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Investments in Mutual Funds |
In order to educate the investors to understand the basics of mutual funds and their operations, SEBI has prepared a brochure in question-answer format explaining the fundamental issues pertaining to mutual funds. Given below is copy of FAQ on Investment in Mutual Funds. The same is also available at www.sebi.gov.in
Introduction Different
investment avenues are available to investors. Mutual funds also offer
good investment opportunities to the investors. Like all investments,
they also carry certain risks. The investors should compare the risks
and expected yields after adjustment of tax on various instruments while
taking investment decisions. The investors may seek advice from experts
and consultants including agents and distributors of mutual funds
schemes while making investment decisions. With an objective to make the investors aware of functioning of mutual funds, an attempt has been made to provide information in question-answer format which may help the investors in taking investment decisions.
What
is a Mutual Fund? Mutual
fund is a mechanism for pooling the resources by issuing units to the
investors and investing funds in securities in accordance with
objectives as disclosed in offer document. Investments
in securities are spread across a wide cross-section of industries and
sectors and thus the risk is reduced. Diversification reduces the risk
because all stocks may not move in the same direction in the same
proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of
money invested by them. Investors of mutual funds are known as unit holders. The
profits or losses are shared by the investors in proportion to their
investments. The mutual funds normally come out with a number of schemes
with different investment objectives which are launched from time to
time. A mutual fund is required to be registered with Securities and
Exchange Board of India (SEBI) which regulates securities markets before
it can collect funds from the public. What
is the history of Mutual Funds in India and role of SEBI in mutual funds
industry? Unit
Trust of India was the first mutual fund set up in India in the year
1963. In early 1990s, Government allowed public sector banks and
institutions to set up mutual funds. In
the year 1992, Securities and exchange Board of India (SEBI) Act was
passed. The objectives of SEBI are � to protect the interest of
investors in securities and to promote the development of and to
regulate the securities market. As
far as mutual funds are concerned, SEBI formulates policies and
regulates the mutual funds to protect the interest of the investors.
SEBI notified regulations for the mutual funds in 1993. Thereafter,
mutual funds sponsored by private sector entities were allowed to enter
the capital market. The regulations were fully revised in 1996 and have
been amended thereafter from time to time. SEBI has also issued
guidelines to the mutual funds from time to time to protect the
interests of investors. All
mutual funds whether promoted by public sector or private sector
entities including those promoted by foreign entities are governed by
the same set of Regulations. There is no distinction in regulatory
requirements for these mutual funds and all are subject to monitoring
and inspections by SEBI. The risks associated with the schemes launched
by the mutual funds sponsored by these entities are of similar type. It
may be mentioned here that Unit Trust of India (UTI) is not registered
with SEBI as a mutual fund (as on January 15, 2002). A
mutual fund is set up in the form of a trust, which has sponsor,
trustees, asset management company (AMC) and custodian. The trust is
established by a sponsor or more than one sponsor who is like promoter
of a company. The trustees of the mutual fund hold its property for the
benefit of the unit holders. Asset Management Company (AMC) approved by
SEBI manages the funds by making investments in various types of
securities. Custodian, who is registered with SEBI, holds the securities
of various schemes of the fund in its custody. The trustees are vested
with the general power of superintendence and direction over AMC. They
monitor the performance and compliance of SEBI Regulations by the mutual
fund. SEBI
Regulations require that at least two thirds of the directors of trustee
company or board of trustees must be independent i.e. they should not be
associated with the sponsors. Also, 50% of the directors of AMC must be
independent. All mutual funds are required to be registered with SEBI
before they launch any scheme. However, Unit Trust of India (UTI) is not
registered with SEBI (as on January 15, 2002). What
is Net Asset Value (NAV) of a scheme? The
performance of a particular scheme of a mutual fund is denoted by Net
Asset Value (NAV). Mutual
funds invest the money collected from the investors in securities
markets. In simple words, Net Asset Value is the market value of the
securities held by the scheme. 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. For example, if
the market value of securities of a mutual fund scheme is Rs 200 lakhs
and the mutual fund has issued 10 lakhs units of Rs. 10 each to the
investors, then the NAV per unit of the fund is Rs.20. NAV is required
to be disclosed by the mutual funds on a regular basis - daily or weekly
- depending on the type of scheme. What
are the different types of mutual fund schemes? Schemes
according to Maturity Period: A
mutual fund scheme can be classified into open-ended scheme or
close-ended scheme depending on its maturity period. Open-ended
Fund/ Scheme An
open-ended fund or scheme is one that is available for subscription and
repurchase on a continuous basis. These schemes do not have a fixed
maturity period. Investors can conveniently buy and sell units at Net
Asset Value (NAV) related prices which are declared on a daily basis.
