Mutual Fund FAQs

Mutual fund investments are a substantial co-operative method to keep your savings managed professionally. These days, more and more investors are moving away from traditional methods and putting their savings into such financial assets. However, when beginning the journey with mutual fund investments, you must take actions extremely cautiously. For this, make sure you are well-versed with everything pertaining to this form of investment.

In this post, let’s navigate through all the common mutual fund frequently asked questions and get better clarity on this aspect.

1. What is a mutual fund?

A: Mutual funs is money pooled by a massive number of investors (people). This fund is typically managed by a fund manager who holds the professionalism and expertise to do so. It is also defined as a trust that accumulates money from several investors with a common investment goal. Then, the money is invested in Bonds, equities, money market instruments or/and other securities.

Every investor owns units that represent a part of the fund’s holdings. The gains or income generated from this collective investment is dispersed proportionally among investors after deducting a few expenses.

2. When should I start investing in mutual funds?

A: If you go by an attractive Chinese proverb, it says - “The best time to plant a tree was 20 years ago. The second best time is now.” Unless you don’t have money to invest, there should not be any reasons to delay your investments. When it comes to mutual funds, there is no age when you can begin investing. When you start earning and saving, you can commence your mutual fund’s journey. These days, even children can open investment accounts with mutual funds. In the same way, this investment has no upper age limit either.

3. What are types of mutual funds?

A: At large, there are three Types of Mutual Funds, such as:

a. Equity Funds

These predominantly invest in equities, meaning shares of companies. The goal is either capital appreciation or wealth creation. Equity Funds generate high returns and are ideal for long-term investments. Some of the major types of equity funds are - Small cap funds, mid cap funds, Large cap funds, sector funds, Diversified Funds, etc.

b. Fixed Income or Bond or Income Funds

They invest in fixed income securities, such as government bonds or securities, debentures and commercial papers, bank certificates of deposits, and money market instruments, like commercial paper, treasury bills, and more. They are safe and ideal for income generation. Some the types of debt funds are Liquid Funds, short-term funds, corporate debt, Gilt Funds, dynamic bond, etc.

c. Hybrid Funds

They invest in both fixed income and equities; hence, provide the best of them. They help in income generation and growth potential, Some of the types of hybrid funds are aggressive Balanced Fund, monthly income plans, conservative balanced funds, etc.

4. Do mutual funds invest only in stocks?

A: This is one of the most prevalent myths around the entire market. Mutual funds don't invest only in stocks. They invest across equity and debt instruments, depending on their type. If you want high returns then equity mutual funds is best long-term investment options. However, keep in mind that they have high volatility and are risky as they are exposed to stocks of several companies. On the contrary, if you want relatively low-risk options, you can choose to go with other types of mutual funds such as debt funds, hybrid funds, etc.

5. What is SEBI?

A: The Securities and Exchange Board of India (SEBI) is the regulatory body that oversees securities and commodity markets in the country. Its operations are held under the Ministry of Finance. This organization was established on 12 April 1988 in the form of an executive body and got statutory powers on 30 January 1992 via the SEBI Act, 1992.

6. Where can I find SEBI guidelines for mutual funds PDF?

A: SEBI has come up with an in-depth guideline that marks everything related to mutual funds. You can find the PDF here.

7. What are the indicators of risk in a mutual fund scheme?

A: You must assess properly before choosing the right mutual fund scheme. Most of the time, investors concentrate on the scheme category and top-performing schemes in that category while overlooking the risk factors. Thus, when comparing schemes, don’t ignore the risk comparison. Some of the most fundamental and important risk indicators to evaluate are:

• Standard Deviation: It evaluates the range of a fund’s return. Any scheme with a high standard deviation will have greater volatility and vice versa

• Beta: It assesses the volatility of the fund concerning the market. Beta >1 says that the scheme is more volatile than the market, and Beta <1 means that the scheme is less volatile than the market. The beta of 1 implies that the scheme will move unitedly with the market

• Sharpe Ratio: It measures the extra return offered by the fund per unit of undertaken risk. This is a good indicator of risk-adjusted return.

• Product Label: In the product label, you can find a riskometer displaying the fund’s risk level. There are six levels of risk in this riskometer that range:

  • Low
  • Low to moderate
  • Moderate
  • Moderately high
  • High
  • Very high

Considering that this risk categorisation is defined by the Securities and Exchange Board of India (SEBI), every mutual fund is bound to categorise under them.

