Mutual funds are different from portfolio management schemes
In case of mutual funds, the investments of different investors are pooled to form a common investible corpus and gain/loss to all investors during a given period are same for all investors while in case of portfolio management scheme, the investments of a particular investor remains identifiable to him. Here the gain or loss of all the investors will be different from each other.
Net Asset Value (NAV) of a scheme-significance and the basis of its calculation
Net asset value on a particular date reflects the realizable value that the investor will get for each unit that he his holding if the scheme is liquidated on that date. It is calculated by deducting all liabilities (except unit capital) of the fund from the realizable value of all assets and dividing by number of units outstanding.
What are the broad guidelines issued for a Mutual Fund?
SEBI is the regulatory authority of MFs. SEBI has the following broad guidelines pertaining to mutual funds:
- MFs should be formed as a Trust under Indian Trust Act and should be operated by Asset Management Companies (AMCs).
- MFs need to set up a Board of Trustees and Trustee Companies. They should also have their Board of Directors.
- The net worth of the AMCs should be at least Rs.5 crore.
- AMCs and Trustees of a MF should be two separate and distinct legal entities.
- The AMC or any of its companies cannot act as managers for any other fund.
- AMCs have to get the approval of SEBI for its Articles and Memorandum of Association.
- All MF schemes should be registered with SEBI.
- MFs should distribute minimum of 90% of their profits among the investors.
- 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.
One can get fixed monthly income by investing in mutual fund units
Yes, there are a number of mutual fund schemes which give you fixed monthly income. Further, you can also get monthly income by making a single investment in an open ended scheme and redeeming fix value of units at regular intervals.
The tax benefits for investing in mutual fund units
Dividend income from mutual fund units will be exempt from income tax with effect from July 1, 1999. Further, investors can get rebate from tax under section 88 of Income Tax Act, 1961 by investing in Equity Linked Saving Schemes of mutual funds. Further benefits are also available under section 54EA and 54EB with regard to relief from long term capital gains tax in certain specified schemes.
Are investments in mutual fund units safe?
No stock market related investments can be termed safe with certainty as they are inherently risky. However, different funds have different risk profile which is stated in its objective. Funds which categorize themselves as low risk, invest generally in debt which is less risky than equity. Anyway, as mutual funds have access to services of expert fund managers, they are always safer than direct investment in the stock markets.
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.
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 at lower prices you end up getting more units for the same investment.
As mutual fund schemes invest in stock markets only, are they suitable for a small investor only?
Mutual funds are meant only for a small investor like you. The prime reason is that successful investments in stock markets require careful analysis of scripts which is not possible for a small investor. Mutual funds are usually fully equipped to carry out thorough analysis and can provide superior returns.
An investor can choose the fund on various criteria according to his investment objective, to name a few:
- Thorough analysis of fund performance of schemes over the last few years managed by the fund house and its consistent return in the volatile market.
- The fund house should be professional, with efficient management and administration.
- The corpus the fund is holding in its scheme over the period of time.
- Proper adequacy of disclosures have to seen and also make a note of any hidden charges carried by them.
- The price at which you can enter/exit (i.e. entry load / exit load) the scheme and its impact on overall return.
Is investor eligible for rebate on income tax by investing in a Mutual Fund?
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:
- Unit holders have a proportionate right in the beneficial ownership of the assets of the scheme and to the dividend declared.
- They are entitled to receive dividend warrants within 42 days of the date of declaration of the dividend.
- They are entitled to receive redemption cheques within 10 working days from the date of redemption.
- 75% of the unit holders with the prior approval of SEBI can terminate AMC of the fund.
- 75% of the unit holders can pass a resolution to wind-up the scheme.
