Question 1

When should I start investing in Mutual Funds?

Accepted Answer

There is a beautiful Chinese proverb, “The best time to plant a tree was 20 years ago. The second best time is now.” There is no reason why one should delay one’s investments, except, of course, when there is no money to invest. Within that, it is always better to use Mutual Funds than to do-it-oneself. There is no minimum age when one can start investing. The moment one starts earning and saving, one can start investing in Mutual Funds. In fact, even kids can open their investment accounts with Mutual Funds out of the money they receive once in a while in form of gifts during their birthdays or festivals. Similarly, there is no upper age for investing in Mutual Funds. Mutual Funds have many different schemes suitable for different purposes. Some are suitable for growth over long periods, whereas some may be for those in need of safety with regular income, and some provide liquidity in the short term, too. You see, whatever stage of life one is in, or whatever one’s requirements, Mutual Funds may have solutions for each one.

Question 2

Do Mutual Funds invest only in stocks?

Accepted Answer

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. There are many types of Mutual Funds meant for the varying investment needs of people. Some investors want high returns which only stocks can deliver. Such investors can invest in Equity Mutual Funds which are among the best long-term investment options available for achieving such objectives. But these Mutual Funds have risk of higher volatility   because of their exposure to stocks of various companies. There are other types of Mutual Funds that do not invest in equity but in bonds issued by banks, companies, government bodies and money market instruments (bank CDs, T-bills, Commercial Papers,) which have lower risk but also offer lower returns compared to equity funds. These funds are better suited as alternatives to traditional options like bank fixed deposits or PPFs.  Hence if you are looking to invest your money that can give you better  returns than a bank or post office FDs and still be more tax efficient, Debt Mutual Funds are a great way to achieve such financial goals.

Question 3

How do I know which fund is right for me?

Accepted Answer

Once an investor has decided to invest in Mutual Funds, he has to make a decision of which scheme to invest in– Fixed Income Fund, Equity Fund 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. Decisions on which fund to invest in would be made based on this information. If you have a long term objective – say, retirement planning, and are willing to assume some risk, then an Equity or Balanced Fund would be ideal. If you have a very short term objective – say, money to be kept aside for a couple of months; a Liquid Fund would be ideal. If the idea is to generate regular income, then a Monthly Income Plan or an Income Fund would be recommended. After deciding on the type of fund to invest in, a decision on the specific scheme from an AMC would have to be made. These decisions are usually made after ascertaining the AMC’s track record, suitability of scheme, portfolio details, etc. Scheme Factsheets and Key Information Memorandum are two documents that every investor needs to peruse before investing. If one needs detailed information then one should look at Scheme Information Document. All of these are easily accessible at every Mutual Fund’s website.

Question 4

What is a Mutual Fund?

Accepted Answer

To many people, Mutual Funds can seem complicated or intimidating. We are going to try and simplify it for you at its very basic level. Essentially, the money pooled in by a large number of people (or investors) is what makes up a Mutual Fund. This fund is managed by a professional fund manager. It is a trust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities. Each investor owns units, which represent a portion of the holdings of the fund. The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value or NAV. Simply put, a Mutual Fund is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

Question 5

Do I need to understand stock, bond or money markets before I invest?

Accepted Answer

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? Not unless you’re a pilot or co-pilot. If you are just a passenger, you only need to understand is whether your need is being served, and for that you need to understand what you need in the first place. In the context of investing, when you are managing your investments yourself, you need to understand the stock, bond and money markets. However, if you decide to use the Mutual Funds for the purpose of investing to reach your financial goals, you need not understand how stocks, bond and money markets work. You only need to know what kind of Mutual Funds serve various purposes. Use Mutual Funds and let an expert fund management team take over the various controls of the vehicle. You just select the vehicle based on your journey and relax.

Question 6

What happens to Mutual Fund Investments after the investor passes away?

Accepted Answer

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. If the investor passes away while the SIP term is on or before the maturity of a close-ended scheme, there are defined procedures to be followed by the nominee, survivors in case of joint holding or legal heirs to claim the proceeds. This process is called transmission. For someone to request for a transmission, the person must be aware of your Mutual Fund investments in the first place, else it can just remain unclaimed forever. Hence, it is advisable to always add a nominee to your Mutual Fund investments just like any other investments and keep the nominee informed about it. If you have a joint account holding, the survivors mentioned in your account can claim for transmission. But if you have neither got nominees nor surviving joint holders mentioned in your folio, your legal heirs can still request for transmission by submitting all the necessary documents and proofs including a death certificate. The person requesting for transmission needs to be KYC registered.

Question 7

How will I evaluate my risk profile?

Accepted Answer

Every individual investor is unique. Not only with regards to investment objectives but even in approach and view of risk. This is what makes Risk Profiling absolutely crucial before investing. A Risk Profiler is essentially a questionnaire that seeks an investor’s answers to questions about both “ability” and “willingness”. It is highly recommended that investors contact their Mutual Fund distributor or an investment advisor to complete this task and get to know their Risk Profile.

Question 8

How to choose a fund basis your risk appetite

Accepted Answer

Mutual Funds are market-linked products that carry various kinds of risks and their returns are not guaranteed. Choosing the right mutual fund involves not only looking at its investment objective, return potential but also an evaluation of its riskiness. Since every investor has a unique personality including risk preference, the choice of mutual funds will be unique to each investor. Apart from risk preference, every investor will have a certain goal in mind that would be unique in its value and time horizon. Hence choosing the right mutual fund requires one to evaluate various funds along with the risk-return-time horizon metric. Let’s understand this with an example. A 30 year old and a 50 year old may both be investing for retirement, but their choice of funds will be different. The 30 year old can take a much higher risk as he/she has 25-30 years left but the 50-year old has to be very cautious in his/her selection because he has just 8-10 yrs left for this goal.  Select a fund whose risk profile matches your risk appetite. If you prefer less risk, choose a debt fund. If you don’t mind taking risk, look for a suitable equity fund. If you prefer moderate risk, look for a hybrid fund. Thus, the starting point for fund selection should be how much risk you are willing to take.

Question 9

Does one need an account in a Bank to invest in its Mutual Fund?

Accepted Answer

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. Some Mutual Funds and banks have a common parent company i.e. they belong to the same corporate conglomerate. However, banks are governed by the RBI and Mutual Fund businesses are regulated by SEBI. While you may come across a Mutual Fund company that carries the same brand name as a well-established bank, remember that they are two different companies which are being run independently. You don’t need to have a savings account with the bank to invest in the funds of its sister concern, i.e. the Mutual Fund company in this case. Banks also work as distributors of various Mutual Funds and cross-sell these funds to their customers. While they may not sell all the Mutual Funds available in the market, they’ll pitch funds from those Mutual Funds with whom they have a distribution tie-up. You can invest in these Mutual Funds which are not related to the bank selling them, i.e. your bank where you have an account.

