Mutual Fund Investment - Investor Awareness Tips

(Article dated 04^th Feb ,2020)

Introduction

The Indian investor has a plethora of investment products to choose from Mutual funds, too, can be a good investment opportunity which investors can consider investing in. Yes, it is true that mutual funds carry risk, but then so does every other investment scheme. Investors are expected to keep their investment horizon, their risk appetite aligned with their investment goal before investing in mutual funds. It is always recommended for the investor to seek the professional advice of a mutual fund expert or consultant before making an investment decision.

The primary objective of this article is to educate the investor about mutual funds and all the aspects that surround mutual funds. Also, we hope that this article helps an investor make an informed investment decision.

What are mutual funds?

Mutual funds are a financial instrument where AMCs collect money from investors sharing a common investment objective and invest this pool of money in securities. Mutual fund investors are issued NAV units.

The money invested in securities is diversified and spread across a wide spectrum of sectors and industries. This diversification allows mutual funds to balance risk as all the company stocks across various sectors may not show similar movements of incline/decline in uniform proportions. This allows mutual funds to diversify and reduce the investor’s overall risk. Investors are allotted NAVs depending on how much money they invested in the mutual fund. Mutual fund investors are referred to as unit holders.

Generally, there are numerous mutual fund schemes offered by various AMCs with different investment objectives. However, the mutual funds are regulated in India by the Securities and Exchange Board of India (SEBI). It is mandatory for mutual funds to register themselves with SEBI before going public.

What is the history of mutual funds in India?(#)

• Unit Trust of India (UTI) came into existence in 1963 and is also the first ever mutual fund AMC in India.
• The year 1992 witnessed the passing of the Securities and Exchange Board of India Act. The primary objective of this act was to protect the interest of investors in securities and to also regulate the securities market.
• The role of SEBI is to regulate and articulate policies related to mutual funds so that the interest of the investors remains protected.
• SEBI released the mutual fund regulations in 1993.
• The private entities were allowed to issue mutual funds in the financial market.
• The regulations issued by SEBI in 1996 have been revised from time to time.
• The SEBI continues to revise and issue guidelines to protect the interest of customers.

What is Net Asset Value or NAV?

Just like an equity share has a price at which it is traded at the stock market, a mutual fund unit has Net Asset Value per unit. The NAV is the overall market value of the shares, bonds, and securities held by a mutual fund (minus the permitted expenses and liabilities). The NAV per unit signifies the market value of all the units in a mutual fund scheme.

Market value of the scheme’s investment + other assets

Net Asset Value = (including accumulated interest) – liabilities / allowed expenses

Total number of outstanding units at the end of the day

What is an exit load?

Exit load is nothing but the cost an investor needs to bear if he/she withdraws or redeems the mutual fund units before the lock-in or maturity period. Usually, equity mutual funds levy an exit load of 1% if the units are sold within one year of purchase. We can safely infer that exit load has been brought into effect to dissuade investors from redeeming their units prematurely.

What are the different types of mutual fund schemes?

Mutual funds are widely categorized as open ended and close ended schemes.

Open ended schemes: Open ended schemes are those mutual fund schemes which do not have a fixed maturity period. Investors can buy and sell these schemes on any given day. The plus point of investing in open ended schemes is that they offer liquidity.

Close ended schemes: Close ended mutual fund schemes come with a maturity period. These funds can only be purchased during the initial public offering or till the time it’s available for purchase. These funds trade a fixed number of units in the stock market.

SEBI categorization of mutual fund schemes based on investment objectives?

Depending on its investment objective, a mutual fund scheme can be classified as a growth scheme, solution oriented scheme, income scheme, or a balanced scheme.

Although most of these schemes are open ended, there are a few close ended schemes and may totally depend on the nature of the fund. Here’s a brief explanation of these schemes:

Growth/Equity oriented schemes: Equity oriented schemes are those funds that predominantly invest in equity and equity related instruments. These funds usually share the investment objective of seeking capital appreciation over the medium term or long term. Equity funds are exposed to higher risk. These funds are usually available in growth and IDCW option, and investors can choose to invest in either depending on their penchant.

Debt/Income oriented schemes: Investors seeking regular income through mutual fund investments can consider investing in debt funds. These funds usually invest in invest fixed income securities such as bonds, corporate debentures, government securities, etc.

Balanced mutual funds: These funds are available in growth and IDCW options and invest in equities and fixed income securities. They are a type of hybrid funds which invest 40 to 60 per cent in both equity and debt related instruments.

Liquid funds: As the name suggests, liquid funds have to offer investors with high liquidity. Liquid funds majorly invest in short term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. These are open ended equity funds that come with a maturity of up to 91 days.

Index funds: Index funds are a good option for investors who have a long-term investment horizon. Index funds or Axis Nifty Index 100 Fund have the same composition as the underlying index and hence moves up and down in tandem with the underlying index.

What are tax saving funds?

