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Mutual Fund Shortest Guide Book

Through the below writeup on the mutual fund, we have tried to provide all aspects about mutual funds which will help you become an expert in the mutual fund as it caters for all aspects of mutual fund in the most concise way and this is the reason we have called it the shortest book on mutual fund which is your road to success.
  • Mutual funds are investment products available to investors through which they can invest in an asset class of their choice such as equity, debt, gold or real estate.
  • Sponsors, trustees and asset management companies (AMC) constitute the principal constituents of a mutual fund.
  • Registrars to an issue & Transfer agents, distributors, bankers, custodians, brokers, depository participants are other constituents of a mutual fund.
  • All these entities are regulated by SEBI for their eligibility in terms of experience and financial soundness, range of responsibilities and accountability.
  • A new product created by the AMC is launched through a new fund offer (NFO) after obtaining the approval of the trustees and SEBI.
  • The KIM is the abridged offer document which is available with each application form for the NFO.
  • An NFO is open for a period of 15 days.
  • The units are allotted to investors within 5 business days of the NFO closing and an account statement giving details of the investment is sent to them.
  • A mutual fund scheme’s investment objective states what the scheme intends to achieve. The investment objective will define the asset class the type of securities in the portfolio and the way the fund will be managed.
  • Each investor’s holding in a mutual fund is represented in terms of units that are derived from the amount invested. It is calculated as amount invested/price per unit.
  • The net asset of a mutual fund scheme is the current value of its portfolio of securities, cash and receivables less expenses such as fund manager’s fees and other direct charges.
  • The net asset per unit of a scheme is calculated as Net assets/Number of outstanding units of the scheme. This is the Net asset value (NAV).
  • The process of valuing the portfolio of securities on a daily basis at current market value is called marking to market.
  • An open-ended scheme allows investors to invest in additional units and redeem investment continuously at current NAV post the NFO.
  • A closed-end scheme is for a fixed period only after which the units redeemed at the current NAV. No additional purchase is allowed from the mutual fund after the NFO.
  • Interval funds are closed end funds which become open-ended during specified periods during which investors can purchase and redeem units like in an open-ended fund.
  • The Securities and Exchange Board of India (SEBI) is the primary regulator of mutual funds in India through the provisions of the SEBI (Mutual Fund) Regulations, 1996.
  • The Association of Mutual Funds in India (AMFI) is the industry body that oversees the functioning of the industry and recommends best practices to be followed by the industry members.
  • The service standards to be followed by mutual funds in their association with investors are prescribed by SEBI. This includes timelines for making allotment, sending account statements, despatch of redemption proceeds.
  • Equity funds invest in a portfolio of equity instruments and the risk and return from the scheme will be similar to directly investing in equity markets.
  • Passive funds invest in the shares that constitute an index and in the same proportion.
  • Active funds adopt various styles and strategies in selecting securities and managing the portfolio. The risk and return of the fund will depend upon these strategies.
  • Diversified equity funds invest across segments, sectors and sizes of companies.
  • Large- cap funds invest in stocks of large, liquid blue-chip companies with stable performance and returns.
  • Mid-cap funds invest in mid-cap companies that have the potential for faster growth and higher returns and small cap funds in small cap companies.
  • Sector funds invest in companies that belong to a particular sector. The risk is higher because of lesser diversification and the returns tend to be cyclical.
  • Theme-based funds invest in multiple sectors and stocks that form part of a theme.
  • Growth Funds portfolios feature companies whose earnings are expected to grow at a rate higher than the average rate.
  • Value Funds seek to identify companies that are trading at prices below their inherent value with the expectation of benefiting from an increase in price as the market recognizes the true value.
  • Dividend yield Funds invest in stocks that have a high dividend yield.
  • ELSS is an equity fund which gives the investor tax deduction benefits under section 80C of the Income Tax Act up to a limit of Rs. 1,00,000 per year.
