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To many people, Mutual Funds can seem complicated or intimidating. We are going to try and simplify it for you at its very basic level. Essentially, the money pooled in by a large number of people (or investors) is what makes up a Mutual Fund. This fund is managed by a Fund Manager.

It is a trust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities. Each investor owns units, which represent a portion of the holdings of the fund. The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value NAV ” Simply put, a Mutual Fund is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

Mutual Funds vs Shares: What’s the difference?

From where do you get the vegetables for dinner? Do you grow them in your backyard, or purchase it from the nearest mandi/supermarket depending on what you need? Growing your own veggies is a great way of eating healthy food, but effort is spent on seed selection, manuring, watering, pest control, etc. The latter option allows you to choose from a wide variety without the hard work.

Similarly, you can create wealth by investing directly in shares of good companies or invest in them through Mutual Funds. Wealth can be created when we buy company stocks which use our money to grow their business, creating value for us.

Direct investment in shares carries a relatively higher risk element. You need to pick stocks by researching the company and sector. It’s a humongous task to choose few companies from thousands of them listed on the stock exchange. Once done, you need to keep a track of every stock’s performance.

In Mutual Funds, the stock picking is done by expert fund managers. You need to keep track of the performance of the fund and not individual stocks within the fund. They also allow investment flexibility unlike stocks, with growth/dividend options, top-ups, systematic withdrawals/transfer, etc. besides helping to ride over volatility by investing smaller amounts regularly through SIPs.

What is the risk of investing in Mutual Funds

We have all heard: “Mutual Fund investments are subject to market risks.” Ever wondered what are these risks?

The image on the left talks about the various types of risks.

Not all risks impact all the fund schemes. The Scheme Information Document (SID) helps understand which risks apply to your selected scheme.

So how does the fund management team manage these risks?

It all depends on what type of investments the Mutual Fund has invested in. Certain securities are more sensitive to certain risks and some are exposed to some other.

Professional help, diversification and SEBI’s regulations help mitigate risks in Mutual Funds.

Finally, and the most important question that many investors have asked: Can a Mutual Fund company run away with my money? This is just not possible given the structure of Mutual Funds as well as the strong regulations.

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How can I start investing in Mutual Funds?

Requires you to complete a few basic formalities. Such formalities may either be completed directly with an Asset Management Company (AMC) at their office, or authorized point of acceptance (PoA), or through an authorized intermediary such as an advisor, banker, distributor or broker.

Prior to investing in a  MF schemeyou need to complete the know you customer (KYC).The completed KYC form may be submitted with the scheme application form (also known as Key Information Memorandum). The application form would have to be carefully filled as it would capture important details like names of all account holders, PAN numbers, bank account details etc. This would have to be signed by all account holders. Much of these can be done through online platforms too.

New investors may take help from their advisors, to make the entire process smooth and easy. And before investing, all investors are advised to read important scheme related documents and know the risks of their scheme choice.

Are Mutual Funds an ideal investment for the small investor?

Yes! Even for an investor with modest savings or small beginnings, Mutual Funds are an ideal investment vehicle.

Almost every investor, small or big, has a Savings Bank (SB) account, and anyone with that account can start investing through Mutual Funds. With amounts as low as ₹ 500 every month, Mutual Funds promote the healthy habit of regular investing.

Other benefits for a small investor in Mutual Funds are-

Ease of transacting- Investing, reviewing, managing and redeeming from a Mutual Fund scheme are all simple processes.

Easy liquidity, maximum transparency and disclosure, timely statements of accounts, and tax benefits are all that a small or first time investor looks out for.

Dividends in Mutual Funds are tax free at the hands of the investor

A Mutual Fund gives the same investment performance, to an investor who has invested ₹ 500 or one who has invested ₹ 5 crores. Thus it has every investor’s interests in mind – small or big.

Professionally managed, diversified portfolio for someone who invests even ₹ 500 a month.

What is Systematic Investment Plan (SIP)?

What are the advantages of investing in SIP?

• Helps you to invest disposable funds each month.
• Gives you the benefits of rupee-cost averaging
• Relieves you of trying to time the market
• Helps you to reach your financial goals

How do I apply for SIP?

• Fill up a single SIP form, and a single application form.
• Draw post-dated cheques (minimum 5 cheques).
• Per cheque minimum SIP amount, there are many funds that have their minimum amount as low as can be as low as Rs 500/-
• Auto Debit Facility

Are there any minimum amount limits for subsequent purchase in same scheme?

Yes, there is a minimum amount limits for subsequent purchase in same scheme.

How often can I remove my money?

An investor has no restriction on redeeming money from an open ended scheme. While there may be an exit load in certain cases, which impacts final amount realised, all open end schemes offer liquidity as a great benefit.

The decision to redeem is totally at investor’s discretion. There are no restrictions on the number of redemptions, or on the amount to be redeemed. There have to be sufficient units in the account to fund redemptions. Scheme documents usually indicate minimum amount that can be redeemed.

Units under lien to a bank or institution cannot be redeemed, unless the lien is removed. Redemptions may be restricted only under extraordinary circumstances, as decided by the Board of Trustees.

Closed end schemes may be redeemed from the AMC only on maturity. However, they do provide a route to liquidity – any time before maturity – by selling units in a recognised exchange.

Redemptions can be made at;

• Investor Service Centres (ISCs)
• AMC offices
• Official Points of Acceptance of Transaction (OPAT)
• Through an authorised on-line platform.

Can I remove money on all days or only on particular days?

An open end fund permits redemptions on all business days. If a redemption request is handed over at an Investor Service Centre on a non-business day, or after a specified cut-off time, say 3:00 p.m., then it is processed on the next business day. Redemptions are processed at that particular day’s Net Asset Value (NAV). All redemption proceeds are credited to the investor’s bank account within a specified time, usually within 10 business days.

Redemptions may be done by handing over a signed redemption request clearly mentioning the scheme’s folio number. Redemptions may also be made on approved on-line platforms, where investors have the necessary security codes.

Investments made in Equity Linked Savings Schemes (ELSS), however have a lock-in of 3 years, after which they can be redeemed on any business day.

Redemptions may be restricted only in extraordinary circumstances. Under approval from the board of trustees, the AMC may impose restrictions when there is a liquidity issue, capital market closure, operational crisis or when directed by SEBI

What is Systematic Withdrawal Plan (SWP)

The unit holder may set up a Systematic Withdrawal Plan on a monthly, quarterly or semi-annual or annual basis to redeem a fixed number of units. They have to pay capital gain tax, which may be short term or long term. Any Unit holder can avail of this facility subject to the terms and conditions contained in the application form / Offer Document, it may also include exit loads if applicable.

ELSS Fund – Tax Saving Mutual Fund

An ELSS is an Equity Linked Savings Scheme, that allows an individual or HUF a deduction from total income of up to Rs. 1.5 lacs under Sec 80C of Income Tax Act 1961.

Thus if an investor was to invest Rs. 50,000 in an ELSS, then this amount would be deducted from the total taxable income, thus reducing her tax burden.

These schemes have a lock-in period of three years from date of units allotment. After the lock-in period is over, the units are free to be redeemed or switched. ELSS offer both growth and dividend options. Investors can also invest through SIP, and investments up to ₹ 1.5 lakhs, made in a financial year are eligible for tax deduction.

Source : AMFI https://www.mutualfundssahihai.com/