Why MFs score over bank deposits

Equity markets may have rebounded smartly after the dramatic fall in May. But fixed-income instruments seem to be stealing the show these days.

After wrecking havoc in stock markets around the world, the tight liquidity scenario is finally playing to small investors' advantage. After several years, investors are finding that fixed deposit rates are climbing to respectable levels.

While 90-day bank deposits are offering around 5 per cent returns, one-year deposits are yielding 7-8 per cent. As far as mutual funds are concerned, though the future of income funds, which invest in medium-and long-term debt papers, seems to be uncertain, short-term debt funds are giving returns in excess of 6.5 per cent.

On a post-tax basis, debt schemes - fixed-maturity plans in particular - seem to be the best option for investors looking for steady returns.

Funds beat banks

Even as banks are luring investors with higher fixed-deposit rates, mutual funds seem to be steeling a march over them with FMPs. The total assets under management under these schemes have nearly doubled this year.

At the end of July, these schemes had a combined corpus of Rs 28,571 crore (Rs 285.71 billion). According to industry sources, in August alone, 14 FMPs have so far been launched with varying maturity and the total collection is expected to be at least around Rs 4,000 crore (Rs 40 billion).

The AMCs that have launched FMPs this month include Reliance, ABN AMRO, Principal, HSBC, UTI, HDFC, LIC, Prudential ICICI, JM Financial, DBS Chola and SBI.

Essentially targeted at corporate and high networth investors, FMPs combine the tax efficiency of mutual funds with the safety of fixed deposits.

The current rates on FMPs are as attractive as bank deposit rates and, thanks to the lower taxes on mutual funds, the post-tax returns on FMPs are better.

Currently, 90-day FMPs are offering around 6.85-7.10 per cent, while one-year FMPs are generating around 8.10 per cent pre-tax returns. HDFC Mutual's 26-month FMP yields 8.45 per cent for corporate investors and 8.10 per cent for retail investors.

These schemes usually come with a quarterly or annual term, and the shorter-term schemes are a huge hit with corporate investors, who usually seek to lower the tax incidence.

Mutual funds charge as low as 5-10 basis points as expenses, which is abysmally low. Even for retail investors in the top income tax bracket, these schemes make sense.

The tax edge

As dividends of mutual funds attract only a dividend distribution tax of 22.44 per cent for corporates and 14.03 per cent for individual investors vis-?interest on deposits and corporate bonds, charged at the marginal income tax rate, mutual funds give better post-tax returns.

"High networth individuals have a lot of appetite for these schemes as they generate significantly higher post-tax returns," says Sameer Kamdar, national head - mutual funds, Mata Securities.

Furthermore, income from mutual fund units - held for more than a year - is deemed to be 'capital gains' and, hence, qualifies for indexation benefit. This reduces the tax incidence even more.

Thus, while a 8.1 per cent, one-year FMP would yield a post-tax return of 7.2 per cent for an individual investor in the top income tax bracket (if he opts for the growth plan), a bank fixed-deposit offering a similar rate would yield only 5.37 per cent net of tax.

Even if you opt for the dividend plan, which is less tax-efficient compared to the growth plan, for more than one-year time horizon, you would come up with a post-tax return of 6.96 per cent.

The post-tax returns indicated above are based an indexation rate of 4.5 per cent. For the uninitiated, indexation is a method wherein returns are deflated to the extent of inflation.

The tax is calculated only on the inflation index-adjusted returns. The idea is that tax on long-term capital gains must be charged only on the real returns earned by an investor. The inflation index is published by the income-tax department every year.

Similarly, 90-day FMPs, which offer 7 per cent, would yield a post-tax return of 6.01 per cent. Currently, JM Mutual and LIC are offering rates upwards of 7 per cent.

The risk factor

Though FMPs are projecting fairly high yields, these are only indicative returns. They produce predictable returns over the desired timeframe since the maturity of the portfolio matches the tenure of fund schemes.