  • Debt funds invest in a portfolio of debt instruments such as government bonds, corporate bonds and money market securities.
  • Money Market or Liquid Funds are very short term maturity. They invest in debt securities with less than 91 days to maturity.
  • Ultra short-term plans are also known as treasury management funds, or cash management funds invest in money market and other short term securities of maturity up to 365 days.
  • Short Term Plans combines short term debt securities to earn interest with a small allocation to longer term debt securities to earn capital gains.
  • Long term debt funds are structured to generate total returns made up of both interest income and capital appreciation from the securities held.
  • The extent of capital gain (or loss) from changes in the price of securities depends upon the tenor of the debt securities held. This is called interest rate risk. Higher the tenor greater is the impact on price of changes in interest rates.
  • An income fund is a debt fund which invests in both short and long term debt securities of the Government, public sector and private sector companies with a view to generate income.
  • Gilt Funds invest in government securities of medium and long-term maturities. They don’t have default risk but high interest rate risk.
  • Dynamic debt funds seek flexible and dynamic management of interest rate risk and credit risk.
  • Floating rate funds invest primarily in floating rate debt instruments.
  • Fixed maturity plans (FMPs) are closed-end funds that invest in debt securities with maturities that match the term of the scheme. An FMP structure eliminates the interest rate risk.
  • Debt-oriented hybrids invest minimum of 70 to 95% in a debt portfolio and the balance in equity instruments. Both debt and equity components are managed conservatively.
  • Monthly income plan is a debt-oriented hybrid.
  • Predominantly equity-oriented hybrids invest in the equity market, but invest up to 35% in debt, so that some income is also generated and there is stability to the returns.
  • Asset Allocation Funds invest in both equity and debt based on the fund manager’s view on which type of investment is expected to do well.
  • Capital Protection Funds are structured such that a portion of the principal amount is invested in debt instruments so that it grows to the principal amount over the term of the fund. Exposure to equity is typically taken through the equity derivatives to give a return boost.
  • A Fund of Funds (FoF) is a mutual fund that invests in units other mutual funds that have been chosen to match its investment objective.
  • Exchange Traded Funds (ETFs) hold a portfolio of securities that replicates an index and are listed and traded on the stock exchange.
  • Gold ETFs have gold as the underlying asset so as to provide investment returns that, closely track the performance of domestic prices of gold. Each ETF unit typically represents one gram of gold.
  • International funds invest in markets outside India, by holding certain foreign securities in their portfolio.
  • Arbitrage funds aim at taking advantage of the price differential between the cash and the derivatives markets. A completely hedged position makes these funds a low-risk investment proposition.
  • Real Estate Mutual Funds invest in real estate either in the form of physical property or in the form of securities of companies engaged in the real estate business.
  • Rajiv Gandhi Equity Savings Scheme, 2012include schemes of mutual funds and ETFs that invest in securities that form part of the BSE100 or CNX 100, shares of PSUs classified as Maharatnas, Navratnas and Miniratnas, among others. The scheme has to be listed on a stock exchange and settled through the depository mechanism. Investors get a tax benefit for these investments.
  • Dividend received by investors from mutual funds are exempt from tax
  • Dividend distribution tax (DDT) applicable on liquid funds is 25% for individual investors and 30% for companies
  • DDT in debt funds is 25% for individual investors and 30% for companies
  • Long-term capital gains from equity funds are exempt from tax. Short term capital gains are taxed at 15%.
  • Long-term capital gains from debt funds are taxed at 10% without indexation and 20% with indexation. Short term capital gains are taxed at the marginal rate of tax applicable to the investor.
  • Redemption from equity-oriented funds will attract Securities Transaction Tax at the rate of 0.001% to be paid by the investor redeeming the units.
  • NRI investors in mutual funds alone have tax deducted at source at the rate of 15% for STCG in equity-oriented funds and at the rate of 30% and 10% for STCG and LTCG from non-equity-oriented funds.
