A mutual fund is a collective investment vehicle that collects & pools money from a number of investors and invests the same in equities, bonds, government securities, money market instruments.

The money collected in mutual fund scheme is invested by professional fund managers in stocks and bonds etc. in line with a scheme’s investment objective. The income / gains generated from this collective investment scheme are distributed proportionately amongst the investors, after deducting applicable expenses and levies, by calculating a scheme’s “Net Asset Value” or NAV. In return, mutual fund charges a small fee.

In short, mutual fund is a collective pool of money contributed by several investors and managed by a professional Fund Manager. Mutual Funds in India are established in the form of a Trust under Indian Trust Act, 1882, in accordance with SEBI (Mutual Funds) Regulations, 1996.The fees and expenses charged by the mutual funds to manage a scheme are regulated and are subject to the limits specified by SEBI.

One should avoid the temptation to review the fund’s performance each time the market falls or jumps up significantly. For an actively-managed equity scheme, one must have patience and allow reasonable time – between 18 and 24 months – for the fund to generate returns in the portfolio.

When you invest in a mutual fund, you are pooling your money with many other investors. Mutual fund issues “Units” against the amount invested at the prevailing NAV. Returns from a mutual fund may include income distributions to investors out of dividends, interest, capital gains or other income earned by the mutual fund. You can also have capital gains (or losses) if you sell the mutual fund units for more (or less) than the amount you invested.

Mutual funds are ideal for investors who –

1. lack the knowledge or skill / experience of investing in stock markets directly.
2. want to grow their wealth, but do not have the inclination or time to research the stock market.
3. wish to invest only small amounts.

As investment goals vary from person to person – post-retirement expenses, money for children’s education or marriage, house purchase, etc. – the investment products required to achieve these goals too vary. Mutual funds provide certain distinct advantages over investing in individual securities. Mutual funds offer multiple choices for investment across equity shares, corporate bonds, government securities, and money market instruments, providing an excellent avenue for retail investors to participate and benefit from the uptrends in capital markets. The main advantages are that you can invest in a variety of securities for a relatively low cost and leave the investment decisions to a professional manager.

Mutual funds come in many varieties, designed to meet different investor goals. Mutual funds can be broadly classified based on –

1. Organisation Structure – Open ended, Close ended, Interval
2. Management of Portfolio – Actively or Passively
3. Investment Objective – Growth, Income, Liquidity
4. Underlying Portfolio – Equity, Debt, Hybrid, Money market instruments, Multi Asset
5. Thematic / solution oriented – Tax saving, Retirement benefit, Child welfare, Arbitrage
6. Exchange Traded Funds
7. Overseas funds
8. Fund of funds

• Open-ended schemes are perpetual, and open for subscription and repurchase on a continuous basis on all business days at the current NAV.

• Close-ended schemes have a fixed maturity date. The units are issued at the time of the initial offer and redeemed only on maturity. The units of close-ended schemes are mandatorily listed to provide exit route before maturity and can be sold/traded on the stock exchanges.

• Interval schemes allow purchase and redemption during specified transaction periods (intervals). The transaction period has to be for a minimum of 2 days and there should be at least a 15-day gap between two transaction periods. The units of interval schemes are also mandatorily listed on the stock exchanges.

Active Funds

In an Active Fund, the Fund Manager is ‘Active’ in deciding whether to Buy, Hold, or Sell the underlying securities and in stock selection. Active funds adopt different strategies and styles to create and manage the portfolio.

• The investment strategy and style are described upfront in the Scheme Information document (offer document)
• Active funds expect to generate better returns (alpha) than the benchmark index.
• The risk and return in the fund will depend upon the strategy adopted.
• Active funds implement strategies to ‘select’ the stocks for the portfolio.

Passive Funds

Passive Funds hold a portfolio that replicates a stated Index or Benchmark e.g. –

• Index Funds
• Exchange Traded Funds (ETFs)

In a Passive Fund, the fund manager has a passive role, as the stock selection / Buy, Hold, Sell decision is driven by the Benchmark Index and the fund manager / dealer merely needs to replicate the same with minimal tracking error.

