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Mutual Funds

 

ARIHANT MUTUAL FUND SERVICE

Does Arihant offer Mutual Fund Service?

Arihant is an AMFI registered mutual fund distributor. We offer you a choice of investment schemes from all the mutual fund providers in India.

Do I have to be an Arihant customer to invest in mutual fund with you?

Investing in a mutual fund through us is open to everybody, regardless of whether you are an Arihant customer.

Will you help me in choosing the right mutual fund scheme for investment?

When you invest in mutual fund through Arihant, we not only help you filling and submitting your MF investment application, but we also help you in your investment decision. Choosing from a universe of 4000+ schemes can be really daunting. But our team of mutual fund advisors will help you to pick the scheme that is right for you based on your profile and investment goal.

So do not worry, just call our advisor or email us on: mutuafund@arihantcapital.com and our executive will get in touch with you.

To know more about Arihant Mutual Fund service, click here

BASICS OF MUTUAL FUND

What is a mutual fund?

A mutual fund is a company that brings together money from many people and invests it in stocks, bonds or other assets on their behalf. The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings. The mutual fund charges a fee to the investor for managing the fund usually in the form of an entry load or an exit load.

How do mutual funds work?

Mutual funds combine money from many investors and place the money in stocks, bonds, money market instruments, other securities or assets, or a combination of these investments. They are managed by a professional portfolio manager who actively adjusts the funds' portfolio to try to increase their value.

Mutual Funds Work

How do I make money through mutual funds?

Mutual funds invest the pooled money of the investors in different asset classes based on the objective of the respective schemes. Usually you can make money from a mutual fund in three ways:

  • Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution.
  • If the fund sells securities that have increased in price, the fund has a capital gain. Some funds also pass on these gains to investors in a distribution or may reinvest it depending on your choice.
  • If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit.

Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.

Why should I invest in mutual funds? What are the benefits of investing in mutual funds?

Mutual funds can offer investors the advantages of diversification and professional management for those who do not have the time nor expertise to do it themselves.

Mutual funds can be especially advantageous for small investors who would be forced to pay enormous transaction fees if they bought the securities individually, and for investors who either don’t have the time to research their own investments or who don’t trust their own investment expertise. Other benefits of investing in mutual funds include:

  • Liquidity - Open-ended mutual funds are priced daily and are always willing to buy back units from investors. This means that investors can sell their holdings in mutual fund investments anytime. In the case of other investment avenues such as stocks and bonds, buyers are not necessarily available and therefore these investment avenues are less liquid compared to open-ended schemes of mutual funds.
  • Low transaction costs - Since mutual funds are a pool of money of many investors, the amount of investment made in securities is large. This therefore results in paying lower brokerage due to economies of scale.
  • Transparency - Prices of open ended mutual funds are declared daily. Regular updates on the value of your investment are available. The portfolio is also disclosed regularly with the fund manager's investment strategy and outlook.
  • Well-regulated industry - All the mutual funds are registered with SEBI and they function under strict regulations designed to protect the interests of investors.
  • Convenience of small investments - Under normal circumstances, an individual investor would not be able to diversify his investments (and thus minimize risk) across a wide array of securities due to the small size of his investments and inherently higher transaction costs. A mutual fund on the other hand allows even individual investors to hold a diversified array of securities due to the fact that it invests in a portfolio of stocks. A mutual fund therefore permits risk diversification without an investor having to invest large amounts of money.

What are the different types of mutual fund schemes? What are open-ended and closed-ended schemes?

There are a wide variety of Mutual Fund schemes that cater to your needs, whatever your age, financial position, risk tolerance and return expectations. There are four basic types of mutual funds. The basic rule of thumb is the greater the risk, the higher the earning potential. The four types

Mutual Fund Schemes

Other categorization of mutual funds include:

- By Structure

  • Open-Ended Schemes:- The units offered by these schemes are available for sale and repurchase on any business day at NAV based prices. These do not have a fixed maturity. You deal directly with the Mutual Fund for your investments and redemptions. The key feature is liquidity. You can conveniently buy and sell your units at net asset value ("NAV") related prices.
  • Close-Ended Schemes:- Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called close-ended schemes. The unit capital of a close-ended product is fixed as it makes a one-time sale of fixed number of units. These schemes are launched with a New Fund Offer (NFO) with a stated maturity period after which the units are fully redeemed at NAV linked prices. In the interim, investors can buy or sell units on the stock exchanges where they are listed. After NFO, the scheme may offer direct repurchase facility to the investors. SEBI Regulations ensure that at least one of the two exit routes is provided to the investor. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but closer to maturity, the discount narrows.
  • Interval Schemes:- These combine the features of open-ended and close- ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.

