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  Mutual Funds

home > Mutuals Funds > FAQs
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.
What is the Regulatory Body for Mutual Funds?
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds mentioned above. All the mutual funds must get registered with SEBI. The only exception is the UTI, since it is a corporation formed under a separate Act of Parliament.
What are the broad guidelines issued for a MF?
SEBI is the regulatory authority of MFs. SEBI has the following broad guidelines pertaining to mutual funds:
  • MFs should be formed as a Trust under Indian Trust Act and should be operated by Asset Management Companies (AMCs).
  • MFs need to set up a Board of Trustees and Trustee Companies. They should also have their Board of Directors.
  • The net worth of the AMCs should be at least Rs.5 crore.
  • AMCs and Trustees of a MF should be two separate and distinct legal entities.
  • The AMC or any of its companies cannot act as managers for any other fund.
  • AMCs have to get the approval of SEBI for its Articles and Memorandum of Association.
  • All MF schemes should be registered with SEBI.
  • MFs should distribute minimum of 90% of their profits among the investors.

There are other guidelines also that govern investment strategy, disclosure norms and advertising code for mutual funds.


Why should I choose to invest in a mutual fund?
For retail investor who does 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 diversify the risk of the investor by 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.
How do mutual funds diversify their risks?
Financial theory states that an investor can reduce his total risk by holding a portfolio of assets instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced.
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 substantially reduced.
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.
How do I invest money in Mutual Funds?
One can invest by approaching a registered broker of Mutual funds or the respective offices of the Mutual funds in that particular town/city. An application form has to be filled up giving all the particulars along with the cheque or Demand Draft for the amount to be invested. Nowadays, funds are also offering the facility of direct debit from the bank account.
What are the parameters on which a Mutual Fund scheme should be evaluated?
Performance indicators like total returns given by the fund on different schemes, the returns on competing funds, the objective of the fund and the promoters' image 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?
As a service to the investing community, Karvy does it for you. Our research team evaluates each scheme based on primary as well as secondary information and presents an unbiased report 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?
That 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.
Which plan should I choose?
It depends on your investment object, which again depends on your income, age, financial responsibilities, risk taking capacity and tax status. For example a retired government employee is most likely to opt for monthly income plan while a high-income youngster is most likely to opt for growth plan.
What is a Systematic Investment Plan and how does it operate?
A systematic investment plan 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 avoids lump sum investment at one point of time
  • In a scenario of falling prices, it reduces your overall cost of acquisition by a process of rupee-cost averaging. This means that at lower prices you end up getting more units for the same investment
What is NAV and how it is calculated?
NAV is the net asset value of the fund. Simply put it reflects what the unit held by an investor is worth at current market prices.
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. You can contact Karvy and we will advice you on the proportion you need to allocate to mutual funds and suitable schemes.
Like IPOs, can there be any situation wherein I am not allotted the units applied for in the initial offer?
In case of closed-ended funds there is a target amount and the funds are permitted a green-shoe option to retain over-subscriptions up to a certain limit. In case of open-ended funds there are no such limits and all applications are honored.
Is there any difference between investing in a mutual fund and in an initial public offering (IPO) of a company?
Yes, there is a difference. IPOs of companies may open at lower or higher price than the issue price depending on market sentiment and perception of investors. However, in the case of mutual funds, the par value of the units may not rise or fall immediately after allotment. A mutual fund scheme takes some time to make investment in securities. NAV of the scheme depends on the value of securities in which the funds have been deployed.
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 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.
What is a Load or no-load Fund?
A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient funds may give higher returns in spite of loads.

A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units.
How does the concept of entry load work in case of unit purchases?
An entry load is an additional cost that an investor pays at the point of entry. Assume that your proposed investment is Rs.10,000/-. Also assume that the current NAV of the fund is Rs.12.00 and that the entry load is Rs.0.50. Then you will receive 10,000/12.50=800 units. For detailed explanation of entry load, refer our mutual fund glossary.
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.0.50. Now if you sell 800 units then you stand to receive 800x11.5=Rs.9,200. For detailed explanation of exit load, refer our mutual fund glossary.
If I redeem and buy and do likewise several times then, how do I keep track of my portfolio?
The moment you buy or get allotted the units, a statement will be given to you mentioning the number of units allotted/bought and redeemed by you. The recording of entries would be similar to your pass book entries in the bank. In mutual fund terminology it is called Account Statement.
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 exempted from capital gains tax. However, short term capital gains (less than 1 year) are taxed at 11.22% (inclusive of surcharge & education cess).
Am I eligible for tax benefit by investing in a MF?
Yes in case of Equity Linked Saving Schemes, tax benefits are available under Section 80C of the Income Tax Act 1961, where contribution up to Rs. 1, 00,000 is exempted from tax. In such cases the fund prospectuses 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 any equity-oriented scheme.
What are my major rights as a unit holder in a mutual fund?
Some important rights are mentioned below:
  • Unit holders have a proportionate right in the beneficial ownership of the assets of the scheme and to the dividend declared.
  • They are entitled to receive dividend warrants within 42 days of the date of declaration of the dividend.
  • They are entitled to receive redemption cheques within 10 working days from the date of redemption.
  • 75% of the unit holders with the prior approval of SEBI can terminate AMC of the fund.
  • 75% of the unit holders can pass a resolution to wind-up the scheme.
If mutual fund scheme is wound up, what happens to money invested?
In case of winding up of a scheme, the mutual funds pay a sum based on prevailing NAV after adjustment of expenses. Unit holders are entitled to receive a report on winding up from the mutual funds which gives all necessary details.
How can the investors redress their complaints?
Investors would find the name of contact person in the offer document of the mutual fund scheme whom they may approach in case of any query, complaints or grievances. Trustees of a mutual fund monitor the activities of the mutual fund. The names of the directors of AMC and trustees are also given in the offer documents. Investors can also approach SEBI for redressal of their complaints. On receipt of complaints, SEBI takes up the matter with the concerned mutual fund and follows up with them till the matter is resolved.
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