Question 10

What are some mistakes people make when investing in Mutual Funds?

Accepted Answer

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: Investing without understanding the product: For example, equity funds are meant for the long term, but investors look for easy returns in the short term. Investing without knowing the risk factors: All Mutual Fund schemes have certain risk factors. Investors need to understand them before making an investment. Not investing the right amount:  Sometimes people invest randomly, often without a goal or plan. In such cases, the amount invested may not yield the desired result. Redeeming too early: Investors sometimes lose patience or do not give the requisite time for an investment to provide the desired rate of return, and hence redeem prematurely. Joining the herd: Very often, investors do not exercise individual judgement and get carried away by the buzz in the ‘market’ or ‘media’, and thus make the wrong choice. Investing without a plan: This is perhaps the biggest mistake. Every single rupee invested needs to have a plan or goal.

Question 11

Who keeps a record of my investments?

Accepted Answer

All Mutual Funds in India are regulated by the Securities and Exchange Board of India (SEBI). Mutual Fund regulations clearly define the roles and responsibilities of Asset Management Companies (AMC) and Custodians. It’s vital to remember that every investor has to complete an effective KYC process before investing. Therefore, only bonafide investors with a valid PAN card can invest in Mutual Fund schemes. Such investors also provide bank details so that all redemption proceeds are directly credited to an investors own account. SEBI also ensures that all AMCs are supervised by a board of trustees, some of whom, have to necessarily be independent individuals. These trustees ensure one more level of safeguards and compliance. Regulations and safeguards ensure that it can never ever be misappropriated and diverted, and that, no one will run with your money.

Question 12

What are the Scheme Related Documents? What information do these documents provide?

Accepted Answer

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). These are prepared by the Asset Management Company (AMC) about a particular scheme, and submitted to the Securities and Exchange Board of India (SEBI) for approval. The SID has information like: All Fundamental Attributes like Investment Objective and Policies, Asset Allocation Pattern, Fees and Liquidity Provisions. Fund Management Team details All Risk Factors in the scheme as well as risk mitigation mechanisms. Scheme details like load, plans and options, past performance, benchmark. General Unitholder information. Other details like list of AMC branches, Investor Service Centres, Official Points of Acceptance.   The SAI has information like: The constitution of the Mutual Fund – Sponsors, Asset Management Company and Trustees. All information on key personnel of the AMC and associates such as Registrars, Custodians, Bankers, Auditors and Legal Counsel. All Financial and Legal issues. The concise version of  SID  is the KIM, that is attached with the application form. As the name suggests, it contains all the Key Information that an investor must know before investing in the scheme. The KIM must be made available with every application form.

Question 13

Are Mutual Funds offered by Banks?

Accepted Answer

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. Banks are governed by RBI while Mutual Funds are regulated by SEBI. If some corporate wants to be in the business of banking and Mutual Funds, it must seek separate license permits from the respective regulators and run these two businesses as different companies. You may come across some banks that also have a Mutual Fund business. But both are two different companies with no functional linkages and does not guarantee returns just because the bank has a sound track record. Most banks today function as distributor of many financial products including Mutual Funds. They operate as a sales channel for the Mutual Funds that have tied up with them (banks) for distribution. Hence, if you are wondering how to invest in Mutual Funds and want to approach a bank, remember that the bank may not be selling all the funds available in the market.

Question 14

What is KYC Process?

Accepted Answer

KYC is an acronym for Know Your Customer and is a term used for Customer Identification Process as a part of Account Opening process with any financial entity. KYC establishes an investor’s identity & address through relevant supporting documents such as prescribed photo id (e.g., PAN card, Aadhar card) and address proof and In-Person Verification (IPV). KYC compliance is mandatory under the Prevention of Money Laundering Act, 2002 and Rules framed there under, read with the SEBI Master Circular on Anti Money Laundering (AML) Standards/ Combating the Financing of Terrorism (CFT) /Obligations of Securities Market Intermediaries. A Know Your Customer (KYC) is generally divided in 2 parts: Part I contains the basic and uniform KYC details of the investor as prescribed by the Central KYC registry (Uniform KYC) to be used by all registered financial intermediaries and Part II additional KYC information as may be sought separately by the financial intermediary such as a Mutual Fund, stock broker, depository participant opening the investor’s account (Additional KYC).

Question 15

What is the co-relation between risk and return?

Accepted Answer

In Mutual Funds, one often hears, ‘more the risk, more the return’. Is there truth in this? If ‘risk’ is measured as either, probability of loss of capital or as swings and fluctuations in investment value, then asset classes like equity are undoubtedly the riskiest, and money in a savings bank account or in a government bond is of course least risky. In the Mutual Fund universe, a liquid fund is least risky and an equity fund is most risky. So, the only reason to invest in equity would be an expectation of higher reward. However, higher returns come to those who invest in equity after careful study and adopting a patient, long term time horizon. In fact, risk in equity can be mitigated by adopting diversification as well having a longer term time horizon. Every category of mutual fund schemes have different types of risks – credit risk, interest rate risk, liquidity risk, market/price risk, business risk, event risk, regulatory risk, etc. Your investment advisor and fund manager’s expertise, and diversification, can help mitigate them.

Question 16

Then why does the disclaimer say Mutual Funds are subject to market risk?

Accepted Answer

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. All of these securities are however traded in the ‘Market’. Company shares are bought and sold through the stock exchange, which is part of the Capital Market. Similarly, debt instruments like Government Securities, can be traded through a platform at the Stock Exchange or through specialised systems called NDS. These serve as markets to buy and sell securities and the buyers and sellers are diverse. So, the entire process of buying and selling, and price determination is done by the ‘market’. The price of any security is dependent on ‘market forces’, and the market acts on any news or development, making it difficult to predict the direction of the market, it's impossible to predict the price of a share or security in the short term. There are too many factors and players that influence its direction. Thus, every investor should know that there always exists a certain risk to security price from an all-important entity known as the ‘Market’. They should also know that Mutual Funds are designed to reduce this risk as much as possible.