- By Investment Objective

  • Growth Schemes:- Aim to provide capital appreciation over the medium to long term. These schemes normally invest a majority of their funds in equities and are willing to bear short- term decline in value for possible future appreciation. These schemes are not for investors seeking regular income or needing their money back in the short-term. These are ideal for:
    1. Investors in their prime earning years.
    2. Investors seeking growth over the long-term
  • Income Schemes:- Aim to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. These are ideal for:-
    1. Retired people and others with a need for capital stability and regular income.
    2. Investors who need some income to supplement their earnings.
  • Balanced Schemes:- Aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest in both shares and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. These schemes are ideal for investors looking for a combination of income and moderate growth.
  • Tax Saving Schemes (ELSS):- These schemes offer tax rebates to the investors under tax laws as prescribed from time to time. This is made possible because the Government offers tax incentives for investment in specified avenues. For example, Equity Linked Savings Schemes (ELSS) and Pension Schemes. These are ideal for investors seeking tax rebates.
  • Special Schemes:- This category includes index schemes that attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50, or industry specific schemes (which invest in specific industries) or sectoral schemes (which invest exclusively in segments such as 'A' Group shares or initial public offerings). Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index. Sectoral fund schemes are ideal for investors who have already decided to invest in a particular sector or segment. Keep in mind that any one scheme may not meet all your requirements for all time.

What is an Asset Management Company (AMC)?

Every mutual fund has an Asset Management Company (AMC) associated with it. The AMC is responsible for managing the investments for the various schemes operated by the mutual fund.

The Trust oversees the performance of the AMC. The AMC employs professionals to manage the funds. The AMC may be assisted by a custodian and a registrar. AMCs are obliged to make investments in compliance with SEBI regulations.

What is active management?

Active management, also called active investing, refers to a portfolio management strategy where the fund manager (in case of a mutual fund) makes specific investments with the goal of outperforming a benchmark index. If a mutual fund is "actively managed," the fund manager constructs the fund's portfolio with stocks and other investments that may outperform the market. Finding these opportunities takes extensive research and analysis (thus the term "active").

Advantages

  • Expertise: Investors rely on a fund manager's knowledge to interpret and act on market trends.
  • Returns: Actively managed funds may have the potential to outperform the market as a whole.
  • Proactive: Active managers can help eliminate sluggish investments in favor of more profitable ones.
  • Over the years, in Indian markets, actively managed funds have managed to outperform the markets and their respective benchmarks. However in a more developed economy, like the UK or US, index funds are more popular.

What is indexing?

Indexing, also called as passive management, tries to mirror the performance and risk characteristics of a particular index, like the S&P CNX Nifty or the Sensex. These funds generally have lower expenses since index fund managers do not need to spend time and resource to research and visit companies, nor do they buy and sell securities as frequently and therefore their transaction costs are lowered.

Advantages

  • Cost: Index funds tend to have low operating costs because there's very little research or trading.
  • Diversification: Index funds can provide exposure to multiple industries.
  • Simplicity: Index funds are easy to understand and manage. You don't need to guess the investing styles of different managers.

In early 1997, UTI created India's first index fund, the India Access Ltd., an offshore fund which tracks the NSE-50 index. Index funds have recently gained popularity in Indian markets, however actively managed funds are still the preferred choice of investors. Internationally, index funds are the most important class of mutual fund schemes.

What are Money Market Schemes? Who should invest in these funds?

Money market funds invest in short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter- bank call money. They help investors reach short-term financial goals because they usually deliver a fixed, modest return over a short period of time. Similar to bond funds, money market funds are sometimes referred to as "fixed-income" funds.

If you're looking for a conservative, comparatively safe investment, this may be the one. Money market funds are a smart way to balance out aggressive investments held in your portfolio. They help turn capital into steady income, and they can give you easy access to your money if you ever need it. However, past performance is no guarantee of future results. Investors with the following profile should invest in money market funds

  • Investment goals have a short time horizon.
  • Low tolerance for risk or looking to diversify with a more conservative investment.
  • Might be looking to generate fixed income.
  • Needs investment to be liquid.

What are bond funds? Who should invest in these funds?

