Do you visualize roller-coasters or toy trains first when you think of an amusement park? Probably the former. These rides are usually the biggest attractions in such parks which create a certain perception about amusement parks. ‘Mutual funds’ too carry a similar perception that they invest only in stocks and hence are risky.

Risks appear in many forms. For example, if you own a share of a company, there is a Price Risk or a Market Risk or a Company Specific Risk. The share of just that company may dip or even crash due to any of the above reasons or even a combination of these reasons.

All mutual fund ads contain a message: “Read all scheme related documents carefully.” What are these documents?

There are 3 important documents: Key Information Memorandum (KIM), Scheme Information Document (SID) and Statement of Additional Information (SAI).

If you are wondering how to invest in a Mutual Fund, remember it is mandatory to have an account with any bank, KYC / CKYC, PAN and Aadhaar cards. This has been made mandatory to ensure Mutual Funds are not used for money laundering purposes by few unscrupulous investors.

Banks are in the business of savings and loans while Mutual Funds are for investments. When you put your money in a savings account or in a fixed deposit, you are making savings whereas when you put your money in Mutual Funds, you are making investments. Banking and Mutual Funds are two completely different businesses, requiring specific domain and organizational expertise.

Mutual Fund investors with long-term investments through SIPs constantly worry about market falls during this period. SIPs are well-designed to overcome some of the Mutual Fund risks like market timing and volatility.

Mutual Funds invest in securities and the nature of securities depends on the scheme’s objective.

For instance, an equity or growth fund would invest in company shares. A liquid fund would invest in Certificates of Deposit and Commercial Paper.

When a Mutual Fund Company shuts down or gets sold off, it is a serious matter to note for any existing investor. However, as Mutual Funds are regulated by SEBI, events of such kind have a prescribed process.

“My son is in the 9^th grade. I am not sure what his interests are or what stream in education he should pursue. Should he go for Science, Commerce or Arts? Can someone help?” Many parents have such concerns. That is where one may approach an education, or a career, counselor, who has evaluated various options available for youngsters.

Yes, there are several types of Mutual Fund schemes – Equity, Debt, Money Market, Hybrid etc.

Many investors worry about loss in Mutual Funds if they are unable to make SIP payments during its tenure. Such situations can arise due to many reasons like you are undergoing some financial difficulty or uncertainty about job or business income. It’s natural that under such situations you may not be able to continue with your regular SIP payments.

Imagine you have to fly to a country far away and a plane is the only choice.

Under what circumstances do you need to understand the various controls for flying the plane? Or the various signals that the pilot receives from the different control towers? Or how to operate the radio system?

4-6 years is considered medium-term in savings and investment decisions and hence capital appreciation should be your objective here.

Mutual Fund schemes usually don’t have a maturity date unless you have invested in a close-ended ELSS or other close-ended schemes like FMPs. Even in case of a SIP, there is a term for which investments need to be made regularly.

Every investment we make involves a risk, only its nature and degree varies. The same applies to Mutual Funds too.

All Mutual Fund schemes do not carry the same risk when it comes to returns on investment.

The answer is a huge, resounding YES! It is important to note that experience in managing money/making investments plays a vital role in generating good performance. The more the experience, the better is the probability of making profitable investment decisions.

Once an investor has decided to invest in Mutual Funds, he has to make a decision of which scheme to invest in – Fixed Income, Equity or Balanced and which Asset Management Company (AMC) to invest with? 

Firstly, discuss freely with your advisor what your objective is, what time period you’re comfortable with, and what your risk appetite is.

In a way, both are supposed to help with your investment decisions, which may include selection of Mutual Fund schemes.

Making a mistake while investing happens across all investments, and Mutual Funds are no different.

Some of the common mistakes while investing in Mutual Funds are:

Imagine asking: At what speed do vehicles run?

Can you generalize the answer for the whole category? Different vehicles run at different speeds – even within one category, e.g. cars, while a car made for city roads may run at a certain maximum speed, the one made for racing can run much faster.

Investments in Mutual Funds require the appropriate time horizon. Having the right time horizon, not only provides a better chance of getting expected, investment returns, but also lowers the risk in the investment.

Like other asset classes, Mutual Funds returns are calculated by computing appreciation in the value of your investment over a period as compared to the initial investment made. Net Asset Value of Mutual Fund indicates its price and is used in calculating returns from your Mutual Fund investments.

There are so many elements involved in providing an investor various services so that he/she can achieve their financial goals.

On a long-distance road journey, sometimes a toll is charged when you enter the road or the bridge, and sometimes when you exit. In many cases, the toll bridge company is allowed to charge the toll only for a certain number of years to recover the building costs. After that period is over, the company is not allowed to charge the passengers any toll.

