SECURITIES AND EXCHANGE BOARD OF INDIA
SEBI INVESTOR EDUCATION PROGRAMME
(INVESTMENTS IN MUTUAL FUNDS)
avenues are available to investors. Mutual funds also offer good investment
opportunities to the investors. Like all investments, they also carry certain
risks. The investors should compare the risks and expected yields after
adjustment of tax on various instruments while taking investment decisions.
The investors may seek advice from experts and consultants including agents
and distributors of mutual funds schemes while making investment decisions.
With an objective to make
the investors aware of functioning of mutual funds, an attempt has been made
to provide information in question-answer format which may help the investors
in taking investment decisions.
What is a Mutual Fund?
Mutual fund is a
mechanism for pooling the resources by issuing units to the investors and
investing funds in securities in accordance with objectives as disclosed in
Investments in securities
are spread across a wide cross-section of industries and sectors and thus the
risk is reduced. Diversification reduces the risk because all stocks may not
move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in
accordance with quantum of money invested by them. Investors of mutual funds
are known as unitholders.
The profits or losses are
shared by the investors in proportion to their investments. The mutual funds
normally come out with a number of schemes with different investment
objectives which are launched from time to time. A mutual fund is required to
be registered with Securities and Exchange Board of India (SEBI) which
regulates securities markets before it can collect funds from the public.
What is the history of
Mutual Funds in India and role of SEBI in mutual funds
Unit Trust of India was the first mutual fund set up
in India in the year 1963. In early 1990s,
Government allowed public sector banks and institutions to set up mutual
In the year 1992,
Securities and exchange Board of India (SEBI) Act was passed. The objectives
of SEBI are – to protect the interest of investors in securities and to
promote the development of and to regulate the securities market.
As far as mutual funds
are concerned, SEBI formulates policies and regulates the mutual funds to
protect the interest of the investors. SEBI notified regulations for the
mutual funds in 1993. Thereafter, mutual funds sponsored by private sector
entities were allowed to enter the capital market. The regulations were fully
revised in 1996 and have been amended thereafter from time to time. SEBI has
also issued guidelines to the mutual funds from time to time to protect the
interests of investors.
All mutual funds whether
promoted by public sector or private sector entities including those promoted
by foreign entities are governed by the same set of Regulations. There is no
distinction in regulatory requirements for these mutual funds and all are
subject to monitoring and inspections by SEBI. The risks associated with the
schemes launched by the mutual funds sponsored by these entities are of
How is a mutual fund
A mutual fund is set up
in the form of a trust, which has sponsor, trustees, asset
management company (AMC) and custodian. The trust is established by a sponsor
or more than one sponsor who is like promoter of a company. The trustees of
the mutual fund hold its property for the benefit of the unitholders.
Asset Management Company (AMC) approved by SEBI manages the funds by making
investments in various types of securities. Custodian, who is registered with
SEBI, holds the securities of various schemes of the fund in its custody. The
trustees are vested with the general power of superintendence and direction
over AMC. They monitor the performance and compliance of SEBI Regulations by
the mutual fund.
SEBI Regulations require
that at least two thirds of the directors of trustee company or board of
trustees must be independent i.e. they should not be associated with the
sponsors. Also, 50% of the directors of AMC must be independent. All mutual
funds are required to be registered with SEBI before they launch any scheme.
What is Net Asset
Value (NAV) of a scheme?
The performance of a
particular scheme of a mutual fund is denoted by Net Asset Value (NAV).
Mutual funds invest the
money collected from the investors in securities markets. In simple words,
Net Asset Value is the market value of the securities held by the scheme.
Since market value of securities changes every day, NAV of a scheme also
varies on day to day basis. The NAV per unit is the market value of
securities of a scheme divided by the total number of units of the scheme on
any particular date. For example, if the market value of securities of a
mutual fund scheme is Rs 200 lakhs
and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of
the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a
regular basis - daily or weekly - depending on the type of scheme.
What are the different
types of mutual fund schemes?
Schemes according to
A mutual fund scheme can
be classified into open-ended scheme or close-ended scheme depending on its
An open-ended fund or
scheme is one that is available for subscription and repurchase on a
continuous basis. These schemes do not have a fixed maturity period.
Investors can conveniently buy and sell units at Net Asset Value (NAV)
related prices which are declared on a daily basis. The key feature of
open-end schemes is liquidity.
A close-ended fund or
scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for
subscription only during a specified period at the time of launch of the
scheme. Investors can invest in the scheme at the time of the initial public
issue and thereafter they can buy or sell the units of the scheme on the
stock exchanges where the units are listed. In order to provide an exit route
to the investors, some close-ended funds give an option of selling back the
units to the mutual fund through periodic repurchase at NAV related prices.