Bonds are debt owned by government, corporate houses etc. Bond funds are debt funds by nature and like all mutual funds they are also investment vehicles. They invest in a multiplicity of debt instruments such as corporate pares, papers issued by GOI etc. with different maturities and qualities. Bonds are sometimes referred to as “fixed-income” investments because every year they should deliver a predefined return, in the form of dividends, with minimal risk.

Bond funds can be a great way to balance out a portfolio that may have more aggressive investments equity funds. Because the equity and bond markets do not move in lockstep with each other, bond funds, even higher risk bond funds, have the potential to decrease overall portfolio volatility. They are much safer instruments compared to equity. Investors with the following profile should invest in bond funds

  • Looking for steady growth.
  • Low tolerance for risk or looking to diversify with a more conservative investment.
  • Wants to generate income or preserve capital.
  • Needs tax-deferred income.

Do bond funds contain any risk?

Some people believe that fixed income instruments are risk-free. However this is not true. Even debt comes entails some risk, but the risk associated with them is much lower than other assets like equities, real estate. Bond funds contain interest rate risk (as interest rates rise, bond prices usually fall), the risk of issuer default and inflation risk.

Can the NAV of a debt fund fall?

Yes the NAV of a debt fund can fall. A debt fund's NAV is the market value of its portfolio holdings at a given point in time. As interest rates change, so do the market value of fixed-income instruments - and hence, the NAV of a debt fund. Thus it is a misconception that the debt fund's NAV does not fall.

What are international equity funds? Who should invest in international equity funds?

Like domestic equity funds, international stock funds also invest in shares of the companies listed on the stock markets. However, international stock funds primarily invest in the common stocks of companies based in international markets.

In India the international equity funds have recently marked a footprint and have gained popularity. Apart from international equity funds, there are funds that also invest in other asset classes of international markets like commodities, real estate.

Investors with the following profile should invest in foreign equity funds

  • Higher risk tolerance.
  • Comfortable with price volatility.
  • Looking to further diversify a portfolio.

DOMESTIC EQUITY FUNDS

What are domestic equity funds?

A domestic stock fund is a fund that primarily invests in equities more commonly known as shares of a company listed on Indian stock exchanges. Stock represents ownership in a company. Equity investments have the potential to deliver high returns but this comes with higher risk. 

Domestic stock funds can be distinguished by several properties. Funds may have a specific style, for example, value or growth. Funds may focus on some size of company, that is, small-cap, large-cap, etc. Funds which are managed by professionals are said to be actively managed where as Index funds try as best as possible to mirror specific market indices.

Why invest in equity funds?

Equity funds can give you a diversified portfolio for a low initial investment, plus the added advantage that comes with professional investment management. They also offer the potential for a high return. For this reason equity funds can be an integral part of portfolios with long-term investment goals, like retirement.

Equity funds can also help in lowering your tax liabilities. For example, if you invest in tax saving equity schemes, you are exempt from long-term capital gains tax.

Who should invest in equity funds?

  • Investors with the following profile should invest in equity funds.
  • Tolerance for risk. If you are less risk averse.
  • Looking to build a diversified portfolio.
  • Long-term investment timeline.

What are a growth equity fund and a value equity fund?

Growth Fund
A growth equity fund looks for companies in the market that have a strong growth potential. In time, this potential may translate into positive returns. However, past performance does not guarantee future results. The primary characteristic of a growth company is an earnings growth rate higher than that of the overall market. Growth funds may be categorized according to a variety of different market capitalization groups, including large cap and small/mid cap. Characteristics of Growth funds

  • Strong potential for long-term growth
  • Projected to grow more than other companies in their industry
  • Potential for strong returns

Value Fund
A value equity fund seeks to invest in companies with earning potential that the market may have underestimated or overlooked. Characteristics of value stocks include relatively low price-to-book, price-to-earnings, price-to-sales, and price-to-cash flow ratios. However, past performance does not guarantee future results. Value funds can range from conservative to aggressive. They also fall into a variety of different market capitalization groups, including large cap and small/mid cap. Characteristics of Value funds

  • Undervalued companies with valuable assets, sales, earnings, growth potential, or cash flow
  • Earnings potential the market has overlooked
  • Priced attractively relative to their peers in the same industry

INVESTING IN MUTUAL FUNDS

How do I invest in a scheme of a mutual fund?

Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. You can visit any of our offices and request for investment in mutual fund.

Our executive will help you in acquiring, filling and submitting the application form. If you need information on performance of different schemes, we will also provide guidance for that. For more information on Arihant’s mutual fund service click here.

What are the frequently used terms in Mutual Funds industry?