Question 17

What are the indicators of risk in a Mutual Fund Scheme

Accepted Answer

You must properly evaluate before picking up the right Mutual Fund scheme to invest your hard-earned money. While investors often go by scheme category and top performing schemes in the category, they ignore risk indicators for these schemes. When you are comparing schemes to choose from, don’t miss out comparing their riskiness. While there are many risk indicators like Standard Deviation, Beta, and Sharpe Ratio provided in the factsheet of every scheme, product label is the most basic thing to look for. The riskometer in the label shows the risk level of the fund. This riskometer is a mandatory requirement by SEBI and represents the underlying risk associated with the fund. The six levels of risk ranging from low, low to moderate, moderate, moderately high, high, and very high have been linked to various categories of mutual funds depending on the level of risk in their portfolio. Since this kind of risk categorization has been defined by SEBI, all mutual funds are bound to categorize similar kinds of funds into the same risk category. Apart from the riskometer which gives an overview of the fund’s riskiness, one can also look at more specific risk indicators provided in the factsheet. Standard Deviation measures the range of a fund’s return. A scheme with a higher standard deviation of return indicates its range of performance is wide, implying greater volatility.  Beta measures a fund’s volatility with respect to the market. Beta >1 implies the scheme will be more volatile than the market and Beta<1 means it’ll be less volatile than the market. Beta of 1 indicates the scheme will move in tandem with market volatility. Sharpe Ratio measures the excess return provided by the fund per unit of risk undertaken.  It is a good indicator of risk-adjusted return. Next time you research on which scheme to invest in, don’t forget to evaluate them on the above risk parameters.

Question 18

What is the difference between Mutual Fund Distributor and Investment Advisor?

Accepted Answer

In a way, both are supposed to help with your investment decisions, which may include selection of Mutual Fund schemes. However, as the name itself suggests, a Mutual Fund distributor is more likely to be focused on Mutual Fund products, whereas an investment advisor may have a broader basket of products and services. Does it mean that a Mutual Fund distributor would sell any Mutual Fund scheme to the investors just to earn commission? Well, the regulations are very stringent in this regard. If a Mutual Fund distributor sells a Mutual Fund scheme that is not suitable for the investor that would qualify as “mis-selling”, which is an offence. A Mutual Fund distributor is required to understand the investor’s situation/risk profile and recommend products suitable for the investor’s needs at the time of recommendation. On the other hand, an investment advisor may look at a broader picture, which may include assessment of the investor’s assets, liabilities, income and expenses and recommend products. Both are registered entities and hence regulated, too. While investment advisors are registered directly with SEBI, the Mutual Fund distributors are registered with AMFI – the Association of Mutual Funds in India, which is the association of the Mutual Fund industry.

Question 19

Are all Mutual Funds risky?

Accepted Answer

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. Equity schemes have the potential to deliver superior returns over the long term that can create wealth. Remember, inflation is a risk, and equities are the best asset class to beat inflation. So, in a sense, there are some risks that are worth taking. On the other hand, the risk associated with liquid funds is significantly low when compared to equity funds. A liquid fund focuses on the protection of capital by taking lower risk and generating returns in line with the risk taken.  It is also important to remember that the risk on returns is not the only risk you need to consider. There are other risks – liquidity risk for instance. Liquidity risk measures the ease in converting your investment into cash. This risk is lowest in Mutual Funds. In the end, the nature and extent of risk is best understood through proper understanding and evaluation of the scheme and by taking the guidance of a Mutual Fund distributor or an investment advisor.

Question 20

How do Mutual Funds help manage risk?

Accepted Answer

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. However, in a Mutual Fund, a typical portfolio holds many securities, thus offering “diversification”. In fact, diversification is one of the biggest benefits of investing in a Mutual Fund. It ensures that the dip in price of one or even a few securities does not affect portfolio performance alarmingly. Another important risk to bear in mind is Liquidity Risk. What is liquidity? It is the ease in converting an asset into cash. Suppose an investor has an investment that is locked in for say 10 years, and she requires money in the 3rd year. This presents a typical liquidity problem. Her priority at this point is access to cash and not returns. Mutual Funds by regulation and structure, offer tremendous liquidity. Portfolios are designed to offer an investor, ease of investing and redemption.

Question 21

What happens when the market falls midway while you have invested for a longer term?

Accepted Answer

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. You can beat market volatility through rupee-cost averaging, by investing regularly in Mutual Funds through SIPs. Here you buy more units when NAV is low and vice versa. The cost per unit is averaged out over the long run if NAVs move both ways. For example, if you invest INR 1,000/- per month, you get 100 units if the NAV is INR 10 and 200 units if NAV drops to INR 5. Over longertime period, the average price per unit will fall if markets move in both directions thus helping to lower volatility of returns as well. If you invest in lump sum, number of units would remain the same during the entire holding period, but their value would go down with falling NAV during market downturns. If you hold your lumpsum investment in an equity fund for long (say over 7-8years), the occasional blips shouldn’t impact your returns as markets usually move up over the long-term. You might end up with a far higher NAV than what you started with.

Question 22

What is the risk of investing in Mutual Funds?

Accepted Answer

We have all heard: “Mutual Fund investments are subject to market risks.” Ever wondered what are these risks? The image on the left talks about the various types of risks. Not all risks impact all the fund schemes. The Scheme Information Document (SID) helps understand which risks apply to your selected scheme. So how does the fund management team manage these risks? It all depends on what type of investments the Mutual Fund has invested in. Certain securities are more sensitive to certain risks and some are exposed to some other. Professional help, diversification and SEBI’s regulations help mitigate risks in Mutual Funds. Finally, and the most important question that many investors have asked: Can a Mutual Fund company run away with my money? This is just not possible given the structure of Mutual Funds as well as the strong regulations.

Question 23

Are fund managers necessary?

Accepted Answer

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. The fund manager is similar to a surgeon in an operation theatre. Though it is the surgeon who actually does the critical operational procedure, he is assisted by assistant surgeons, anaesthetists, nurses and other support staff. Similarly, the fund manager is assisted by the research team, junior fund managers and an operations team. Just as a surgeon has all the latest equipment to ensure a successful operation, the fund manager has access to the latest information, reports and analysis. An experienced fund manager would have seen many economic cycles, business developments, political and policy changes. Such issues have a bearing on investment performance. Since all these issues are normally beyond the grasp of an average investor, a fund manager brings not just their own expertise and competence, but also the collective wisdom from the information and data that he has access to.

Question 24

Diversify risk, for potential rewards

Accepted Answer

Risks could be controlled. And Mutual Funds can be rewarding! When we say “RISK” in investments, a few questions immediately arise in the mind of the investor… “Is my money safe?”  ”How much return will I get?” “Will I get my money back when I want it?”… While, all these are very valid questions, let’s look at them from three angles to understand Mutual Funds better Professional Fund Management - Mutual funds are managed by professional fund managers and as an investor, you benefit from their research and expertise. While this may not completely eliminate risk, it certainly lowers it. Diversification – Mutual Funds invest in a basket of securities. Diversification helps in minimizing the risk from a specific security’s under-performance. Select a Scheme In Line With Your Investment Objective - If the time horizon of the investment is in sync with the fund selected, you protect yourself from very short term fluctuations. For example, if you have invested in an Equity Fund, you may be affected by short term fluctuations, but over a longer term, you would be more likely to get the long term returns associated with equities. Most people believe that Mutual Funds are risky possibly because of the standard disclaimer they come across in the Mutual Fund advertisements. It’s important to remember that the stringent regulations that ensure investor protection, professional fund management and diversification mitigate it to a large extent.

