Myths & Facts about Mutual Funds
Fact : Mutual funds can be for the short term or for longer term based on one’s investment horizon and objective.
There are different types of mutual fund schemes – which invest in different types of securities – in equity as well as debt securities that are suitable for different investor needs.
In fact, there are various short-term schemes where you can invest for a few days to a few weeks to a few years e.g., Liquid Funds are low duration funds, with portfolio maturity of less than 91 days, while Ultra short-Term Bond Funds are low duration funds, with portfolio maturity of less than a year. There are Short-Term Bond Funds which are medium duration funds where the underlying portfolio maturity ranges from one year – three years. Then, there are Long-Term Income Funds which are medium to long duration funds with portfolio maturity between 3 and 10 years.
While Equity Schemes are most suitable for a longer term, debt mutual funds are suitable for investors with short term (less than 5 years) investment horizon.
Fact : This is a very common misconception because of the general association of Mutual Funds with shares. One needs to keep in mind that the NAV of a scheme is nothing but a reflection of the market value of the underlying shares held by the fund on any day. Mutual Funds invest in shares, which may be bought or sold whenever deemed appropriate by the Fund Manager depending on the scheme’s investment strategy (Buy-Hold-Sell). If the Fund Manager feels that a particular stock has peaked, he can choose to sell it.
A high NAV does not mean the fund is expensive. In fact, high NAV indicates a good performance of the scheme over the years.
Fact : In fact, Mutual funds are meant for of common investors who may lack the knowledge or skill set to invest in securities market. Mutual Funds are professionally managed by expert Fund Managers after extensive market research for the benefit of investors. A mutual fund is an inexpensive way for investors to get a full-time professional fund manager to manage their money.
in stock market +
Fact : Mutual Funds invest in stock market (i.e., equities), bond market (corporate bonds as well as govt. bonds) and Money Market instruments such as Treasury Bills, Commercial Papers, Certificate of Deposit, Collateral Borrowing & Lending Obligation (CBLO) etc. Many of these instruments are not available to retail investors due to large ticket size of minimum order quantity (such as G-Secs) and hence, retail investors could participate in such investments through mutual fund schemes
Fact : Mutual fund ratings are dynamic and based on performance of the scheme over time – which in itself is subject to market fluctuations. So, a Mutual fund scheme that may be on top of the rating chart currently, may not necessarily maintain the same rating month after month or at a later date . However, a top rated fund is a good first step to short list a scheme to invest in (although past performance does not necessarily guarantee better returns in future). Investment in a mutual fund scheme needs to be tracked with respect to the scheme’s benchmark to evaluate its performance periodically to decide whether to stay invested or to exit.
Fact : Holding mutual fund Units in Demat mode is absolutely optional, except in respect of Exchange Traded Funds. For all other schemes, including the close-ended listed schemes like Fixed Maturity Plans (FMPs), it is entirely upto the investor whether to hold the units in a Demat mode or in conventional physical accountant statement mode.
Fact : Absolutely incorrect. One could start investing mutual funds with just ₹5000 for a lump-sum / one-time investment with no upper limit and ₹1000 towards subsequent / additional subscription in most of the mutual fund schemes. And for Equity linked Savings Schemes (ELSS), the minimum amount is as low as ₹ 500.
In fact, one could invest via Systematic Investment Plan ( SIP) with as little as ₹500 per month for as long as one wishes to.
Fact :This is a common misconception. A mutual fund's NAV represents the market value of all its underlying investments. NAV of a fund is irrelevant, because it represents the market value of the fund’s investments and not the market price. Any capital appreciation will depend on the price movement of its underlying securities. Let us understand this through an illustration.
Suppose, you invest ₹10,000 each in scheme A whose NAV is ₹20 and scheme B (whose NAV is say, ₹100. You will be allotted 500 units of scheme A and 100 units of scheme B. Assuming that both schemes have invested their entire corpus in exactly same stocks and in the same proportions, if the underlying stocks collectively appreciate by 10%, the NAV of the two schemes should also rise by 10%, to ₹22 and ₹110, respectively. Thus, in both the scenarios, the value of your investment increases to ₹ 11,000.
Thus, the current NAV of a fund does not have any impact on the returns.
Frequently Asked Questions
The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV). In simple words, NAV is the market value of the securities held by the scheme.
Mutual funds invest the money collected from investors in securities markets. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis.
The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date.
For example, if the market value of securities of a mutual fund scheme is INR 200 lakh and the mutual fund has issued 10 lakh units of INR 10 each to the investors, then the NAV per unit of the fund is INR 20 (i.e.200 lakh/10 lakh). NAV is required to be disclosed by the mutual funds on a daily basis. The NAV per unit of all mutual fund schemes have to be updated on AMFIís website and the Mutual Funds’ website by 9 p.m. of the same day. Fund of Funds are allowed time till 10 a.m. the following business day to update the information.
Unlike stocks (where the price is driven by the market and changes from minute-to-minute) , mutual funds don't declare NAVs through the day.
