Mutual Fund FAQs

What is a Mutual Fund?

A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI), that pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets.

Which was the First Mutual Fund to be set up in India?

Unit Trust of India is the first Mutual Fund set up under a separate act, UTI Act in 1963, and started its operations in 1964 with the issue of units under the scheme US-64.

How many Mutual Funds are there in India currently?

Presently there are 44 Mutual Funds in India which together offer more than 2500 mutual fund schemes.

What is the total size of the mutual fund sector in India?

Currently the Average AUM of mutual funds in India are over Rs 32.33 Lac crore. (As on 28th February 2021) The AUM of the Indian MF Industry has grown from Rs. 7.07 trillion as on February 28, 2011 to Rs. 31.64 trillion as on February 28, 2021 about 4 ½ fold increase in a span of 10 years. The total number of accounts (or folios as per mutual fund parlance) as on February 28, 2021 stood at 9.62 crore (96.2 million), while the number of folios under Equity, Hybrid and Solution Oriented Schemes, wherein the maximum investment is from retail segment stood at about 8.07 crore (80.7 million).

What is the Regulatory Body for Mutual Funds?

Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds. All the mutual funds must get registered with SEBI.

Why should I choose to invest in a mutual fund?

For a retail investor who does not have the time and expertise to analyse and invest in stocks and bonds, mutual funds offer a viable investment alternative. This is because:
Mutual funds diversify the risk of the investor by investing in a basket of assets, A team of professional fund managers manages them with in-depth research inputs from investment analysts. Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information which individual investors cannot access.

How do mutual funds diversify their risks?

Financial theory states that an investor can reduce his total risk by holding a portfolio of assets instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio with suitable asset allocation, this risk gets substantially reduced.

Can mutual funds be viewed as risk-free investments?

No. Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds with proper diversification, potential risks gets substantially reduced.

What are the risks involved in investing in mutual funds?

A very important risk involved in mutual fund investments is the market risk. When the market is in doldrums, most of the equity funds experience a downturn but at the same times these equity MFs carry extraordinary potential of creating a good wealth for an investor over a long run.

What are open-ended and closed-ended mutual funds?

In an open-ended mutual fund there are no limits on the total size of the corpus. Investors are permitted to enter and exit the open-ended mutual fund at any point of time at a price that is linked to the net asset value (NAV). In case of closed-ended funds, the total size of the corpus is limited by the size of the initial offer.

Do both open-ended and closed-ended funds come out with an initial offering?

Yes. But the only difference is that in case of open-ended funds, once the initial offer closes ,fund continuous offer period starts & investor can enter and exit the fund at a price linked to the NAV.

What is the investor’s exit route in case of a closed-ended fund?

According to Sebi regulations, all closed-ended funds have to be necessarily listed on a recognized stock exchange. Thus the secondary market provides an exit route in the case of closed-ended funds.

How do I invest money in Mutual Funds?

One can invest by approaching an amfi certified distributor of Mutual funds. Investor can opt for an online mode of investing through BSE/NSE/MFU Platforms available with their respective mutual fund distributor.

What are the parameters on which a Mutual Fund scheme should be evaluated?

Performance indicators like rolling CAGR returns given by the fund and returns delivered by the benchmark index of the fund is a basic criterion to evaluate ant MF schemes. Also, the performance of the competitive peer schemes during a same tenure is an analytical method to evaluate the mutual fund schemes, Also the objective of the fund and the promoters image are some of the key factors to be considered while taking an investment decision regarding mutual funds.

As a lay investor, how do I go about analysing the mutual fund scheme?

As a service to the investing community, We do it for you. Our research team evaluates each scheme based on primary as well as secondary information received AMCs and various research agencies and presents an unbiased report which will help you to take a decision on whether a fund is worth investing or not.

What are the different funds we currently have in India?

Currently, MF industry offers a variety of categories such as Large cap funds, Large & mid, Flexi cap, Midcap, smallcap, Hybrid, Dynamic asset allocation, sectoral funds, thematic funds, Index funds, Arbitrage funds, Gold funds ,ETFs, Retirement savings funds, ELSS, pension funds, child benefit funds. Also there is a basket of debt funds available to invest for short and medium term tenures.