Unlike other schemes that suffer from volatility and, hence, risk of erosion in asset value, an FMP - structured as closed-end funds - carries no interest rate risk. Whether yields rise or fall, the asset value of these schemes is protected as deposits/ bonds are held to maturity.

Still, they do not guarantee returns as bank deposits - where the interest is assured - do. Though FMPs have delivered the returns they have indicated so far, there could be a risk of asset-liability mismatch, and the investor may not finally get exactly the indicated yield.

Says Dhirendra Kumar, chief executive officer of Value Research, a Delhi-based mutual fund tracking firm, "Since there is no guarantee on the returns that funds give, there is a risk that investors may or may not eventually get the returns indicated even in case of FMPs, which are otherwise quite predictable."

Besides, if you lock in funds in an FMP you don't have the option of liquidating it prematurely. But in case of bank deposits, you can withdraw your money without any penalty. However, the interest rate you earn on the deposit would be based on the period the money is invested for.

For instance, if you break a one-year deposit after three months, you would be entitled to the interest rate applicable for the three-month deposit - and not the one-year rate.

In fact, since bank deposits can be withdrawn without any penalty, it is an ideal time for investors to close their old deposit accounts yielding lower returns and renew them at the prevailing rates.

Other debt funds

With uncertainty on interest rates receding, debt markets have rallied over the past one month. The 10-year benchmark yield has declined from 8.5 per cent in mid-July to 7.91 per cent now, and this has propped up the returns on debt fund schemes.

Most categories of debt funds have delivered returns in excess of 6 per cent. Particularly, medium-term gilt and debt funds have generated over 10 per cent returns. Should you then begin to relook at income funds?

May be, not yet.

Fund managers warn that this kind of returns may not be sustainable. On the contrary, the debt market rally looks overdone and the market may be in for some correction.

And if that happens, income funds may be back to square one. Moreover, the risk-return factor, today, is strongly in favour of short-term funds.

"The return differential between medium-term and short-term debt funds is quite narrow, and the choice must be obvious given that short-term funds offer far greater stability and slightly lower returns," says Kumar.

Over the past one-month, short-term funds have seen a surge in returns too. This category has given an average return of 7.2 per cent, which again compares favourably with bank deposits on a tax-adjusted basis. 



Source: N Mahalakshmi | BS | 

Tips for NRIs to optimise their spending and maximise savings

Many non-resident Indians (NRIs) have been toiling hard to rake in that extra bit but are unable to fathom where all their money disappears by the end of the month. In most cases, there is a money leak happening somewhere. This leakage needs to be fixed right away before your expenses balloon to unimaginable proportions leading you into a debt trap.

A well-planned financial budget can help you set your finances in order. This will help you to allocate your income according to your needs and desires. Here are some of the important points that NRIs need to keep in mind so as to better manage their finances.

Ascertain your total income
Jot down all your sources of income, which includes that of your spouse too if both are working. Apart from your regular employment, your part-time jobs, dividends, interest income from investments are all sources of income. Total them all.

Save at least 20% to 30% of your gross income
Leave this money untouched. Depending on your age, goals and risk profile invest this amount in mutual funds, equities, fixed income, bullion, real estate and other asset classes.

You have to also check whether you have a good support system in place for yourself and your family. For example, if you are living in a place like Australia where children’s education, retirement and health expenses are supported by the government, there is not much to worry about. If you are covered under a social security system, then you may reduce your saving ratios by about 5%.

Buy property at the earliest
Buy a home at the earliest, irrespective of which country you reside in outside India. Many NRIs make the mistake of not buying a home in the foreign country they stay in and continue to live in rented apartments for long periods. You must consider buying a home at the earliest as most properties continue to get more expensive over time.

Also, for those who are planning to buy a property back home in India on their return should make the purchase much earlier. The property values in most cities in India move up considerably over a period of 5-10 years. After a decade, a property in the NRI’s home state may become unaffordable.

Are you spending on a need or a want?
Paying up your monthly rent, electricity and grocery bills are all needs you cannot wish away. But you can surely cut down on your several outings at expensive restaurants and shopping sprees that burn a deep hole in your pocket.

