Sri Samrudhi Investment Services

FAQ

General FAQs on Mutual Funds

What is a Mutual Fund?
Mutual funds are investment avenues that pool the money of several investors like you to invest in financial instruments such as stocks, government securities, debentures to name a few. The appreciation made on the investments is distributed among the investors on the basis of the units held by each of them. Mutual fund companies have fund managers who invest your money on your behalf in the above mentioned avenues to rake in maximum returns.

Due to a large pool of investors, the individual risk is spread. So individually you take on low risk. Hence mutual funds are relatively safe investment avenues enabling you to rake in attractive gains. The mutual funds in India are governed by Association of Mutual Funds in India, the umbrella body for mutual funds, which is in turn governed by the Securities and Exchange Board of India.
Which are the various types of mutual funds?
By structure:
- Open Ended: These are funds that you can buy and sell anytime throughout the year.
- Close Ended: These are funds that are open only for a specific period after which you'd have to buy them from the secondary market. For e.g. NFO's.
- Interval schemes: These schemes combine the features of open ended and close ended schemes and are available for purchase or sale during a select period
By investment objective:
- Growth: These are highly aggressive schemes and invest mainly in equities.
- Income: Income funds invest in medium to long-term debt instruments. These are low risk and aim at a fixed current income.
- Balanced: Also called Hybrid funds, these are a combination of growth, debt and money market funds.
- Money market schemes: These schemes invest in short term debt instruments and are highly liquid.
- Tax saving: These are equity linked saving schemes that offer tax benefits under Section 80 C and have a compulsory lock in period of three years.
- Special schemes: Special schemes: These are select funds that aim at replicating the performance of an index. Also there are funds that invest in specific sectors that fall under this category.
What is an AMC?
AMC or Asset Management Company is the company that runs and manages mutual funds.
How different are mutual funds from other investment avenues?
In case of other investment avenues such as fixed deposits, post office savings, PPF you're almost certain about the amount you would be receiving on maturity. The risk is low and you receive returns accordingly.

But with mutual funds the returns are not assured since they are linked to the stock market. Stock market investments would mean taking on high risk. But since mutual funds spread the risk among several investors like you, individually you would take on low risk and rake in stock market related returns.
What are the benefits of investing in a mutual fund?
Some positives of investing in a mutual fund include:
- Money is managed by experienced and skilled professionals
- Diversification over a large number of companies and industries, thus reducing the element of risk.
- Liquidity, especially in an open-end fund.
- Costs of research and of investing directly in the individual securities are spread over a large corpus and thousands of investors.
- High degree of transparency in the operation of a mutual fund.
- Choice of schemes to suit your needs.
- Well-regulated industry with many measures oriented towards investor protection.
What are the risk involved in investing in mutual fund?
Equity Funds are exposed to market risk i.e. there is a possibility that the price of the stocks in which the Fund has invested could decrease. Of course, the prices may also increase, making it possible for the fund to earn profits.

Debts Funds are exposed to two main risks:
- Credit Risk
  - The company in whose bonds the fund has invested could default on the payment of its interest or principal.
- Interest Rate Risk
  - The price of the bond in which the Fund has invested may decrease because of an increase in the interest rates. In general, it is useful to remember that this is a "see-saw" relationship - bond prices (and therefore, NAVs) increase when interest rates decrease and vice versa.
Please refer to the Scheme Information Document and Statement of Additional Information for a more comprehensive set of risks before considering investing in any scheme.
How are mutual funds regulated?
The performance of a mutual fund is reviewed by various publications and rating agencies, making it easy for investors to compare one with another. All mutual funds are required to register with SEBI, who regularly monitors their operations. Mutual funds are obliged to follow strict regulations designed to protect investors.
How is investing in mutual fund different from depositing money in bank?
When you deposit money with the bank, the bank promises to pay you a certain rate of interest for the period you specify. On the date of maturity, the bank is supposed to return the principal amount and interest to you. However, in a mutual fund, the money you invest, is in turn invested by the manager, on your behalf, as per the investment strategy specified for the scheme. The profit, if any, less expenses of the manager, is reflected in the NAV or distributed as income and is directly beneficial to you. Likewise, loss, if any, along with expenses, will be reflected in the NAV and borne by you. Mutual Funds also do not offer a guaranteed rate of return.
How are mutual fund different from portfolio management schemes?
Mutual Funds are subject to several investment restrictions and are highly regulated. The investments of investors are pooled to form a common corpus and the gain/loss to all investors. On the other hand in the case of a portfolio management scheme, the investment of a particular investor remains individual and unique to him. Here, the gain or loss of each investor will be different.
What is rupee cost averaging?
Rupee cost averaging means reducing market risk through systematic purchase of a given security. In other words instead of investing a lumpsum in a mutual fund scheme you adopt a disciplined approach to investing a certain fixed amount every month at pre-determined intervals. That way your investment amount remains fixed while the number of units you receive would be more or less depending on the fluctuations of the market. And that brings down your average cost. Such a methodology insulates you against market risks.