8. What are the Related Scheme Documents? What information do these documents provide?

A: If you are interested in mutual funds, you must have looked at the ads carefully. If yes, you would have come across a common message stating, “Read all scheme-related documents carefully.” There are three crucial documents, such as:

• Key Information Memorandum (KIM) This one is a concise version of KIM and is generally attached to the application. It comprises key information that you, as an investor, should know before investing in that specific scheme.

• Scheme Information Document (SID) It includes the following information:

  • All fundamental attributes, such as liquidity provisions, fees, Asset Allocation patterns, investment policies, and objectives
  • General unitholder information
  • Details of the fund management team
  • Scheme details, such as benchmark, past performance, plans and options, and load
  • All risk factors and risk mitigation mechanisms in the scheme
  • Additional information, such as official points of acceptance, investor service centers, and AMC branches

• statement of Additional Information (SAI)

It includes the following information:

• • Every financial and legal issue
  • The mutual fund’s constitution such as the trustees, AMC, and sponsors
  • Every required detail on key personnel of the associates and AMC, like legal counsel, auditors, bankers, custodians, and registrars
  • All of these documents are prepared by the Asset Management Company (AMC) about a specific scheme and are submitted to SEBI to get approval

  9. What is a mutual fund dividend?

A: A dividend is the distribution of earnings from a mutual fund or a stock. In a mutual fund scheme, dividends are dispersed when a fund has gained profits on the sale of securities available in the portfolio. These profits are transferred to a Dividend Equalization Reserve. At the trustees’ discretion, this dividend is declared. Generally, dividends are declared as the percentage of the Face Value (FV) of the scheme and not the NAV. Suppose if the FV for every unit is Rs. 10 and the dividend rate is 20%, each investor will get Rs. 2 in the form of a dividend.

10. What is Net Asset Value (NAV)?

A: Net Asset Value (NAV) denotes the performance of a specific mutual fund scheme. Putting it simply, NAV is referred to as the market value of securities held by a scheme. Mutual funds collect money from investors and invest the amount in the securities market.

Considering that the market value of these securities changes every day, a scheme’s NAV varies daily as well. The per unit NAV is the market value of securities of a specific scheme divided by the total number of units of that scheme on any specific date. For all mutual fund schemes, the NAVs are declared at the end of the trading day once markets close.

11. What are Exchange Traded Funds?

A: Unlike a common mutual fund, an Exchange Traded Fund (ETF) trades just like a stock on a stock exchange. The units of ETFs are generally purchased and sold via a registered broker of a reputed stock exchange. These units get listed on stock exchanges, and their NAV varies according to the movements in the market. You can purchase as many units as you wish without any restrictions.

12. Are all mutual funds risky?

A: Every investment you make comes with a risk, just that the nature and degree of the risk vary. The same goes for mutual funds as well. Every mutual fund scheme doesn’t carry a similar risk. Equity schemes can offer higher returns over the long term that can help you create wealth. However, they are extremely risky in nature. On the contrary, the risk factor associated with liquid funds is substantially low compared to equity funds. They concentrate on protecting your capital by taking a low risk and creating in-line returns.

13. What happens when the market falls midway while you have invested for a longer term?

A: If you have long-term investments in mutual funds through Systematic Investment Plans (SIPs), you might worry about the market falling throughout the period. However, one thing that you must keep in mind is that these SIPs are accurately designed to conquer some risks, such as volatility and market timing.

You can overcome market volatility through rupee-cost averaging and by regularly investing in mutual funds through SIPs. Here, you purchase more units when Net Asset Value (NAV) is low and vice versa. If NAVs move in both directions, the cost per unit is averaged out over the longer time duration.

For instance, suppose you invest Rs. 1,000 every month, and you receive 100 units in case the NAV is Rs. 10 and 200 units if NAV falls to Rs. 5. Over a long period, the average price for each unit will fall down if the market moves in both directions; thus, helping in decreasing volatility of returns. However, if you have invested a lump sum amount, the number of units will remain the same throughout the holding period. But, their value will fall with a decreasing NAV during the market downturns.

14. How do I withdraw my money from mutual funds?

A: One of the best things about mutual funds is liquidity, meaning the convenient process of converting units into cash. There are well-laid norms by SEBI to ensure liquidity. After the redemption is complete, funds get transferred to your bank account within 3 business days after lodging the redemption.