SEBI Regulations stipulate that at least one of the two exit routes is
provided to the investor i.e. either repurchase facility or through listing
on stock exchanges. These mutual funds schemes disclose NAV generally on
Schemes according to
A scheme can also be
classified as growth scheme, income scheme, or balanced scheme considering
its investment objective. Such schemes may be open-ended or close-ended
schemes as described earlier. Such schemes may be classified mainly as
Growth / Equity
The aim of growth funds
is to provide capital appreciation over the medium to long- term. Such
schemes normally invest a major part of their corpus in equities. Such funds
have comparatively high risks. These schemes provide different options to the
investors like dividend option, capital appreciation, etc. and the investors
may choose an option depending on their preferences. The investors must
indicate the option in the application form. The mutual funds also allow the
investors to change the options at a later date. Growth schemes are good for
investors having a long-term outlook seeking appreciation over a period of
Income / Debt Oriented
The aim of income funds
is to provide regular and steady income to investors. Such schemes generally
invest in fixed income securities such as bonds, corporate debentures,
Government securities and money market instruments. Such funds are less risky
compared to equity schemes. These funds are not affected because of
fluctuations in equity markets. However, opportunities of capital appreciation
are also limited in such funds. The NAVs of such
funds are affected because of change in interest rates in the country. If the
interest rates fall, NAVs of such funds are likely
to increase in the short run and vice versa. However, long term investors may
not bother about these fluctuations.
The aim of balanced funds
is to provide both growth and regular income as such schemes invest both in
equities and fixed income securities in the proportion indicated in their
offer documents. These are appropriate for investors looking for moderate
growth. They generally invest 40-60% in equity and debt instruments. These
funds are also affected because of fluctuations in share prices in the stock
markets. However, NAVs of such funds are likely to
be less volatile compared to pure equity funds.
Money Market or Liquid
These funds are also
income funds and their aim is to provide easy liquidity, preservation of
capital and moderate income. These schemes invest exclusively in safer
short-term instruments such as treasury bills, certificates of deposit,
commercial paper and inter-bank call money, government securities, etc.
Returns on these schemes fluctuate much less compared to other funds. These
funds are appropriate for corporate and individual investors as a means to
park their surplus funds for short periods.
These funds invest
exclusively in government securities. Government securities have no default
risk. NAVs of these schemes also fluctuate due to
change in interest rates and other economic factors as is the case with
income or debt oriented schemes.
Index Funds replicate the
portfolio of a particular index such as the BSE Sensitive index, S&P NSE
50 index (Nifty), etc These schemes invest in the securities in the same weightage comprising of an index. NAVs
of such schemes would rise or fall in accordance with the rise or fall in the
index, though not exactly by the same percentage due to some factors known as
"tracking error" in technical terms. Necessary disclosures in this
regard are made in the offer document of the mutual fund scheme.
There are also exchange
traded index funds launched by the mutual funds which are traded on the stock
What are sector
These are the
funds/schemes which invest in the securities of only those sectors or
industries as specified in the offer documents. e.g.
Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum
stocks, etc. The returns in these funds are dependent on the performance of
the respective sectors/industries. While these funds may give higher returns,
they are more risky compared to diversified funds. Investors need to keep a
watch on the performance of those sectors/industries and must exit at an
appropriate time. They may also seek advice of an expert.
What are Tax Saving Schemes?
These schemes offer tax
rebates to the investors under specific provisions of the Income Tax Act,
1961 as the Government offers tax incentives for investment in specified
avenues. e.g. Equity Linked Savings Schemes (ELSS).
Pension schemes launched by the mutual funds also offer tax benefits. These
schemes are growth oriented and invest pre-dominantly in equities. Their
growth opportunities and risks associated are like any equity-oriented
What is a Fund of Funds (FoF)
scheme that invests primarily in other schemes of the same mutual fund or
other mutual funds is known as a FoF scheme. An FoF scheme enables the
investors to achieve greater diversification through one scheme. It spreads risks
across a greater universe.
What is a Load or
A Load Fund is one that
charges a percentage of NAV for entry or exit. That is, each time one buys or
sells units in the fund, a charge will be payable. This charge is used by the
mutual fund for marketing and distribution expenses. Suppose the NAV per unit
is Rs.10. If the entry as well as exit load charged is 1%, then the investors
who buy would be required to pay Rs.10.10 and those who offer their units for
repurchase to the mutual fund will get only Rs.9.90 per unit. The investors
should take the loads into consideration while making investment as these
affect their yields/returns. However, the investors should also consider the
performance track record and service standards of the mutual fund which are
more important. Efficient funds may give higher returns in spite of loads.