What is NAV?
NAV or Net Asset Value is the market value of the assets per unit after deducting the liabilities. Here's how the NAV is calculated:

 {
 (Market Value of the Scheme's Investments)
 + Other Assets (including accrued interest)
 + Un amortised Issue Expenses (only in case of schemes launched on a load basis)
 - All Liabilities except unit capital and reserves)
 }
 Divided by the number of units outstanding at the end of the day.

How often is NAV announced?
In case of Open-ended funds the NAVs are announced daily but in case of close-ended funds they are announced on a weekly basis.
What is the tax I need to pay on mutual funds?
Your tax liability would depend on the fund you invest in as also the amount of time you remain invested. The government has made dividends on mutual funds tax-free. If you're invested in equity fund for lesser than 12 months you are liable to short term capital gains. Whereas, if you remain invested in an equity mutual fund for over 12 months you have no tax liability since long term capital gains are tax free.
Do I need a demat account to invest in mutual funds?
Except for Exchange Traded Funds you do not need a demat account to invest in mutual funds.
What are NFOs?
NFOs or New Fund Offerings are new schemes introduced by mutual fund companies from time to time. During the launch period the fund unit is available for Rs 10 with the relevant loads.
What are loads?
Loads is the fee charged by the mutual fund company for entering or exiting a fund. These are termed as entry load or exit load can go upto a maximum of 2%. For instance lets say you plan to invest Rs 5,000 in a fund and the entry load is 2%. Your entry load would be 100 and the amount invested would be Rs 4900. A fund would charge you one of the two - either an entry or an exit load. Not both. At present there is no entry load in mutual funds. An exit load is charged for certain equity and debt scheme and the duration of minimum investment period also varies from scheme to scheme.
What is the lock-in period in mutual funds?
If you're looking at investing in equity linked saving schemes (ELSS) the lock in period is three years. Which means your money will remain locked in with the mutual fund company for a period of three years.
Do mutual funds guarantee safety of capital?
As per SEBI rules mutual funds cannot guarantee you assured returns.
What is SIP?
SIP or Systematic Investment Plan enables you to invest an amount on a regular basis and bring about a disciplined approach to investing. Through SIP you are able to get more or less units of a fund over a period of time with the investment amount remaining constant.

For instance lets say you decide to invest Rs 500 every month in a mutual fund scheme. You could receive either 25, 24 or 22 units each month respectively depending on the highs and lows of the market. This turns out to be beneficial in the long run as your per unit cost gets evened out.