Question 25

What happens when a Mutual Fund company shuts down / gets sold off?

Accepted Answer

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. In the case of a Mutual Fund company shutting down, either the trustees of the fund have to approach SEBI for approval to close or SEBI by itself can direct a fund to shut. In such cases, all investors are returned their funds based on the last available net asset value, before winding up. If a Mutual Fund is acquired by another fund house, then there are usually two options. One, the schemes continue in their original format, albeit with a new fund house overseeing it. Or, the acquired schemes are merged with schemes in the new fund house. SEBI approval is required for all Asset Management Company (AMC) Mergers and Acquisitions, as well as scheme level mergers too. In all such cases, investors are given an option to exit the schemes with no load being levied. Any action by investor or fund house is ALWAYS done at prevailing Net Asset Value.

Question 26

What are the benefits of investing in Mutual Funds?

Accepted Answer

Many of us dread the thought of managing our own investments. With a professional fund management company, people are put in charge of various functions based on their education, experience and skills. As an investor, you can either manage your finances yourself, or hire a professional firm. You opt for the latter when: You do not know how to do the job best – many of us hire someone to file our income tax returns, or almost all of us get an architect to do our house. You do not have enough time or inclination. It’s like hiring drivers even though we know how to drive. When you are likely to save money by outsourcing the job instead of doing it yourself. Like going on a journey driving your own vehicle is far costlier than taking a train. You can spend your time for other activities of your choice / liking Professional fund management is one of the best benefits of Mutual Funds. The infographic on the left highlights all the others. Given these benefits, there is no reason why one should look at any other investment avenue.

Question 27

Choosing a Mutual Fund is too confusing?

Accepted Answer

Yes, there are several types of Mutual Fund schemes – Equity, Debt, Money Market, Hybrid etc. And there are many Mutual Funds   in India managing several hundreds of schemes amongst them. So it may appear that zeroing on a scheme is actually a very complex and confusing affair. Choosing the scheme to invest in should be the last thing in an investor’s mind. There are several more important steps before that, which will help remove much confusion later. An investor should first of all have an investment objective, say retirement planning or renovating one’s house. The investor has to arrive at two figures – how much would this cost and how long it would take, while also knowing how much risk can be taken. In other words, based on an investor’s goals and objectives and risk profile, a type of fund is recommended, say equity or hybrid or debt, and only then specific schemes are selected, based on track record, , portfolio fit etc. In essence, if there is clarity of investment purpose in the beginning, there would be a lot less confusion about choice of fund in the end.

Question 28

What happens when you miss SIP payments in-between?

Accepted Answer

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. Since SIPs are a long-term investment option, it’s fine if you skip a few payments in-between. Unlike an insurance policy where non-payment of annual premium can lead to policy inactivation, here your investments made so far will continue to earn a return and you can withdraw it anytime. However, you would accumulate lower wealth than what you had initially expected and may miss your financial goals if you are too irregular with your SIP. While Mutual Fund companies don’t penalize for non-payment of SIP instalments, your SIP will automatically be cancelled if you fail to make the payments for three consecutive months.Also your bank will penalize you for dishonoring the auto debit payments. Hence,it is advisable to stop the SIP by sending a request atleast 30days in advance if you foresee a cash crunch in future. Start a fresh SIP later whenever you feel financially comfortable.

Question 29

How much of my investment can I withdraw?

Accepted Answer

Majority of Mutual Fund schemes are open end schemes, which allow an investor to redeem the entire invested amount without any time restrictions. Only under few instances  schemes impose a restriction on redemption, under extraordinary circumstances, as decided by the Board of Trustees. All Equity Linked Savings Schemes (ELSS), that offer tax benefits under Sec 80C, are required to ‘lock-in’ investments for a period of 3 years. However, any dividend declared by these schemes during this period is available as a pay out without restrictions. No other category of schemes can impose such a lock-in. Some may impose an exit-load for premature redemptions, to prevent short term investments from entering a scheme. AMCs may specify minimum amounts that may be submitted. All such information is contained in scheme related documents which is important for an investor to read before investing. Closed end schemes have a fixed tenure and the AMC does not fund or permit any redemption until termination/conclusion date. However, all closed end funds have their units listed in the stock exchange and an investor seeking liquidity needs to sell units to another buyer at a market determined rate.

Question 30

How often can I remove my money?

Accepted Answer

An investor has no restriction on redeeming money from an open ended scheme. While there may be an exit load in certain cases, which impacts final amount realised, all open end schemes offer liquidity as a great benefit. The decision to redeem is totally at investor’s discretion. There are no restrictions on the number of redemptions, or on the amount to be redeemed. There have to be sufficient units in the account to fund redemptions. Scheme documents usually indicate minimum amount that can be redeemed. Units under lien to a bank or institution cannot be redeemed, unless the lien is removed. Redemptions may be restricted only under extraordinary circumstances, as decided by the Board of Trustees. Closed end schemes may be redeemed from the AMC only on maturity. However, they do provide a route to liquidity – any time before maturity - by selling units in a recognised exchange. Redemptions can be made at; Investor Service Centres (ISCs) AMC offices Official Points of Acceptance of Transaction (OPAT) Through an authorised on-line platform.

Question 31

What are the expenses incurred in a Mutual Fund scheme?

Accepted Answer

There are so many elements involved in providing an investor various services so that he/she can achieve their financial goals. All these elements need to be paid their remuneration for the services provided. For this, there is an expense charged to each Mutual Fund scheme, as a percentage of the scheme’s corpus. SEBI regulations impose certain limits beyond which the charges are not allowed, even if the expenses are higher than the expenses charged. As per the said SEBI regulations, as the fund size grows, the maximum expenses that can be charged as percent of the Assets Under Management (AUM) come down. The offer document indicates the maximum-allowed expense ratio for each scheme you are considering to invest in. The monthly fact sheet and the half-yearly mandatory disclosures allow you to see the actual expenses charged per scheme.

Question 32

Money doesn’t get locked up. It gets invested!