A no-load fund is one
that does not charge for entry or exit. It means the investors can enter the
fund/scheme at NAV and no additional charges are payable on purchase or sale
Can a mutual fund
impose fresh load or increase the load beyond the level mentioned in the
Mutual funds cannot
increase the load beyond the level mentioned in the offer document. Any
change in the load will be applicable only to prospective investments and not
to the original investments. In case of imposition of fresh loads or increase
in existing loads, the mutual funds are required to amend their offer
documents so that the new investors are aware of loads at the time of
What is a sales 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 applicable.
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 applicable.
What is an assured
Assured return schemes
are those schemes that assure a specific return to the unitholders
irrespective of performance of the scheme.
A scheme cannot promise
returns unless such returns are fully guaranteed by the sponsor or AMC and
this is required to be disclosed in the offer document.
carefully read the offer document whether return is assured for the entire
period of the scheme or only for a certain period. Some schemes assure
returns one year at a time and they review and change it at the beginning of
the next year.
Can a mutual fund
change the asset allocation while deploying funds of investors?
Considering the market
trends, any prudent fund managers can change the asset allocation i.e. he can
invest higher or lower percentage of the fund in equity or debt instruments
compared to what is disclosed in the offer document. It can be done on a
short term basis on defensive considerations i.e. to protect the NAV. Hence
the fund managers are allowed certain flexibility in altering the asset
allocation considering the interest of the investors. In case the mutual fund
wants to change the asset allocation on a permanent basis, they are required
to inform the unitholders and giving them option to
exit the scheme at prevailing NAV without any load.
How to 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. Investors can also contact the agents and distributors of
mutual funds who are spread all over the country for necessary information
and application forms. Forms can be deposited with mutual funds through the
agents and distributors who provide such services. Now a
days, the post offices and banks also distribute the units of mutual
funds. However, the investors may please note that the mutual funds schemes
being marketed by banks and post offices should not be taken as their own
schemes and no assurance of returns is given by them. The only role of banks
and post offices is to help in distribution of mutual funds schemes to the
Investors should not be
carried away by commission/gifts given by agents/distributors for investing
in a particular scheme. On the other hand they must consider the track record
of the mutual fund and should take objective decisions.
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.
How much should one
invest in debt or equity oriented schemes?
An investor should take
into account his risk taking capacity, age factor, financial position, etc.
As already mentioned, the schemes invest in different type of securities as
disclosed in the offer documents and offer different returns and risks.
Investors may also consult financial experts before taking decisions. Agents
and distributors may also help in this regard.
How to fill up the
application form of a mutual fund scheme?
An investor must mention
clearly his name, address, number of units applied for and such other
information as required in the application form. He must give his bank
account number 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 number, etc at a later date should be informed to the mutual fund
What should an
investor look 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. 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. An investor, before
investing in a scheme, should carefully read 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, etc.
When will the investor
get certificate or statement of account after investing in a mutual fund?
Mutual funds are required
to despatch certificates or statements of accounts
within six weeks from the date of closure of the initial subscription of the
scheme. In case of close-ended schemes, the investors would get either a demat account statement or unit certificates as these are
traded in the stock exchanges. In case of open-ended schemes, 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
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
A mutual fund is required
to despatch 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 despatch 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).
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. The mutual funds are also required to follow similar procedure while
converting the scheme form close-ended to open-ended scheme and in case of
change in sponsor.
How will an investor
come to know about the changes, if any, which may occur in the mutual fund?
There may be changes from
time to time in a mutual fund. The mutual funds are required to inform any
material changes to their unitholders. Apart from
it, many mutual funds send quarterly newsletters to their investors.
At present, offer
documents are required to be revised and updated at least once in two years.
In the meantime, new investors are informed about the material changes by way
of addendum to the offer document till the time offer document is revised and
How to know the
performance of a mutual fund scheme?
The performance of a
scheme is reflected in its net asset value (NAV) which is disclosed on daily
basis in case of open-ended schemes and on weekly basis in case of
close-ended schemes. The NAVs of mutual funds are
required to be published in newspapers. The NAVs
are also available on the web sites of mutual funds. All mutual funds are
also required to put their NAVs on the web site of
Association of Mutual Funds in India (AMFI) www.amfiindia.com and thus the investors
can access NAVs of all mutual funds at one place
The mutual funds are also
required to publish their performance in the form of half-yearly results
which also include their returns/yields over a period of time i.e. last six
months, 1 year, 3 years, 5 years and since inception of schemes. Investors
can also look into other details like percentage of expenses of total assets
as these have an affect on the yield and other useful information in the same
The mutual funds are also
required to send annual report or abridged annual report to the unitholders at the end of the year.
Various studies on mutual
fund schemes including yields of different schemes are being published by the
financial newspapers on a weekly basis. Apart from these, many research
agencies also publish research reports on performance of mutual funds
including the ranking of various schemes in terms of their performance.