If you're planning a SIP note that the minimum amount you can invest is Rs 500. Off late with the change in rules mutual fund companies also allow you to invest Rs 100 or Rs 50 (micro SIP) but for a minimum lock in period of three years.
What are the factors that influence the performance of Mutual Funds?
The performances of Mutual funds are influenced by the performance of the stock market as well as the economy as a whole. Equity Funds are influenced to a large extent by the stock market. The stock market in turn is influenced by the performance of the companies as well as the economy as a whole. The performance of the sector funds depends to a large extent on the companies within that sector. Bond-funds are influenced by interest rates and credit quality. As interest rates rise, bond prices fall, and vice versa. Similarly, bond funds with higher credit ratings are less influenced by changes in the economy.
Who are fund managers?
Fund managers are experts who have their pulse on the market and decide on the right pick of stocks, debentures, debt instruments, government securities among others to maximize gains on your investment.
What is ELSS all about?
Equity Linked Saving Schemes (ELSS) are tax saving mutual fund schemes that enable you to get tax benefits under Section 80C of the Income Tax Act. But mind you, there's a lock in period of three years.
What is an offer document?
An offer document provides details about a new mutual fund scheme entering the market. It provides information on the features of the scheme, risk factors, loads - entry or exit load, the track record of the mutual fund company among others.
What is KIM?
KIM or Key Information Memorandum provides detailed performance related information on the several schemes of a mutual fund company. So before you invest in any scheme you can have a look at the various scheme performances and take an informed decision. But always remember that a fund's past performance is no guarantee of its future success.
What is the difference between open ended and close-ended funds?
Open ended schemes: Open ended funds are those funds that do not have a fixed maturity period. You can buy and sell these funds just anytime. These funds offer high liquidity.

Close ended schemes: In case of close ended schemes the maturity period ranges between two years to 15 years. You may buy these schemes when they are launched as initial issue or buy or sell the units when they are listed on the stock exchange. You could also sell back the units to the mutual fund company during a specified period.
Can NRIs invest in mutual funds?
Sure. NRIs can invest in mutual funds.
Can I nominate other indivdual?
Individuals, on their own behalf, singly or jointly can nominate. A unit holder can, at the time an application is made, or by subsequently writing to an ISCs, request for a nomination form in order to nominate not more than three individuals, to receive the units upon his/her death, subject to completion of the necessary formalities, e.g. proof of death of the unit holder, signature of the nominees, furnishing of proof of guardianship in case a nominee is a minor, execution of indemnity bond or such other document as may be required from the nominee(s) in favour of and to the satisfaction of the Mutual Fund, the AMC, or the Trustee.

If the units are held jointly, all joint unit holders will be required to sign the nomination form, even incase of 'Either or Survivor'.

Investors shall indicate clearly the percentage of allocation/share in favour of each of the nominees against their names, and such allocation/share shall be in whole numbers without any decimals.

In the event of the investor not indicating the percentage of allocation/share for each of the nominees, the AMC shall settle the claim equally amongst all the nominees.

A minor can be nominated and in that event, the name and address of the guardian of the minor nominee shall be provided by the unit holder. Nomination can also be in favour of the Central Government, State Government, a local authority, any person designated by virtue of his office or a religious or charitable trust. The Nominee shall not be a trust, other than a religious or charitable trust, society, body corporate, partnership firm, Karta of Hindu Undivided Family or a Power of Attorney holder. A non-resident Indian can be a Nominee subject to the exchange controls in force, from time to time.
Can I cancel / change my nomination?
Yes one can change nomination. Individuals, on their own behalf, singly or jointly can nominate. A unit holder can, at the time an application is made, or by subsequently writing to an ISCs, request for a nomination form in order to nominate not more than three individuals, to receive the units upon his/her death, subject to completion of the necessary formalities, e.g. proof of death of the unit holder, signature of the nominees, furnishing of proof of guardianship in case a nominee is a minor, execution of indemnity bond or such other document as may be required from the nominee(s) in favour of and to the satisfaction of the Mutual Fund, the AMC, or the Trustee.

If the units are held jointly, all joint unit holders will be required to sign the nomination form, even incase of 'Either or Survivor'.

Investors shall indicate clearly the percentage of allocation/share in favour of each of the nominees against their names, and such allocation/share shall be in whole numbers without any decimals.

In the event of the investor not indicating the percentage of allocation/share for each of the nominees, the AMC shall settle the claim equally amongst all the nominees.

A minor can be nominated and in that event, the name and address of the guardian of the minor nominee shall be provided by the unit holder. Nomination can also be in favour of the Central Government, State Government, a local authority, any person designated by virtue of his office or a religious or charitable trust. The Nominee shall not be a trust, other than a religious or charitable trust, society, body corporate, partnership firm, Karta of Hindu Undivided Family or a Power of Attorney holder. A non-resident Indian can be a Nominee subject to the exchange controls in force, from time to time.

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