Active Fund –

• Rely on professional fund managers who manage investments.
• Aim to outperform Benchmark Index
• Suited for investors who wish to take advantage of fund managers’ alpha generation potential.

Passive Funds –

• Investment holdings mirror and closely track a benchmark index, e.g., Index Funds or Exchange Traded Funds (ETFs)
• Suited for investors who want to allocate exactly as per market index.
• Lower Expense ratio hence lower costs to investors and better liquidity

Mutual funds offer products that cater to the different investment objectives of the investors such as –

1. Capital Appreciation (Growth)
2. Capital Preservation
3. Regular Income
4. Liquidity
5. Tax-Saving

Mutual funds also offer investment plans, such as Growth and Dividend options, to help tailor the investment to the investors’ needs.

GROWTH FUNDS

• Growth Funds are schemes that are designed to provide capital appreciation.
• Primarily invest in growth oriented assets, such as equity
• Investment in growth-oriented funds require a medium to long-term investment horizon.
• Historically, Equity as an asset class has outperformed most other kind of investments held over the long term. However, returns from Growth funds tend to be volatile over the short-term since the prices of the underlying equity shares may change.
• Hence investors must be able to take volatility in the returns in the short-term.

Liquid Funds :

• The objective of Income Funds is to provide regular and steady income to investors.
• Income funds invest in fixed income securities such as Corporate Bonds, Debentures and Government securities.
• The fund’s return is from the interest income earned on these investments as well as capital gains from any change in the value of the securities.
• The fund will distribute the income provided the portfolio generates the required returns. There is no guarantee of income.
• The returns will depend upon the tenor and credit quality of the securities held.

Debt funds are the schemes where mutual fund manager invest money in fixed instrument as mentioned below

• Liquid Schemes, Overnight Funds and Money market mutual fund are investment options for investors seeking liquidity and principal protection, with commensurate returns.
  – The funds invest in money market instruments* with maturities not exceeding 91 days.
  – The return from the funds will depend upon the short-term interest rate prevalent in the market.
• These are ideal for investors who wish to park their surplus funds for short periods.
  – Investors who use these funds for longer holding periods may be sacrificing better returns possible from products suitable for a longer holding period.
  
  * Money Market Instruments includes commercial papers, commercial bills, treasury bills, Government securities having an unexpired maturity up to one year, call or notice money, certificate of deposit, usance bills, and any other like instruments as specified by the Reserve Bank of India from time to time.

Under SEBI (Mutual Funds) Regulations, 1996, Mutual Funds are permitted to charge certain operating expenses for managing a mutual fund scheme – such as sales & marketing / advertising expenses, administrative expenses, transaction costs, investment management fees, registrar fees, custodian fees, audit fees – as a percentage of the fund’s daily net assets.

All such costs for running and managing a mutual fund scheme are collectively referred to as ‘Total Expense Ratio’ (TER)

The TER is calculated as a percentage of the Scheme’s average Net Asset Value (NAV). The daily NAV of a mutual fund is disclosed after deducting the expenses.

Currently, in India, the expense ratio is fungible, i.e., there is no limit on any particular type of allowed expense as long as the total expense ratio is within the prescribed limit. The regulatory limits of TER that can be incurred/charged to the fund by a Mutual Fund AMC have been specified under Regulation 52 of SEBI Mutual Fund Regulations.

Effective from April 1, 2020 the TER limit has been revised as follows.

In addition, mutual funds have been allowed to charge up to 30 bps more, if the new inflows from retail investors from beyond top 30 cities (B30) cities are at least (a) 30% of gross new inflows in the scheme or (b) 15% of the average assets under management (year to date) of the scheme, whichever is higher. This is essentially to encourage inflows into mutual funds from tier – 2 and tier – 3 cities.

TER has a direct bearing on a scheme’s NAV – the lower the expense ratio of a scheme, the higher the NAV. Thus, TER is an important parameter while selecting a mutual fund scheme.

As per the current SEBI Regulations, mutual funds are required to disclose the TER of all schemes on a daily basis on their websites as well as AMFI’s website.