15. What is a direct plan?

A: A direct plan allows you to invest directly with an AMC without any distributor's involvement to facilitate the transaction. Thus, such a plan has a lower expense ratio as there are no distribution fees in the picture. So, if you choose to invest through a direct plan, you might get marginally higher returns but you will not be able to avail of the distribution services of an intermediary.

16. What is CAS?

A: A Consolidated Account Statement (CAS) is a combined or single account statement that displays the information regarding financial transitions made by the investor during a specific month across all mutual funds and securities held in the Demat account.

17. What does a mutual fund manager do?

A: The role of a mutual fund manager is to implement the investment strategy of a fund and manage trading activities. They regulate pensions or mutual funds, handle analysts, conduct research and make crucial decisions related to investment.

18. What are some mistakes people make when investing in mutual funds?

A: Some of the most common mistakes that people make when investing in mutual funds include:

• Investing without understanding the product
• Investing without a plan
• Not knowing the risk factors
• Getting carried away by the buzz in the media or the market
• Not investing the correct amount
• Redeeming too early

19. How often can I remove my money?

A: From an open-ended scheme, you will have no restrictions when redeeming money. Although there could be an exit load in some situations, which influences the total amount, all open-end schemes provide liquidity as a huge advantage. You don’t have any restrictions on the amount that can be redeemed or the number of redemptions. But make sure there are enough units in the account. Usually, you can find the minimum redeemable amount in scheme documents.

Units under lien to an institution or a bank cannot be redeemed unless that lien has been removed. Redemptions might get restricted under extraordinary situations as per the decisions of the Board of Trustees. As far as closed-end schemes are concerned, you can only redeem the money from the AMC on maturity.

20. Who handles the day-to-day management of the mutual fund?

A: A portfolio manager handles your mutual fund investments. Their job is to regulate the fund on a day-to-day basis and decide when to buy or sell investments as per the objective of the fund.

21. What is the correlation between risk and return?

A: When deciding to invest in Mutual Funds, you must have heard - ‘more the risk, more the return.’ If you think the risk is evaluated as a possibility of capital loss or fluctuations and swings in investment value, the asset classes, such as equity, will be the riskiest, and money in a government bond or a Savings Account would be the least risky.

In mutual funds, a liquid fund has less risk, and an equity fund has more risk. Thus, the prime reason to invest in equity will be the anticipation of high rewards. But, you can only gain high returns if you invest in equities after a careful study and are patient enough to invest for a long-time.

Each category of the mutual fund scheme has varying types of risks, such as:

• Credit risk
• Interest rate risk
• Liquidity risk
• Market / price risk
• Business risk
• Event risk
• Regulatory risk
• And more.

With the help of your fund manager’s expertise and investment advisor, you can easily mitigate these risks to a great extent.

22. What happens when a mutual fund company shuts down / gets sold off?

A: Whenever a mutual fund company gets sold off or shuts down, it becomes a serious matter for an existing investor. However, since SEBI controls mutual funds, such events come with a prescribed process. If a mutual fund company is shutting down, either SEBI can direct the fund to shut, or the fund’s trustees will have to approach SEBI to get the closure approval. In this situation, every investor gets their funds based on the last available NAV.

On the other hand, if a mutual fund gets acquired by another fund house, two scenarios come up. The first one is where the scheme continues working, regardless of the new fund house taking over. The second is that the acquired schemes merge with the new fund house schemes. In this situation, investors can either exit the scheme with no load or can continue with their investment at the prevailing NAV.

23. What happens when you miss SIP payments in-between?

A: Considering that SIPs are long-term investments, it is completely fine if you end up skipping a few payments. Here, the investments you would have made so far continue to earn returns, and you can withdraw them anytime. But, you will garner lower wealth than what you would have expected and may miss your financial goals as well.

Also, know that mutual fund companies don’t put any penalty for not paying the SIP installments. Still, your SIP can get canceled automatically if you don’t pay for three consecutive months. Moreover, you will also have to pay the penalty to your bank for not adhering to the auto-debit payments.

24. Are Debt Funds risk-free?

A: It is a common myth that debt funds don’t have any risk as they don’t invest in equities. Sure, debt funds are less risky in comparison to equity funds, but they don’t guarantee only profits and happy days. Generally, debt funds invest in money and debt market securities prone to varying risk factors, such as liquidity risk, credit risk, and rate risk. While these factors are not as prevalent as the stock market risks, they cannot be ignored.