A Dividend is a distribution of earnings from a stock or a Mutual Fund. In Mutual Fund schemes dividends are distributed when the fund has booked profits on the sale of securities in its portfolio.

Let’s consider a Balanced Fund, which aims to provide growth and capital appreciation from the equity portion, and income and stability from the debt portion. This scheme still carries considerable risk, as the portion of equity could be as high as 75%. This is recommended only for investors with a healthy risk appetite and long term time horizon.

The performance of a particular scheme of a Mutual Fund is denoted by Net Asset Value (NAV). In simple words, NAV is the market value of the securities held by the scheme. Mutual Funds invest the money collected from investors in securities markets. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis.

An open end fund permits redemptions on all business days. If a redemption request is handed over at an Investor Service Centre on a non-business day, or after a specified cut-off time, say 3:00 p.m., then it is processed on the next business day. Redemptions are processed at that particular day’s Net Asset Value (NAV).

Do different types of Mutual Fund schemes offer different kinds of returns?

Some people like to play safe and opt for familiar options. Suppose you are in a new restaurant. The menu has exotic dishes, but you still order something familiar just to be sure you don’t regret it later. You may choose a regular ‘Paneer Kathi Roll’ over a ‘Couscous Paneer Salad’ to be safe.

Recurring Deposits (RDs) and Fixed Deposits (FDs) are some of the most popular savings instruments in our country. They are safe and offer a guaranteed rate of return.  

Every Mutual Fund scheme has an investment objective and is managed by a designated fund manager, who is responsible for the fund performing optimally to achieve that objective.

Simply put, inflation is the rise in prices over time, relative to the money available. In relatable terms, a certain amount of money buys you much less today, than it did years ago.

If you are looking for a regular income inflow to manage your monthly household expenses, you should go for Systematic Withdrawal Plans (SWPs)in a Mutual Fund.

Market capitalisation is the average of full market capitalisation of the stock on all recognised stock exchanges where it’s listed, or the full market capitalisation of the stock on the single exchange where it’s listed. Fund managers invest in companies as per the fund’s investment objective and investors know what they are investing in.

From where do you get the vegetables for dinner? Do you grow them in your backyard, or purchase it from the nearest mandi/supermarket depending on what you need? Growing your own veggies is a great way of eating healthy food, but effort is spent on seed selection, manuring, watering, pest control, etc.

Anyone under the age of 18 (minor) can invest in Mutual Funds, with the help of parents/legal guardians until the age of 18. The minor must be the sole account holder represented by the parent/guardian. Joint holding is not allowed in a minor’s Mutual Fund folio.

Long-term investments aim to finance distant future goals, like college education, home, retirement, etc. Hence, choose a fund suitable for wealth creation. Long-term goals have a horizon beyond 10 years and equity-oriented schemes(>=65% equity allocation) are the one of the best long-term investment option.

With so many Mutual Funds schemes in the market, often one may wonder which scheme may be the best. But, understanding the meaning of “best” is more important.

Often, people tend to select the “best” performers of a recent past period – schemes that have delivered highest returns in the recent past.

To begin with, it is important to select the right scheme for your investment need. Look at it this way.

How do you decide what mode of transport you should take when you travel? Whether you want to walk it up, take an auto rickshaw, a train or a flight, it all depends on your destination, on your budget and travel time available.

A ULIP is Unit-Linked Insurance Plan. It is a life insurance policy with an investment component that is invested in various financial markets. The returns generated by the investment component determine the value of the policy. However, the sum assured on the death of the policy holder may not be a function of the market – the minimum sum assured may remain unaffected.

While banks and certain small savings schemes issue a passbook, Mutual Funds do not issue a passbook, they issue an Account Statement instead. The main purpose of a passbook is to keep track of all transactions with a bank: deposit, withdrawals, credit of interest etc.

SIP in Mutual Fund is like running a marathon. Marathon runners practice throughout the year but keep stepping-up their targets every year starting from dream run, moving to half marathon and finally a full marathon. The same goes with SIPs.

An ETF is an Exchange Traded Fund, which unlike regular Mutual Funds trades like a common stock on a stock exchange.

Mutual Fund investments are subject to capital gains tax. It’s paid on the profit we make while redeeming / selling our Mutual Fund holdings (units).

We grew up listening to the famous hare and tortoise story that taught us - slow and steady wins the race. This moral takeaway finds relevance in all spheres of life including investments. No wonder, we have Systematic Investment Plans (SIPs) becoming popular among investors.

