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Mutual fund faq

1-what is fund house/family?

Ans- A fund house or an asset management company is the company that manages Mutual Funds. the job of a fund house is to invest pooled funds of retail and institutional investors in equity, fixed income or other such securities in line with the stated investment objective of the fund

2- WHAT ARE THE FUNDS  NET ASSETS?

ANS- The total value of a fund’s Cash and Securities less its liabilities and obligations.

3- what is fund portfolio?
ans- A group of securities held by the mutual fund. A portfolio could be a mixture of stock, bonds, and cash.

4- What is the Net asset value (NAV)?

The price or value of one unit of a fund. It is calculated by summing 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. Most open-ended funds companies compute NAVs once a day based on closing market prices.

5. How are mutual funds classified based on their portfolios?

  • Growth Funds
    • Investment objective: Capital appreciation of equity shares
    • Investment avenue: Equity shares of companies with high growth potential
    • For eg. Morgan Stanley Growth Fund
  • Income Funds
    • Investment objective: Providing safety of investments and regular income
    • Investment avenue: Bonds, debentures and other debt related instruments as well as equity shares of companies with high dividend payouts. There are 2 aspects of income funds viz. low investment risk with constant income and high investment risk generating high income.
    • For eg. Templeton Income Fund
  • Balanced Funds
    • Investment objective: Modest risk of investment and reasonable rate of return
    • Investment avenue: Judicious mix of equity shares, preference shares as well as bonds, debentures, and other debt related instruments.
    • For eg. GIC Balanced Fund
  • Money Market Mutual Funds (MMMFs)
    • Investment objective: To take advantage of the volatility in interest rates in the money market
    • Investment Avenue: Certificate of deposits (CDs), call money market, commercial papers. Investors can participate indirectly in the money market through MMMFs.
    • For eg. IDBI-PRINCIPAL Money Market Fund 1997
  • Specialized Funds
    • Investment Objective: To take advantage of conditions in a particular sector or a specific income producing security
    • Investment Avenue: Specialized investments in securities of companies in certain sectors or specific income producing securities
    • For eg. Jain’s Pioneer’s Internet Opportunities Fund
  • Leveraged Funds
    • Investment objective: To increase the value of the portfolio and benefit the shareholders by gains exceeding the cost of borrowed funds
    • Investment avenue: Speculative and risky investments, like short sales to take advantage of declining market. Not common in India
  • Index Funds
    • Investment Objective: To increase the value of the portfolio in line with the benchmark index (for eg. BSE Sensex, SP CNX 50)
    • Investment Avenue: Investments only in those shares that form a part of the benchmark index, in exactly the same proportion, so that the value of the index fund varies in proportion with the benchmark index.
    • For e.g. UTI Nifty Index Fund
  • Hedge Funds
    • Investment Objective: To hedge risks in order to increase the value of the portfolio
    • Investment Avenue: Employ speculative trading principles – buy rising shares and sell shares whose prices are likely to fall.
    • Not common in India

 

 

6.How are mutual funds classified functionally?

Functional classification of mutual funds is done on the following basis:

·        Open-ended scheme 
Investors under this scheme are free to join the fund or withdraw from the fund at any time after an initial lock-in period. Such funds announce sale and repurchase prices from time to time. In an open-ended scheme, investors can resell units in the fund to the issuing mutual fund at the net asset value (NAV) of the units. This is because open-ended schemes are permitted to buy/sell their own units. For e.g. Alliance Capital 1995 Fund
·        Close-ended scheme 
Unlike the open-ended schemes, close-ended schemes do not issue units for repurchase redemption on a periodic basis. Its units can be redeemed only on termination of the scheme, or through dealings in the secondary market. In such schemes, the period of the scheme is specified at the outset. They have a definite target amount for the funds and cannot sell more after initial offering. For eg. UTI Mastergain 1986

 

7.How are mutual funds classified geographically?

Mutual funds can be classified geographically on the following basis:

·        Domestic funds 
Domestic fund houses launch funds, which mobilize savings of the nationals within the country. These schemes could fall under any of the categories mentioned under portfolio classification and functional classification. Schemes launched by Indian MFs like GIC MF, UTI LIC MF, SBI MF, Canbank MF, Bank of Baroda MF, Bank of India MF, Morgan Stanley, Templeton, Alliance.
·        Offshore Funds 
Offshore funds can invest in securities of foreign companies, after requisite permission from RBI. The objective behind launching offshore funds is to attract foreign capital for investment in the country of the issuing company. These funds facilitate cross border fund flow, which is a direct route for getting foreign currency. From the investment point of view, Offshore funds open up domestic capital markets to the international investors and global portfolio investments.

