MUTUAL FUNDS FAQ'S
Q. What is an Asset Management Company (AMC)?
A. An AMC is the company which manages numerous mutual fund schemes of investors, by pooling in resources from multitude of investors and investing in financial securities
Q. Are investments in Mutual Funds safe?
A. Mutual Funds are not entirely risk-free. The possibility of capital loss, credit risk, market risk still persists.
Q. What is the right time to invest in mutual funds?
A. Various studies have shown that ‘time in the market’ matters more than ‘timing the market.’ The right time to invest in mutual funds is NOW. Do not wait for a market correction or you may be left waiting a long time. Corrections are very hard to predict and time correctly. Instead, figure out your goals and risk appetite and invest without delay.
Q. What are the eligibility criteria for investing in Mutual Funds?
A. Anyone can invest in a mutual fund with a minimum investment of as low as ₹100. Both resident Indians and NRIs can invest in mutual funds. You can also invest in the name of your spouse or kids. If your child is a minor (below 18), your details have to be mentioned while investing and you operate the account till he or she turns 18. Even partnerships, LLPs, Trusts and Companies can invest in mutual funds.
Q. How much money do you need to start investing in a mutual fund?
A. The minimum investment amount may differ depending upon the fund you intend to invest in. But, the absolute minimum investment that you can start with, can be as low as Rs. 500.
Q. What is CRISIL MF Ranking?
A. CRISIL is a global credit rating agency which ranks mutual funds based on numerous parameters including mean returns, volatility, active returns, portfolio analysis, etc. The ranks are given on a scale from 1 to 5. In each category, the top 10 percentile of funds are ranked as CRISIL Fund Rank 1 and the next 20 percentile as CRISIL Fund Rank 2.
Q. What is Net Asset Value (NAV) of a scheme? and how is NAV calculated?
A. NAV of a mutual fund is the market value of the fund, just like shares have a share price. It is directly dependent on the value of total assets under management of the fund. As the AUM of the fund increases, the NAV of the fund also increases. NAV is calculated using the formula = (total fund assets - total fund liabilities)/ Total number of outstanding units of the scheme.
Q. What is the average interest rate for a mutual fund?
A. Mutual funds are market linked investments and do not provide guaranteed returns. Hence there is no interest rate for a mutual fund. Returns are not guaranteed but they are potentially higher than various fixed return investments currently available in the market.
Q. Is investing in mutual funds tax free?
A. No. Mutual funds are subject to short term capital gains (STCG) and long term capital gains (LTCG) taxation rules. Different mutual fund categories are taxed differently such as equity and debt. In case of mutual fund dividends, the Dividend Distribution Tax (DDT) become applicable and is deducted at source by the fund. You can read more about mutual fund taxation, here.
Q. What are Tax - Saving Mutual Funds?
A. A category of equity funds known as Equity Linked Savings Schemes(ELSS) is also known as tax-saving mutual fund scheme. Investment upto ₹1.5 lakh in these schemes is exempted from taxation under Section 80(C) of the IT Act. ELSS have a lock-in period of 3 years.
Q. Open Ended or Close Ended Funds?
A. Open ended funds give you flexibility. You can invest in them and exit them on any business day. However due to their nature, they can bet hit by large, sudden redemptions. Close ended funds are inflexible. You can buy them from the AMC only during the New Fund offer (NFO) period and exit when the fund matures. However their closed nature safeguards the fund manager from the pressure of large redemptions and allows him to focus on delivering returns.
Q. SIP or Lumpsum?
A. Systematic Investment Plans or SIPs invest a fixed amount in a mutual fund at regular intervals. For example Rs 10,000 in invested in a mutual fund each month. SIPs spread your investment and protect you from catching a market high (bad timing). They also average out your purchase price, reducing your risk. SIPs work best with equity funds and not debt funds.
Lumpsums are a one-time investment. You should go for lumpsums only if you are highly confident of the fund you are investing in. If the fund’s NAV rises continuously, a lumpsum rather than SIP will maximise returns. In case of Debt funds,interest is accrued on an ongoing basis making lump sum investment in them more efficient than SIPs, broadly speaking.
Q. When should you sell a mutual fund?
A. You should sell a fund if:
- It starts underperforming its benchmark and peers on a sustained basis.
- The time for which you invested, has come to an end. For instance, you have invested for your children’s education and their college fees have become due.
- The goal for which you invested has been attained. For instance, you invested to buy a home and a large enough sum has accumulated to fund your home purchase.