A few frequently used terms are explained here below:

Net Asset Value ("NAV"): Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.
 
Sale Price: Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load.

Repurchase Price: Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.

Redemption Price: Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related.
 
Sales Load: Is a charge collected by a scheme when it sells the units. Also called, 'Front-end' load. Schemes that do not charge a load are called 'No Load' schemes.

Repurchase or 'Back-end' Load: Is a charge collected by a scheme when it buys back the units from the unitholders.

How do I fill up the application form of a mutual fund scheme?

You must mention clearly your name, address, number of units applied for and such other information as required in the application form. You must give your bank account details so as to avoid any fraudulent encashment of any cheque/draft issued by the mutual fund at a later date for the purpose of dividend or repurchase. Any changes in the address, bank account details etc at a later date should be informed to the mutual fund immediately.

When you invest with Arihant, our executives will help you in all these procedures.

Can non-resident Indians (NRIs) invest in mutual funds?

Yes, non-resident Indians can also invest in mutual funds. Necessary details in this respect are given in the offer documents of the schemes.

What should I look for into an offer document?

An abridged offer document, which contains very useful information, is required to be given to the prospective investor by the mutual fund. You should read the whole offer document very carefully. The application form for subscription to a scheme is an integral part of the offer document. SEBI has prescribed minimum disclosures in the offer document. Due care must be given to portions relating to main features of the scheme, risk factors, initial issue expenses and recurring expenses to be charged to the scheme, entry or exit loads, sponsor’s track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed.

What is Entry/Exit Load?

A Load is a charge, which the Asset Management Company (AMC) may collect on entry and/or exit from a mutual fund. A load/fee is charged to cover the up-front cost incurred by the AMC for selling the fund. It also covers one time processing costs. Some funds do not charge any entry or exit load. These funds are referred to as ‘No Load Fund’.

Funds usually charge an entry load ranging between 1.00% and 2.00%. Exit loads vary between 0.25% and 2.00%. For e.g. Let us assume an investor invests Rs. 10,000/- and the current NAV is Rs.13/-. If the entry load levied is 1.00%, the price at which the investor invests is Rs.13.13 per unit. The investor receives 10000/13.13 = 761.6146 units. (Note that units are allotted to an investor based on the amount invested and not on the basis of no. of units purchased).

Let us now assume that the same investor decides to redeem his 761.6146 units. Let us also assume that the NAV is Rs 15/- and the exit load is 0.50%. Therefore the redemption price per unit works out to Rs. 14.925. The investor therefore receives 761.6146 x 14.925 = Rs.11367.10.

What is a sale or repurchase/redemption price?

The price or NAV a unitholder is charged while investing in an open-ended scheme is called sales price. It may include sales load, if any. Repurchase or redemption price is the price or NAV at which an open-ended scheme purchases or redeems its units from the unitholders. It may include exit load, if any.

How do I know where the mutual fund scheme has invested money mobilised from the investors?

The mutual funds are required to disclose full portfolios of all of their schemes on half-yearly basis which are published in the newspapers. The portfolio details of mutual funds is available online on various websites and is updated on a monthly basis. You can visit www.arihantcapital.com and get the portfolio details of the mutual fund schemes under news and markets section.

Some mutual funds send the portfolios to their unitholders. The scheme portfolio shows investment made in each security i.e. equity, debentures, money market instruments, government securities, etc. and their quantity, market value and % to NAV. Some of the mutual funds send newsletters to the unitholders on a monthly / quarterly basis which also contain portfolios of the schemes. 

To acquire this information, you can ask your Arihant relationship manager and he/she would provide you all the requisite details.

Can a mutual fund change the nature of the scheme from the one specified in the offer document?

Yes. However, no change in the nature or terms of the scheme, known as fundamental attributes of the scheme e.g. structure, investment pattern, etc. can be carried out unless a written communication is sent to each unitholder and an advertisement is given in one English daily having nationwide circulation and in a newspaper published in the language of the region where the head office of the mutual fund is situated. The unitholders have the right to exit the scheme at the prevailing NAV without any exit load if they do not want to continue with the scheme.

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

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. Sometimes, they prefer a new scheme which is issuing units at Rs.10 whereas the existing schemes in the same category are available at much higher NAVs. Investors may please note that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance. On the other hand, investors should choose a scheme based on its merit considering performance track record of the mutual fund, service standards, professional management, etc.

How do I choose a scheme for investment from a number of schemes available?