The key feature of open-end schemes is liquidity. Close-ended
Fund/ Scheme A
close-ended fund or scheme has a stipulated maturity period e.g. 5-7
years. The fund is open for subscription only during a specified period
at the time of launch of the scheme. Investors can invest in the scheme
at the time of the initial public issue and thereafter they can buy or
sell the units of the scheme on the stock exchanges where the units are
listed. In order to provide an exit route to the investors, some
close-ended funds give an option of selling back the units to the mutual
fund through periodic repurchase at NAV related prices. SEBI Regulations
stipulate that at least one of the two exit routes is provided to the
investor i.e. either repurchase facility or through listing on stock
exchanges. These mutual funds schemes disclose NAV generally on weekly
basis. Schemes
according to Investment Objective: A
scheme can also be classified as growth scheme, income scheme, or
balanced scheme considering its investment objective. Such schemes may
be open-ended or close-ended schemes as described earlier. Such schemes
may be classified mainly as follows: Growth
/ Equity Oriented Scheme The
aim of growth funds is to provide capital appreciation over the medium
to long- term. Such schemes normally invest a major part of their corpus
in equities. Such funds have comparatively high risks. These schemes
provide different options to the investors like dividend option, capital
appreciation, etc. and the investors may choose an option depending on
their preferences. The investors must indicate the option in the
application form. The mutual funds also allow the investors to change
the options at a later date. Growth schemes are good for investors
having a long-term outlook seeking appreciation over a period of time. Income
/ Debt Oriented Scheme The
aim of income funds is to provide regular and steady income to
investors. Such schemes generally invest in fixed income securities such
as bonds, corporate debentures, Government securities and money market
instruments. Such funds are less risky compared to equity schemes. These
funds are not affected because of fluctuations in equity markets.
However, opportunities of capital appreciation are also limited in such
funds. The NAVs of such funds are affected because of change in interest
rates in the country. If the interest rates fall, NAVs of such funds are
likely to increase in the short run and vice versa. However, long term
investors may not bother about these fluctuations. Balanced
Fund The
aim of balanced funds is to provide both growth and regular income as
such schemes invest both in equities and fixed income securities in the
proportion indicated in their offer documents. These are appropriate for
investors looking for moderate growth. They generally invest 40-60% in
equity and debt instruments. These funds are also affected because of
fluctuations in share prices in the stock markets. However, NAVs of such
funds are likely to be less volatile compared to pure equity funds. Money
Market or Liquid Fund These
funds are also income funds and their aim is to provide easy liquidity,
preservation of capital and moderate income. These schemes invest
exclusively in safer short-term instruments such as treasury bills,
certificates of deposit, commercial paper and inter-bank call money,
government securities, etc. Returns on these schemes fluctuate much less
compared to other funds. These funds are appropriate for corporate and
individual investors as a means to park their surplus funds for short
periods. Gilt
Fund These
funds invest exclusively in government securities. Government securities
have no default risk. NAVs of these schemes also fluctuate due to change
in interest rates and other economic factors as is the case with income
or debt oriented schemes. Index
Funds Index
Funds replicate the portfolio of a particular index such as the BSE
Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest
in the securities in the same weight age comprising of an index. NAVs of
such schemes would rise or fall in accordance with the rise or fall in
the index, though not exactly by the same percentage due to some factors
known as "tracking error" in technical terms. Necessary
disclosures in this regard are made in the offer document of the mutual
fund scheme. There
are also exchange traded index funds launched by the mutual funds which
are traded on the stock exchanges. What
are sector specific funds/schemes? These
are the funds/schemes which invest in the securities of only those
sectors or industries as specified in the offer documents. e.g.
Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum
stocks, etc. The returns in these funds are dependent on the performance
of the respective sectors/industries. While these funds may give higher
returns, they are more risky compared to diversified funds. Investors
need to keep a watch on the performance of those sectors/industries and
must exit at an appropriate time. They may also seek advice of an
expert. These
schemes offer tax rebates to the investors under specific provisions of
the Income Tax Act, 1961 as the Government offers tax incentives for
investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS).
Pension schemes launched by the mutual funds also offer tax benefits.
These schemes are growth oriented and invest pre-dominantly in equities.
Their growth opportunities and risks associated are like any
equity-oriented scheme. What
is a Load or no-load Fund? A
Load Fund is one that charges a percentage of NAV for entry or exit.
That is, each time one buys or sells units in the fund, a charge will be
payable. This charge is used by the mutual fund for marketing and
distribution expenses. Suppose the NAV per unit is Rs.10. If the entry
as well as exit load charged is 1%, then the investors who buy would be
required to pay Rs.10.10 and those who offer their units for repurchase
to the mutual fund will get only Rs.9.90 per unit. The investors should
take the loads into consideration while making investment as these
affect their yields/returns. However, the investors should also consider
the performance track record and service standards of the mutual fund
which are more important. Efficient funds may give higher returns in
spite of loads. A
no-load fund is one that does not charge for entry or exit. It means the
investors can enter the fund/scheme at NAV and no additional charges are
payable on purchase or sale of units. Can
a mutual fund impose fresh load or increase the load beyond the level
mentioned in the offer documents? Mutual
funds cannot increase the load beyond the level mentioned in the offer
document. Any change in the load will be applicable only to prospective
investments and not to the original investments. In case of imposition
of fresh loads or increase in existing loads, the mutual funds are
required to amend their offer documents so that the new investors are
aware of loads at the time of investments. What
is a sales or repurchase/redemption price? The
price or NAV a unitholder is charged while investing in an open-ended
scheme is called sales price. It may include sales load, if applicable. Repurchase
or redemption price is the price or NAV at which an open-ended scheme
purchases or redeems its units from the unit holders. It may include exit
load, if applicable. What
is an assured return scheme? Assured
return schemes are those schemes that assure a specific return to the unit holders
irrespective of performance of the scheme. A
scheme cannot promise returns unless such returns are fully guaranteed
by the sponsor or AMC and this is required to be disclosed in the offer
document. Investors
should carefully read the offer document whether return is assured for
the entire period of the scheme or only for a certain period. Some
schemes assure returns one year at a time and they review and change it
at the beginning of the next year. Can
a mutual fund change the asset allocation while deploying funds of
investors? Considering
the market trends, any prudent fund managers can change the asset
allocation i.e. he can invest higher or lower percentage of the fund in
equity or debt instruments compared to what is disclosed in the offer
document. It can be done on a short term basis on defensive
considerations i.e. to protect the NAV. Hence the fund managers are
allowed certain flexibility in altering the asset allocation considering
the interest of the investors. In case the mutual fund wants to change
the asset allocation on a permanent basis, they are required to inform
the unit holders and giving them option to exit the scheme at prevailing
NAV without any load. How
to invest in a scheme of a mutual fund? Mutual
funds normally come out with an advertisement in newspapers publishing
the date of launch of the new schemes. Investors can also contact the
agents and distributors of mutual funds who are spread all over the
country for necessary information and application forms. Forms can be
deposited with mutual funds through the agents and distributors who
provide such services. Now a days, the post offices and banks also
distribute the units of mutual funds. However, the investors may please