With several malls around, convenience is in, no doubt. But think. Are you buying goods that you really need or are you following the herd? Have you used that food processor you bought last Christmas or is it still lying in a sealed pack in the corner of your kitchen? Analyse your past purchases and you will know your spending habits.

Put off impulse purchases
Do you go berserk when you hear of heavy discount offers, free gifts and cashback schemes? Stop! Simply put off impulse buying. That “buy one, get one free” offer may not be as good as it seems. Besides, give a thought - do you really need that shirt now or do you want it because it simply appears to be a good offer?

Follow the 60:30:10 ratio
Try maintaining a ratio of 60:30:10 between your needs, wants and desires. Maintain a list of each of your expenses, howsoever, insignificant they may seem. And you will know how much you have ended up spending on items you don’t really need. Segregate the fixed and variable expenditure. While there’s not much you can do with the former, you can easily fine-tune your variable expenditure.

Contingency fund is a must
Financial emergencies such as loss of employment, illness in the family and accidents can spring up unpleasant surprises just anytime. You need a contingency fund that can take care of sudden financial needs. Keep aside three to six months of your income for emergencies. And you won’t have to dip into your savings in case of a financial crisis.

Stick to your budget, review regularly
Creating a budget is easy but it is hard to stick to it. Ascertain each time how close you have been to your laid-out plan. Make necessary changes wherever needed, fine-tune and stick to your budget always, come what may. Do a review to find out to what extent you are on track and whether there is a diversion at all. If yes, make up for the same in the next month and soon you will be on the right track to achieving your goals

Source: times of money..

Financial planning for your child SIPs Are Safe

Financial planning for your child

Source: Economic Times

When it comes to financial planning for a child’s education, the most affordable way is to start saving early. There are many dedicated insurance products for children but this route is generally not recommended by financial planners. “Such offerings find favour because of the emotional value attached to such investments,” says Amit Suri, a Delhi-based financial planner.

Children's plans are also available through the mutual fund route. “Most of these schemes are not recommended due to their erratic track records and low assets under management,” says Nikhil Naik, managing director of Naik Wealth, a Mumbaibased investment advisory

Then there are products such as ‘Kotak Starkid facility’ which allow investors to choose across three schemes offered by the fund house — Kotak 30, Kotak Opportunities Fund or Kotak TaxSaver, in the name of the child and further enjoy free insurance to the extent of unpaid SIP instalments.

The catch is you have to commit to the fund house till the extent of the SIP period. “Open-ended diversified equity funds make great sense when it comes to building corpus for goals such as child’s education,” says Mr Naik.

The best feature of such funds is the opportunity it gives the investor to correct his mistakes and realign asset allocation.
Higher education in the fields of medicine, engineering or courses in overseas institutions can be exceptionally high 15 years from now. A degree in medicine which costs a parent around Rs 10 lakh today will cost Rs 28.54 lakh in 18 years if inflation were a modest 6%.

Accumulating savings of this magnitude might appear a herculean task, but can be achieved if a parent starts early. If you invest Rs 4,500 every month in a mix of investments that earn a portfolio return of 11%, this will generate savings of around Rs 28 lakh.

The returns on bank deposits will simply not be enough as inflation and taxes will eat into the returns . Moreover, in the very long term, interest rates on term deposits are expected to decline.

Given the high costs, lower liquidity and lower transparency levels, of late ULIP child plans are not recommended by financial planners.

Child plans by mutual fund houses too are not recommended since the track record of such schemes are erratic and they have very low assets under management.

There is also a charge on early exit under most of these funds. Child plans by mutual funds are largely balanced funds but are not comparable to regular balanced funds as the allocations are different.

Another option is to start by investing 100% of your funds, in diversified equity mutual funds with a good track record.

If you start at your child’s infancy and have 18 years in hand, three or four good diversified equity funds SIP is a good starting point. Over a period of time the funds will accumulate in healthy corpus.

