One of the
characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but
the discount narrows as maturity nears. These funds are open for subscription only once and can be
redeemed only on the fixed date of redemption.The units of these funds are listed (with certain
exceptions), are tradable and the subscribers to the fund would be able to exit from the fund at any time
through the secondary market.
• Interval funds These funds combine the features of both open-ended and close-ended funds wherein
the fund is close-ended for the first couple of years and open-ended thereafter. Some funds allow fresh
subscriptions and redemption at fixed times every year (say every six months) in order to reduce the
administrative aspects of daily entry or exit, yet providing reasonable liquidity.
(c) On the basis of geographic location
• Domestic funds These funds mobilise the savings of nationals within the country.
• Offshore Funds These funds facilitate cross border fund flow. They invest in securities of foreign
companies. They attract foreign capital for investment.
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8. What are the different plans that Mutual Funds offer? |
Ans.
1. Growth Plan and Dividend Plan A growth plan is a plan under a scheme wherein the returns from
investments are reinvested and very few income distributions,if any, are made. The investor thus only
realises capital appreciation on the investment. This plan appeals to investors in the high income bracket.
Under the dividend plan, income is distributed from time to time. This plan is ideal to those investors
requiring regular income.
2. Dividend Reinvestment Plan Dividend plans of schemes carry an additional option for reinvestment of
income distribution. This is referred to as the dividend reinvestment plan. Under this plan, dividends
declared by a fund are reinvested on behalf of the investor, thus increasing the number of units held by the
investors.
3. Automatic Investment Plan Under the Automatic Investment Plan (AIP) also called Systematic Investment
Plan (SIP), the investor is given the option for investing in a specified frequency of months in a specified
scheme of the Mutual Fund for a constant sum of investment. AIP allows the investors to plan their savings
through a structured regular monthly savings program.Automatic Investment Plan Under the Automatic
Investment Plan (AIP) also called Systematic Investment Plan (SIP), the investor is given the option for
investing in a specified frequency of months in a specified scheme of the Mutual Fund for a constant sum of
investment. AIP allows the investors to plan their savings through a structured regular monthly savings
program.
4. Automatic Withdrawal PlanUnder the Automatic Withdrawal Plan (AWP) also called Systematic Withdrawal
Plan (SWP), a facility is provided to the investor to withdraw a pre-determined amount from his fund at a
pre-determined interval.
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9. What is Entry/Exit Load? |
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Ans. A Load is a charge, which the AMC may collect on entry and/or exit
from a fund. A load is levied to cover the up-front cost incurred by the AMC for selling the fund.
It also covers one time processing costs. Some funds do not charge any entry or exit load. These
funds are referred to as 'No Load Fund'. Funds usually charge an entry load ranging between 1.00%
and 2.00%. Exit loads vary between 0.25% and 2.00%. For eg. Let us assume an investor invests Rs.
10,000/- and the current NAV is Rs.13/-. If the entry load levied is 1.00%, the price at which the
investor invests is Rs.13.13 per unit. The investor receives 10000/13.13 = 761.6146 units. (Note
that units are allotted to an investor based on the amount invested and not on the basis of no.
of units purchased). Let us now assume that the same investor decides to redeem his 761.6146 units.
Let us also assume that the NAV is Rs 15/- and the exit load is 0.50%. Therefore the redemption
price per unit works out to Rs. 14.925. The investor therefore receives 761.6146 x 14.925 =
Rs.11367.10
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10. What is Sales/Purchase price? |
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Ans. Sales/Purchase price is the price paid to purchase a unit of the fund.
If the fund has no entry load, then the sales price is the same as the NAV. If the fund levies an entry
load, then the sales price would be higher than the NAV to the extent of the entry load levied.
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11. What is redemption price? |
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Ans. Redemption price is the price received on selling units of open-ended
scheme. If the fund does not levy an exit load, the redemption price will be same as the NAV. The
redemption price will be lower than the NAV in case the fund levies an exit load.
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12. What is repurchase price? |
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Ans. Repurchase price is the price at which a close-ended scheme repurchases its units.
Repurchase can either be at NAV or can have an exit load.
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13. What is a Switch? |
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Ans. Some Mutual Funds provide the investor with an option to shift his investment
from one scheme to another within that fund. For this option the fund may levy a switching fee. Switching allows
the Investor to alter the allocation of their investment among the schemes in order to meet their changed
investment needs, risk profiles or changing circumstances during their lifetime.