Instead, NAVs of all mutual fund schemes are declared at the end of the trading day after markets are closed, in accordance with SEBI Mutual Fund Regulations. Further, as per SEBI Mutual Fund Regulations, for all mutual fund schemes, other than liquid fund schemes, the mutual fund Units are allotted only at prospective NAV, i.e., the NAV that would be declared at the end of the day, based on the closing market value of the securities held in the respective schemes.
Thus, what is important here is the cut-off time for submission/receipt of the transaction – If you invest before the cut-off time, you will get the end-of-day NAV of that particular business day. The cut off time for purchase transactions for all mutual fund schemes other than liquid fund schemes is 3:00 p.m. This means that if you have invested till 3:00 p.m. on a particular day, you will get that day's NAV.
A mutual fund may accept applications even after the cut-off time, but you will get the NAV of the next business day. Further, the cut-off time rules apply for redemptions too.
Liquid Funds
- Subscription
- Where the application is received up to 2.00 p.m. on a day and funds are available for utilization before 2:00 p.m. without availing any credit facility, the closing NAV of the day immediately preceding the day of receipt of application.
- Where the application is received after 2.00 p.m. on a day and funds are available for utilization on the same day without availing any credit facility, the closing NAV of the day immediately preceding the next business day; and
- Irrespective of the time of receipt of application (before or after 2:00 p.m. on a day), where the funds are not available for utilization before 2:00 p.m. without availing any credit facility, the closing NAV of the day immediately preceding the day on which the funds are available for utilization.
- Redemption
- Where the application is received up to 3.00 pm – the closing NAV of day immediately preceding the next business day; and
- Where the application is received after 3.00 pm – the closing NAV of the next business day.
a. Subscription
For amount less than ₹2 lakh
- Where the application is received up to 3:00 p.m., closing NAV of the day on which the application is received.
- 2. Where the application is received after 3:00 p.m., closing NAV of the next business day.
For amount equal to ₹2 lakh or more
- Where the application is received up to 3:00 p.m. and funds are available for utilization before 3:00 p.m., closing NAV of the day on which the application is received.
- Where the application is received after 3:00 p.m. and funds are available for utilization, closing NAV of the next business day.
- Irrespective of the time of receipt of application (before or after 3:00 p.m.), where the funds are not available for utilization, closing NAV of the day on which the funds are available for utilization.
b. Redemption
- Where the application is received up to 3.00 pm – closing NAV of the day on which the application is received; and
- Where the application is received after 3.00 pm – closing NAV of the next business day.
All mutual funds publish their scheme NAVs on their respective web sites.
In addition, one can also access the NAVs of all mutual funds on the web site of Association of Mutual Funds in India (AMFI)
The Cut-off timing is the time before which an investor has to submit a valid purchase or withdrawal/ redemption form to be eligible for a particular day's price or Net Asset Value (NAV).
The price or NAV a unit holder is charged while investing in a mutual fund scheme is called sales price.
Repurchase or redemption price is the price or NAV at which a mutual fund repurchases (buys back) / redeems its units from the unitholders. It may include exit load, if applicable.
Mutual funds are market linked investments. They invest in either Equity, Bond or Gold markets and these markets have fixed open and closing hours for trading. The NAV of a scheme is based market value of the underlying portfolio and thus highly correlated with the market prices. So in order to be eligible for a particular days' NAV, the fund manager needs to be aware of the amount that needs to be purchased or sold as per the settlement period and trading times of the markets. The timings also largely help in ensuring that all classes of investors get the same treatment irrespective of their quantum of investing.
Much like a bank account number, a Folio number is your Account Number in a Mutual Fund Scheme, under which yours Unit holdings in a mutual fund scheme are recorded in the Unit Holders’ Register.
Most Mutual Funds allot a Master Folio number, so that Unit holdings of a unit holder (or same set of unit holders, in case of joint holders) are shown under a common folio number thereby avoiding the need to remember multiple folio numbers.
As the name suggests, it is a statement that reflects your holding in a scheme. A statement of accounts is like a bank pass book.
An account statement will reflect the following
- The scheme in which you have invested.
- The amount you've invested, the purchase price and the units you were allotted.
- Other details like Bank details, mailing and contact details, nominee details etc.
The Mutual Funds issue a Consolidated Account Statement (CAS) across all fund houses once a month. However, one may request for an account statement with each fund house that will solely reflect the holdings in the schemes managed by that particular fund house. There may be charges levied for issue of a duplicate account statement.
Mutual funds are required to issue statements of accounts within five working days from the date of closure of the initial subscription of the scheme. In case of close-ended schemes, the investors would get either a demat account statement as these are traded in the stock exchanges. In case of open-ended schemes, a statement of account is issued by the mutual fund within five working days from the date of closure of initial public offer of the scheme and/or from the date of receipt of the request from the unitholders. The procedure of repurchase is mentioned in the offer document.
Also, AMCs are required to send confirmation specifying the number of units allotted to the applicant by way of email and/or SMS’s to the applicant’s registered email address and/or mobile number as soon as possible but not later than five working days from the date of closure of the initial subscription list and/or from the date of receipt of the request from the unitholders.
Yes, non-resident Indians can invest in mutual funds in India. Please refer to the respective mutual fund’s offer documents for details.