Switch In Time

In the last three years, the money should move out of equities and get into safer short-term debt mutual funds or even fixed deposits.
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Five fund myths

Five fund myths

Source: yahoo, Personal finance

It is easy, even for an intelligent investor, to be taken in by the hype surrounding a mutual fund scheme. Such misconceptions can impact the investments, which is why they need to be debunked.

Topics
A fund with a net asset value (NAV) of Rs 10 is cheaper than the one whose NAV is Rs 50
A balanced fund will always have a 50:50 debt to equity ratio
Large corpus funds generate higher returns
Funds that regularly declare dividends are good buys
SIP always scores over lump-sum investing


Here are the five common myths:

1. A fund with a net asset value (NAV) of Rs 10 is cheaper than the one whose NAV is Rs 50:
The NAV of a mutual fund represents the market value of all its investments. Any capital appreciation in the fund scheme will depend on the price movement of its underlying securities. Suppose you invest Rs 1,000 each in Fund A (a new scheme with an NAV of Rs 10) and Fund B (an older scheme with an NAV of Rs 50). You will get 100 units of Fund A and 20 units of Fund B. Let's assume that both the schemes invest in just one stock, quoting at Rs 100. If the stock appreciates by 10%, the NAVs of the two will rise by 10%, to Rs 11 and Rs 55, respectively. In both cases, the value of investment rises to Rs 1,100-an identical gain of 10%. Fund B's NAV is higher as it has been around for a longer time and had bought the scrip earlier, which appreciated. Any subsequent rise and fall in the funds' NAVs will depend on how the scrip moves.

2. A balanced fund will always have a 50:50 debt to equity ratio:
Balanced funds aim to achieve a balance between equities and debt. But the balance can tip depending on the nature of the fund. The equity-oriented balanced funds usually invest at least 65% in equities and the rest in debt. The others do this in a 40:60 ratio.

3. Large corpus funds generate higher returns:
A fund with a very large corpus is prone to inefficiencies as rising assets become unmanageable after a point. Also, most fund managers are more dextrous managing mid-sized funds. A large fund forces them to broaden their stock universe. This can lead them to include less researched or low-potential stocks in the fund's portfolio or increase the stake in certain stocks, leading to a selection bias. HDFC Equity has a corpus of Rs 2,680 crore, but its three-year annualised return is -1.68%, whereas the best performer for the same period is Reliance Regular Savings Fund, with an annualised return of 7.71% and an AUM of Rs 618 crore. At one-fifth the assets, the Reliance fund has fared far better.

4. Funds that regularly declare dividends are good buys:
Fund houses declare dividends when they have distributable surplus. However, there are times when fund managers declare dividends as they do not have adequate investment opportunities. In some circumstances, a fund manager may sell some quality stocks to generate surplus for dividend distribution to attract investors.

5. SIP always scores over lump-sum investing:
A systematic investment plan (SIP) is the best way to invest during volatility as it lowers the average per unit cost. This is also termed as rupee cost averaging. However, investing systematically during a bull run results in lower returns. When markets are constantly rising, SIP fails to lower the average cost and so results in lower returns compared with a lumpsum investment.

Beginner's Basics about mutual funds

Beginner's Basics

SEBI INVESTOR EDUCATION PROGRAMME

Introduction

Different investment avenues are available to investors. Mutual funds also offer good investment opportunities to the investors. Like all investments, they also carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking investment decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making investment decisions.

With an objective to make the investors aware of functioning of mutual funds, an attempt has been made to provide information in question-answer format which may help the investors in taking investment decisions.

What is a Mutual Fund?

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unitholders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.

What is the history of Mutual Funds in India and role of SEBI in mutual funds industry?

Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds.

In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI are – to protect the interest of investors in securities and to promote the development of and to regulate the securities market.

As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors.

All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type. It may be mentioned here that Unit Trust of India (UTI) is not registered with SEBI as a mutual fund (as on January 15, 2002).

How is a mutual fund set up?

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unitholders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.

SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme. However, Unit Trust of India (UTI) is not registered with SEBI (as on January 15, 2002).

