What is a Mutual Fund?
A Mutual Fund is a trust that pools together the savings of a number of investors who share a common financial goal. All such investors buy units in a fund that best suit their needs - be it growth in capital, regular returns or safety of capital. The Fund Manager then invests this pool of money in securities, ranging from shares to debentures to money market instruments or a mixture of Equity and Debt, depending on the objective of the scheme.
How is the income earned from mutual fund investments distributed?
The income earned by the investments of the scheme, net of recurring expenses, subject to a maximum ceiling of 2.5% in equity schemes and 2.25% in debt schemes, is shared by way of dividends or capital gains by the unitholders of the scheme proportionately. These recurring expenses include asset management fees not exceeding 1.25%, it also is due to other expenses such as Trustee Fees, Registrar Fees and Marketing expenses etc.
Capital Gain: Capital gain is the profit, which you earn if you sell the units at a high NAV than the original cost. Units held for more than 12 months and sold thereafter will attract Long Term Capital Gains while units that are held for less than 12 months will attract Short Term Capital Gains tax.
Dividend: When a fund makes a profit on its investments, this profit may be in form of dividends. You can either invest your dividend in the fund or receive it in the form of cash.
But mutual funds only invest in stock markets. And I do not want to be exposed to the volatility of the stock markets.
Mutual Funds offer a wide variety of schemes. Many of these schemes, like a 100% Debt scheme, only invest in debt instruments like company debentures and Bonds, Government Securities and money market instruments. Such schemes offer a relatively safer investment alternative for your hard-earned money. In fact, both internationally and in India, mutual funds manage more money in debt schemes than in equity schemes.
What are the different types of funds available for investment ?
The different types of funds available for investment.
Debt Funds invest predominently in debt instruments, government securities and money market instruments. Hence they are relatively safer than equity funds. At the same time the expected returns from debt funds would be lower.
Gilt Funds are debt funds, which invest only in Government Securities and hence have zero credit risk. However it does involve Interest Rate Risk.
Liquid Funds are debt funds, which invest in short term papers, with maturities usually not exceeding 180 days and hence are safe from interest rate risk.
Balanced Funds invest in a mix of equity and debt investments normal 60 to 40 in either equity or debt and vice-versa. Hence, they are less risky than equity funds, but at the same time provide commensurately lower returns. They provide a good investment opportunity to investors who do not wish to be completely exposed to equity markets, but is looking for higher returns than those provided by debt funds.
Marginal Equity Funds are funds which have predominent investment of atleast 75% in debt instruments & the balance in equities. These funds will get you the security of Debt with the flavour of equities.
Equity Funds invest predominently in the stock markets and attempt to provide investors the opportunity to benefit from the higher returns which stock markets can provide. However they are also exposed to the volatility and attendant risks of stock market investments and hence should be chosen by investors who have risk taking capabilities. Sectoral funds are specialised equity funds, which restrict their investments only to shares of a particular sector and hence, are riskier than diversified equity funds.
Index funds:
Aren't mutual funds risky investments?
Mutual funds offer a variety of schemes ranging from relatively safe debt funds like Income Fund and gilt funds, to very risky sectoral funds like Sector Funds Umbrella. Investors can choose schemes best suited to their risk appetite. Debt funds and gilt funds, which invest only in fixed-income instruments, are relatively safe and offer returns equivalent to returns on pure Debt instruments, when held for atleast a year. Sectoral funds, such as IT Funds, Pharma Funds, etc can offer very high returns when the stock markets are bullish, but these are high risk products and can also result in a loss on capital when the markets are bearish.
How do I choose the right scheme for me?
Choosing your investment mix depends on factors such as you risk appetite, time horizon of your investment, your investment objective, your age, etc. Hence it is recommended that you consult designated collecting Bank Branches of Asset Management Company or any professional financial advisor, who will analyse your requirements and create a portfolio of schemes best suited to your needs. In general, the mix of equity and debt products changes as your age increases. While an investor in the age group of 25-35 could look at upto 60% in equity, an investor in the age group of 35-45 should have less than 50% in equity and the rest in debt. Investors above 55 years of age could be investing fully in debt. This is only an indicative portfolio mix and may vary depending on the risk appetite of the individual investors, for accesing your risk & an indicative schemes from SBI Mutual Fund value to login, click here.
