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Mutual Funds - Frequently Asked Questions

What is Mutual Fund?

A Mutual Fund is a pool of money that is invested according to a common investment objective by an Asset Management Company (AMC). The AMC offers to invest the money of hundreds of investors according to a certain objective. Investors buy a scheme if it fits in with their investment goals, like getting a regular income now or letting the money accumulate over the long term.

Why should I invest in Mutual Fund?

Investors with small portfolios may not have the necessary expertise nor get the required diversification across debt and equity products. For example, for as little as Rs. 1,000, an investor can approach most schemes and get well-diversified portfolios, across product classes and instruments. The money is invested by market experts called Fund Managers.

Is investing in Mutual Funds safe?

The Mutual Fund industry is well regulated in India. The market regulator, the Securities and Exchange Board of India (SEBI) has ensured that a repeat of the vanishing companies does not happen here. Therefore, Mutual Funds in India are in the form of a Trust. This means that the money belongs to the investors and is only held in the name of the trust. The investment arm, the AMC, acts as a fee-for investment manager and does not own the money. This does not mean that the investments are risk-free. Investors need to take the risk of volatility or bad management and money can grow or lose value depending on the market and investment decisions. However, sensible Mutual Fund investing is a good way to include equity and debt in individual portfolios to see realistic growth.

Types of Mutual Funds

Systematic Investment Plan

Systematic Investment Plan (SIP) is a disciplined way of investing, where you invest fixed amounts at a regular frequency. You often decide to start saving and investing regularly, but get caught up in your day-to-day activities and forget investments. SIP, the time-tested investment approach helps bring in the much-needed discipline, and has shown good results in all the market conditions.

How does SIP work?

It is a very simple, yet powerful concept. Once you have identified the fund that you want to invest in and the savings required to achieve your goals, all you have to do is to give an ECS instruction to your bank to debit your account directly without the hassle of writing individual cheques. However, you have an option of giving post-dated cheques as well.

What’s special about SIP?

To get you into the habit of saving regularly, SIP puts two powerful forces to work for you:

Rupee Cost Averaging

Month	Amount you invest	NAV	No. of Units
1	Rs. 1000	Rs. 10	100.000
2	Rs. 1000	Rs. 12	83.333
3	Rs. 1000	Rs. 10	100.000
4	Rs. 1000	Rs. 8	125.000
5	Rs. 1000	Rs. 10	100.000
TOTAL	Rs. 5000	Rs. 50	508.333

The average NAV = 50/5 = Rs. 10.00

Your average price = Your total Investment / Total No. of Units
= 5000/508.333 = Rs. 9.84

What you see from the table is fascinating aspect of Rupee Cost Averaging. It makes you buy fewer units when the price is high and more units when the price is low, thereby bringing down your average cost. Moreover, this gives you the same discipline as investment professionals.

The Power of Compounding

The longer the period of your investment, the more you accumulate, because of the power of compounding…which is why it makes sense to start investing early.

Illustration: If you invest Rs.1000 per month into a Mutual Fund with an asset allocation of 20% in equity fund and 80% in income fund (a conservative approach), which may possibly generate a return of 13%.



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* NSE DERIVATIVES: INF 230901838 * DP CDSL IN: 58 2000 * MUTUAL FUNDS: ARN 1563
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