 

8.What are the different plans that mutual funds offer?

Mutual Funds in  order to cater to a range of investors, have various investment plans. Some of the important investment plans include:

·        Growth Plan 
Under the Growth Plan, the investor realizes only the capital appreciation on the investment (by an increase in NAV) and does not get any income in the form of dividend.
·        Income Plan 
Under the Income Plan, the investor realizes income in the form of dividend. However his NAV will fall to the extent of the dividend.
·        Dividend Re-investment Plan 
Here the dividend accrued on mutual funds is automatically re-invested in purchasing additional units in open-ended funds. In most cases mutual funds offer the investor an option of collecting dividends or re-investing the same.
·        Systematic Investment Plan (SIP) 
Here the investor is given the option of preparing a pre-determined number of post-dated cheques in favour of the fund. He will get units on the date of the cheque at the existing NAV. For instance, if on 25th March, he has given a post-dated cheque for June 25th, he will get units on 25th June at existing NAV.
·        Systematic Withdrawal Plan 
As opposed to the Systematic Investment Plan, the Systematic Withdrawal Plan allows the investor the facility to withdraw a pre-determined amount/units from his fund at a pre-determined interval. The investor’s units will be redeemed at the existing NAV as on that day.
·        Retirement Pension Plan 
Some schemes are linked with retirement pension. Individuals participate in these plans for themselves, and corporates for their employees.
·        Insurance Plan 
Some schemes launched by UTI and LIC offer insurance cover to investors.

9.What is a 401(k) plan?

A popular contribution program in the USA, available through many employers. Within these tax-sheltered plans, participants often can choose mutual funds as one or more of the investment choices.

This plan (or even a variant) is yet to be introduced in India.

10.What are the advantages of investing in a mutual fund?

Mutual funds are superior to other comparable investment avenues because of the following reasons:

Investors are exposed to reduced investment risk due to portfolio diversification, economies of scale in transaction cost and professional management.

·        Limited Risk 
Investors are exposed to reduced investment risk due to portfolio diversification, economies of scale in transaction cost and professional management.
·        Diversified investment 
Small investors can participate in larger basket of securities and share the benefits of efficiently managed portfolio by experts, and are freed from maintaining records of company share certificates, and tracking tax rules. Mutual fund investments are less risky due to portfolio diversification, which is possible mainly due to large funds available at their disposal. Small investors can never spread their risks across such a wide portfolio, as can mutual funds.
·        Freedom from tracking investments 
Investors do not have to track their investments regularly, as the tracking is done by experts who buy and sell securities for them. Investors are only required to track the performance of the mutual fund.
·        Professional management 
Mutual funds are run by professionals, with experience in portfolio management. Analysts employed by mutual funds analyze data and information available in a manner that cannot be matched by the lay investor.
·        Tax benefits 
Income tax benefits are granted to investors in mutual funds, making it more tax efficient as compared to other comparable investment avenues.

11.Who is a custodian?

The custodian, an independent organization, has the physical possession of all securities purchased by the mutual fund, and undertakes responsibility for its handling and safekeeping. For instance, the Stock Holding Corporation of India Ltd (SCHIL) is the custodian for most fund houses in the country.

12.What is an Asset Management Company (AMC)?

A highly regulated organization that pools money from many people into a portfolio structured to achieve certain objectives. Hence it is termed as an Asset Management Company. Typically an

AMC manages several funds – open-end /closed-end across several categories – growth, income, balanced. Every mutual fund has an AMC associated with it.

For instance, Alliance Capital Mutual Fund is associated with Alliance Capital Asset Management Company Ltd.

 

13.What is load?

It is a charge collected by a mutual fund when it sells units. It can be either front-end load (i.e., the charge is collected when an investor buys the units) or back-end load (i.e, the charge collected when the investor sells back the units). Some schemes do not charge any load and are called No Load Schemes

14.What is an ex-dividend date?

Normally, one business day after the record date. Investors purchasing unit on or after the ex-dividend date are not entitled to collect dividends or bonus units. The NAV falls by the amount of the dividend distributed and/or bonus issued. The terms ex-bonus and ex-dividend often are used synonymously.