(www.amfiindia.com)

RISK FACTORS

As per SEBI guidelines on Categorization and Rationalization of schemes issued in October 2017, mutual fund schemes are classified as –

1. Equity Schemes
2. Debt Schemes
3. Hybrid Schemes
4. Solution Oriented Schemes – For Retirement and Children
5. Other Schemes – Index Funds & ETFs and Fund of Funds

– Under Equity category, Large, Mid and Small cap stocks have now been defined.

– Naming convention of the schemes, especially debt schemes, as per the risk level of underlying portfolio (e.g., the erstwhile ‘Credit Opportunity Fund’ is now called “Credit Risk Fund”)

– Balanced / Hybrid funds are further categorised into conservative hybrid fund, balanced hybrid fund and aggressive hybrid fund.

An equity Scheme is a fund that –

– Primarily invests in equities and equity related instruments.

– Seeks long term growth but could be volatile in the short term.

– Suitable for investors with higher risk appetite and longer investment horizon.

The objective of an equity fund is generally to seek long-term capital appreciation. Equity funds may focus on certain sectors of the market or may have a specific investment style, such as investing in value or growth stocks.

Equity Fund Categories as per SEBI guidelines on Categorization and Rationalization of schemes

*Also referred to as Diversified Equity Funds – as they invest across stocks of different sectors and segments of the market. Diversification minimizes the risk of high exposure to a few stocks, sectors or segment.

Sectoral funds invest in a particular sector of the economy such as infrastructure, banking, technology or pharmaceuticals etc.

– Since these funds focus on just one sector of the economy, they limit diversification, and are thus riskier.

– Timing of investment into such funds are important, because the performance of the sectors tend to be cyclical.

Examples of Sector Specific Funds – Equity Mutual Funds with an investment objective to invest in

• Pharma & Healthcare Sector
• Banking & Finance Sector:
• FMCG (fast moving consumer goods) and related sectors.
• Technology and related sectors

• Thematic funds select stocks of companies in industries that belong to a particular theme – For example, Infrastructure, Service industries, PSUs or MNCs.
• They are more diversified than Sectoral Funds and hence have lower risk than Sectoral funds.

• Equity funds may be categorized based on the valuation parameters adopted in stock selection, such as

  – Growth funds identify momentum stocks that are expected to perform better than the market

  – Value funds identify stocks that are currently undervalued but are expected to perform well over time as the value is unlocked

• Equity funds may hold a concentrated portfolio to benefit from stock selection.

  – These funds will have a higher risk since the effect of a wrong selection can be substantial on the portfolio’s return

• Contra funds are equity mutual funds that take a contrarian view on the market.
• Underperforming stocks and sectors are picked at low price points with a view that they will perform in the long run.
• The portfolios of contra funds have defensive and beaten down stocks that have given negative returns during bear markets.
• These funds carry the risk of getting calls wrong as catching a trend before the herd is not possible in every market cycle and these funds typically underperform in a bull market.
• As per the SEBI guidelines on Scheme categorisation of mutual funds, a fund house can either offer a Contra Fund or a Value Fund, not both.

ELSS invests at least 80% in stocks in accordance with Equity Linked Saving Scheme, 2005, notified by Ministry of Finance.

• Has lock-in period of 3 years (which is shortest amongst all other tax saving options)
• Currently eligible for deduction under Sec 80C of the Income Tax Act upto ₹1,50,000

• A debt fund (also known as income fund) is a fund that invests primarily in bonds or other debt securities.
• Debt funds invest in short and long-term securities issued by government, public financial institutions, companies

  – Treasury bills, Government Securities, Debentures, Commercial paper, Certificates of Deposit and others

• Debt funds can be categorized based on the tenor of the securities held in the portfolio and/or on the basis of the issuers of the securities or their fund management strategies, such as

  – Short-term funds, Medium-term funds, Long-term funds

  – Gilt fund, Treasury fund, Corporate bond fund, Infrastructure debt fund

• Floating rate funds, Dynamic Bond funds, Fixed Maturity Plans
• Debt funds have potential for income generation and capital preservation.