note that the mutual funds schemes being marketed by banks and post
offices should not be taken as their own schemes and no assurance of
returns is given by them. The only role of banks and post offices is to
help in distribution of mutual funds schemes to the investors. Investors
should not be carried away by commission/gifts given by
agents/distributors for investing in a particular scheme. On the other
hand they must consider the track record of the mutual fund and should
take objective decisions. Can
non-resident Indians (NRIs) invest in mutual funds? Yes,
non-resident Indians can also invest in mutual funds. Necessary details
in this respect are given in the offer documents of the schemes. How
much should one invest in debt or equity oriented schemes? An
investor should take into account his risk taking capacity, age factor,
financial position, etc. As already mentioned, the schemes invest in
different type of securities as disclosed in the offer documents and
offer different returns and risks. Investors may also consult financial
experts before taking decisions. Agents and distributors may also help
in this regard. How
to fill up the application form of a mutual fund scheme? An
investor must mention clearly his name, address, number of units applied
for and such other information as required in the application form. He
must give his bank account number so as to avoid any fraudulent
encashment of any cheques/draft issued by the mutual fund at a later date
for the purpose of dividend or repurchase. Any changes in the address,
bank account number, etc at a later date should be informed to the
mutual fund immediately. What
should an investor look into an offer document? An
abridged offer document, which contains very useful information, is
required to be given to the prospective investor by the mutual fund. The
application form for subscription to a scheme is an integral part of the
offer document. SEBI has prescribed minimum disclosures in the offer
document. An investor, before investing in a scheme, should carefully
read the offer document. Due care must be given to portions relating to
main features of the scheme, risk factors, initial issue expenses and
recurring expenses to be charged to the scheme, entry or exit loads,
sponsor�s track record, educational qualification and work experience
of key personnel including fund managers, performance of other schemes
launched by the mutual fund in the past, pending litigations and
penalties imposed, etc. When
will the investor get certificate or statement of account after
investing in a mutual fund? Mutual
funds are required to dispatch certificates or statements of accounts
within six weeks from the date of closure of the initial subscription of
the scheme. In case of close-ended schemes, the investors would get
either a demat account statement or unit certificates as these are
traded in the stock exchanges. In case of open-ended schemes, a
statement of account is issued by the mutual fund within 30 days from
the date of closure of initial public offer of the scheme. The procedure
of repurchase is mentioned in the offer document. How
long will it take for transfer of units after purchase from stock
markets in case of close-ended schemes? According
to SEBI Regulations, transfer of units is required to be done within
thirty days from the date of lodgment of certificates with the mutual
fund. As
a unitholder, how much time will it take to receive dividends/repurchase
proceeds? A
mutual fund is required to dispatch to the unit holders the dividend
warrants within 30 days of the declaration of the dividend and the
redemption or repurchase proceeds within 10 working days from the date
of redemption or repurchase request made by the unitholder. In
case of failures to dispatch the redemption/repurchase proceeds within
the stipulated time period, Asset Management Company is liable to pay
interest as specified by SEBI from time to time (15% at present). Can
a mutual fund change the nature of the scheme from the one specified in
the offer document? Yes.
However, no change in the nature or terms of the scheme, known as
fundamental attributes of the scheme e.g. structure, investment pattern,
etc. can be carried out unless a written communication is sent to each
unitholder and an advertisement is given in one English daily having
nationwide circulation and in a newspaper published in the language of
the region where the head office of the mutual fund is situated. The unit holders
have the right to exit the scheme at the prevailing NAV
without any exit load if they do not want to continue with the scheme.