Accepted Answer

In Mutual Funds, money doesn’t get locked up. It gets invested! When investing in Mutual Funds, one of the most common questions is, ‘Does my money get locked up?’ It is important to note two facts: a. In a Mutual Fund scheme, the money is Invested and not Locked, and the money always stays yours. It is simply being managed by a professional fund manager. b. Your money is always easily accessible. The structure of a Mutual Fund ensures that there is flexibility in accessing it. You may redeem your investment either partially or entirely. You can even pre-specify the redemption dates, by giving standing instructions to the Mutual Fund company to transfer a fixed amount into your bank account on a specified date every month or every quarter, as you choose. You can also choose to transfer your investment from one Mutual Fund scheme to another managed by the same Mutual Fund company. And you always get a comprehensive /easy to understand account statement that neatly documents it. Go ahead and invest in a Mutual Fund scheme of your choice and enjoy the flexibility, transparency and liquidity. In other words, a superior investing experience, while being in the care of professional managers.

Question 33

What are loads?

Accepted Answer

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. Investment in Mutual Funds also may be subject to some loads, but they’re different from the example of the tolls you just read. Until 2009, there used to be a charge levied at the time of entry into a Mutual Fund, but that doesn’t exist anymore. Some schemes levy a charge on exiting the scheme, under certain conditions, which is called “exit load”. In most cases, even when an exit load is charged, it applies to exit within a certain period. If you stay invested longer than this period, no exit load would be applicable. In other words, most often, the exit load serves the purpose of discouraging an early exit from a scheme. Even on an “exit load”, SEBI, the mutual fund regulatory authority, has set a limit on the maximum exit load that can be charged.

Question 34

How do I choose a Mutual Fund?

Accepted Answer

Imagine asking a travel agent, “How should I choose my mode of transport?” The first thing he/she will say is, “Depends on where you want to go.” If I were to travel to a distance of 5 kms, an auto rickshaw might be the best option, while for a journey from New Delhi to Kochi, a flight might be the best. A flight would not be available for a short distance and an auto rickshaw would be highly uncomfortable and slow for a long-distance journey. In Mutual Funds too, the starting point must be- What are your requirements? It begins with your financial goals and risk appetite. You’ve got to identify your financial goals, first. Some Mutual Fund schemes are suitable for short term requirements or goals, whereas some might be better for long term goals. Next comes your risk appetite. Different people would have different risk appetite. Even husband and wife may have joint finances but different risk profiles. Some are comfortable with high risk products, whereas some are just not. You can get help from financial planners or investment advisers or Mutual Fund distributors to assess your risk appetite.

Question 35

What is Net Asset value (NAV)?

Accepted Answer

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. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. The video on the left explains how NAV is calculated. The NAVs of all Mutual Fund schemes are declared at the end of the trading day after markets are closed, in accordance with SEBI Mutual Fund Regulations.

Question 36

When can I withdraw my investment?

Accepted Answer

An investment in an open end scheme can be redeemed at any time. Unless it is an investment in an Equity Linked Savings Scheme (ELSS), wherein there is a lock-in of 3 years from date of investment, there are no restrictions on investment redemption. Investors need to keep in mind any applicable exit load on their investment. Exit loads are charges deducted at the time of redemption, only if applicable. AMCs usually impose an exit load to deter short term or speculative investors from entering a scheme. Closed end schemes do not offer this, as all units are automatically redeemed on the date of maturity. However, units of closed end schemes are listed at a recognised stock exchange, and investors can sell their units to others only through the exchange. Mutual funds are one of the most liquid investment avenues in India, and are an ideal asset class for every financial plan.

Question 37

What is the benefit of staying invested in the long term?

Accepted Answer

Invest for long term – an advice routinely given by many Mutual Fund distributors and investment advisors. This is especially true in case of certain Mutual Funds – such as equity and balanced funds. Let us understand why the professionals give such advice. What really happens in the long term? Is there a benefit of staying invested for long term? Consider your Mutual Fund investment as a good quality batsman. Every good quality batsman has a certain style of batting. However, each good quality batsman would be able to accumulate lots of runs, if he continues to play for years. We are talking about the record of a “good quality” batsman. Every good batsman would go through some good and poor performances. On average the record would be impressive. Similarly, a good Mutual Fund would also go through some ups and downs – often due to factors beyond the control of the fund manager. An investor would benefit if one stays invested through these funds for long periods of time. So, as long as you can afford, stay invested for long periods of time – especially in equity and balanced funds.

Question 38

How do I get my returns in Mutual Funds?

Accepted Answer

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. Return over a period is calculated as the difference in sale date NAV and purchase date NAV upon  purchase date NAV and converted to percentage by multiplying the result by 100 . Any net dividend* or other income distribution by the fund during the holding period is also added to the capital appreciation while computing total returns. Capital appreciation in Mutual Funds is reflected by increase in NAV over time. This happens because NAV of a fund is derived from stock prices of companies included in the portfolio of the fund, and the prices fluctuate every day. Change in NAV of a fund over time contributes to the capital appreciation or loss in your holding. View the return performance of your investments in the account statement provided to you by the fund house. This statement captures both your transactions and the return on your investments. Note: *NAV of a Fund falls to the extent of dividend payout and statutory levy, if any.

Question 39

Does long term mean less risk?

Accepted Answer

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. Now what is this “risk” we are talking about? In simple terms, it is volatility of investment performance, as well as chances of eroding investment capital. By staying invested over the long term, some years of low/negative returns and some years of impressive returns will make the average returns quite reasonable. Therefore, the investor can ‘average out every year’s widely fluctuating returns’ to get a more stable long term return. The recommended time horizon, differs for every asset class as well as Mutual Fund category. Please consult an investment advisor and read scheme related documents before making an investment decision.

Question 40

How soon can I withdraw my money from Mutual Funds?

Accepted Answer

Mutual Funds are one of the most liquid assets, i.e. it is one of the easiest to convert into cash. In order to redeem funds through offline mode, the unit holder needs to submit a signed Redemption Request form to the AMC's or the Registrar’s designated office. The form requires details like unit holder’s name, folio number, scheme name, and number of units to redeem. The proceeds from the redemption will be credited to the registered bank account of the first named unit holder. Mutual Funds can also be purchased and redeemed on the concerned fund’s website. You simply have to log-on to the ‘Online Transaction’ page of the desired Mutual Fund and log-in using your Folio Number and/or the PAN, select the Mutual Fund Scheme and the number of units (or the amount) you wish to redeem and confirm your transaction. In addition, registrars like CAMS (Computer Age Management Services Pvt. Ltd.), Karvy, etc. offer the option of redeeming Mutual Fund bought from several AMCs. You can download the form online or visit the nearest office. Please note that these agencies might not service all the AMCs.

Question 41

What is Mutual Fund Dividend?

