Basics of Mutual Funds For Money Multiplication

BASICS OF MUTUAL FUNDS

BASICS OF MUTUAL FUNDS


Basics of Mutual Funds For Money Multiplication

#1 How to fill up the mutual fund scheme’s application form?

An investor must mention clearly his name, address, number of units applied for and such other information as required in the application form. The investor must provide his bank account number so as to avoid any fraudulent encashment of any cheque/draft issued by the mutual fund.

 

#2 How to identify the funds whose investment objectives match your asset allocation needs?

Before identifying the funds, it’s important for you to understand your asset allocation needs. Based on this understanding choose a mutual fund that meets your risk tolerance and your risk capacity.

 

#3 How to select a mutual fund?

Selecting a mutual fund investing requires well-thought strategic inputs and asset allocation plan as any other investment option.

 

#4 How to invest in a mutual fund?

Mutual funds normally come out with an announcement advertisement of the launch of the new schemes in newspapers. The Investors can contact mutual fund agents and distributors for necessary information and application forms. Nowadays, post offices and banks also distribute mutual fund units.

 

#5 How will an investor come to know about the changes, if any, made in the mutual fund scheme?

The mutual funds are obliged to inform any material changes to their unitholders from time to time. With an attempt to keep their unit holders informed, many mutual funds send quarterly newsletters to their investors.

 

#6 If the NAV of the fund I am holding it down should I hold this fund or redeem it?

Market behaviour is not rational. Hence, your decision to sell the fund units should not be based on market volatilities. This might lead to irrational decisions.

Mentioned below are the criteria, which you should consider to sell your fund or not –

  1. If you need money
  2. If the fund is not performing as per stated objectives
  3. If you are not confident of the future prospects
  4. If you have to rebalance your portfolio
  5. If there is a change in taxation policy

 

#7 How many different schemes should one can invest in?

Diversification is the best way to reduce the risk of your investment. Pick two to three mutual funds that match your investment objectives. We recommend a 60:40 split if you have shortlisted 2 funds and a 50:25:25 split if you have short-listed 3 funds for investment.

 

#8 If a mutual fund scheme winds up, what happens to money invested?

If a scheme winds up, the mutual funds pay a sum based on prevailing NAV after adjustment of expenses.

 

#9 If schemes in the same category of different mutual funds are available, should one choose a scheme with lower NAV?

You will find a mix of opinions on this – some of the investors have the tendency to prefer a scheme that is available at lower NAV compared to the one available at higher NAV. The decision of buying a mutual fund should be based on the performance track record of the fund, objective of the fund, its merits, service standards, professional management, etc.

 

#10 Is it advisable to buy a fund just before it goes ex-dividend?

When a fund goes ex-dividend, the prevailing unitholders are paid out a dividend and the NAV of the fund declines by the amount of dividend per unit paid out. For an investor, who has bought the fund prior to the ex-dividend date, this dividend income is tax-free, however, it is a capital loss. If the investor has made a corresponding capital gain, then it is tax-beneficial to purchase the units of the mutual fund just before it goes ex-dividend, take the dividend and then sell the units and book the capital loss.

 

#11 Kindly suggest if arbitrage funds are ok for earning high returns with low risk.

Arbitrage funds are unique funds. They are more like a debt fund, which are low risk and low returns fund. However, as far as the tax laws are concerned, Arbitrage funds are treated on par with equity funds.

Therefore, with arbitrage funds, you can expect 6-9% p.a. returns like any debt fund. However, a small drawback with these funds is the redemption.

 

#12 Does mutual funds provide risk diversification?

Yes. Mutual funds provide risk diversification. Diversification is amongst the primary objectives of portfolio structuring. It’s essential to reduce the risk level as assumed by the portfolio holder.

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