The mutual funds are also required to follow similar procedure while
converting the scheme form close-ended to open-ended scheme and in case
of change in sponsor. How
will an investor come to know about the changes, if any, which may occur
in the mutual fund? There
may be changes from time to time in a mutual fund. The mutual funds are
required to inform any material changes to their unitholders. Apart from
it, many mutual funds send quarterly newsletters to their investors. At
present, offer documents are required to be revised and updated at least
once in two years. In the meantime, new investors are informed about the
material changes by way of addendum to the offer document till the time
offer document is revised and reprinted. How
to know the performance of a mutual fund scheme? The
performance of a scheme is reflected in its net asset value (NAV) which
is disclosed on daily basis in case of open-ended schemes and on weekly
basis in case of close-ended schemes. The NAVs of mutual funds are
required to be published in newspapers. The NAVs are also available on
the web sites of mutual funds. All mutual funds are also required to put
their NAVs on the web site of Association of Mutual Funds in India (AMFI)
www.amfiindia.com and thus the investors can access NAVs of all mutual
funds at one place The
mutual funds are also required to publish their performance in the form
of half-yearly results which also include their returns/yields over a
period of time i.e. last six months, 1 year, 3 years, 5 years and since
inception of schemes. Investors can also look into other details like
percentage of expenses of total assets as these have an affect on the
yield and other useful information in the same half-yearly format. The
mutual funds are also required to send annual report or abridged annual
report to the unitholders at the end of the year. Various
studies on mutual fund schemes including yields of different schemes are
being published by the financial newspapers on a weekly basis. Apart
from these, many research agencies also publish research reports on
performance of mutual funds including the ranking of various schemes in
terms of their performance. Investors should study these reports and
keep themselves informed about the performance of various schemes of
different mutual funds. Investors
can compare the performance of their schemes with those of other mutual
funds under the same category. They can also compare the performance of
equity oriented schemes with the benchmarks like BSE Sensitive Index,
S&P CNX Nifty, etc. On
the basis of performance of the mutual funds, the investors should
decide when to enter or exit from a mutual fund scheme. How
to know where the mutual fund scheme has invested money mobilised from
the investors? The
mutual funds are required to disclose full portfolios of all of their
schemes on half-yearly basis which are published in the newspapers. Some
mutual funds send the portfolios to their unitholders. The
scheme portfolio shows investment made in each security i.e. equity,
debentures, money market instruments, government securities, etc. and
their quantity, market value and % to NAV. These portfolio statements
also required to disclose illiquid securities in the portfolio,
investment made in rated and unrated debt securities, non-performing
assets (NPAs), etc. Some
of the mutual funds send newsletters to the unitholders on quarterly
basis which also contain portfolios of the schemes. Is
there any difference between investing in a mutual fund and in an
initial public offering (IPO) of a company? Yes,
there is a difference. IPOs of companies may open at lower or higher
price than the issue price depending on market sentiment and perception
of investors. However, in the case of mutual funds, the par value of the
units may not rise or fall immediately after allotment. A mutual fund
scheme takes some time to make investment in securities. NAV of the
scheme depends on the value of securities in which the funds have been
deployed. If
schemes in the same category of different mutual funds are available,
should one choose a scheme with lower NAV? Some
of the investors have the tendency to prefer a scheme that is available
at lower NAV compared to the one available at higher NAV. Sometimes,
they prefer a new scheme which is issuing units at Rs. 10 whereas the
existing schemes in the same category are available at 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. This is explained in an
example given below. Suppose
scheme A is available at a NAV of Rs.15 and another scheme B at Rs.90.
Both schemes are diversified equity oriented schemes. Investor has put
Rs. 9,000 in each of the two schemes. He would get 600 units (9000/15)
in scheme A and 100 units (9000/90) in scheme B. Assuming that the
markets go up by 10 per cent and both the schemes perform equally good
and it is reflected in their NAVs. NAV of scheme A would go up to Rs.