Debt Fund Categories as per SEBI guidelines on Categorization and Rationalization of schemes

Dynamic Bond funds alter the tenor of the securities in the portfolio in line with expectation on interest rates. The tenor is increased if interest rates are expected to go down and vice versa

Floating rate funds invest in bonds whose interest are reset periodically so that the fund earns coupon income that is in line with current rates in the market, and eliminates interest rate risk to a large extent

Short-Term Debt Funds

The primary focus of short-term debt funds is coupon income. Short term debt funds have to also be evaluated for the credit risk they may take to earn higher coupon income. The tenor of the securities will define the return and risk of the fund.

– Funds holding securities with lower tenors have lower risk and lower return.

• Liquid funds invest in securities with not more than 91 days to maturity.
• Ultra Short-Term Debt Funds hold a portfolio with a slightly higher tenor to earn higher coupon income.

Short-Term Fund combine coupon income earned from a pre-dominantly short-term debt portfolio with some exposure to longer term securities to benefit from appreciation in price.

Fixed Maturity Plans (FMPs)

– FMPs are closed-ended funds which eliminate interest rate risk and lock-in a yield by investing only in securities whose maturity matches the maturity of the fund.

– FMPs create an investment portfolio whose maturity profile match that of the FMP tenor.

– Potential to provide better returns than liquid funds and Ultra Short Term Funds since investments are locked in

– Low mark to market risk as investments are liquidated at maturity.

– Investors commit money for a fixed period.

– Investors cannot prematurely redeem the units from the fund

– FMPs, being closed-end schemes are mandatorily listed – investors can buy or sell units of FMPs only on the stock exchange after the NFO.

– Only Units held in dematerialized mode can be traded; therefore investors seeking liquidity in such schemes need to have a demat account.

Capital Protection Oriented Funds are close-ended hybrid funds that create a portfolio of debt instruments and equity derivatives

– The portfolio is structured to provide capital protection and is rated by a credit rating agency on its ability to do so. The rating is reviewed every quarter.

– The debt component of the portfolio has to be invested in instruments with the highest investment grade rating.

– A portion of the amount brought in by the investors is invested in debt instruments that is expected to mature to the par value of the capital invested by investors into the fund. The capital is thus protected.

– The remaining portion of the funds is used to invest in equity derivatives to generate higher returns

Hybrid funds Invest in a mix of equities and debt securities.

Invest in a mix of equities and debt securities. They seek to find a ‘balance’ between growth and income by investing in both equity and debt.

– The regular income earned from the debt instruments provide greater stability to the returns from such funds.

– The proportion of equity and debt that will be held in the portfolio is indicated in the Scheme Information Document

– Equity oriented hybrid funds (Aggressive Hybrid Funds) are ideal for investors looking for growth in their investment with some stability.

– Debt-oriented hybrid funds (Conservative Hybrid Fund) are suitable for conservative investors looking for a boost in returns with a small exposure to equity.

– The risk and return of the fund will depend upon the equity exposure taken by the portfolio – Higher the allocation to equity, greater is the risk

SEBI has classified Hybrid funds into 7 sub-categories as follows:

• A multi-asset fund offers exposure to a broad number of asset classes, often offering a level of diversification typically associated with institutional investing.
• Multi-asset funds may invest in a number of traditional equity and fixed income strategies, index-tracking funds, financial derivatives as well as commodity like gold.
• This diversity allows portfolio managers to potentially balance risk with reward and deliver steady, long-term returns for investors, particularly in volatile markets.

Arbitrage” is the simultaneous purchase and sale of an asset to take advantage of the price differential in the two markets and profit from price difference of the asset on different markets or in different forms.

• – Arbitrage fund buys a stock in the cash market and simultaneously sells it in the Futures market at a higher price to generate returns from the difference in the price of the security in the two markets.
• – The fund takes equal but opposite positions in both the markets, thereby locking in the difference.
• – The positions have to be held until expiry of the derivative cycle and both positions need to be closed at the same price to realize the difference.
• – The cash market price converges with the Futures market price at the end of the contract period. Thus it delivers risk-free profit for the investor/trader.
• – Price movements do not affect initial price differential because the profit in one market is set-off by the loss in the other market.
• – Since mutual funds invest own funds, the difference is fully the return.

