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15 common questions about mutual funds answered

By Finserv MARKETS - Aug 2,2019
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15 common questions about mutual funds answered

Mutual fund investments are a great co-operative means to have your savings professionally managed. Investment patterns are evolving in In India; investors are moving away from traditional avenues and putting their savings into financial assets.

These are answers to some of the most common questions asked regarding mutual funds:

1. How do mutual funds work?

A mutual fund can be referred to as a collective fund generated by pooling in money from investors. This fund is then invested in a variety of securities. The income generated in the form of returns are shared by investors in proportion to the number of units possessed by each investor. The management of these funds is done by experts who have relevant market knowledge.

15 common questions about mutual funds answered

2. What is the minimum amount that you need to invest in a mutual fund scheme?

This depends on the type of fund you are investing in. Earlier, the minimum investment ranged from Rs. 500 to Rs. 5000 but now, in order to attract more consumers, mutual fund companies are letting their investors to start investing with just Rs. 100.

3. Do mutual fund guarantee returns?

Every form of investment comes with a certain amount of risk. While advisors might tell you that the returns will be good if you invest for a long term, but in reality, mutual funds are subject to risks and there is no guarantee for good returns. Thus, depending on the securities the fund is investing in, or the mix of securities chosen for a specific fund, the element of ‘risk’ varies substantially.

4. Are mutual funds liquid enough?

An asset that can be converted into cash readily is considered to have high liquidity. Mutual funds as an asset are very liquid. You can exit a scheme and fund monetized within a short period of time; this is irrespective of the fact whether returns are profitable or not.

5. Which equity mutual funds generated the highest returns?

If you are planning for a short- term investment, then equity investment might not be the right option for you. You can consider liquid funds of mutual funds which can give you around 7 per cent return before tax.

6. Which share class is right for me?

Essentially, it depends on your goal. Mutual funds have three classes, A shares, B shares, and C shares. The only difference between these is regarding the type of fees and expenses associated with them. Each class will invest in the same securities. Select a class that best aligns with your objective; be clear about your objectives and carry out your research regarding various kinds of fees associated with each class.

7. What is NAV?

NAV (Net Asset Value) is the total value of assets in a mutual fund divided by the number of units of the mutual fund. This value is equal to the price of a unit. NAV is determined once a day.

8. What is the expense ratio?

There is a certain fee that you need to pay to your fund managers and for administrative and other expenses. This fee is considered as the expense ratio or the management expense ratio.

9. What is a SIP? How is it different from a lump sum investment?

Through the Systematic Investment Plan (SIP) of the mutual fund, an investor can invest a fixed amount of money each month; a certain amount is deducted, say, for example, on the 10th of every month. On the other hand, in a lump sum investment, you invest an amount on a particular day.

10. How efficient are the fund managers?

Fund managers are considered to be efficient as they possess the knowledge to ensure that your funds are invested appropriately. But it is highly recommended to carry out a background check and understand how credible and efficient your fund manager is. It is also advisable to understand the rationale behind his strategies and not blindly agree to what he suggests.

11. Are there any tax benefits?

If you invest in any tax saving scheme, you can claim tax deductions of up to Rs 1.5 lakh under Section 80C. These schemes are referred to as Equity Linked Saving Schemes (ELSS).

12. Are mutual funds replacing bank deposits as a preferred investment option?

Mutual funds are definitely becoming a preferred mode of investment. Over the past three years investment in mutual funds have almost doubled while bank deposits grew by about 34 per cent and there has been re-allocation to funds in 2018. This is mainly due to the fact that deposit rates have considerably come down.

13. What to do if mutual funds are giving negative returns?

This largely depends on the time period. If you are investing for a longer period, then you must keep in mind that when the stock market is down, it will have a negative impact on the equity. Make sure that the scheme that you have invested in is in line with your objectives.

14. Is the mutual fund industry evolving in India?

In India, mutual funds have grown from being an alternative to direct equity investment. Despite the high market volatility in 2018, investors remained confident in their investments. In February 2019, the SIP book size stood over 8,000 crores.

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

Yes, non-resident Indians can also invest in mutual funds. However, it is mandatory for the investor to adhere to the Foreign Exchange Management Act (FEMA).

Now that your key questions on mutual funds have been answered, you can consider purchasing mutual funds yourself. Instead of going through a cumbersome offline route that may involve agents and loads of paperwork, consider purchasing mutual funds on Finserv MARKETS. Doing so comes with a host of benefits including zero commission, fast and free accounting opening and detailed portfolio insights.

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