16.50 and that of scheme B to Rs. 99. Thus, the market value of
investments would be Rs. 9,900 (600* 16.50) in scheme A and it would be
the same amount of Rs. 9900 in scheme B (100*99). The investor would get
the same return of 10% on his investment in each of the schemes. Thus,
lower or higher NAV of the schemes and allotment of higher or lower
number of units within the amount an investor is willing to invest,
should not be the factors for making investment decision. Likewise, if a
new equity oriented scheme is being offered at Rs.10 and an existing
scheme is available for Rs. 90, should not be a factor for decision
making by the investor. Similar is the case with income or debt-oriented
schemes. On
the other hand, it is likely that the better managed scheme with higher
NAV may give higher returns compared to a scheme which is available at
lower NAV but is not managed efficiently. Similar is the case of fall in
NAVs. Efficiently managed scheme at higher NAV may not fall as much as
inefficiently managed scheme with lower NAV. Therefore, the investor
should give more weightage to the professional management of a scheme
instead of lower NAV of any scheme. He may get much higher number of
units at lower NAV, but the scheme may not give higher returns if it is
not managed efficiently. How
to choose a scheme for investment from a number of schemes available? As
already mentioned, the investors must read the offer document of the
mutual fund scheme very carefully. They may also look into the past
track record of performance of the scheme or other schemes of the same
mutual fund. They may also compare the performance with other schemes
having similar investment objectives. Though past performance of a
scheme is not an indicator of its future performance and good
performance in the past may or may not be sustained in the future, this
is one of the important factors for making investment decision. In case
of debt oriented schemes, apart from looking into past returns, the
investors should also see the quality of debt instruments which is
reflected in their rating. A scheme with lower rate of return but having
investments in better rated instruments may be safer. Similarly, in
equities schemes also, investors may look for quality of portfolio. They
may also seek advice of experts. Are
the companies having names like mutual benefit the same as mutual funds
schemes? Investors
should not assume some companies having the name "mutual
benefit" as mutual funds. These companies do not come under the
purview of SEBI. On the other hand, mutual funds can mobilize funds from
the investors by launching schemes only after getting registered with
SEBI as mutual funds. Is
the higher net worth of the sponsor a guarantee for better returns? In
the offer document of any mutual fund scheme, financial performance
including the net worth of the sponsor for a period of three years is
required to be given. The only purpose is that the investors should know
the track record of the company which has sponsored the mutual fund.
However, higher net worth of the sponsor does not mean that the scheme
would give better returns or the sponsor would compensate in case the
NAV falls. Where
can an investor look out for information on mutual funds? Almost
all the mutual funds have their own web sites. Investors can also access
the NAVs, half-yearly results and portfolios of all mutual funds at the
web site of Association of mutual funds in India (AMFI)
www.amfiindia.com. AMFI has also published useful literature for the
investors. Investors
can log on to the web site of SEBI www.sebi.gov.in and go to
"Mutual Funds" section for information on SEBI regulations and
guidelines, data on mutual funds, draft offer documents filed by mutual
funds, addresses of mutual funds, etc. Also, in the annual reports of
SEBI available on the web site, a lot of information on mutual funds is
given. There
are a number of other web sites which give a lot of information of
various schemes of mutual funds including yields over a period of time.
Many newspapers also publish useful information on mutual funds on daily
and weekly basis. Investors may approach their agents and distributors
to guide them in this regard. If
mutual fund scheme is wound up, what happens to money invested? In
case of winding up of a scheme, the mutual funds pay a sum based on
prevailing NAV after adjustment of expenses. Unitholders are entitled to
receive a report on winding up from the mutual funds which gives all
necessary details. How
can the investors redress their complaints? Investors
would find the name of contact person in the offer document of the
mutual fund scheme whom they may approach in case of any query,
complaints or grievances. Trustees of a mutual fund monitor the
activities of the mutual fund. The names of the directors of asset
management company and trustees are also given in the offer documents.
Investors can also approach SEBI for redressal of their complaints. On
receipt of complaints, SEBI takes up the matter with the concerned
mutual fund and follows up with them till the matter is resolved.
Investors may send their complaints to: Securities
and Exchange Board of India |
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Cochin Stock Exchange, Kochi, India |