What is Net Asset Value (NAV) of a scheme?

The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV).

Mutual funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly - depending on the type of scheme.

What are the different types of mutual fund schemes?

• Schemes according to Maturity Period

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.

Open-ended Fund/ Scheme

An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.

Close-ended Fund/ Scheme

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

Schemes according to Investment Objective

A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:

Growth / Equity Oriented Scheme

The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.

Income / Debt Oriented Scheme

The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.

Balanced Fund

The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

Money Market or Liquid Fund

These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

Gilt Fund

These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.

Index Funds

Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.

There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.

What are sector specific funds/schemes?

These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert.

What are Tax Saving Schemes?

These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.

What is a Load or no-load Fund?

A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient funds may give higher returns in spite of loads.

A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units.

Can a mutual fund impose fresh load or increase the load beyond the level mentioned in the offer documents?

Mutual funds cannot increase the load beyond the level mentioned in the offer document. Any change in the load will be applicable only to prospective investments and not to the original investments. In case of imposition of fresh loads or increase in existing loads, the mutual funds are required to amend their offer documents so that the new investors are aware of loads at the time of investments.

What is a sales or repurchase/redemption price?

The price or NAV a unitholder is charged while investing in an open-ended scheme is called sales price. It may include sales load, if applicable.

Repurchase or redemption price is the price or NAV at which an open-ended scheme purchases or redeems its units from the unitholders. It may include exit load, if applicable.

What is an assured return scheme?

Assured return schemes are those schemes that assure a specific return to the unitholders irrespective of performance of the scheme.

A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document.

Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year.

Can a mutual fund change the asset allocation while deploying funds of investors?

Considering the market trends, any prudent fund managers can change the asset allocation i.e. he can invest higher or lower percentage of the fund in equity or debt instruments compared to what is disclosed in the offer document. It can be done on a short term basis on defensive considerations i.e. to protect the NAV. Hence the fund managers are allowed certain flexibility in altering the asset allocation considering the interest of the investors. In case the mutual fund wants to change the asset allocation on a permanent basis, they are required to inform the unitholders and giving them option to exit the scheme at prevailing NAV without any load.

How to invest in a scheme of a mutual fund?

Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Now a days, the post offices and banks also distribute the units of mutual funds. However, the investors may please note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes and no assurance of returns is given by them. The only role of banks and post offices is to help in distribution of mutual funds schemes to the investors.

Investors should not be carried away by commission/gifts given by agents/distributors for investing in a particular scheme. On the other hand they must consider the track record of the mutual fund and should take objective decisions.

Can non-resident Indians (NRIs) invest in mutual funds?

Yes, non-resident Indians can also invest in mutual funds. Necessary details in this respect are given in the offer documents of the schemes.

How much should one invest in debt or equity oriented schemes?

An investor should take into account his risk taking capacity, age factor, financial position, etc. As already mentioned, the schemes invest in different type of securities as disclosed in the offer documents and offer different returns and risks. Investors may also consult financial experts before taking decisions. Agents and distributors may also help in this regard.

How to fill up the application form of a mutual fund scheme?

An investor must mention clearly his name, address, number of units applied for and such other information as required in the application form. He must give his bank account number so as to avoid any fraudulent encashment of any cheque/draft issued by the mutual fund at a later date for the purpose of dividend or repurchase. Any changes in the address, bank account number, etc at a later date should be informed to the mutual fund immediately.

What should an investor look into an offer document?

An abridged offer document, which contains very useful information, is required to be given to the prospective investor by the mutual fund. The application form for subscription to a scheme is an integral part of the offer document. SEBI has prescribed minimum disclosures in the offer document. An investor, before investing in a scheme, should carefully read the offer document. Due care must be given to portions relating to main features of the scheme, risk factors, initial issue expenses and recurring expenses to be charged to the scheme, entry or exit loads, sponsor’s track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed, etc.

When will the investor get certificate or statement of account after investing in a mutual fund?

Mutual funds are required to despatch certificates or statements of accounts within six weeks from the date of closure of the initial subscription of the scheme. In case of close-ended schemes, the investors would get either a demat account statement or unit certificates as these are traded in the stock exchanges. In case of open-ended schemes, a statement of account is issued by the mutual fund within 30 days from the date of closure of initial public offer of the scheme. The procedure of repurchase is mentioned in the offer document.

How long will it take for transfer of units after purchase from stock markets in case of close-ended schemes?

According to SEBI Regulations, transfer of units is required to be done within thirty days from the date of lodgment of certificates with the mutual fund.

As a unitholder, how much time will it take to receive dividends/repurchase proceeds?

A mutual fund is required to despatch to the unitholders the dividend warrants within 30 days of the declaration of the dividend and the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase request made by the unitholder.

In case of failures to despatch the redemption/repurchase proceeds within the stipulated time period, Asset Management Company is liable to pay interest as specified by SEBI from time to time (15% at present).

Can a mutual fund change the nature of the scheme from the one specified in the offer document?

Yes. However, no change in the nature or terms of the scheme, known as fundamental attributes of the scheme e.g.structure, investment pattern, etc. can be carried out unless a written communication is sent to each unitholder and an advertisement is given in one English daily having nationwide circulation and in a newspaper published in the language of the region where the head office of the mutual fund is situated. The unitholders have the right to exit the scheme at the prevailing NAV without any exit load if they do not want to continue with the scheme. The mutual funds are also required to follow similar procedure while converting the scheme form close-ended to open-ended scheme and in case of change in sponsor.

How will an investor come to know about the changes, if any, which may occur in the mutual fund?

There may be changes from time to time in a mutual fund. The mutual funds are required to inform any material changes to their unitholders. Apart from it, many mutual funds send quarterly newsletters to their investors.

At present, offer documents are required to be revised and updated at least once in two years. In the meantime, new investors are informed about the material changes by way of addendum to the offer document till the time offer document is revised and reprinted.

How to know the performance of a mutual fund scheme?

The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published in newspapers. The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) http://www.amfiindia.com/ and thus the investors can access NAVs of all mutual funds at one place

The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an affect on the yield and other useful information in the same half-yearly format.

The mutual funds are also required to send annual report or abridged annual report to the unitholders at the end of the year.

Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis. Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds.

Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc.

On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme.

How to know where the mutual fund scheme has invested money mobilised from the investors?

The mutual funds are required to disclose full portfolios of all of their schemes on half-yearly basis which are published in the newspapers. Some mutual funds send the portfolios to their unitholders.

The scheme portfolio shows investment made in each security i.e. equity, debentures, money market instruments, government securities, etc. and their quantity, market value and % to NAV. These portfolio statements also required to disclose illiquid securities in the portfolio, investment made in rated and unrated debt securities, non-performing assets (NPAs), etc.

Some of the mutual funds send newsletters to the unitholders on quarterly basis which also contain portfolios of the schemes.

Is there any difference between investing in a mutual fund and in an initial public offering (IPO) of a company?

Yes, there is a difference. IPOs of companies may open at lower or higher price than the issue price depending on market sentiment and perception of investors. However, in the case of mutual funds, the par value of the units may not rise or fall immediately after allotment. A mutual fund scheme takes some time to make investment in securities. NAV of the scheme depends on the value of securities in which the funds have been deployed.

If schemes in the same category of different mutual funds are available, should one choose a scheme with lower NAV?

Some of the investors have the tendency to prefer a scheme that is available at lower NAV compared to the one available at higher NAV. Sometimes, they prefer a new scheme which is issuing units at Rs. 10 whereas the existing schemes in the same category are available at much higher NAVs. Investors may please note that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance. On the other hand, investors should choose a scheme based on its merit considering performance track record of the mutual fund, service standards, professional management, etc. This is explained in an example given below.