Accepted Answer

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. As per regulation, a fund can declare dividends only from the gains it has made from the sale of securities in the portfolio, or through any current income in the form of interest or dividends. Such gains are transferred to a Dividend Equalization Reserve, and at the discretion of the trustees, a dividend is declared. Dividends are declared as a percentage of the scheme’s face value (FV), and not the NAV. If FV per unit is Rs. 10 and dividend rate is 20%, every investor in the dividend option gets Rs.2 as dividend. However, the NAV, of the scheme falls by an equivalent amount after dividend declaration. Investors in the growth option are not entitled to the dividend, and the profit from the scheme is ploughed back into the scheme in this case. Thus, NAV of growth option increases in contrast to dividend option. With effect from 01 Apr 2020, dividends from mutual fund schemes have been made taxable in the hands of investors. Investors opting for dividend payout will now have to pay income tax on any dividend income received in a financial year at the highest income tax rate applicable to them. Investors opting for dividend reinvest will not have any implication on their taxes since they receive the profit in terms of additional units allotted in their folio.

Question 42

Are there funds that need me to stay invested for a stipulated time?

Accepted Answer

One of the biggest advantages in a Mutual Fund scheme is Liquidity, i.e. ease of converting investment into cash. Equity Linked Savings Schemes (ELSS), which offer tax benefits under Sec 80C, are required by regulation to ‘lock-in’ units for a period of 3 years, after which, they are free to be redeemed. There is another category of schemes popularly called as “Fixed Maturity Plans” (FMP’s) where investors need to stay invested for a stipulated period which is pre-defined in the offer document of the scheme. These schemes have an investment duration of anywhere between three months to a few years. A few open end schemes may however, specify an exit load period. For instance, a scheme may specify that units redeemed with 6 months would attract an exit load of 0.50% at applicable NAV. One should bear in mind that while there be may some rules and regulations on minimum time horizon, it is best to take the advice of an investment advisor to know the appropriate or ideal time horizons for every type of schemes.

Question 43

Can I remove money on all days or only on particular days?

Accepted Answer

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). All redemption proceeds are credited to the investor’s bank account within a specified time, usually within 10 business days. Redemptions may be done by handing over a signed redemption request clearly mentioning the scheme’s folio number. Redemptions may also be made on approved on-line platforms, where investors have the necessary security codes. Investments made in Equity Linked Savings Schemes (ELSS), however have a lock-in of 3 years, after which they can be redeemed on any business day. Redemptions may be restricted only in extraordinary circumstances. Under approval from the board of trustees, the AMC may impose restrictions when there is a liquidity issue, capital market closure, operational crisis or when directed by SEBI. It is important to note that these occurrences are extremely rare.

Question 44

What kind of returns should one expect from Mutual Funds?

Accepted Answer

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. There is not one product called Mutual Fund, there are many types of different Mutual Funds. The investment returns from the different categories could vary and then there are certain fund categories that exhibit higher level of uncertainty in performance. If the fund invests in a market where prices fluctuate a lot, the Net Asset Value (NAV) of the fund is likely to witness huge fluctuations (e.g. growth funds investing in equity market); however, if it invests in a market where prices do not fluctuate much, the Net Asset Value (NAV) of the fund would be quite stable (e.g. liquid funds investing in money market). In other terms, a liquid fund would exhibit far lower uncertainty in comparison to an equity fund. An investor would be advised to focus on the characteristic nature of the fund and match the same with one’s own requirements.

Question 45

Is there an advantage in investing in funds with an exit load?

Accepted Answer

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 60%. This is recommended only for investors with a healthy risk appetite and long term time horizon. The fund management team of such a scheme would ideally want only long term investors who share their conviction of staying invested for a long period, of a minimum of 3 years. Thus the fund may impose an exit load of 1% for all redemptions done before 3 years. In such a case, the fund is not impacting liquidity directly, but is discouraging investors from exiting before a period of 3 years. The advantage for the scheme would stem from the fact that all investors are aligned to a longer time horizon. This would be a comforting factor for the fund manager, enabling him to pick securities with such a thought in mind. In the fund manager’s view such a strategy would enable better fund performance, as there would be no short term investors and redemptions impacting a long term strategy.

Question 46

How do I withdraw my money from Mutual Funds?

Accepted Answer

One of the biggest advantages of Mutual Funds is liquidity – the ease of converting an investor’s units into cash. Mutual Funds, being regulated by Securities and Exchange Board of India (SEBI), have well laid out norms to ensure liquidity. Open end schemes, which comprise of a large majority of schemes, offer liquidity as a major feature. Liquidity is ease of access or conversion of an asset into cash. Once the redemption is complete, funds are transferred to the designated bank account of the investor, within 3 business days after the redemption was lodged. However two issues need to be kept in mind. One, there may be an exit load period in certain schemes. In such cases, redemptions before a certain specified period, say 3 months, may attract a nominal load like 0.5% of Asset Value. Fund Managers impose such loads to deter short term investors. Secondly, AMCs may indicate what the minimum amount for redemption is. Investors are advised to read all scheme related documents carefully before investing.

Question 47

Don’t let money go. Let it grow!

Accepted Answer

Do different types of Mutual Fund schemes offer different kinds of returns? “Why should one invest in Mutual Funds? We keep hearing about poor performance of many Mutual Funds. And Mutual Funds offer no guarantees. Given these limitations, is there any reason why someone should consider investing in Mutual Funds at all? Do they perform at all?” Well, often there are versions of this question, asked by existing as well as potential Mutual Fund investors. Whereas the question might be similar in many cases, the origin of the question, the reason why such a question arose could be very different across different individuals. In one of the cases, the investor thought that the scheme he had invested in was not delivering investment returns as much as what he had expected. However, when probed, it was found that the investor was comparing two completely different schemes. This is like comparing apples with oranges – not the right approach. In another case, the investor had invested in a scheme, where the overall market was going through turmoil. When someone is stuck in a traffic jam, however great a driver or however great a car, there is no way to speed up. Exactly the same thing happens when the overall market is not good. In such a case, as in case of a traffic jam, one has to wait till things clear out. In most situations, the Mutual Funds are perceived to be not performing well when the way of looking could be incorrect.

Question 48

Are there funds that give quarterly payouts?

Accepted Answer

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. All you need to do is invest a large lump sum amount in a suitable scheme and then start a SWP after a year, so that short-term capital gains tax doesn’t apply. You can decide the payout amount and frequency as per your need and change them whenever you like. SWP is better than opting for dividend option in a Mutual Fund scheme because dividend payments are not guaranteed. They are subject to profits made by the companies in which the Mutual Fund has invested your money. If the market goes down and your fund makes losses in its portfolio, you may not receive any dividends. In case of SWP, even if the scheme is making losses it will still pay the amount opted for, by digging into the principal. Hence, you should have a lump sum amount to begin with in case of a SWP. You can set a withdrawal amount as a proportion (%) of your lump sum investment that will be slightly less than the returns you expect from the fund, so that your principal remains intact most of the times.