Investors should study these reports and keep themselves informed about the
performance of various schemes of different mutual funds.
Investors can compare the
performance of their schemes with those of other mutual funds under the same
category. They can also compare the performance of equity oriented schemes
with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc.
On the basis of
performance of the mutual funds, the investors should decide when to enter or
exit from a mutual fund scheme.
How to 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. 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. These portfolio statements also required to disclose illiquid
securities in the portfolio, investment made in rated and unrated debt
securities, non-performing assets (NPAs), etc.
Some of the mutual funds
send newsletters to the unitholders on quarterly
basis which also contain portfolios of the schemes.
Is there any
difference between investing in a mutual fund and in 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.
If schemes in the same
category of different mutual funds are available, should one 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. This is explained in
an example given below.
Suppose scheme A is
available at a NAV of Rs.15 and another scheme B at Rs.90. Both schemes are
diversified equity oriented schemes. Investor has put Rs.
9,000 in each of the two schemes. He would get 600 units (9000/15) in scheme
A and 100 units (9000/90) in scheme B. Assuming that the markets go up by 10
per cent and both the schemes perform equally good
and it is reflected in their NAVs. NAV of scheme A
would go up to Rs. 16.50 and that of scheme B to Rs. 99. Thus, the market value of investments would be Rs. 9,900 (600* 16.50) in scheme A and it would be the
same amount of Rs. 9900 in scheme B (100*99). The
investor would get the same return of 10% on his investment in each of the
schemes. Thus, lower or higher NAV of the schemes and allotment of higher or
lower number of units within the amount an investor is willing to invest,
should not be the factors for making investment decision. Likewise, if a new
equity oriented scheme is being offered at Rs.10 and an existing scheme is
available for Rs. 90, should not be a factor for
decision making by the investor. Similar is the case with income or
On the other hand, it is
likely that the better managed scheme with higher NAV may give higher returns
compared to a scheme which is available at lower NAV but is not managed
efficiently. Similar is the case of fall in NAVs.
Efficiently managed scheme at higher NAV may not fall as much as
inefficiently managed scheme with lower NAV. Therefore, the investor should
give more weightage to the professional management
of a scheme instead of lower NAV of any scheme. He may get much higher number
of units at lower NAV, but the scheme may not give higher returns if it is
not managed efficiently.
How to 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. They may also look into the past track record of performance of
the scheme or other schemes of the same mutual fund. They 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.
Are the companies
having names like mutual benefit the same as mutual funds schemes?
Investors should not assume
some companies having the name "mutual benefit" as mutual funds.
These companies do not come under the purview of SEBI. On the other hand,
mutual funds can mobilise funds from the investors
by launching schemes only after getting registered with SEBI as mutual funds.
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.
Where can an investor
look out for information on mutual funds?
Almost all the mutual
funds have their own web sites. Investors 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.
Investors can log on to
the web site of SEBI 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.
There are a number of
other web sites which give a lot of information of various schemes of mutual
funds including yields over a period of time. 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.
Can an investor appoint a nominee for his investment in
units of a mutual fund?
The nomination can be made by individuals applying for / holding units on their
own behalf singly or jointly. Non-individuals
including society, trust, body corporate, partnership firm, Karta of Hindu Undivided Family, holder of Power of
Attorney cannot nominate.
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 the investors redress
Investors would find the
name of contact person in the offer document of the mutual fund scheme whom they 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. Investors should approach the concerned Mutual
Fund / Investor Service Centre of the Mutual Fund with their complaints,
If the complaints remain
unresolved, the investors may approach SEBI for facilitating redressal of their complaints. On receipt of complaints,
SEBI takes up the matter with the concerned mutual fund and follows up with it regularly.
Investors may send their complaints to:
Securities and Exchange
Board of India
Office of Investor
Assistance and Education (OIAE)
Plot No.C4-A , “G” Block, 1st Floor,
Bandra (E), Mumbai – 400 051.
What is the procedure
for registering a mutual fund with SEBI ?
An applicant proposing to
sponsor a mutual fund in India must submit an application in
Form A along with a fee of Rs.25,000. The
application is examined and once the sponsor satisfies certain conditions
such as being in the financial services business and possessing positive net
worth for the last five years, having net profit in three out of the last
five years and possessing the general reputation of fairness and integrity in
all business transactions, it is required to complete the remaining formalities
for setting up a mutual fund. These include inter alia,
executing the trust deed and investment management agreement, setting up a
trustee company/board of trustees comprising two- thirds independent
trustees, incorporating the asset management company (AMC), contributing to
at least 40% of the net worth of the AMC and appointing a custodian. Upon
satisfying these conditions, the registration certificate is issued subject
to the payment of registration fees of Rs.25.00 lacs
For details, see the SEBI (Mutual Funds)