What is Mutual Funds?

A Mutual Fund scheme as the name suggests, is a shared fund that pools money from multiple investors and invests the collected corpus in stocks, bonds, short-term money-market instruments, other securities or assets, or a combination of these investments. The investments are in accordance with the investment objectives as disclosed in offer document. Therefore, an equity-oriented mutual fund scheme will invest predominantly in a set of stocks.

A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) before it can collect funds from the public.

How do Mutual Funds Work?
Mutual funds issue units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unitholders.

The combined securities and assets the mutual fund own is known as its portfolio, which is managed by a qualified investment professional also known as a Fund Manager. Each unit an investor holds represents a portion of the portfolio. The value of the units held fluctuates with respect to the underlying value of the portfolio. The value of each unit is represented by the Net Asset Value (NAV) of the fund.

The organization that manages the investments is termed as the ASSET MANAGEMENT COMPANY (AMC). The AMC employs various employees in different roles who are responsible for servicing and managing investments.

The AMC offers various products (schemes/funds) in mutual funds, which are structured in a manner to benefit and suit the requirement of investors. Every scheme has a portfolio statement, revenue account and balance sheet.

What is a Mutual Fund NAV?

In simple words, NAV or net asset value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day-to-day basis. The NAV of the fund is used to judge its performance.

Types of Mutual Funds;

Tenor: Tenor refers to the ‘time’. Mutual funds can be classified on the basis of time as under,

  1.  Open ended funds: These funds are available for subscription throughout the year. These funds do not have a fixed maturity. Investors have the flexibility to buy or sell any part of their investment at any time.
  2. Close Ended funds: These funds begin with a fixed corpus and operate for a fixed duration. These funds are open for subscription only during a specified period. When the period terminates, investors can redeem their units.

Asset class:

  • Equity funds: These funds invest in shares. These funds may invest money in growth stocks, momentum stocks, value stocks or income stocks depending upon the schemes investment objectives.
  • Debt funds or Income funds: These funds invest money in bonds and money market instruments. These funds may invest into long-term and/or short-term maturity bonds.
  • Hybrid funds: These funds invest in a mix of both equity and debt. In order to retain its equity status, they generally invest at least 65% of their assets in equities and roughly 35% in debt instruments, failing which they will be classified as debt oriented schemes. Ideally Monthly Income Plans (MIPs) form a part of this category which invests upto 25% into equities and the balance into debt.
  • Real asset funds: These funds invest in physical assets such as gold, platinum, silver, oil, commodities and real estate.
Investment Philosophy

  1. Diversified Equity Funds: These funds diversify their equity component of their asset under management in varied sectors. Such funds are not known for taking any sectoral bets and thus, reduce their portfolio risk through its diversification strategy.
  2. Sector Funds: These funds are expected to investin only a specific sector. For instance, a banking fund will invest only in banking stocks. Generally, such funds invest 65% of its total assets in a respective sector.
  3. Index Funds: These funds seek to have a position which replicates the index, say BSE Sensex or NSE Nifty. They maintain an investment portfolio that replicates the composition of the chosen index, thus following a passive style of investing.
  4. Exchange Traded Funds (ETFs): These funds are open-ended funds which are traded onto the exchange. They are benchmarked against the stock exchange index. Unlike an index fund where the units are traded at the day’s NAV, in ETFs (since they are traded on the exchange) its price keeps on changing during the trading hours of the exchange. The AMC does not offer sale and re-purchase for the units. If an investor wants to invest or sell his ETF units, he can do so by placing orders with his broker, who will in-turn offer a two-way real time quote at all times. ETFs are generally concentrated towards pre-specified index, sectors, themes and gold.
  5. Fund of Funds: These funds invest their money in other funds of the same mutual fund house or other mutual fund houses. They are not allowed to invest in any other fund of fund scheme and they are not entitled to invest their assets other than in mutual fund schemes/funds, except to such an extent where the fund requires liquidity to meet its redemption requirements, as disclosed in the offer document or the fund of fund scheme.
  6. Fixed Maturity Plan (FMP): These funds are basically income/debt schemes like Bonds, Debentures and Money market instruments. They give a fixed return over a period of time. FMPs are similar to close ended schemes which are open only for a fixed period of time during the initial offer. However, unlike closed ended schemes where an investor’s money is locked for a particular period, FMPs give the investor an option to exit which is subject to an exit load as per the funds regulations. FMPs if listed on the exchange provide investors with an opportunity to liquidate by selling their units at the prevailing price on the exchange. FMPs are launched in the form of series having different maturity profiles. The maturity period varies from 3 months to one year.
How to Invest In Mutual Funds?

As a newbie, you may be wondering about how and which mutual fund schemes to invest in.With innovations in technology and investor-focused regulations, you can invest in mutual fund schemes in multiple ways.

But before you embark on the journey of investing in mutual funds, you need to complete your KYC (Know Your Customer) formalities. KYC is a prerequisite for investing in mutual funds (and almost all financial instruments). It is vital compliance on the part of financial product manufacturers, to know their investor better.

KYC For Mutual Funds
The Government has appointed the Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI) to establish a central KYC registry, which simplifies the process of complying to KYC procedures — and you need to do it just once. This means you don't have to fill-up the KYC form every time you invest in new Mutual Funds.

Documents required for KYC:
  • CKYC form
  • Recent passport size photograph
  • Proof of Identity
  • PAN Card Copy
  • Proof of Address

The list of acceptable documents for Proof of Identity and Proof of Address is published at the bottom of the KYC form.

Fill up the form and attach attested copies of your documents. Once verified, your KYC will be registered.

Mode of Investment in Mutual Fund:

An investor can invest in mutual funds in the following ways:

  1. Lumpsum – When you want to invest a significant amount in a mutual fund at one go.
  2. SIP - You also have an option to invest small amounts periodically. This way of investing is known as Systematic Investment Plan (SIP). SIP encourages regular investment of fixed amounts bi-monthly, monthly, quarterly and so on, depending on your need and the options available with the mutual fund.