Mutual Funds

Ans.Mutual funds are a category of investment that collect a pool of money from multiple investors and manage it professionally. You can invest in equities, bonds, money market instruments, specific themes or sectors through mutual funds. Due to economies of scale, the cost of investing is much lower and risk is diversified among a variety of stocks/sectors. Mutual funds’ performance is measured through NAV (Net Asset Value) declared every day. Investors are allotted units at the purchase day’s NAV and sold at the unit's NAV prevailing on the day of sale. The NAV is calculated as market value of the fund minus all expenses/liabilities plus fund’s accrued profits divided by total number of units of the fund.

Ans: ELSS or (Equity Linked Saving Schemes) are a category of mutual funds that invest the corpus primarily in equity and equity related instruments. The investment is locked-in for a period of three years from the date of investment. ELSS Schemes qualify for tax deductions under Section 80 C of the Income Tax Act up to a limit of Rs 1,50,000 per financial year (for taxpayers opting for old tax regime. Refer to income tax rules). ELSS schemes encourage investors to invest in equities for a long time horizon to reap the benefit of long term wealth creation. ELSS schemes score over traditional tax saving instruments as they grow your wealth through equity allocation and give tax benefits at the same time.

Ans: Debt Funds are a class of mutual funds that invest in fixed income securities like government bonds, corporate bonds, treasury bills, commercial paper and other money market instruments. The objective of a debt fund investment is to generate fixed income with capital appreciation. Debt funds are less risky compared to other mutual fund classes because they invest in low risk, interest bearing securities with defined maturity period .

Ans: Liquid Funds are a type of debt fund that invest in short term securities like money market instruments, commercial paper, government securities, treasury bills etc with maturity period of up to 91 days. Since the price of short term securities do not change as much in the short term, the returns are more stable compared to long term debt funds. Liquid funds are ideal to park money for a very short term.

Ans: Equity funds are a category of mutual funds that invest primarily in shares of companies. There are different types of equity funds e.g. Index funds that invest in a particular index e.g. Nifty/Sensex and mirror the performance of the index over time. Non - index based funds are managed by fund managers actively as per objective of the fund. There are Large Cap, Small Cap and Mid Cap equity funds. A Large cap fund invests 80% of its corpus in shares of large cap companies i.e. companies with a market capitalization above a threshold e.g Rs, 20,000 crores. Large cap funds are less volatile and give stable returns and dividends as the business is established and mature. A Mid Cap fund invests at least 65% of its corpus in shares of mid cap companies i.e. companies with market cap between Rs 5000 crore and Rs 20,000 crore. Mid cap funds have the potential to give higher returns as compared to large cap but the risk is also higher as mid cap companies are in the early phase of growth and business is more prone to external factors e.g. recession, sectoral changes, govt regulation, competition, costs etc. A Small cap fund invests in shares of small and medium sized companies with market cap less than Rs 5000 crores. These companies are in very nascent phase of business with highest potential for growth but high risk as well due to uncertainty in future and vulnerability.

Ans: Growth funds invest in stocks of companies with high growth potential instead of stocks with high dividend yields. The objective of a growth fund is to achieve capital appreciation and not dividend income. The risk is relatively high in growth funds as they go for early stage businesses with high growth potential in the near future.

Ans: Dividend Yield funds invest in stocks of companies with a track record of high dividend yield. These are stable businesses with high earnings so that they are able to distribute dividends to shareholders on a regular basis. Dividend funds are relatively stable with less volatility .

Ans: Expense Ratio is a measure of total cost you pay to a mutual fund for managing your funds. It includes all expenses like marketing and distribution expenses, fund manager’s fees, legal and administrative costs. It is calculated as a percentage of daily investment value. For example, if a funds expense ratio is 1% and you investment in the fund is Rs 2,00,000 on a particular day, the total expense you pay on your investment value is: (1% of 2,00,000)/365 = 5.4 Rs It means your expense is Rs 5.4 on that particular day. It is calculated as Total Expenses divided by Average AUM of the fund. Larger the size of a fund, lower is the expense ratio due to scale and vice versa. SEBI has specified limits on maximum expense ratios for various categories of funds and AUM size.

