Frequently Asked Questions(F.A.Q’s) on Mutual Funds.

1. What is a Mutual Fund?
Ans: A mutual fund is a pool of investments used to buy a large portfolio of securities that will be managed by a professional advisor. When you buy a share in a mutual fund, you effectively buy a bit of each security held in the fund’s portfolio.

2. What is the risk involved?
Ans: Mutual funds are not risk free investments. Even investing in mutual funds whose portfolios consist only of guaranteed government bonds contains an element of risk. Before you invest in a mutual fund, be sure you completely understand the risk. When you invest in a fund, the risk of total loss is lessened due to the diversity in the portfolio.

3. What is NAV (Net Asset Value?)
Ans: The net asset value is the present rupee value of each unit of the mutual fund. It is determined by totaling the market value of all securities owned by the fund and subtracting all its liabilities. The balance is divided by the number of the fund’s outstanding units to arrive at the net asset value per unit of the fund. The fund uses this value when redeeming (or selling) unit

4. How many Mutual Funds are there in India currently?
Ans: The list is updated regularly at AMFI India website.

5. If schemes in the same category of different mutual funds are available, should I choose a scheme with lower NAV?
Ans: Some of the investors have the tendency to prefer a scheme that is available at lower NAV compared to the one available at higher NAV. Sometimes, they prefer a new scheme which is issuing units at Rs.10 whereas the existing schemes in the same category are available at much higher NAVs. Investors may please note that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance. On the other hand, investors should choose a scheme based on its merit considering performance track record of the mutual fund, service standards, professional management, etc.

6. Who is the Regulatory Body for Mutual Funds?
Ans: Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds mentioned above. All the mutual funds must get registered with SEBI. The only exception is the UTI, since it is a corporation formed under a separate Act of Parliament.

7. Why should I choose to invest in a mutual fund?
Ans: For a retail investor who does not have the time and expertise to analyze and invest in stocks and bonds, mutual funds offer a viable investment alternative. This is because: Mutual Funds provide the benefit of cheap access to expensive stocks Mutual funds diversify the risk of the investor by investing in a basket of assets A team of professional fund managers manages them with in-depth research inputs from investment analysts. Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information which individual investors cannot access

8. Can mutual funds be viewed as risk-free investments?
Ans: No. Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced.

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

10. What are open-ended and closed-ended mutual funds?
Ans: In an open-ended mutual fund there are no limits on the total size of the corpus. Investors are permitted to enter and exit the open-ended mutual fund at any point of time at a price that is linked to the net asset value (NAV). In case of closed-ended funds, the total size of the corpus is limited by the size of the initial offer.

11. Is the purchase and redemption in case of open-ended funds done at the NAV?
Ans: Generally every fund levies either an entry load or an exit load or both to provide for administrative and other routine costs. The purchase price will be higher than the NAV to the extent of the entry load and the redemption price will be lower than the NAV to the extent of the exit load.

12. How do I invest money in Mutual Funds?
Ans: One can invest by approaching a registered broker of Mutual funds or the respective offices of the Mutual funds in that particular town/city. An application form has to be filled up giving all the particulars along with the cheque or Demand Draft for the amount to be invested.

13. What is a Systematic Investment Plan and how does it operate?
Ans: A systematic investment plan is one where an investor contributes a fixed amount every month and at the prevailing NAV the units are credited to his account

14. What are the benefits of Systematic Investment Plan?
Ans: A systematic investment plan (SIP) offers 2 major benefits to an investor: It avoids lump sum investment at one point of time In a scenario of falling prices, it reduces your overall cost of acquisition by a process of rupee-cost averaging. This means that at lower prices you end up getting more units for the same investment

15. What proportion of my investment should be invested in mutual funds?
Ans: This decision will depend on factors like your income, risk aversion and tax status.

16. Like IPOs, can there be any situation wherein I am not allotted the units applied for in the initial offer?
Ans: In case of open-ended funds there are no such limits and all applications are honored.

17. Can an investor redeem part of the units?
Ans: Yes. One can redeem part units also.

18. Say I redeem and buy and do likewise several times then, how do I keep track of my portfolio?
Ans: The moment you buy or get allotted the units, an account statement will be given to you mentioning the number of units allotted/bought and redeemed by you. The recording of entries would be similar to your pass book entries in the bank.

19. What are my major rights as a unitholder in a mutual fund?
Ans: Unit holders have a proportionate right in the beneficial ownership of the assets of the scheme and to the dividend declared. They are entitled to receive dividend warrants within 42 days of the date of declaration of the dividend. They are entitled to receive redemption cheques within 10 working days from the date of redemption. 75% of the unit holders with the prior approval of SEBI can terminate AMC of the fund. 75% of the unit holders can pass a resolution to wind-up the scheme.

20. Can mutual fund performance be guaranteed?
Ans: No। Mutual Fund investments are subject to market risks. A prospective investor should read the offer document for details on risk factors before investment. However, some schemes having Capital Guaranty have been launched recently.

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