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14. What is Shut-Out Period? |
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Ans. After the closure of the Initial Offer Period, on an ongoing basis,
the Trustee reserves a right to declare Shut-Out period not exceeding 5 days at the end of each
month/quarter/half-year, as the case may be, for the investors opting for payment of dividend under
the respective Dividends Plans. The declaration of the Shut-Out period is envisaged to facilitate the
AMC/the Registrar to determine the Units of the unitholders eligible for receipt of dividend under
the various Dividend Options. Further, the Shut-Out period will also help in expeditious processing
and despatch of dividend warrants. During the Shut-Out period investors may make purchases into the
Scheme but the Purchase Price for subscription of units will be calculated using the NAV as at the
end of the first Business Day in the following month/quarter/half-year as the case may be, depending
on the Dividend Plan chosen by the investor. Therefore, if investments are made during the Shut
-Out period, Units to the credit of the Unitholder's account will be created only on the first Business
Day of the following month/ quarter/half year, as the case may be, depending on the dividend plan
chosen by the investor. The Shut-Out period applies to new investors in the Scheme as well as to
Unitholders making additional purchases of Units into an existing folio. The Trustee reserves the
right to change the Shut-Out period and prescribe new Shut- Out period, from time to time.
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15. Is there any minimum lock-in period for my units? |
Ans. There is no lock-in period in the case of open-ended funds.
However in the case of tax saving funds a minimum lock-in period is applicable.
The lock-in period for different tax saving schemes are as follows:
section minimum lock-in period U/s 88 3 yrs.U/s 54EA 3 yrs. U/s 54EB 7 yrs.
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16. Who are the issuers of Mutual funds in India? |
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Ans. Unit Trust of India was the first mutual fund which began operations in 1964.
Other issuers of Mutual funds are Public sector banks like SBI, Canara Bank, Bank of India, Institutions like IDBI,
ICICI, GIC, LIC, Foreign Institutions like Alliance, Morgan Stanley, Templeton and Private financial companies like
Kothari Pioneer, DSP Merrill Lynch, Sundaram, Kotak Mahindra, Cholamandalam etc.
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17. What are the factors that influence the performance of Mutual Funds? |
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Ans. The performances of Mutual funds are influenced by the performance of the
stock market as well as the economy as a whole. Equity Funds are influenced to a large extent by the stock
market. The stock market in turn is influenced by the performance of the companies as well as the economy
as a whole. The performance of the sector funds depends to a large extent on the companies within that sector.
Bond-funds are influenced by interest rates and credit quality. As interest rates rise, bond prices fall, and
vice versa. Similarly, bond funds with higher credit ratings are less influenced by changes in the economy.
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18. As a new investor how do I select a particular scheme? |
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Ans. Choice of any scheme would depend to a large extent on the investor preferences.
For an investor willing to undertake risks, equity funds would be the most suitable as they offer the maximum returns.
Debt funds are suited for those investors who prefer regular income and safety. Gilt funds are best suited for the
medium to long-term investors who are averse to risk. Balanced funds are ideal for medium- to long-term investors
willing to take moderate risks. Liquid funds are ideal for Corporates, institutional investors and business houses
who invest their funds for very short periods. Tax Saving Funds are ideal for those investors who want to avail tax
benefits. An important aspect while selecting a particular scheme is the duration of the investment. Depending on
your time horizon you can select a particular scheme. Besides all this, factors like promoter's image, objective of
the fund and returns given by the funds on different schemes should also be taken into account while selecting a
particular scheme.
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19. What are the rights that are available to a Mutual Fund holder? |
Ans.As per SEBI Regulations on Mutual Funds, an investor is entitled to
1. Receive Unit certificates or statements of accounts confirming your title within 6 weeks from the date your
request for a unit certificate is received by the Mutual Fund.
2. Receive information about the investment policies, investment objectives, financial position and general
affairs of the scheme;
3. Receive dividend within 42 days of their declaration and receive the redemption or repurchase proceeds
within 10 days from the date of redemption or repurchase
4. The trustees shall be bound to make such disclosures to the unit holders as are essential in order to keep
them informed about any information which may have an adverse bearing on their investments. 5. 75% of
the unit holders with the prior approval of SEBI can terminate the AMC of the fund.
5. 75% of the unit holders can pass a resolution to wind-up the scheme.
6. An investor can send complaints to SEBI, who will take up the matter with the concerned Mutual Funds and
follow up with them till they are resolved.
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20. It is very often said that Mutual Funds have performed badly. Please explain? |
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Ans. The performance of Mutual Funds is evaluated on the basis of absolute increase or decrease
in its Net Asset Value (NAV). However a fund's performance should be evaluated on the basis of a comparison with the relevant
indices and alternative instruments. The NAV varies from fund to fund. Therefore this argument is not entirely true. However
some funds have performed poorly with their NAV quoting well below their original IPO price.
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