  • Investors can enhance their post-tax returns by choosing the right investment option: dividend or growth option, given the type of investment and period of holding.
  • The categories of investors who can invest in a mutual fund scheme in India include resident individuals, NRIs, PIOs, Foreign nationals, Institutions, Trusts.
  • Eligible investors in mutual funds are required to have a permanent account number (PAN) issued by the Income Tax authority.
  • The exceptions to this are micro investments which are defined as investment made in a fund through a lump sum or a systematic investment plan not exceeding Rs. 50000 per year by individual investors.
  • SEBI requires investors to ensure compliance with the KYC norms when they initiate a mutual fund transaction for the first time.
  • The KYC process involves establishing the identity and address of the investor by collection of required information in a specified format.
  • KYC done with any one market participant registered with SEBI will apply to transactions with others as well.
  • The common KYC form is in 2 parts: part 1 has information required to establish identity and address and part 2 collects information relevant to a particular intermediary.
  • KYC process also involves in-person verification by an authorized official of the intermediary.
  • The acknowledgement sent by the KYC registration agency is the proof that the investor is KYC compliant.
  • An investor can make an initial investment in a mutual fund either in the new fund offer (NFO) or subsequently when the open-ended fund opens for transactions.
  • An application is used to make a fresh purchase of units. A folio is created for the investor using the mandatory information such as name, address, status, PAN and KYC compliance provided in the application form.
  • In an NFO units are allotted at the offer price. Post the NFO, units are allotted at current NAV.
  • Investor can make additional purchase in the same folio by just quoting the folio number.
  • Payment modes for mutual fund purchases include cheques, demand drafts, and electronic payment modes such as ECS, RTGS and direct transfer.
  • Cash and third party payments are accepted under limited circumstances.
  • Investors can buy units directly, or through a distributor or through the stock market platform for mutual funds.
  • Redemption proceeds are sent by pre-printed cheque, account transfer in favour of the first holder.
  • In case of NRI investors, repatriation rules must be considered while crediting the redemption proceeds.
  • A mutual fund captures the address, status, bank details mode of joint holding, nomination while creating the folio. Any change in this information has to be updated in the records of the KRA and the mutual fund.
  • Minor investors may invest through a guardian. Other investors may appoint a power of attorney. Both these entities have to be PAN and KYC compliant.
  • Transmission is the process of transfer of units of an investor to persons eligible to receive it on the death of the investor.
  • Joint holders, nominees and heirs are the order in which claims for transmission is considered.
  • The statement of account (SoA) is the proof of investment for an investor and record of all transactions done with the mutual fund.
  • The R&T agent has to send the SoA within 5 working days of the transaction request.
  • A consolidated account statement is required to be sent to investors for each month in which there has been a transaction in the folio.
  • In a systematic investment plan, investors commit to invest a fixed sum of money at regular intervals over a period of time in a mutual fund scheme.
  • Post-dated cheques, electronic payment modes, standing instructions are common modes of payment for SIP.
  • An SIP can be discontinued or cancelled by the investor giving notice of the same in writing to the mutual fund and to the bank, in case of electronic payment instructions.
  • A systematic withdrawal plan (SWP) enables recurring redemptions from a scheme over a period of time at the applicable NAV on the date of redemption. There will be load and tax implications for each tranche of SWP.
  • A systematic transfer plan combines a series of redemptions from one scheme and an investment to another scheme of the same mutual fund.
  • A switch is a single transfer from one scheme or option of a scheme to another scheme, or option of the same scheme.
  • Mutual funds provide the benefits of investment expertise, diversification, convenience and flexibility to investors.
Go through the above given points which have been compiled by us as the shortest book or you can call it as a guide on the mutual fund as knowing about all aspects of the mutual fund will help you to get the best out of this investment product. So, do not skip any part of the above guide and be rest assured that you will be an expert. 

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