Investors often wonder how to go about tracking the progress of my investments.

It is like chasing a target in a cricket match. In a cricket match, the team batting second knows the equation – how many runs, how many wickets and how many overs.

Retired people usually have their savings and investments locked up in bank FDs, PPFs, gold, real estate, insurance, pension plans etc. Most of these options are difficult to convert to cash immediately. This may lead to undue stress in case of medical or other emergencies.

There are several ways to start investing in a Mutual Fund scheme.

While most Indian Mutual Funds invest only in India, there are quite a few schemes that invest in overseas securities.

Once you invest in a Mutual Fund scheme, you will get an account statement with details like the date of the transaction, the amount invested, and the price at which the units are bought and the number of units allotted to you.

Investing in Mutual Funds requires you to complete a few basic formalities.

Yes, Non Resident Indians (NRI) and Persons of Indian Origin (PIO) can invest in Indian Mutual Funds on a full repatriation as well as non-repatriation basis.

Collective and pooled investments have existed in various traditional formats across the world for some time. Mutual Fund as we know it came into existence in 1924, with creation of Massachusetts Investors Trust.

The Mutual Fund industry growth was accompanied by three broad trends:

Invest in SIP or a one-time investment (lumpsum)? Choosing one depends on your familiarity with Mutual Funds, the fund you want to invest in and your goal. If you want to invest regularly to accumulate sufficient capital for a goal, invest in a suitable equity scheme through SIP.

Before you make any Mutual Fund investment, you need to complete a KYC process. This is done through submission of certain documents as proof of identity and proof of address. The process of starting or stopping an SIP is extremely convenient and easy. How to start an SIP is explained in the graphics on the left.

The Global Assets Under Management (AUM) of Open-end Mutual Fund schemes exceeded US$ 37.1 trillion, across 100,494 schemes as on Dec 31, 2015.

To many, the power of compounding seems like a difficult topic. But it is not so. We’ll help you understand this in a simple manner.

Let us understand what could be a proper answer to the above question.

Through numerous interactions with investors, we feel that in most cases the hidden, oft-unexpressed need is to find out the scheme that would deliver outstanding returns over the period that the investor plans to invest.

Investing in Mutual Funds through SIP offers a lot of flexibility. Investors can control the amount they want to invest, tenure for which they want to invest, frequency with which they want to invest (weekly, monthly, quarterly, etc.). 

But once you start a SIP, are you bound by the initial choices made until the end of your SIP tenure? 

A Mutual Fund invests in various asset classes, as per the Scheme Information Document (SID). Typical examples of proposed asset allocation for a scheme could be:

Some people invest in Mutual Funds for a regular income, and they usually look at options of getting a dividend. Thus many schemes, especially debt oriented schemes, have monthly or quarterly dividend options.

Debt funds are for investors who seek safety of capital or regular income from investment and/or want to park money for short periods.

But debt funds are of various types. 

There are different equity funds catering to various needs of investors. The broad objective of all is to generate appreciation over long periods.

Mutual Fund schemes investing in a single asset category are like specialist bowlers or batsmen. Whereas certain other schemes, known as hybrid funds, invest in more than one asset categories, e.g. some invest in equity and debt both. Some may also invest in gold apart from equity and debt.

All Mutual Fund Schemes offer two plans- Direct and Regular. In a Direct Plan, an investor has to invest directly with the AMC, with no distributor to facilitate the transaction.

Variety is the spice of life. At the same time, you do not seek variety just for the sake of it. Some variety is required simply because the situation demands it. So when you eat food, you’ve got to maintain balance.

The minimum tenure for investment in Mutual Funds is a day and the maximum tenure is ‘perpetual’.

There’s no free lunch in this world. We pay for every product or service we consume, either directly or indirectly. For instance, you pay a parking fee for the time you use the parking space. When you send a courier, you pay for the weight of the courier and the distance it needs to travel to reach the recipient.

Investors switch their investment from one open ended scheme to another within the same fund house for better financial planning. To switch within the same fund house, fill up a switch form specifying the amount/no.

Dividends from Mutual Fund schemes are tax-free in the hands of the investor but are subject to Dividend Distribution Tax (DDT) at source. DDT paid by the scheme reduces the distributable surplus available for investors.

If two students pass class X board exam with 95% from two different boards (CBSE and ICSE), whom would you consider a better performer? The one who scored 95% from CBSE board or the one from ICSE? You obviously can’t compare their scores since they had different syllabus, question paper pattern and evaluation system.

You can invest in Mutual Funds through regular periodic investments and/or lump sum investments. In the 1st case, you can choose the frequency at which you want to invest. For daily/weekly/monthly frequency, you can automate your investments through SIP.