For instance, if the record date for dividend is October 15th, then investors who don’t have their names in the list of unitholders as on that day, will not receive dividend. This works very similar to dividend and bonus declarations in the case of stocks.

15.How does one calculate the expense ratio for a fund?

The expense ratio for a fund is the annual expenses of a fund (at the end of the financial year), including the management fee, administrative costs, divided by the number of units on that day.

16.How relevant is the expense ratio?

As is evident from the definition, a lower expense ratio underlines the efficiency of a fund. This is a yardstick that investors need to apply to gauge the efficiency (or lack of it) between funds.

17.What is cheque-writing facility?

A service enabling investors to write cheques against their mutual fund account balances. Cheques usually must meet a certain minimum amount and the service is restricted to money-market funds.

18.What is a contingent deferred sales charge (or CDSC)?

A back-end load imposed on an investor if he exits from the fund before a pre-determined period (say 6 months). The charges decline the longer an investor stays invested with a fund.

19.What is a daily dividend fund?

A fund (money-market or bond) that calculates dividends daily, paying out or reinvesting the same.

20.What are derivatives?

Financial instruments based on some primary underlying asset or index such as a stock, bond, commodity, or a benchmark of stock prices. Derivative securities fluctuate up and down in tandem with the primary security. Derivatives often are leveraged, making them more volatile. They can be used to speculate as well as to reduce or control an unwanted risk. Options and futures are standardized derivatives. Others are customized to meet specific needs.

21.What is an Initial public offering (IPO)?

The sale of a company’s shares or a fund house’s mutual fund to investors for the first time.

22.What is an asset management fee?

The fee charged by the asset management company (AMC) for portfolio management. The fee charged on an annual basis is calculated as the percentage of net assets under management.

23.What is growth investing?

A popular investment style whereby fund managers identify companies showing promise of above-average earnings. Stocks are held primarily for price appreciation as opposed to dividend income. Growth investors (or managers) are willing to pay a premium to acquire a stock if they feel it has the right prospects. Growth investing is an alternative to value investing. For instance, buying an over-valued software stock would be the part of a growth manager’s investment strategy.

24.What is value investing?

As opposed to growth investors, value investors (or managers) focus on identifying under-priced stocks. Value investors look out for stocks selling at low prices, but which have the potential to give attractive returns in future.

25. what is hedging?

A general term used to describe any of several risk-reduction strategies. A fund manager might partially hedge against a market decline simply by moving a larger fraction of the portfolio into cash. Alternatively, the manager could sell stock-index futures contracts. If the market falls, the gains on the shorted futures would more or less offset the decline in the portfolio’s value.

26.What is passive investing?

This is the investment style espoused by index fund managers who simply invest by benchmarking their portfolio to a common stock market index like the BSE-30 or the SP CNX-50. The fund manager only invests in stocks in the index in exactly  the same proportion. There is no attempt to beat the benchmark index, but to simply replicate it, and therefore it is called as passive investing. The index fund will never outperform the benchmark index, nor does it attempt to.

27.How to add/cancel/modify nominee?

 

Nomination Registration

The SEBI (Mutual Fund) Regulations, 1996, notifies that the mutual fund shall provide for

nomination facility to the unit holders to nominate a person in whose favor the units shall

be transmitted in the event of death of the unit holder. In accordance, with the same, the

AMC provides for the nomination facility as permitted under the Regulations.

Nomination facility:

  1. Nomination is mandatory for single mode of holding along with complete details of full address of the nominee.
  2. All holders in the folio need to sign the nomination form, irrespective of the mode of holding.
  3. Nomination shall not be allowed in a folio held on behalf of a minor.
  4. Non-individuals including society, trust, body corporate, partnership firm, Karta of Hindu Undivided Family, holder of Power of Attorney cannot nominate.
  5. The Nominee shall not be a trust (other than a religious or charitable trust), society, body corporate, partnership firm,Karta of Hindu Undivided Family or a Power of Attorney holder.
  6. A nomination form cannot be signed by Power of Attorney (PoA) holders.
  7. Investors who do not wish to nominate must sign separately confirming their non-intention to nominate.
  8. A non-resident Indian can be a Nominee subject to the exchange controls in force, from time to time.
  9. Nomination in respect of the units stands withdrawn upon the transfer of units.
  10. Investors who want to make multiple nominations need to fill the separate Multiple Nomination Form available on www.icicipruamc.com and submit it to the AMC.