Can I get assured returns from mutual funds?
Strictly speaking, assured return products are not mutual fund products. However debt funds are reasonably safe and investors can expect to get positive returns over a year in such funds. Besides a well-managed debt fund should be able to give higher returns than bank deposits or fixed deposits of equivalent time period.
What is the NAV of a Mutual Fund? Is investing at par better than investing at a higher NAV?
The Net Asset Value (NAV) of a fund is the value of underlying assets of each unit of a mutual fund. Thus even if you buy less units of a mutual fund at higher NAV, it is the same as buying more units at a lower NAV, since the total value of the underlying assets is the same i.e. equivalent to your investment amount. The appreciation/loss of this invested amount is divided equally amongst the number of units owned by the investor.
What is entry load and exit load?
The entry load is the premium charged on the NAV on entry in the scheme. The exit load is the discount charged on NAV on exit from the scheme.
The impact of the loads on the re-issue price & repurchase price is calculated as under:
Sales Purchase = Applicable NAV x ( 1 + Sales Charge )
Repurchase Price = Application NAV x ( 1 - exit load)
What are the advantages of investing in a Mutual Fund?
You'll receive several benefits from investing in mutual funds.
Professional expertise: Fund managers in mutual funds are professionals who track the markets on a minute-to-minute basis. With their mix of professional qualification and market knowledge, they are better placed than the average investor to understand the markets.
Diversification: Since a mutual fund scheme invests in a number of stocks or debentures, the attendant risks are greatly reduced. Even if the stock price of one of the companies goes down or company defaults on payment of interest, it does not result in a substantial loss to the investor, as the other holdings of the fund can compensate for this fall.
Relatively inexpensive: When compared to direct investments in the capital market, mutual funds cost less. This is due to savings in brokerage costs, demat costs, depository costs, etc.
Liquidity: Investments in mutual funds are completely liquid and can be redeemed at NAV related prices on any working day. Since these are bought back by the mutual fund itself, there is no risk of not finding a buyer. Besides redemption money can be received by the investor within a week.
Transparency: You will always have access to up-to-date information on the value of your investment in addition to the complete portfolio of investments that have been made by your scheme, the proportion allocated to different assets and the Fund Manager's investment strategy.
Flexibility: Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience. These are called Systematic Investment Plans (SIP) and Systematic Withdrawal Plans (SWP).
SEBI regulated: All mutual funds are registered with SEBI and function within the provisions and regulations that protect the interests of investors.
What is Systematic Investment Plan ?
For as little as Rs. 250* each month for 12 months or Rs. 500 every month for 6 months, you can purchase mutual fund units and avoid larger minimum investment amounts of over Rs. 1,000. Fixed amounts can be invested in Mutual Funds each month using funds drawn automatically from your savings account regularly.
Investing in MF's Systematic Investment Plan (SIP) offer the benefit of "Rupee-cost averaging", i.e., by purchasing Mutual Fund units over a period of time, you automatically buy more units when prices are low and fewer units when prices are high, resulting in lower "per unit acquiring cost" as a result of averaging.
Month Monthly Investment Asumed NAV No of Units
January 10000 10.15 985.22
February 10000 10.20 980.39
March 10000 10.35 966.18
April 10000 10.45 956.94
May 10000 10.50 952.38
June 10000 10.60 943.40
July 10000 10.40 961.54
August 10000 10.30 970.87
September 10000 10.40 961.54
October 10000 10.60 943.40
November 10000 10.65 938.97
December 10000 10.75 930.23
10.45 11,616.41
Total Investment 120000
No. of Units 11,616.41
Average NAV 10.45
What is Systematic Withdrawal Plan ?
Systematic Withdrawal Plan (SWP) lets you automatically redeem a prearranged amount of your mutual fund holdings each month. SWPs are an ideal way to supplement your monthly cash flow, meet minimum withdrawal requirements, or move assets between the funds.
SWP is a no-charge service. When you set up your SWP, cash proceeds from each redemption (minimum balance maintained @ 25% of the holding at any given point of time) are given to you in the form of post-dated cheques (six monthly cheques at par, which enables you to get the funds lodged).