Question 49

Can Mutual Funds help create wealth?

Accepted Answer

Business and commerce allows us to create wealth by investing our money with those who are on the path to creating wealth. We can be investors in businesses of entrepreneurs, by investing in stocks of various companies. As the entrepreneurs and the managers run their businesses efficiently and profitably, the shareholders get the benefits. In this regard, Mutual Fund are a great way to build wealth. But how do we know which stocks to buy, and when? That is where taking professional help counts. They also take the advantage of a large corpus to explore more opportunities simultaneously. Like a balanced diet – we all need proteins, vitamins, carbohydrates, etc. Eating only one type results in some nutrient deficiency. Similarly, in a diversified equity fund you’re exposed to different segments of the economy, and also protected from the potential downside. Invest in a professionally managed, diversified equity fund and stay invested for long period to create wealth for yourself and your next generation.

Question 50

Are there particular funds that help create wealth over the long term?

Accepted Answer

What is wealth? What purpose does it serve? Many answer these questions as “living a life of one’s dreams”, or “not having to worry about money”, or “having financial freedom”. Being wealthy means having enough money to spend for one’s responsibilities and dreams. However, for all the long term expenses, one must never forget one major factor – “Inflation”. As the name suggests, inflation is a phenomena that inflates the cost that you will incur to fulfil your life goal when the time arrives to fulfil it.   Diversified equity funds offer the opportunity to create wealth over the long term at reasonable levels of risk. The risk associated with equities gets controlled with equity Mutual Funds due to three factors The expertise of the professional fund manager who manages the fund Diversification of risks due to the investments made in a basket of securities Investing for the long term which lowers the impact of short term volatility   Although it’s true that equities as an asset class offer investors the opportunity to create wealth, it is important to keep in mind that equities as an asset class is volatile over shorter time frames. Therefore, you need to invest for the long term.

Question 51

Why don't Mutual Funds give a fixed rate of return like a saving account or FD?

Accepted Answer

The returns in a Mutual Fund portfolio are a function of many things, like the avenues one has invested in, the way various markets move, the ability of the fund management team, and the investment period. Since many of these factors are uncertain, the returns cannot be guaranteed, unlike a fixed deposit where these factors are absent, at least to some extent. With a fixed deposit – the returns are FIXED only for a FIXED period. These returns and the period, both are decided by the issuer company and not by the depositor. Hence, if one wants to invest money for six years and a deposit is available for five years, the returns are known only for the first five years, but not for the entire six-year period. Thus, the investment returns are known only in case of guaranteed return products, where the product maturity and investor’s time horizon are matching perfectly. In all other cases, the investment returns are unknown over the investor’s investment horizon.

Question 52

What is inflation?

Accepted Answer

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. Let’s use an example to understand this better. Say you buy a grilled sandwich today for INR 100. The yearly inflation is 10%. Next year, the same sandwich will cost you INR 110. If your income also doesn’t increase at least as per the inflation rate, you’re unable to buy the sandwich or other such products, right? Inflation also tells investors how much of a return (%) their investments need to make for them to maintain their current/present standard of living. For example, if investment in ‘X’ returned 4% and inflation was 5%, then the real return on investment would be -1% (5%-4%). Mutual Funds give you investment options which have the potential to give inflation beating returns! You can aim to protect your purchasing power over the long run by investing in the right type of Mutual Funds.

Question 53

Aren’t RDs and FDs enough to secure the future?

Accepted Answer

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.   That really depends on what an investor expects from the future. If the investor wants her capital to be safe and earn some reasonable fixed rate of return, irrespective of inflation and taxes, then these may be good enough. However, if the investor wants to earn a positive return even after factoring inflation and taxes, then these may not be good enough. If an investor has a large enough corpus to start with and is really not worried about enhancing purchasing power, then RDs and FDs are safe and useful savings and income generating options. If an investor is more concerned about safety of principal and receipt of timely and predictable income, a FD may be ideal.

Question 54

Are Mutual Funds suitable for those who don’t want to invest in share market?

Accepted Answer

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. But you managed to get an idea about the new restaurant while enjoying its services, ambience and food.   Investing in Mutual Funds is like ordering the right dish on the menu at a restaurant. If you prefer to stay away from the stock market, you can still choose to invest in debt funds for your financial goals. Mutual Funds are broadly categorized into equity, debt and hybrid, Solution Oriented Schemes and Other Schemes based on where they invest. If you don’t want to invest in stocks via equity mutual funds, you can still experience the benefits of investing in mutual funds through debt funds that invest in bonds issued by banks, corporates, govt. bodies including RBI and money market instruments like commercial papers, bank CDs, T-bills etc. A debt fund fund helps you grow your money better because of tax efficient returns than your traditional choices of bank FDs, PPFs and post office saving schemes.

Question 55

What affects the performance of a Mutual Fund?

Accepted Answer

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. This performance is affected by the decisions that the fund management team takes, as well as twists and turns in the market, either equity or debt. Typically, all fund management teams have a process in place that dictates the choice of securities in the portfolio. And it is the performance of these securities, in varying market conditions, that finally dictates the scheme’s performance. Fund management teams make best efforts to take the right decisions based on price, quality, risk, financials, news flows and economic developments. A team that possesses sound skills, strong processes and relevant experience is bound to do well. It is however important to measure performance against realistic time horizons – long term for equity funds, medium term for hybrid funds or very short term for liquid funds.

Question 56

Mutual Funds vs Shares: What’s the difference?

Accepted Answer

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. The latter option allows you to choose from a wide variety without the hard work. Similarly, you can create wealth by investing directly in shares of good companies or invest in them through Mutual Funds. Wealth can be created when we buy company stocks which use our money to grow their business, creating value for us. Direct investment in shares carries a relatively higher risk element. You need to pick stocks by researching the company and sector. It’s a humongous task to choose few companies from thousands of them listed on the stock exchange. Once done, you need to keep a track of every stock's performance. In Mutual Funds, the stock picking is done by expert fund managers. You need to keep track of the performance of the fund and not individual stocks within the fund. They also allow investment flexibility unlike stocks, with growth/dividend options, top-ups, systematic withdrawals/transfer, etc. besides helping to ride over volatility by investing smaller amounts regularly through SIPs.

Question 57

Is it Wise for Retirees to Invest in Mutual Funds?

Accepted Answer

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. Mutual Funds provide the much-needed liquidity to retirees as they are easy to withdraw and offer better post-tax returns. Most retired people fear the volatility or fluctuation in returns of Mutual Funds and stay away from them. They should put some part of their retirement corpus in Debt Mutual Funds and go for a Systematic Withdraw Plan (SWP). This will help them earn a regular monthly income from such investments. Debt funds are relatively safer than equity funds as they invest in bonds issued by banks, companies, government bodies and money market instruments (bank CDs, T-bills, Commercial Papers). SWP in debt funds provides tax efficient returns as compared to bank FDs. Income from FDs/pension plans are taxed at higher effective rates compared to withdrawals under SWP. You can easily stop a SWP or change the withdrawal amount anytime depending on your need unlike in a pension plan. Thus, retirees should include Mutual Funds in their financial plans.