Ans: Exit load is a charge levied by a fund house when an investor redeems/sells units fully or partially within a specified time. Exit load is not part of the fund's expense ratio, it is charged on total fund value upon redemption as a percentage. AMCs charge exit load to discourage investors from redeeming early or make frequent entry exits, so that they remain invested for long term. For example, you hold 2000 units in a scheme that charges an exit load of 1% of you redeem within 365 days from investment date. You redeem at 6 months at the current NAV of Rs 130. The exit load will be: Total redemption amount 130*2000 = 2,60,000 Exit Load: 2,60,000*1% = 2600 Total realised value = 2,60,000 - 2600 = Rs 2,57,400 Exit load varies between AMCs and type of fund. For example, equity funds have higher exit loads compared to debt funds, as equity markets are volatile in the short term and investors who stay invested benefit from long term appreciation and compounding. Exit load details are mentioned in the Scheme Information Document.

Ans: Lock in period is the time period from the date of investment during which you cannot redeem and exit the investment. Some mutual funds have a lock-in period. For example, ELSS funds have a 3-year lock in period. It is to ensure that investors stay in the fund for a certain period and benefit from long term equity holding and growth. Lock-in period also ensures that the fund manager has a stable corpus to take long term investment decisions to even out short term fluctuations in the market.

Ans: Lumpsum investment means that you invest all your investible corpus at one go instead of making multiple investments of smaller amounts in a staggered manner. Mutual funds offer systematic investment plans wherein you can opt for periodic regular investments instead of one time lump sum allocation of funds.

Ans: SIP or Systematic Investment Plan is a mode of investing in mutual funds where you can invest a fixed amount periodically e.g. monthly or quarterly. SIPs are effective tools for disciplined investment, invest even with a very small amount and benefit from rupee cost averaging. When you invest via SIPs you invest at all market levels. When the NAV is high you get less units and when markets fall you get a higher number of units. Overall the average cost of holding works in investors favour over a long period. SIPs foster a habit of saving and save time and effort by automating the investment decision.

Ans: NAV is Net Asset Value. It is the basic metric to measure the value and performance of a mutual fund. When you purchase a stock in the share market, you buy it at the prevailing market price. When you buy a mutual fund, you buy it at the fund’s NAV for the day. NAV value moves according to the price of stocks in its portfolio. The formula for calculating NAV is: (Total Assets - Total Liabilities)/Total number of units Fund managers invest the assets in the stock market. The NAV goes up or down depending on the value of shares going up or down everyday in the market. NAV is not an absolute value that can be compared across different schemes. It is a relative index to compare a particular scheme’s performance over a period. NAV is published on a daily basis

Ans: NAV is a metric that reflects the value of every unit in a mutual fund and its performance over a period of time. Suppose you invested Rs 1,00,000 in a mutual fund scheme on 10th Jan 2023 and received 2000 units at NAV of Rs 50 that day. The Nav of the fund today is Rs 90. If you redeem your units today, your fund value = 2000* 90 = 1,80,000 Your profit = Rs. 1,80,000 - Rs. 1,00,000 = Rs. 80,000 Hence, your investment’s value is reflected in the fund’s NAV. It moves with the value of stocks invested in the portfolio.

Ans: NFO stands for New Fund Offer. When a fund launches a new scheme, it is known as a New Fund Offer. Investing in NFO means making first time subscription in the new to be launched scheme by any AMC. AMC buys stocks and builds a maiden portfolio from the funds collected from investors during NFO subscription period..

Ans: Open ended schemes are open for subscriptions at all times whereas close ended schemes have a limited window of time when the scheme is open for subscription, at the time of NFO launch. Usually,close ended funds have a lock in period after which they become open ended. Close-ended schemes allow fund managers to invest the corpus with a long term view without the pressure of redemptions or short term results. Open ended funds, on the other hand, are liquid and accept subscriptions and redemptions anytime.

Ans: When you make profits from your investments, the net gain is known as capital gains. Capital gains are taxed at different rates for equity and non equity schemes. Capital gains earned when you redeem your mutual fund units within 12 months of investment is known as short term capital gain. A profit earned when you hold your investment for more than 12 months is called long term capital gains. For equity funds, short-term capital gains are taxed at 15%. Long term capital gain (LTCG) up to Rs 1 lakh is exempt from tax. Any profit over Rs 1 lakh per annum is taxable at the rate of 10%, with no indexation benefit. Capital gains from debt funds are added to income and taxed at applicable income tax slab rates.