While both Mutual funds and Portfolio Management Services (PMS) allow investors to invest in stocks and bonds by investing their money in a pooled investment vehicle that is managed by professional fund managers, they both are two different investment options serving different objectives and are meant for two different kinds of investors.

Currently dividends from Mutual Funds are tax-free in the hands of investors. Investors don’t have to pay income tax on the dividend income from their Mutual Fund investments. The fund house deducts a Dividend Distribution Tax (DDT) from the distributable surplus (profit) of the fund to calculate net distributable surplus.

Imagine you’ve booked an 8 am flight from Bengaluru to Chennai on FlyIndia Airlines. You realise that the wrong flight was booked and needs rescheduling. What kind of charges do you think FlyIndia will charge you? You will have to pay a penalty for changing your mind even though it is the same airline, same date of travel, same destination and the same passenger!

One of the most important considerations before choosing an investment avenue is the expected “time horizon”, i.e. time in days, months or years that an investor intends to stay invested.

And why is this so important?

One of the main reasons for KYC to be introduced in financial markets was to limit/prevent cases of fraud, tax evasion and money laundering. In order to do that, the source and destination in case of any financial transaction must be found out. This is where KYC was strengthened and in cases of investments and bank accounts, these processes were made mandatory and stringent.

If someone asked you which car should I buy, an SUV or a premium hatchback, what would your advice be? You probably would ask, what is your main reason for buying this car? Do you need it for a long haul along with family or you need something convenient for yourself to suit the city roads for regular driving?

Debt Funds invest our money in interest-bearing securities like bonds and money market instruments that promise to pay regular interest. These interest payments are received by the fund which in turn contributes to the total return we, as investors of the fund, earn.

“Aren’t all Mutual Funds the same? After all, it’s a Mutual Fund, isn’t it?” Asked Gokul. His friend Harish, a Mutual Fund distributor, smiled. He was all too familiar with such a remark coming from many.

Remember the first time you boarded a flight? Did you have butterflies in your stomach or a queasy feeling? Finally, when the flight was air-borne, didn’t you feel reassured? Flying at 30,000 ft, seat belt fastened and a warm cabin crew along with an able pilot to take care of you.

Usually, when people select a scheme themselves, they do so based on its performance. They don’t consider that past performances may not be sustained. Evaluation of schemes is a function of various attributes of the schemes, e.g. scheme objective, investment universe, the risks that the fund is taking, etc. This requires the investor to put in time and effort.

People think that Mutual Funds are elite investments made only for the wealthy. The fact is: one does not need large sum to invest in Mutual Funds, you can start with a sum as low as ₹ 500, or 5000 depending on the kind of fund you choose.

Why keep the minimum amounts as low as these?

After its launch in 1964, Mutual Funds have grown to manage assets over 17.37 lakh  crores (as on Jan 31, 2017).

This impressive growth is because of a strong Indian economy, better regulation, entry of reputed Indian and Foreign Asset Managers, and increasing acceptance of Mutual Funds as a preferred asset class amongst Indian investors.

Returns from Mutual Funds depend on the kind of investment it makes, and the risks associated with these investments. The taste of a cake differs from that of a samosa because both are made up of different ingredients and are prepared differently.

Every open ended scheme offers liquidity with almost complete freedom, i.e. no restriction on time or amount of redemption. However, a few schemes may specify an Exit Load.

Rahim and Suresh moved to Mumbai as opportunities to earn and spend were higher.

Suresh looked at the income opportunity and decided to enjoy life. Rahim, on the other hand, decided to save and invest his earning, in order to survive in the city.

Rahim was concerned when he learnt about Suresh’s lifestyle and tried explaining him the benefits of saving young with numbers.

When you park your money in a bank Fixed Deposit (FD), the bank promises to pay fixed interest in return. Here you’ve lent money to the bank, and the bank is a borrower of your money, owes you a fixed periodic interest. Debt Mutual Funds invest in debt securities like Government bonds, Company bonds, Money market securities.

Debt Funds invest their investors’ money in interest-bearing securities like bonds, corporate deposits, G-secs, money market instruments, etc. These bonds are like certificates that carry an obligation on the part of the bond issuer to pay regular interests (coupons) to the bond investors.

If someone asked you, who should eat more of proteins or carbohydrates or vitamins, what would be your answer?

Everyone!

Once you invest in a Mutual Fund scheme, any change you wish to make in terms of changing plans (Regular/Direct), options (Growth/Dividend) or changing schemes within the same fund house will be considered as a sale (redemption).