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FAQ-Mutual Fund

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.

Who 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.

What are the broad guidelines issued for a MF?

SEBI is the regulatory authority of MFs. SEBI has the following broad guidelines pertaining to mutual funds :
(1) MFs should be formed as a Trust under Indian Trust Act and should be operated by Asset Management Companies (AMCs).
(2) MFs need to set up a Board of Trustees and Trustee Companies. They should also have their Board of Directors.
(3) The net worth of the AMCs should be at least Rs.5 crore.
(4) AMCs and Trustees of a MF should be two separate and distinct legal entities.
(5) The AMC or any of its companies cannot act as managers for any other fund.
(6) AMCs have to get the approval of SEBI for its Articles and Memorandum of Association.
(7) All MF schemes should be registered with SEBI.
(8) MFs should distribute minimum of 90% of their profits among the investors.
(9) There are other guidelines also that govern investment strategy, disclosure norms and advertising code for mutual funds.

How do mutual funds diversify their risks?

According to basis financial theory, which 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.

Can mutual funds assumed to be 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 types 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 the different types of funds offered by fund house?

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 mutual fund 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.

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.

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.

Why should one choose to invest in a mutual fund?

For 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:
(1) Mutual Funds provide the benefit of cheap access to expensive stocks
(2) Mutual funds diversify the risk of the investor by investing in a basket of assets
(3) A team of professional fund managers manages them with in-depth research inputs from investment analysts.
(4) Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information which individual investors cannot access.

How investors invest 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 promoter’s image are some of the key factors to be considered while taking an investment decision regarding mutual funds.

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 s Systematic Investment Plan?

A systematic investment plan (SIP) offers 2 major benefits to an investor:
(1) It avoids lump sum investment at one point of time
(2) In a scenario of falling prices, it reduces your overall cost of acquisition by a process of rupee-cost averaging. This means that (3) at lower prices you end up getting more units for the same investment.

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 net worth investors while in case of mutual funds the target investors are the retail investors.

Is investor eligible for rebate on income tax by investing in a MF?

Yes in case of certain specific Equity Linked Saving Schemes, tax benefits are available under Section 88 of the Income Tax Act. In such cases the fund prospectuses explicitly states that it is a tax saving fund. In such cases 20% of your contribution will qualify for rebate under Section 88 of the Income Tax Act.

Do investments in mutual funds offer tax benefit on capital gains?

Yes. If the capital gains earned by you during a financial year are invested in specified mutual funds then such capital gains are exempt from capital gains tax under Section 54EA and Section 54EB of the Income Tax Act.

Do mutual fund investments attract wealth tax?

No. Under the Wealth Tax Act, all financial assets, including mutual fund units are exempt totally from Wealth Tax.

If I gift mutual fund units, does it attract gift tax?

No. With effect from 1st October 1998, units of a mutual fund gifted by unitholders are no longer chargeable to Gift Tax.

Is dividend earned from mutual funds exempt from income tax?

Yes. Income from mutual funds in the form of dividends is entirely exempt from income tax provided the fund in question is a equity/growth fund where more than 50% of the portfolio is invested in equities.

What are my major rights as a unit holder in a mutual fund?

Some important rights are mentioned below:
(1) Unit holders have a proportionate right in the beneficial ownership of the assets of the scheme and to the dividend declared.
(2) They are entitled to receive dividend warrants within 42 days of the date of declaration of the dividend.
(3) They are entitled to receive redemption cheques within 10 working days from the date of redemption.
(4) 75% of the unit holders with the prior approval of SEBI can terminate AMC of the fund.
(5) 75% of the unit holders can pass a resolution to wind-up the scheme.