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 FAQ - Mutual Fund

 
    What is a Mutual Fund?
    Which was the First Mutual Fund to be set up in India?
    Which are the other institutions that have floated Mutual Funds in India?
    How many Mutual Funds are there in India currently?
    What is the total size of the mutual fund sector in India?
    What is the Regulatory Body for Mutual Funds?
    Why should I choose to invest in a mutual fund?
    How do mutual funds diversify their risks?
    If that is the case then why has Morgan Stanley Fund given such poor returns?
    Can mutual funds be viewed as risk-free investments?
    What are the risks involved in investing in mutual funds?
    What are open-ended and closed-ended mutual funds?
    Do both open-ended and closed-ended funds come out with an initial offering?
    Is the purchase and redemption in case of open-ended funds done at the NAV?
    What is the investor's exit route in case of a closed-ended fund?
    How do I invest money in Mutual Funds?
    What are the parameters on which a Mutual Fund scheme should be evaluated?
    What are the different funds we currently have in India?
    What are the different types of plans that any mutual fund scheme offers?
    Which plan should I choose?
    What is a Systematic Investment Plan and how does it operate?
    What are the benefits of Systematic Investment Plan?
    What is NAV and how it is calculated?
    What proportion of my investment should be invested in mutual funds?
    Like IPOs, can there be any situation wherein I am not allotted the units applied for in the
       initial offer?
    How do I get the information regarding the forthcoming schemes of different mutual funds?
    Can a Mutual Fund assure fixed returns?
    How much return can I expect by investing in mutual funds?
    What is the difference between mutual funds and portfolio management schemes?
    Why has the concept of mutual funds taken so long to pick up in India?
 
     
 

What is a Mutual Fund?

A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI), that pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets.


 
   
 

Which was the First Mutual Fund to be set up in India?

Unit Trust of India is the first Mutual Fund set up under a separate act, UTI Act in 1963, and started its operations in 1964 with the issue of units under the scheme US-64.


 
   
 

Which are the other institutions that have floated Mutual Funds in India?

Currently public sector banks like SBI, Canara Bank, Bank of India, institutions like IDBI, GIC, LIC Foreign Institutions like Alliance, Morgan Stanley, Templeton and Private financial companies like Kothari Pioneer, DSP Merrill Lynch, Sundaram, Kotak Mahindra etc. have
floated their own mutual funds.


 
   
 

How many Mutual Funds are there in India currently?

Presently there are 33 Mutual Funds in India and close to 400 mutual fund schemes. We will very soon be putting up detailed analysis of major schemes operating in India.


 
   
 

What is the total size of the mutual fund sector in India?

Currently the total funds under mutual fund management in India are a little over Rs.100,000 crore. Out of this UTI accounts for nearly 70 percent while the private funds account for around 22 percent. The balance 8 percent is managed by mutual funds floated by public sector banks and financial institutions.


 
   
 

What is the Regulatory Body for Mutual Funds?


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.


 
   
 

Why should I choose to invest in a mutual fund?


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.


 
   
 

How do mutual funds diversify their risks?

Financial theory states that an investor can reduce his total risk by holding a portfolio of assets instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced.

 
   
 


If that is the case then why has Morgan Stanley Fund given such poor returns?

A very important factor that determines the returns on a fund is the timing of the fund's launch. Morgan Stanley Fund was launched when the equity markets were at their peak and then saw a sustained downtrend for close to 5 years. That is the reason the fund has taken such a long time to appreciate.

 
   
 

Can mutual funds be viewed as risk-free investments?


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.

 
   
 

What are the risks involved in investing in mutual funds?


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.

 
   
 

What are open-ended and closed-ended mutual funds?


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.

 
   
 


Do both open-ended and closed-ended funds come out with an initial offering?

Yes. But the only difference is that in case of open-ended funds, a month after the initial offer closes the continuous offer period starts when the investor can enter and exit the fund at a price linked to the NAV.

 
   
 

Is the purchase and redemption in case of open-ended funds done at the NAV?


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.

 
   
 


What is the investor's exit route in case of a closed-ended fund?

According to Sebi regulations, all closed-ended funds have to be necessarily listed on a recognized stock exchange. Thus the secondary market provides an exit route in case of closed-ended funds.

 
   
 

How do I invest money in Mutual Funds?


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.

 
   
 

What are the parameters on which a Mutual Fund scheme should be evaluated?


Performance indicators like total returns given by the fund on different schemes, the returns on competing funds, the objective of the fund and the promoters image are some of the key factors to be considered while taking an investment decision regarding mutual funds.

 
   
 

What are the different funds we currently have in India?

Currently there exist balanced funds, Income fund, Growth funds, Sector funds etc. To get more details about the different funds and their features please visit our mutual fund glossary

 
   
 

What are the different types of plans that any mutual fund scheme offers?


That depends on the strategy of the concerned scheme. But generally there are 3 broad categories. A dividend plan entails a regular payment of dividend to the investors. A reinvestment plan is a plan where these dividends are reinvested in the scheme itself. A growth plan is one where no dividends are declared and the investor only gains through capital appreciation in the NAV of the fund.


 
   
 

Which plan should I choose?

It depends on your investment object, which again depends on your income, age, financial responsibilities, risk taking capacity and tax status. For example a retired government employee is most likely to opt for monthly income plan while a high-income youngster is most likely to opt for growth plan.

 
   
 

What is a Systematic Investment Plan and how does it operate?

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. Today many funds are offering this facility.

 
   
 

What are the benefits of Systematic Investment Plan?

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.


 
   
 

What is NAV and how it is calculated?

NAV is the net asset value of the fund. Simply put it reflects what the unit held by an investor is worth at current market prices. For details on calculation methodology and formulae, please click on our mutual fund glossary.


 
   
 

What proportion of my investment should be invested in mutual funds?

Once again this decision will depend on factors like your income, risk aversion and tax status.

 
   
 

Like IPOs, can there be any situation wherein I am not allotted the units applied for in the initial offer?

In case of closed-ended funds there is a target amount and the funds are permitted a green-shoe option to retain over-subscriptions up to a certain limit. In case of open-ended funds there are no such limits and all applications are honored.

 
   
 


How do I get the information regarding the forthcoming schemes of different mutual funds?

For the guidance of the investors our web site is giving a detailed analyses of the forthcoming schemes of different mutual funds .

 
   
 

Can a Mutual Fund assure fixed returns?

As per Sebi Regulations, mutual funds are not allowed to assure returns. However, funds floated by AMCs of public sector banks and financial institutions were permitted to assure returns to the unitholders provided the parent sponsor was willing to give an explicit guarantee to honor such a commitment. But in general, mutual funds cannot assure fixed returns to their investors.

 
   
 

How much return can I expect by investing in mutual funds?

Investors need to be clear that mutual funds are essentially medium to long term investments. Hence, short-term abnormal profits will not be sustainable in the long run. But in the medium to long run the mutual funds tend to outperform most other avenues of investments at the same time avoiding the risk of direct investment accompanied with professional fund management.

 
   
 


What is the difference between mutual funds and portfolio management schemes?

While the concept remains the same of collecting money from investors, pooling them and investing the funds, the target investors are different. In the case of portfolio management the target investors are high networth investors while in case of mutual funds the target investors are the retail investors.

 
   
 

Why has the concept of mutual funds taken so long to pick up in India?

Even in the US the concept of mutual funds has started picking up only in the last decade. This whole process of investor education and investor awareness takes a lot of time. But Indian investors are now beginning to understand the benefits of investing through the mutual funds route and hence the collections are beginning to pick up.


 
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