Hence, Arbitrage funds are considered to be a good choice for cautious investors who want to benefit from a volatile market without taking on too much risk.

Index funds create a portfolio that mirrors a market index.

• – The securities included in the portfolio and their weights are the same as that in the index
• – The fund manager does not rebalance the portfolio based on their view of the market or sector
• – Index funds are passively managed, which means that the fund manager makes only minor, periodic adjustments to keep the fund in line with its index. Hence, Index fund offers the same return and risk represented by the index it tracks.
• – The fees that an index fund can charge is capped at 1.5%

Investors have the comfort of knowing the stocks that will form part of the portfolio, since the composition of the index is known.

An ETF is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund.

• ETFs are listed on stock exchanges.
• Unlike regular mutual funds, an ETF trades like a common stock on a stock exchange. The traded price of an ETF changes throughout the day like any other stock, as it is bought and sold on the stock exchange.
• ETF Units are compulsorily held in Demat mode
• ETFs are passively managed, which means that the fund manager makes only minor, periodic adjustments to keep the fund in line with its index
• Because an ETF tracks an index without trying to outperform it, it incurs lower administrative costs than actively managed portfolios.
• Rather than investing in an ‘active’ fund managed by a fund manager, when one buy units of an ETF one is harnessing the power of the market itself.
• Suitable for investors seeking returns similar to index and liquidity similar to stocks

• Fund of funds are mutual fund schemes that invest in the units of other schemes of the same mutual fund or other mutual funds.
• The schemes selected for investment will be based on the investment objective of the FoF
• The FoF have two levels of expenses: that of the scheme whose units the FoF invests in and the expense of the FoF itself. Regulations limit the total expenses that can be charged across both levels as follows:

  – TER in respect of FoF investing liquid schemes, index funds & ETFs has been capped @ 1%

  – TER of FoF investing in equity-oriented schemes has been capped @ 2.25%

  – TER of FoF investing in other schemes than mentioned above has been capped @2%.

• Gold ETFs are ETFs with gold as the underlying asset

  – The scheme will issue units against gold held. Each unit will represent a defined weight in gold, typically one gram.

  – The scheme will hold gold in form of physical gold or gold related instruments approved by SEBI.

  – Schemes can invest up to 20% of net assets in Gold Deposit Scheme of banks

• The price of ETF units moves in line with the price of gold on metal exchange.
• After the NFO, units are issued to intermediaries called authorized participants against gold or funds submitted. They can also redeem the units for the underlying gold

Benefits of Gold ETFs

• Convenience –> option of holding gold electronically instead of physical gold.

  – Safer option to hold gold since there are no risks of theft or purity.

  – Provides easy liquidity and ease of transaction.

• Gold ETFs are treated as non-equity oriented mutual funds for the purpose of taxation.

  – Eligible for long-term capital gains benefits if held for three years.

  – No wealth tax is applicable on Gold ETFs

• International funds enable investments in markets outside India, by holding in their portfolio one or more of the following:
• – Equity of companies listed abroad.
• – ADRs and GDRs of Indian companies.
• – Debt of companies listed abroad.
• – ETFs of other countries.
• – Units of passive index funds in other countries.
• – Units of actively managed mutual funds in other countries.
• International equity funds may also hold some of their portfolios in Indian equity or debt.
• – They can hold some portion of the portfolio in money market instruments to manage liquidity.
• International funds gives the investor additional benefits of
• – Diversification, since global markets may have a low correlation with domestic markets.
• – Investment options that may not be available domestically.
• – Access to companies that are global leaders in their field.
• There are risks associated with investing in such funds, such as –
• – Political events and macro economic factors that are less familiar and therefore difficult to interpret
• – Movements in foreign exchange rate may affect the return on redemption
• – Countries may change their investment policy towards global investors.
• For the purpose of taxation, these funds are considered as non-equity oriented mutual fund schemes.

NAV stands for Net Asset Value. The performance of a mutual fund scheme is denoted by its NAV per unit.

NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on a given date. For example, if the market value of securities of a mutual fund scheme is ₹200 lakh and the mutual fund has issued 10 lakh units of ₹ 10 each to the investors, then the NAV per unit of the fund is ₹ 20 (i.e., ₹200 lakh/10 lakh).

Since market value of securities changes every day, NAV of a scheme also varies on day-to-day basis.

NAVs of mutual fund schemes are published on respective mutual funds’ websites as well as AMFI’s website daily.

Unlike stocks, where the price is driven by the stock market and changes from minute-to-minute, NAVs of mutual fund schemes are declared at the end of each trading day after markets are closed, in accordance with SEBI Mutual Fund Regulations. Further, Units of mutual fund schemes under all scheme (except Liquid & Overnight funds) 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.

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.

*other than Liquid Funds & Overnight Funds

Sale Price

• Sale Price is the price payable per unit by an investor for purchase of units (subscription) and/or switch-in from other schemes of a mutual fund.
• SEBI vide circular no. SEBI / IMD / CIR No. 4 / 168230 / 09 dated June 30, 2009 has abolished Entry Load for all mutual fund schemes.
• Hence, during the New Fund Offer (NFO), the Sale Price per unit is at Face Value per unit specified in the respective Scheme Information Document (SID) and Key Information Memorandum (KIM)
• During the ‘Ongoing Offer’ period (i.e., the date from which the scheme re-opens for subscriptions/redemptions after the closure of the NFO period.), the units may be purchased at NAV i.e., the Sale Price per unit is equivalent to applicable NAV on the date of subscription

Repurchase/Redemption Price

• The Repurchase/Redemption Price is the price per Unit at which a Mutual Fund would ‘repurchase’ the units (i.e., buys back units from the investor) upon redemption of units or switch-outs of units to other schemes/plans of the Mutual Fund by the investors, and includes Exit Load, if / wherever applicable.
• Redemption price is calculated as follows:
• Redemption Price = Applicable NAV*(1- Exit Load, if any) For Example: If the Applicable NAV is ₹10 and Exit Load is 2%, then the Redemption Price will be = ₹10* (1-0.02) = ₹9.80

It may be noted that an AMC / Trustee has the right to modify existing Exit Load structure and/or to introduce Exit Loads subject to a maximum limit prescribed under the Regulations.

Any change in Load structure will be effective on prospective basis and will not affect the existing mutual fund units in any manner.

As per SEBI (Mutual Funds) Regulations, 1996, in respect of Open-Ended Schemes, Repurchase Price (commonly referred to as Redemption price) shall not be lower than 95% of NAV.

It may be noted that units of Closed Ended Schemes cannot be Repurchased prematurely.

As per SEBI circular no. SEBI/HO/IMD/DF2/CIR/P/2020/175 dated September 17, 2020 read with circular no. SEBI/HO/IMD/DF2/CIR/P/2020/253 dated December 31, 2020, effective from February 1, 2021, the applicable NAV in respect of purchase of units of mutual fund scheme shall be subject to realization & availability of the funds in the bank account of mutual fund before the applicable cut off timings for purchase transactions, irrespective of the amount of investment, under ALL mutual fund schemes. (The above rule is already applicable for purchase transactions under Liquid funds and Overnight Funds).

TO WHICH TRANSACTIONS IS THE NAV BASED ON REALIZATION OF FUNDS APPLICABLE?

i. All purchase transactions – whether Initial purchase or additional purchase of units; whether lump-sum investment or under Systematic Investment Plan (SIP); irrespective of the amount of investment.

ii. Purchase of units through Inter-scheme switching of investments, including switch transactions under Systematic Transfer Plan (STP) or trigger events irrespective of the amount of investment.

