Mutual Funds FAQs

Mutual fund is a pool of investment/savings of a number of investors who have a common financial goal. These funds are a diversified portfolio of financial instruments (equity, debt or money market) and the pool (total size of the fund) is invested in these markets to help meet investment objectives. The income earned through these investments (capital appreciation) is shared with the unit holders in proportion to the number of units owned by them. Mutual funds are a suitable investment for the common man as they offer an opportunity to invest in a diversified, professionally managed basket of securities.

The benefits of investing in mutual funds are as follows:

Professional Fund Managers – Your investment is managed by fund managers who have a high level of educational and professional credentials and appropriate investment managerial experience.

 

Diversification – Mutual funds aim to reduce volatility of returns and risk by diversification. They invest in a number of companies across a broad section of industries/sectors. With a small investment, an investor can achieve diversification that would otherwise not be possible if the investor invests directly in those securities.

 

Liquidity – Open-ended mutual funds are priced daily and can be redeemed anytime. This means that investors can redeem their holdings in mutual funds anytime.

 

Low Transaction Costs – Since mutual funds are a pool of money of many investors, the amount of investment made in securities is large. A small management fee is charged by the company, which if invested directly would cost an individual investor a lot.

 

Transparency – Prices of open-ended mutual funds are announced daily. The portfolio is also disclosed in the monthly Fund Managers Report.

Unlike a bank deposit, the value of your principal can rise or fall. People invest in mutual funds because of the fact that they want their principal to rise over time. The value of a fund depends on the value of the securities it owns. Stocks and bonds fluctuate in value and therefore so do mutual funds.

Probably not. Most people want assurance money they immediately need will be there when they need it. Mutual funds (except for money market funds) by their nature fluctuate in value and therefore may not be the most comfortable place for your emergency funds.

 

Net Asset Value is calculated by summing up the current market values of all securities held by the fund, adding in cash and any accrued income, then subtracting liabilities and dividing the result by the number of units outstanding. NAV is the market value of the assets of the scheme minus its liabilities. Per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the valuation date.

Every mutual fund is bound by the investment objectives outlined in its offering document. The investment objectives specify the class of securities mutual funds can invest in. Mutual funds can be divided into various types, depending on asset classes. They can also invest in debt instruments such as bonds, money market, and Government securities apart from equity.

An Account Statement is sent to you by post stating the number of units allotted, not later than 15 days from the date of purchase.

Most mutual funds quote return on an annualized basis except those with equity as a component of the underlying asset. Return of equity based funds is on absolute basis.