Nomination Modification/Cancellation

  • To modify/cancel an existing nomination, the investor is required to fill in the Modification/Cancellation form and submit the same duly signed to the Customer Service Center.
  • The cancellation of nomination can be made only by those individuals who hold units on their own behalf, single or jointly and who made the original nomination and the request has to signed by all the holders.
  • On cancellation of the nomination, the nomination shall stand withdrawn and the AMC shall not be under any obligation to transfer the units in favor of the Nominee.

28.What is the process for changing an address in the folio?

Change of Address:

  1. KYC Complied Folios/Investors:
  • In case of change of address for KYC complied (verified)folios, the investors shall be required to submit the below stated documents to the designated intermediaries of the KYC Registration Agency:
  • Proof of new address (POA) and,
  • Any other document the KYC Registration Agency may specify from time to time.
  1. KYC not Complied Folios/Investors:

In case of change of address for KYC not complied(not verified) folios, the investors shall be required to submit the below stated documents:

  • Proof of new address and,
  • Proof of Identity (POI): Only PAN card copy, if PAN is updated in the folio.
  • In a case where PAN is not updated, the copy of PAN card or the other POI as may be prescribed.

However, it is advisable for these investors to complete the KYC process.

  1. Units in Demat Mode:

For investors holding units in demat mode, the procedure for change in address would be as determined by the depository participant.

Note:

  • List of admissible documents for POA and POI as mentioned in the SEBI circular no. MIRSD/SE/Cir-21/2011dated October 5, 2011, shall be considered or any other or additional documents as may be required by SEBI, AMFI or SEBI authorized KYC Registration Agency from time to time.
  • In case, the original of any of the aforesaid documents are not produced for verification, then the copies should be properly attested/verified by the authorities who are authorized to attest as per SEBI circular no. MIRSD/SE/Cir-21/2011 dated October 5, 2011.

29.What is the process for changing bank details?

Change of Bank Mandate:

In case of change of bank request, the investors shall be required to submit the below stated supporting documents to effect the change:

  • Change of Bank Mandate Form
  • The original cancelled cheque of the new bank with the investor name mentioned on the cheque.

or

  • Copy of the bank statement/passbook duly attested by the new Bank, evidencing the name and bank account details of the investor (The bank statement shall not be later than 3 months old

In case the request for the change in bank account information and redemption request is in the same transaction slip or letter, such change of bank mandate shall not be processed.

 

However, the valid redemption transaction will be processed and the payout would be released as per the specified service standards and the last registered bank account shall be used for all the purposes.


Cooling Period:

If the investor submits redemption request accompanied with a standalone request for change of Bank mandate or submits a redemption request within seven days from the date submission of a request for change of Bank mandate details, the AMC will process the redemption but the release of redemption proceeds shall be deferred on account of additional verification, but will be within the regulatory limits as specified by SEBI from time to time

Change of Bank Mandate for Systematic Investment Plan (SIP)

In order to change the existing bank account for SIP, investors need to submit following documents 30 days before the next SIP debit date:

  • A new ‘SIP’ Form with the change of bank details and the cancelled cheque of new bank evidencing the name and bank account details of the investor.
  • Letter to discontinue the existing SIP.

 

30.How do I have my name corrected in the folio?

Name Change

Documents required for effecting Name change
Name change request can be accepted from an investor, in the below-mentioned scenario(s)

  1. Data Entry Correction
  2. Investor has changed his/her name
  3. Name change consequent to marriage
  4. Name change consequent to Divorce
  5. Minor Correction in the name filled in the application
  6. Major Correction in the name filled in the application
  7. Name change of a Minor
  8. Data Entry Correction
  • If there is an error in updating of the name in our records as compared to the name filled in the application form same can be corrected by contacting the customer service or by providing a written request for the same.
  1. The investor has actually changed his/her name:
  • Request letter from the investor.
  • Notarized copy of Notification in Official Gazette of India
  • Attestation from the bank manager of the Bank whose mandate has been provided at the time of original investment, confirming the Investors Name, Bank branch, Account number, and Signature.
  • Any official/legal document reflecting the name change viz.:
  • Bank statement from the same bank of which bank mandate is on our record Passport.
  • Attestation from School Principal confirming the name change and registered accordingly in the school records – This is for applications made by minor investors
  1. Change of name consequent to marriage:
  • Investors request Letter
  • Notarized copy of the marriage certificate