Section 80C allows tax payers to claim a deduction on your gross taxable income by investing in various financial instruments. You can claim a tax deduction for tuition fees, insurance premiums, home loans, etc. Although these are some ways you can save tax, they cannot be considered as tools for wealth creation. Equity Linked Saving Scheme or ELSS is a mutual fund investment scheme that has a lock-in period of three years and offers you a chance of investment capital appreciation in equity along with tax-saving benefits. Any individual with a high-risk tolerance and long term investment goal can opt for an ELSS scheme. Under Section 80C of the Indian Income Tax Department, an individual can invest up to 1.5 lakh rupees and claim tax benefit of up to Rs. 46,800* with ELSS.

What is the sales/redemption price?

The price or NAV, an investor, is charged while purchasing an open ended scheme is called sales price. The redemption price refers to the price at which the investors purchase or sell their mutual fund units.

What is sum assured?

An assured sum is the fixed amount promised to the unitholder by the mutual fund scheme, as mentioned in the offer document. Unitholders are eligible for assured sum irrespective of the scheme’s performance. Investors should, however, read the offer document carefully since few schemes might offer assured sum in the first year of investment and revise the same later.

How to invest in a mutual fund scheme?

Aspiring investors can get in touch with any AMC selling mutual funds to seek all the necessary information along. Application forms, too, are available with the fund house. These forms shall be filled and returned to the AMC. These days, you can even purchase a mutual fund scheme online in an easy and hassle free manner.

How to fill the mutual fund application form?

Investors must make sure that they do not scribble on the mutual fund and fill all the necessary details like -

• Name
• Address
• Bank account number
• Number of units applied

Make sure that you fill in these details without making any errors. In case of a change in address or bank account details, investors are requested to highlight the same to the mutual fund AMC immediately.

For more details, please refer to our website https://web-cug.axismf.com

What is the difference between purchasing mutual funds in general and making a purchase during an IPO (Initial Public Offering)?

When you purchase a mutual fund in general, you pay the price depending on its current NAV. The price of the units offered during IPO is generally lower, and hence you may receive more units if you invest in the mutual fund during its initial public offering. Post IPO, the NAV may rise or fall depending on the fund’s performance in the market.

How to keep a tab on the performance of the scheme?

The performance of a scheme will always reflect in the fund’s NAV. Investors can access an open ended scheme’s performance on a daily basis, whereas NAV of close ended schemes is disclosed weekly. The NAVs are publicly available, and investors should make the most out of this opportunity.

Where can investors find out more about mutual funds?

In the age of internet and online media, almost every AMC has their own mutual funds details posted on their website like information about the scheme, including diversification of the portfolio, amount of risk it carries, investment objective, current NAV, track record over the years, etc. Association of Mutual Funds in India aims to provide mutual fund information with all the necessary information about mutual funds. There are several investor awareness circulars released by SEBI, and investors seeking information about mutual fund guidelines and regulations can visit the website and navigate to the mutual fund section to access all the necessary information.

Is there any way to redress complaints regarding mutual funds?

For any kind of grievances or complaints, investors are requested to contact their respective mutual fund houses. In case the fund house is unable to resolve the issue, investors can write to SEBI detailing their complaints.

Well now that you have a fair idea about what mutual funds are and how one can invest in them, plan on some investment? We do have some tips for aspiring mutual fund investors

Few tips for choosing the right mutual fund scheme

• Identify your investment goal: Investors, before making any investment decision, are always expected first to identify their ultimate financial goal. This is the very first question investors must be asking themselves. Every investor will have a unique investment objective; some might be investing in mutual funds to build a retirement corpus while others might be investing to secure their child’s education and future. Having a defined investment goal may help investors in understanding how much investment they need to make in order to achieve their ultimate financial goal investment objective.

• Identify your risk appetite: Once investors are successful in identifying the core purpose behind their investments, the next thing to do is identify their risk appetite. Depending on their risk appetite, investors should decide how much corpus they should invest in which type of scheme. Identifying their risk appetite may help investors in picking a mutual fund that carries the amount of risk they are willing to take. Investors with zero risk appetite should reconsider before investing in any type of mutual fund scheme.
• Expense ratio: An expense ratio refers to the price of owning a fund. The expense ratio of a fund may have an impact on the returns provided by the scheme. Hence you should also be aware of the expense ratio being charged by the mutual fund scheme. It is necessary to know a scheme’s expense ratio because the mutual fund you invest in should hold the potential to break even, in order to overcome the expense ratio of owning the equity fund. It is only after this that your money has a chance to grow.

We hope that this article was helpful to both new as well as seasoned investors in garnering some information about mutual funds. Investors should always limit their investments and not go beyond their risk appetite. Having a defined investment goal might help investors in identifying how and where to diversify their investments and make an informed investment decision.

*As per the present tax laws, eligible investors (individual/HUF) are entitled to deduction from their gross income of the amount invested in Equity Linked Saving Scheme (ELSS) up to Rs.1.5 lakhs (along with other prescribed investments) under section 80C of the Income Tax Act, 1961. Tax savings of Rs. 46,800 mentioned above is calculated for the highest income tax slab. Investors are advised to consult his/her own Tax Consultant with respect to the specific amount of tax and other implications arising out of his/her participation in ELSS.

# Source - https://www.amfiindia.com/research-information/mf-history

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.