25. Do I need to understand stock, bond, or money markets before I invest?

A: If you are managing your investments independently, you must understand money, bond, and stock markets. However, if you only invest in mutual funds to accomplish financial goals, you don’t have to know how stocks, bonds, and money markets work. Here, you can only concentrate on the type of mutual funds that can serve your purpose. Accordingly, you can select a mutual fund and allow an expert, professional fund management team to regulate your investments.

26. What happens to mutual fund Investments after the investor passes away?

A: Usually, mutual fund schemes don’t come with a maturity date unless you’ve made your investments in either a close-ended ELSS or any other close-ended scheme, such as FMP. As far as a SIP is concerned, you have to make regular investments until a specified term.

In case the investor passes away during this tenure, there is a defined procedure, known as transmission, that a nominee, survivor, or a legal heir can follow to claim. However, for somebody to request a transmission, they should be familiar with the existence of your mutual fund investments. Hence, it is advised that you must add a nominee, or your investments will remain unclaimed forever.

27. How to choose a fund based on your risk appetite?

A: Considering that every investor has a different investment requirement, the mutual fund choice will also be different. In addition to the risk preference, each investor will have a specific objective that would be different in its time horizon and value. Thus, selecting the right mutual fund needs you to assess a variety of funds along with a risk-return-time horizon metric.

Let’s learn better about it with an example. Suppose a 40-years old and a 50-years old are both investing for their retirement. However, their choice of funds will be distinct from one another. The 40 years old can take a higher risk as they still have approximately 20-25 years left. However, the 50-years old will have to be cautious as they just have 10-15 years to achieve their retirement goal.

So, make sure you choose a fund whose risk profile matches your risk appetite. You can go with an equity fund if you are not scared of the risk factor. Otherwise, choose a Debt fund. You can go with a hybrid fund if you are fine with moderate risk.

28. How do I know which fund is right for me?

A: Once you have decided to invest in mutual funds, you will have to decide upon the scheme, whether an equity fund, fixed income fund, or balanced. Along with that, you must decide which AMC to invest with. To begin with, discuss your objectives, the comfortable time period, and risk appetite with your advisor. Keep the following pointers in mind when deciding upon which fund to invest in:

• If you have a long-term goal, you can choose a balanced or equity fund
• If you have a short-term goal, you can choose a liquid fund
• If you wish to generate regular income, you can go with an income fund or a Monthly Income Plan

Once you have finalized the fund type, decide upon a certain scheme from an AMC. Such a decision is generally made after ensuring that the portfolio details, scheme’s suitability, and the track record of the AMC are adequate.

29. How will I evaluate my risk profile?

A: risk profiling questionnaire helps you get answers to your willingness and ability questions. You can easily find the questionnaire online to evaluate which type of investment approach may suit you best. It is also highly advisable that you contact your investment advisor or mutual fund distributor to accomplish this task and know your risk profile.

30. What is a load and no-load fund?

A: Load funds are a type of mutual funds that charge a sales commission or fee. On the other hand, no-load funds don’t charge any commission or sales fee.

31. What is the Fund of Funds (FoF) scheme?

A: A Fund of Funds (FOF) is an investment strategy that holds a portfolio of other investment funds instead of investing directly in bonds, stocks and securities. An FOF scheme primarily invests in the units of other mutual fund schemes. It is also known as multi-manager investment.

32. What is an expense ratio?

A: An expense ratio evaluates how much you will be paying over the time of a year to own a fund. This amount pays for varying things, such as advertising, marketing, fund management and other costs linked with running the fund. Both ETFs and mutual funds charge an expense ratio. When the discussion of the fund being expensive takes place, the gist is the expense ratio.

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

A: Yes, Non-Resident Indians (NRIs) and Persons of Indian Origin (PIO) can invest in mutual funds in India on both a non-repatriation and full repatriation. But, NRIs will have to adhere to all regulatory requirements, like completing KYC before investing. Also, keep in mind that a few nations, like Canada and the US, have limited NRI investments without relevant disclosures. Thus, NRIs from such nations will have to cross-check with their advisors on the ease of investing in Indian funds.

Conclusion

This comprehensive list of mutual fund FAQs will surely help you understand your investments in a better way. Moreover, you will be able to make decisions wisely. Whether you are a novice or a professional investor, make sure you study well and stay updated with the latest transformations happening in this industry.