Suppose scheme A is available at a NAV of Rs.15 and another scheme B at Rs.90. Both schemes are diversified equity oriented schemes. Investor has put Rs. 9,000 in each of the two schemes. He would get 600 units (9000/15) in scheme A and 100 units (9000/90) in scheme B. Assuming that the markets go up by 10 per cent and both the schemes perform equally good and it is reflected in their NAVs. NAV of scheme A would go up to Rs. 16.50 and that of scheme B to Rs. 99. Thus, the market value of investments would be Rs. 9,900 (600* 16.50) in scheme A and it would be the same amount of Rs. 9900 in scheme B (100*99). The investor would get the same return of 10% on his investment in each of the schemes. Thus, lower or higher NAV of the schemes and allotment of higher or lower number of units within the amount an investor is willing to invest, should not be the factors for making investment decision. Likewise, if a new equity oriented scheme is being offered at Rs.10 and an existing scheme is available for Rs. 90, should not be a factor for decision making by the investor. Similar is the case with income or debt-oriented schemes.

On the other hand, it is likely that the better managed scheme with higher NAV may give higher returns compared to a scheme which is available at lower NAV but is not managed efficiently. Similar is the case of fall in NAVs. Efficiently managed scheme at higher NAV may not fall as much as inefficiently managed scheme with lower NAV. Therefore, the investor should give more weightage to the professional management of a scheme instead of lower NAV of any scheme. He may get much higher number of units at lower NAV, but the scheme may not give higher returns if it is not managed efficiently.

How to choose a scheme for investment from a number of schemes available?

As already mentioned, the investors must read the offer document of the mutual fund scheme very carefully. They may also look into the past track record of performance of the scheme or other schemes of the same mutual fund. They may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future performance and good performance in the past may or may not be sustained in the future, this is one of the important factors for making investment decision. In case of debt oriented schemes, apart from looking into past returns, the investors should also see the quality of debt instruments which is reflected in their rating. A scheme with lower rate of return but having investments in better rated instruments may be safer. Similarly, in equities schemes also, investors may look for quality of portfolio. They may also seek advice of experts.

Are the companies having names like mutual benefit the same as mutual funds schemes?

Investors should not assume some companies having the name "mutual benefit" as mutual funds. These companies do not come under the purview of SEBI. On the other hand, mutual funds can mobilise funds from the investors by launching schemes only after getting registered with SEBI as mutual funds.

Is the higher net worth of the sponsor a guarantee for better returns?

In the offer document of any mutual fund scheme, financial performance including the net worth of the sponsor for a period of three years is required to be given. The only purpose is that the investors should know the track record of the company which has sponsored the mutual fund. However, higher net worth of the sponsor does not mean that the scheme would give better returns or the sponsor would compensate in case the NAV falls.

Where can an investor look out for information on mutual funds?

Almost all the mutual funds have their own web sites. Investors can also access the NAVs, half-yearly results and portfolios of all mutual funds at the web site of Association of mutual funds in India (AMFI) www.amfiindia.com. AMFI has also published useful literature for the investors.

Investors can log on to the web site of SEBI www.sebi.gov.in and go to "Mutual Funds" section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual reports of SEBI available on the web site, a lot of information on mutual funds is given.

There are a number of other web sites which give a lot of information of various schemes of mutual funds including yields over a period of time. Many newspapers also publish useful information on mutual funds on daily and weekly basis. Investors may approach their agents and distributors to guide them in this regard.

If mutual fund scheme is wound up, what happens to money invested?

In case of winding up of a scheme, the mutual funds pay a sum based on prevailing NAV after adjustment of expenses. Unitholders are entitled to receive a report on winding up from the mutual funds which gives all necessary details.

How can the investors redress their complaints?

Investors would find the name of contact person in the offer document of the mutual fund scheme whom they may approach in case of any query, complaints or grievances. Trustees of a mutual fund monitor the activities of the mutual fund. The names of the directors of asset management company and trustees are also given in the offer documents. Investors can also approach SEBI for redressal of their complaints. On receipt of complaints, SEBI takes up the matter with the concerned mutual fund and follows up with them till the matter is resolved. Investors may send their complaints to: