How do I invest in a mutual fund scheme?
Mutual funds usually issue advertisements in newspapers, announcing the launch of new schemes. They can also contact the funds’ agents and distributors for information and application forms. Filled application forms may be deposited with the funds, through the agents or distributors. Today, these units are available at post offices and banks too. However banks and post offices offer no assurance of returns.
What is a prospectus or offer document?
An offer document or a prospectus is a document that all mutual funds are required to provide to investors. It must contain the following:
- Date of issue: This is the start and end date of new fund offers.
- Minimum investment to be made: In this section, Mutual funds prescribe the minimum amount to be invested through new fund offers and multiple amounts in addition to the prescribed minimum.
- Investment objectives: This section details the broad criteria that the mutual fund will follow with regard to investing in a particular security.
- Investment policies: The offer document will also outline the general strategies the fund managers will implement, types of investments, and asset allocation pattern considered appropriate for the fund.
- Risk factors: The offer document is required to describe the risks associated with investing in the fund through this section. You should be familiar with the differences between varieties of risk, why these risks are inherent in particular funds, and how these risks fit in with risks in the overall portfolio.
- Benchmarks used: This section details the benchmarks chosen by the fund to ensure that its relative performance is appropriate. Be careful to read the fine print in these sections.
- Fees and expenses: Offer documents are also required to list the limits on fees, including entry and exit loads, switching charges, annual recurring expenses, management fees and investor servicing costs. The prospectus also indicates the impact these have had on fund investment.
- Key personnel: This section details the qualifications and professional experience of the top management in the fund company, including those of the chief executive officer (CEO) and fund managers.
- Tax benefits information: Mutual funds enjoy significant tax benefits. Thus careful reading of the tax benefits is essential before you to plan tax benefits so as to enhance post-tax returns.
- Investor services: These are details of services such as automatic reinvestment of dividend and systematic investment/withdrawal plans that a mutual fund provides for an investor’s convenience.
What should I look for in offer documents?
Mutual funds are required to provide an abridged version of the offer document to investors; this version contains useful information. Read this version carefully. The application form for subscribing to schemes is an integral part of the offer document. The Securities and Exchange Bureau of India (SEBI) has prescribed minimum disclosures in the offer document. Due care must be given to portions relating to the scheme’s main features, risk factors, initial issue expenses and recurring expenses, entry and exit loads, sponsor’s track record, performance of other schemes launched by the fund, and the qualifications and experience of key personnel including fund managers.
How are mutual fund issues different from initial public offerings (IPOs)?
Company IPOs may open at prices that are lower or higher price than the issue price, depending on market sentiment and investor perceptions. However, in the case of mutual funds, the par value of units is unlikely to rise or fall immediately after allotment. Mutual fund schemes require time to invest in securities. The value of securities in which the scheme deploys its funds will drive the scheme’s NAV.
Can investors appoint nominees for their investments in mutual fund units?
Yes. Nominations may be made by individuals applying for or holding units on their own behalf, either singly or jointly. Non-individuals including societies, trusts, corporate bodies, partnership firms, Kartas of Hindu undivided families, or holders of power of attorney cannot nominate.
What is the net asset value (NAV) of a scheme?
The NAV denotes the performance of a mutual fund scheme. It is the market value of the securities held by the scheme. Since market value changes every day, NAVs of schemes also vary on a daily basis. It is calculated on a simple formula:
Market value of the scheme’s securities / Total number of units on a given date.
Mutual funds are required to disclose their NAVs on a daily or weekly basis, depending on the type of scheme.
What is a load or no-load fund?
A load fund charges a percentage of the NAV for entry or exit from the scheme. Each time you buy or sell units in the fund, you pay a charge. The fund uses this charge to meet its marketing and distribution expenses. You should, therefore, take the loads into consideration while investing, as these affect your returns. You also need to factor in the fund’s performance track record and service standards. The efficient funds often offer high returns despite the loads.
A no-load fund is one that does not charge for entry or exit. This means that you can enter the fund or scheme at NAV and no additional charges are payable on purchase or sale of units.
What do I get as proof of my holdings?
You get an account statement, which is similar to a bank passbook. This is a non-transferable document, which includes details of all purchases and sales, along with the price at which the purchase or sale was made. It also indicates the amount invested and redeemed to date, and the number of units held, helping you track investments.
Can I switch between funds?
You may switch all or part of your investments in one fund to another available fund. AMCs do not charge fees for such switches. To process a switch, you need to provide clear instructions, by completing a form and submitting it on any business day at an investor service centre, or the office of registrar or transfer agent. An account statement reflecting the new holdings will be sent to you within three days of completion of transaction.
Who is the custodian?
The custodian is the company responsible for the possession, handling and safekeeping of all securities purchased by the mutual fund.
How do I evaluate the performance of mutual fund schemes?
The NAV, disclosed on a daily basis in the case of open-end schemes, and weekly basis in the case of close-end schemes, will help you evaluate a fund’s performance. The funds also publish half-yearly results, which include the returns over periods of time; these half-yearly results also provide details such as the percentage of expenses of total assets, which affects yield. You will also receive annual reports or abridged versions of the annual report from the fund at the end of the year.
Studies relating to mutual fund schemes are published by the financial newspapers on a regular basis. Research agencies also publish reports on the performance of mutual funds and rankings of schemes in terms of performance. Such reports and analyses will also help you keep abreast of developments. Monitoring the performance of funds will help you decide when to enter or exit a scheme.
If a variety of mutual funds offer schemes are available in the same category, should I choose the scheme with the lowest NAV?
Some investors prefer schemes that are available at low NAVs. However, remember that in the case of mutual funds schemes, low or high NAVs have little or no relevance. You should choose schemes based on factors such as the fund’s past performance, service standards and level of professional management. It is likely that the better-managed scheme with a higher NAV may give better returns than a scheme that has a lower NAV, but is not managed efficiently.
How significant are fund costs while choosing schemes?
The costs of investing through mutual funds are not insignificant, and deserve due consideration, especially when you are considering to invest in fixed income funds. Factors such as management fees, and the fund’s annual expenses and sales loads can eat into significant portions of your returns. Also, carefully consider the fees charged by funds for entering or exiting a scheme.
What are “Fundamental Attributes” of a scheme?
The following are classified as “Fundamental Attributes” as per clause (d) of sub-regulation (15) of regulation 18:
Type of a scheme
- Open ended/Close ended/Interval scheme
- Sectoral Fund/Equity Fund/Balance Fund/Income Fund/Index Fund/Any other type of Fund
- Main Objective - Growth/Income/Both.
- Investment pattern - The tentative Equity/Debt/Money Market portfolio break-up with minimum and maximum asset allocation, while retaining the option to alter the asset allocation for a short term period on defensive considerations.
Terms of Issue
- Liquidity provisions such as listing, repurchase, redemption.
- Aggregate fees and expenses charged to the scheme.
- Any safety net or guarantee provided.
Are investments in mutual fund units safe?
No stock market related investments can be termed safe with certainty; they are inherently risky. However, funds have varying risk profiles, as stated in their objective. Funds, which categorise themselves as low risk, invest generally in debt, which is less risky than equity. Mutual funds are, however, always safer than direct investments in the stock markets as they have access to the services of expert fund managers.
What are the inherent risks in mutual funds?
Equity Funds are open to market risks; the price of the stocks in which the fund has invested may reduce. Conversely, the prices may go up, enabling the funds to earn profits. Debts Funds are open to credit and interest rate risks.
Are mutual fund schemes suitable for small investors?
Mutual funds are meant specifically for small investors. Although small investors may not be able to carefully monitor and analyse investments in the stock markets, mutual funds are usually equipped to carry out thorough analysis and thus, ensure superior returns to investors.
Are mutual funds insured?
No. Unlike certain types of savings accounts and certificates of deposit, mutual fund units are not insured by the government, or any government agency, and do not have any other type of insurance. There is no guarantee that when you sell your shares, you will receive what you paid for them.
How long does it take to transfer units after buying them from the stock markets in case of close-ended schemes?
According to SEBI Regulations, transfer of units has to be done within 30 days from the date of lodgement of certificates with the mutual fund.
How long will it take for investors to receive dividends/repurchase proceeds?
A mutual fund is required to despatch the dividend warrants to unit holders within 30 days of the declaration of dividends; redemption or repurchase proceeds are to be sent within 10 working days from the date of redemption or repurchase request made by the unit holder. In case of failures to despatch the redemption/repurchase proceeds within the stipulated time period, the AMC is liable to pay interest as specified by SEBI from time to time (15 per cent at present).
What happens to the money I have invested in a mutual fund scheme, if it winds up?
If a scheme winds up, the mutual funds pays a sum based on the prevailing NAV, after adjustment of expenses. Unit holders are entitled to receive a report on the wind up from the mutual funds, which provides all the necessary details.
Are ‘mutual benefit’ companies the same as mutual funds?
No. Companies with the tag, ‘mutual benefit,’ in their names are not mutual funds. These companies do not come under the purview of SEBI. Mutual funds, however, can mobilise funds from investors only after getting registered with SEBI.
How do I get my grievances redressed?
The name of the person to contact for redressal of grievances is mentioned in the offer document. Trustees of mutual funds monitor the activities of the funds. The names of the directors of the AMC and trustees are also provided in the offer documents. You can also approach SEBI for redressal of complaints. On receipt of complaints, SEBI takes up the matter with the concerned mutual fund and follows up on these till the matter is resolved.
Do Mutual Fund schemes have any variants?
Yes. There are six major types of variants in Mutual Fund schemes:
- Money Market Mutual Funds (MMMFs) or liquid funds: These are open-ended funds that invest solely in money market instruments.
- Equity linked saving schemes (ELSS): They are tax-saving schemes offered by mutual funds and are among the only tax-saving instruments that are allowed to invest in equities.
- Systematic Investment Plans (SIPs): These schemes enable investors to overcome the impact of vagaries in the market, and are plans offered by mutual funds to promote regular savings.
- Fixed Maturity Plans (FMPs): These are investment schemes floated by mutual funds and are close-ended with a maturity period ranging from one month to five years. These plans are predominantly debt-oriented, while some may have a small equity component.
- Capital Protection-oriented Funds (CPFs): They are funds where the structure of the scheme, with or without external support, ensures protection of the original investment at the scheme’s maturity.
- Gold Exchange Traded Funds (GETFs): These schemes are open-ended funds and present a relatively cost-efficient and secure way to access the gold market but without the necessity of taking physical delivery of gold.
This FAQ is for investor’s guidance only. While utmost care has been exercised while preparing the FAQs, Edelweiss Mutual Fund / Edelweiss AMC does not warrant the completeness and absolute accuracy or completeness of this information and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient alone shall be fully responsible / liable for any decision taken on the basis of this material. The recipient should make their own investigation and seek appropriate professional advice. Please read the respective Scheme Information Document of the Scheme(s) and the Statement of Additional Information of the respective schemes carefully before investing.