Question 58

Do Mutual Funds issue a passbook?

Accepted Answer

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. In a Mutual Fund scheme too, similar transactions could be there: purchase, redemptions, switches, reinvestment of dividend etc. In a Mutual Fund scheme, such transactions are captured in the account statement. An account statement is issued after the first investment in a scheme is made. The account statement would reflect all relevant details: Investor name, address, details of joint holding, amount invested, NAV details, units allotted etc. Every time a new transaction is made, the account statement would be updated and a copy is mailed to the investor. In this digital era, many investors opt for e-statements, which is more convenient way to read, access and store information. Investors can at any time access and avail a duplicate account statement by contacting the Asset Management Companies (AMC) or its Registrar. The scheme account statement thus plays the role of a passbook.

Question 59

Aren’t safe investments enough to meet financial goals?

Accepted Answer

One must keep in mind that the regular expenses as well as the cost for various financial goals rise over a period. If the inflation is at 6% per year, the cost of a goal doubles over approximately 12 years. However, if the inflation is at 7%, the doubling happens roughly in ten years. Now when inflation is at 7% and you seek total safety of the principal amount, you would be able to invest in avenues that offer returns very close to the inflation. Adjust for taxes on the investment returns and your post-tax investment returns are lower than inflation. Let us look at some simple numbers: If inflation is 7% per year, and you can buy something for Rs. 100 now, you would need Rs. 107 to buy the same thing next year. A year later, the same item would cost Rs. 114.49, if the inflation remains at the same level. At the same time, if you had saved your money in a totally safe avenue that offered 6% per year after taxes, your Rs. 100 would grow to Rs. 106. This is Re. 1 less than the amount required above. After two years, the amount would have grown to Rs. 112.36, which is less than the cost of the item to be purchased. The table on the left highlights an approximate of values of investments, costs of goals and the gaps between them over a period of years. So it’s important to not just save but invest.

Question 60

How can I track my investments on a regular basis?

Accepted Answer

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. It is very similar when it comes to investing for achievement of financial goal, too. Consider the financial goal as the target score- The amount you have accumulated so far is the runs you have scored so far. The amount yet to be accumulated is the runs to be scored and the time left is the overs left. The condition of the wickets and the quality of the bowlers may be compared to various risks – be it related to the national or global economy; global capital flows; political situation in the country; changes in laws, regulations and taxes, etc. The scoreboard in this case is the account statement you get when you invest in a Mutual Fund scheme. There are also online tools, and mobile apps available to check the value of one’s investments – the scoreboard.

Question 61

What is an Exchange Traded Fund (ETF)

Accepted Answer

An ETF is an Exchange Traded Fund, which unlike regular Mutual Funds trades like a common stock on a stock exchange. The units of an ETF are usually bought and sold through a registered broker of a recognised stock exchange. The units of an ETF are listed in stock exchanges and the NAV varies as per market movements. Since units of an ETF are listed in the stock exchange only, they are not bought and sold like any normal open end equity fund. An investor can buy as many units as she wishes without any restriction through the exchange. In the simple terms, ETFs are funds that track indexes such as CNX Nifty or BSE Sensex, etc. When you buy shares/units of an ETF, you are buying shares/units of a portfolio that tracks the yield and return of its native index. The main difference between ETFs and other types of index funds is that ETFs don't try to outperform their corresponding index, but simply replicate the performance of the Index. They don't try to beat the market, they try to be the market. ETFs typically have higher daily liquidity and lower fees than Mutual Fund schemes, making them an attractive alternative for individual investors.

Question 62

A plan for every goal

Accepted Answer

Yes, Mutual Funds are ideal to help you plan your life goals! ·   Mr. Rajput eventually wants to move away from the city, into a farmhouse on a hill station when he plans to retire after 15-20 years. ·   Mrs. Patel didn’t receive any retirement benefits. Although she has savings, she now needs a regular income from her investments to meet her regular expenses. ·   Mrs. Sharma has surplus money generated from her business and lets it lie idle in her bank account. She is required to pay her suppliers and staff only after a few days. The above could be real life situations. Is there any option available for these investors? YES!  Mutual Funds! Mutual Funds offer different kinds of schemes for different kinds of investment objectives. For e.g. -   Long term goals like building a corpus for retirement – You could consider equity and balanced funds -   Looking to generate income with relatively low risk – You could consider a bond fund -   Park your surplus money till you decide where to invest it next – You could consider a liquid fund Mutual Funds offer different kinds of investment options for planning one’s investments, especially when one is clear about their goals.

Question 63

Which is a better option for Retirement Planning: Mutual Funds or Insurance?

Accepted Answer

Pension plans provide a guaranteed source of income in the form of annuity during retirement. However, they don’t provide immediate liquidity for emergencies and offer limited choice in terms of diversification and investment styles. The premium paid towards a pension plan is tax deductible. Mutual Funds investments are not tax deductible unless you have invested in an ELSS fund but they offer you much more variety and flexibility in designing a retirement plan as per your need. If you are young, you can start SIPs in equity funds suiting your risk preference and continue the SIPs close to your retirement. You would have built a good corpus by then which can be transferred to short-term debt funds through STP(Systematic Transfer Plan) 2-3 yrs prior to retirement to reduce your risk. If you didn’t plan well in advance for your retirement through SIP but are now thinking of it just before retirement, you can invest your lumpsum savings and opt for SWP to withdraw a specified amount every month post retirement.  Pension plans have a conservative allocation and offer stable return while you need to choose a fund with suitable allocation in case of mutual funds. Since annuity income is taxed as per your income slab while you pay only capital gains tax on mutual fund withdrawals, Mutual Funds can be more tax-efficient.

Question 64

Can minors invest in Mutual Funds?

Accepted Answer

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. One should have an investment goal for the minor that needs to be achieved by investing in Mutual Funds like say funding higher education. Once a child attains the age of 18 and becomes a major, the first thing you as a parent/guardian need to do is change the status of the sole account holder from Minor to Major else all transactions would be stopped in the account. The tax implications will now have to be borne by the sole account holder as applicable to any investor above the age of 18 years. Until the child is a minor, all incomes and gains from the child's portfolio is clubbed under the parent's income and the parent pays the applicable taxes. In the year the child turns major, he/she will be treated as a separate entity and will pay taxes for the number of months for which he/she is a major in that year.