Which plan should I choose?

It depends on your investment object, which again depends on your income, age, financial responsibilities, risk taking capacity and tax status. For example a retired person is most likely to opt for monthly income/Dividend/SWP plan while a high-income youngster is most likely to opt for growth plan.

What is a Systematic Investment Plan and how does it operate?

A systematic investment plan is one where an investor contributes a fixed amount every month and at the prevailing NAV the units are credited to his account. Today many funds are offering this facility.

What are the benefits of s Systematic Investment Plan?

It avoids lump sum investments at expensive levels, In a scenario of falling prices, it reduces your overall cost of acquisition by a process of rupee-cost averaging. This means that at lower prices you end up getting more units for the same investment

What is NAV and how it is calculated?

NAV is the net asset value of the fund. it reflects what the unit held by an investor is worth at current market prices. For details on calculation methodology and formulae, please click on our mutual fund glossary. NAV = (Assets - Liabilities) / Total number of outstanding shares.

What proportion of my investment should be invested in mutual funds?

Once again this decision will depend on factors like your income, savings, risk aversion and tax status.

Like IPOs, can there be any situation wherein I am not allotted the units applied for in the initial offer?

In case of closed-ended funds there is a target amount and the funds are permitted a green-shoe option to retain over-subscriptions up to a certain limit. In case of open-ended funds there are no such limits and all applications are honoured.

How do I get the information regarding the forthcoming schemes of different mutual funds?

For the guidance of the investors our web site is giving a detailed information of the forthcoming schemes of different mutual funds .You can visit our website or connect with DFI Relationship Manager to get such information on forthcoming scheme openings.

Can a Mutual Fund assure fixed returns?

As per Sebi Regulations, mutual funds are not allowed to assure returns.

How much return can I expect by investing in mutual funds?

Investors need to be clear that mutual funds are essentially medium to long term investments. Hence, short-term abnormal profits will not be sustainable in the long run. But in the medium to long run the mutual funds tend to outperform most other traditional avenues of investments at the same time avoiding the risk of direct investment accompanied with professional fund management.

What is the difference between mutual funds and portfolio management schemes?

While the concept remains the same of collecting money from investors, pooling them and investing the funds, the target investors are different. In the case of portfolio management the target investors are high networth investors while in case of mutual funds the target investors are the retail investors.

How does the concept of exit load work in case of unit redemptions?

An exit load is levy that an investor pays at the point of exit. This is levied to dissuade investors from exiting the fund. Assume that the current NAV of the fund is Rs.12.00 and that the exit load is Rs.0.50. Now if you sell 800 units then you stand to receive 800X11.5 = Rs. 9200. For detailed explanation of exit load, refer our mutual fund glossary.

Can an investor redeem part of the units?

Yes. One can redeem part units also.

Say I redeem and buy and do likewise several times then, how do I keep track of my portfolio?

The moment you buy or get allotted the units, a statement will be given to you mentioning the number of units allotted/bought and redeemed by you. The recording of entries would be similar to your pass book entries in the bank. In mutual fund terminology it is called Account Statement.

Do mutual fund investments attract wealth tax?

No. Under the Wealth Tax Act, all financial assets, including mutual fund units are exempt totally from Wealth Tax.

Is my profit &income from mutual fund taxable?

Yes. Investor is eligible to pay short term capital gain tax of 15% if redeem from an equity MF before 1 year & Long term capital gain tax of 10% if redeem after 1 year, If investor is having any dividend income from equity MF, it gets added to the total income & taxed as per the tax bracket. As far as dividend income from debt schemes is concerned, It attracts the dividend distribution tax of 29.12% which gets deducted at source at the time of distributing the dividends.

What are my major rights as a unit holder in a mutual fund?

Some important rights are mentioned below:
Unit holders have a proportionate right in the beneficial ownership of the assets of the scheme and to the dividend declared.
They are entitled to receive dividend warrants within 42 days of the date of declaration of the dividend.
They are entitled to receive redemption cheques within 10 working days from the date of redemption.
75% of the unit holders with the prior approval of SEBI can terminate AMC of the fund.
75% of the unit holders can pass a resolution to wind-up the scheme.