OR

  • Certified true copy of the state Gazette OR the original copy of the state gazette in which a declaration has been made to that effect.
  1. Change of name consequent to divorce:
  • Investors request Letter
  • Notarized copy of the divorce certificate
  • Certified true copy of the state Gazette OR the original copy of the
  • State Gazette in which a declaration has been made to that effect.
  1. Minor Error in the name:
    There could be a minor spelling in the name like spelling mistake and when it appears to be a genuine case should be considered for the name change after doing a KYC and subject to submission of the following documents:
  • Investor request letter
  • Account statement
  • Void cheque copy from the investor with his/her name clearly printed on the cheque. The name should match with the name change requested by the Investor.
  • In absence of such a Cheque, an attestation from the bank manager of the Bank whose mandate has been provided at the time of original investment, confirming the Investors Name, Bank branch, Account number, and Signature.
  • Photo ID with Signature i.e. PAN Card (If not already available), MAPIN Card, Passport, etc.
  • Indemnity Bond on a plain paper, duly signed by all the holders in that folio. (Attached herewith as (ANNEXURE 1 as below)

 

  1. Name change of a Minor
  • In case of minor or major name correction and the investor being a minor, the documents will remain the same. The Indemnity bond will be submitted by the Parent/guardian.

 

31.What is the process of lien marking/cancellation?

Lien registration procedure.

Lien registration- Following documents are required

  • Request letter from Investor clearly specifying the folio number, scheme, units and the person/ institution in whose favor the lien has to be marked.
  • Consent letter from the person/institution in whose favor the lien has to be marked/
  • The letters should clearly mention whether the future dividend (if any) will be in paid to the investor (normal lien) or will be paid to the person/bank/institution in whose favor the lien is marked (dynamic lien)
  • constitution (in whose favor the lien is marked)
  • Bank name and its account details from the financier on their lien marking request for Lien invocation process.

Lien cancellation procedure.

  • Consent letter from the person/institution in whose favor the lien has to be removed.
  • Request letter from Investor clearly specifying the folio number, scheme, units and the person/ institution in whose favor the lien has to be removed (Not Mandatory)
  • ASL of the constitution. (Required if the authorized signatory has changed )

32.What is the process of updating change of status from Minor to Major?

 

Investments made on behalf of Minors

 

  1. Accounts of Minors:
  2. Name of the guardian along with relationship must be mentioned if the investments are being made on behalf of a minor.
  3. Guardian of the minor should either be a natural guardian (i.e. father or mother) or a court appointed the legal guardian.
  4. Joint holding is not allowed if the first applicant is minor.
  5. If the first applicant is minor, date of birth along with a photocopy of supporting documents as enumerated below shall be mandatory while opening the account on behalf of a minor:
  • Birth certificate of the minor, or
  • School leaving certificate / Mark sheet issued by Higher Secondary
  • Board of respective states, ICSE, CBSE etc., or
  • Passport of the minor, or (d) Any other suitable proof evidencing the date of birth of the minor.
    1. In case of the natural guardian, a document evidencing the relationship has to be submitted, if the same is not available as part of the documents submitted as proof of date of birth of the minor applicant.
    2. In case a court appointed legal guardian- a notarized photocopy of the court order should be submitted along with the application.

 

  1. Change in Tax Status (Minor Attaining Majority)

Upon attaining majority, a minor has to write to the fund, giving his/her specimen signature duly authenticated by his/her banker, as well his/her new bank mandate, PAN details, KYC acknowledgement letter, in order to facilitate the Fund to update its records and permit the erstwhile minor to operate the account in his/her own right.

 

List of standard documents to change account status from minor to major.

  • Services Request form, duly filled and containing details like name of the major, folio numbers, etc.
  • New Bank mandate where account changed from minor to major.
  • Signature attestation of the major by a manager of a scheduled bank / Bank Certificate
  • Letter
  • KYC acknowledgment of the major.
  • In case of existing folios where the date of birth may not be available, AMC shall obtain this information and update their records at the earliest.
Rohan Sharma

Rohan Sharma

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About Me

I’m a Commerce Graduate & CFP Professional, engaged in blogging since 3 years. I’m not affiliated with any financial product. The purpose of writing blog is to spread financial awareness and help people in achieving excellence for money. Please note that the views expressed on this Blog/Comments are clarifications meant for reference and guidance of the readers to explore further on the topics. These should not be construed as investment advice or legal opinion.

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Mutual fund faq

1-what is fund house/family? Ans- A fund house or an asset management company is the company that manages Mutual Funds. the job of

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