As already mentioned, the investors must read the offer document of the mutual fund scheme very carefully. Every individual has different financial goals and different investor profile, so one scheme that may be suitable for your friend might not be suitable for you. You need to consult a financial advisor to find the right scheme for you. Arihant can help you in carefully selecting the right mutual fund scheme based on your profile and financial goals.

However, you may also look into the past track record of performance of the scheme or other schemes of the same mutual fund. You may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future performance and good performance in the past may or may not be sustained in the future, this is one of the important factors for making investment decision.

In case of debt oriented schemes, apart from looking into past returns, the investors should also see the quality of debt instruments which is reflected in their rating. A scheme with lower rate of return but having investments in better rated instruments may be safer. Similarly, in equities schemes also, investors may look for quality of portfolio. They may also seek advice of experts.

Is the higher net worth of the sponsor a guarantee for better returns?

In the offer document of any mutual fund scheme, financial performance including the net worth of the sponsor for a period of three years is required to be given. The only purpose is that the investors should know the track record of the company which has sponsored the mutual fund. However, higher net worth of the sponsor does not mean that the scheme would give better returns or the sponsor would compensate in case the NAV falls.

WHAT HAPPENS AFTER INVESTING

When will I get certificate or statement of account after investing in a mutual fund?

Mutual funds are required to dispatch certificates or statements of accounts within six weeks from the date of closure of the initial subscription of the scheme. If you have invested in a close-ended scheme, you would get either a demat account statement or unit certificates as these are traded in the stock exchanges. In case you are invested in an open-ended scheme, a statement of account is issued by the mutual fund within 30 days from the date of closure of initial public offer of the scheme. The procedure of repurchase is mentioned in the offer document.

How long will it take for transfer of units after purchase from stock markets in case of close-ended schemes?

According to SEBI Regulations, transfer of units is required to be done within thirty days from the date of lodgment of certificates with the mutual fund.

As a unitholder, how much time will it take to receive dividends/repurchase proceeds?

A mutual fund is required to dispatch to the unitholders the dividend warrants within 30 days of the declaration of the dividend and the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase request made by the unitholder. 

In case of failures to dispatch the redemption/repurchase proceeds within the stipulated time period, Asset Management Company is liable to pay interest as specified by SEBI from time to time (15% at present).

MUTUAL FUND INFORMATION AND COMPLAINTS

Where do I look out for information on mutual funds?

Almost all the mutual funds companies have their own web sites where you can get the information about their schemes (NAV, offer document, portfolio, fund manager profile, etc.) and forthcoming funds. Mutual Fund companies also publish fact sheets of their funds every month from where you can get useful information of the current running schemes.

You can also access the NAVs, half-yearly results and portfolios of all mutual funds at the web site of Association of mutual funds in India (AMFI) www.amfiindia.com. AMFI has also published useful literature for the investors. You can also log on to the web site of SEBI i.e. www.sebi.gov.in and go to "Mutual Funds" section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual reports of SEBI available on the web site, a lot of information on mutual funds is given. Many newspapers also publish useful information on mutual funds on daily and weekly basis. Investors may approach their agents and distributors to guide them in this regard.

If mutual fund scheme is wound up, what happens to money invested?

In case of winding up of a scheme, the mutual funds pay a sum based on prevailing NAV after adjustment of expenses. Unitholders are entitled to receive a report on winding up from the mutual funds which gives all necessary details.

How can I redress my complaints?

You would find the name of contact person, in the offer document of the mutual fund scheme, whom you may approach in case of any query, complaints or grievances. Trustees of a mutual fund monitor the activities of the mutual fund. The names of the directors of asset management company and trustees are also given in the offer documents.

You can also approach SEBI for redressal of their complaints. On receipt of complaints, SEBI takes up the matter with the concerned mutual fund and follows up with them till the matter is resolved.

OTHER QUESTIONS

Is there any difference between issue of a mutual fund (NFO) and an initial public offering (IPO) of a company?

Yes, there is a difference. IPOs of companies may open at lower or higher price than the issue price depending on market sentiment and perception of investors. However, in the case of mutual funds, the par value of the units may not rise or fall immediately after allotment. A mutual fund scheme takes some time to make investment in securities. NAV of the scheme depends on the value of securities in which the funds have been deployed.

Who is a custodian?

The custodian is responsible for the possession, handling and safekeeping of all securities purchased by the mutual fund.

Are mutual funds allowed to indulge in speculation / day trading?

No, Mutual funds are not permitted to speculate. As per SEBI regulations, all trades done by mutual funds should be settled by delivery except derivative trades, which are settled in cash.


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