The Applicable NAV for purchase transactions (including Switch-In transactions) under all mutual fund schemes (other than Liquid funds and Overnight Funds) irrespective of the amount of investment, shall be determined as follows:

NAV applicability matrix (applicable from 01-Feb-2021)

ILLUSTRATIONS TO EXPLAIN THE NEW APPLICABLE NAV RULE (EFFECTIVE FROM 01-FEB-2021)

a) Lump Sum purchase transaction for say, ₹50,000 received (time stamped) before cut-off time of 3.00 p.m. on Thursday 11-Feb-2021. If the funds are received in the mutual fund’s account before cut-off time of 3.00 p.m. on 11th February 2021, the investor will be allotted closing NAV of 11-Feb-2021. However, if the funds are received in the mutual fund’s bank account at say 5.00 p.m. on 11th February 2021, i.e., after the cut-off time of 3.00 p.m., the allotment of units will be done at the NAV of Friday 12-Feb-2021. However, if the funds are received in the mutual fund’s bank account at say 4.00 p.m. on Friday 12-Feb-2021, the units will be allotted at the closing NAV of Monday 15-Feb-2021 (Feb. 13 & 14 being Saturday & Sunday i.e., non-business days) In short, the units are allotted at the NAV of the business day on which the funds are received into the mutual fund account before applicable cut-off time.

b) SIP Transaction Assuming an investor has signed up for SIP transaction of say, ₹5,000 to be debited on 10th of every month. Hitherto, the investor would have been allotted SIP units at the NAV for 10th the month (assuming the same is a Business day) irrespective of the date on which the money was received / credited to the Mutual Fund’s bank account. As per the new Rule, the investor would be allotted the SIP units at the NAV for 10th only if the money is received/credited to the Mutual Fund’s bank account before 3.00 p.m. on 10th. Else, the SIP units will be allotted units at the NAV of the next business day on which funds are received before the cut-off time. In view of the above, investors are encouraged to avail electronic payment modes for remittance of funds to the mutual fund bank account to facilitate speedy fund transfers.

Valid applications for Inter-scheme switching of investments will be considered for processing on the earliest day which is a Business Day for both the ‘Switch out’ scheme and the ‘Switch in’ scheme. Applications for ‘Switch In’ shall be treated as purchase applications and the Applicable NAV based on the cut off time for purchase shall be applied. Applications for Switch Out shall be treated as redemption applications and the Applicable NAV based on the cut off time for redemption shall be applied. Please see Table below.

Does the new rule on applicable of NAV applies to all mode of transactions?

Yes. The new NAV Rule is uniformly applicable for all mode of transactions (whether physical or through online platforms such as exchange platforms/online channel partners/MFU etc) In short, the allotment of units will be subject to realization of subscription money irrespective of the mode of transaction.

What will be applicable NAV on units allotted on Re-investment of Dividends?

The allotment of units upon reinvestment of dividend will be at ex-dividend NAV.

The Applicable NAV for redemptions continues to be as follows:

MYTH: Mutual funds are for Experts?

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.

MYTH: Mutual funds Investments are only for the long term?

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.

MYTH: Investing in Mutual Funds are same as investing in stock market/Mutual Funds is an Equity Product?

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

MYTH: Mutual Fund scheme with a NAV of Rs 10/- is better than Mutual Fund scheme whose NAV is Rs 25/- per unit

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.

MYTH: One needs a large amount of money to invest in mutual funds

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.

MYTH: One needs a Demat Account to invest in Mutual Funds

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.

MYTH: A scheme with a higher NAV has reached its PEAK !

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.

MYTH: Buying a Top Rated Mutual Fund scheme ensures better returns

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.

Compounded Annual Growth Rate(CAGR) is a widely used return metric because it truly captures the year-on-year return earned by an investment, unlike absolute return that captures the point-to-point return from an investment without considering the time taken to earn it.

CAGR is preferred because it allows returns to be compared across different asset classes by providing the average annual return earned by an investment based on the initial invested amount, the final value of investment and the time-period lapsed. If an investment of Rs1000 made 5 years ago is worth Rs.1800 today, while the absolute growth rate is 80%, its CAGR is the average return the investment earned every year. The CAGR works out to be 12.5%. If you had to compare this with a bank FD that promised 12.5% per annum, CAGR makes it easier to compare.

Similarly, if you had to calculate the return earned by your investment after removing inflation, which is an annual figure of say 4%, CAGR makes it simpler to calculate that you really earned 8.5% after removing inflation. CAGR is useful when returns are compared for period greater than one year. The investment may have given more than 12.5% in some years and less than 12.5% in other years but on an average, it grew by 12.5% annually during the 5-year period.