Most frequent questions and answers
Investor who don’t have the time to study and monitor the market constantly, or the deep understanding of the financial market, a Mutual Fund offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
Mutual fund schemes are normally classified on the basis of their structure and their investment objective.
An Open-ended Fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can buy and sell units of the schemes at Net Asset Value (NAV) prices anything they want.
A Close-ended Fund has a stipulated maturity period, which generally ranges from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public Offering and thereafter they can buy or sell the units of the scheme on the Stock Exchanges, if they are listed.
By Investment Objective
Growth funds aim to provide capital appreciation over the medium to long term. Growth schemes normally invest a majority of their corpus in equities.
Income Funds aim to provide regular and steady income to investors. Income schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities.
Balanced Funds aim to provide both growth and regular income. Balanced schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents.
Money Market Funds
Money Market Funds aim to provide easy liquidity, preservation of capital and moderate income. Money Market Funds schemes generally invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit, Inter-Bank Call money and Commercial Paper
Other Equity Related Schemes
Tax Saving Schemes
These schemes offer tax rebates to investors under specific provisions of the Indian Income Tax laws, as the Government offers tax incentives for investments in specified avenues.
Sectoral Funds are those which invest exclusively in specified sector(s) such as IT, entertainment, Pharmaceuticals, FMCG, etc.
Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE S&P CNX 50.
What are the different options that mutual funds offer?
Investors have varying investment needs. To meet this, Mutual Funds offer various investment plans like.
Dividend is not paid-out under a Growth Plan and the investor realises only the capital appreciation on the investment.
Dividend Payout Option
Dividends are paid-out to investors under a Dividend Payout Option. However, the NAV of the mutual fund scheme falls to the extent of the dividend payout.
Dividend Re-investment Plan
The dividend accrued on mutual funds is automatically re-invested in purchasing additional units in open-ended funds.
These schemes offer insurance cover as part of the investment to investors.
Systematic Investment Plan (SIP)
Investors are given the option of giving post-dated cheques (or a direct debit of the bank account) in favour of the fund. The investor is allotted units on a pre-determined date specified in the Offer Document at the applicable NAV.
Systematic Encashment Plan (SEP)
The Systematic Encashment Plan allows the investor the facility to withdraw a pre-determined amount / units from his fund at a pre-determined interval. The investor’s units will be redeemed at the applicable NAV as on that day.
Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.
Mutual Funds do not offer guaranteed returns to investors. While SEBI regulations allow Mutual Funds to offer guaranteed returns subject to the Fund meeting certain conditions, most Funds do not offer such guarantees. In case of a guaranteed return scheme, the sponsor or the AMC, guarantees a minimum level of return and makes good the difference if the actual returns are less than the guaranteed minimum.
Mutual funds are a vital tool to ensure your financial well-being. They help you to get better returns even from relatively smaller investment amounts, and are quite flexible in nature. Whether you want to invest a small amount at regular intervals or a big lumpsum amount at once, you will find a mutual fund product suitable for your needs. With options like SIP (Systematic Investment Plan) and SWP (Systematic Withdrawal Plan), mutual funds can help you plan for short-term as well as long-term goals and financial liabilities.
A Systematic Investment Plan (SIP) is a plan that lets you invest specific amounts of money at regular intervals to gradually build a large corpus. By investing in a SIP, your investments get disciplined. Also, since you are investing regularly, the setbacks to your investments when markets are low get balanced by your investments’ gains when the market is high. And as you gain returns and keep investing higher amounts during the investment tenure, your returns keep multiplying and growing.