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.
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
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
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).
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).
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.
The methodology of calculating the sale and repurchase price of units:
Subscription (Sale) Price = Applicable NAV * (1+Entry Load)
Eg. If the Applicable NAV is Rs. 10, and Entry Load is 1%, then the subscription
price will be:
Rs. 10*(1+0.01) = Rs. 10.10
Unitholders may note that the Regulations do not permit any Entry Load for
subscription of Units, and accordingly, the subscription price will be the
Redemption (Repurchase) Price = Applicable NAV * (1-Exit Load)
Eg. If the Applicable NAV is Rs. 10, and Exit Load is 1%, then the redemption
price will be :
Rs. 10*(1-0.01) = Rs. 9.90.
A mutual fund scheme can be classified into
open-ended scheme or close-ended scheme depending on its maturity period.
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.
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.
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:
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.
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
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.
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.
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 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.
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.
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
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.
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.
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.
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.
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.
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
Yes, non-resident Indians can also invest in mutual funds. Necessary details
in this respect are given in the offer documents of the 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
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.
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.
Mutual funds are required to dispatch 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
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
A mutual fund is required to dispatch 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 dispatch 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).
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.
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.
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) 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
On the basis of performance of the mutual funds, the investors should decide
when to enter or exit from a mutual fund scheme.
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.
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.
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.
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.
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.
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.
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 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
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
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: