Following are our answers to the most commonly asked Mutual Fund questions.

What is a mutual fund?
What are the different plans that mutual funds offer?
What is Net Asset Value (NAV)?
What are loads?
Can the buy and sell price of units be different from the NAV?
What is Purchase price?
What is redemption price?
What is repurchase price?
What is Switch?

What is a mutual fund?
A mutual fund is essentially a diversified portfolio of financial instruments - these could be equities, debentures / bonds or money market instruments. A mutual fund is created by pooling together contributions from various investors. The corpus of the fund is then deployed in investment alternatives that help to meet predefined investment objectives.

The fund (and through it, its investors) receives help in achieving the common investment objectives from its fund manager (normally an asset management company). The fund compensates its fund manager
through a fee, and also bears the other expenses incurred in managing it. The income earned through these investments, and the capital appreciation realized by the fund, are shared by its investors in proportion to the number of units of the fund owned by
them (pro rata).

Types of Mutual Funds: Mutual fund schemes may be classified on the basisof their structure and its investment objective.

By Structure:

Open-ended Funds -- An Open-ended Fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices.

Close-ended Funds -- A Close-ended Fund has a stipulated maturity period,which generally ranges from 3 to 15 years. The fund is open for subscription only during a specified period. 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, if they are listed. The market price at the stock exchange could vary from the scheme's NAV on account of demand and supply situation, unit holders' expectations and other market factors.

By Investment Objective:

Growth Funds -- The aim of growth funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a majority of their corpus in equities. Growth schemes are ideal for investors who have a long-term outlook and are seeking growth over a period of time.

Income Funds -- The aim of Income Funds is to provide regular and steadyincome to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income. Capital appreciation in such funds may be limited, though risks are typically lower than that in a growth fund.

Balanced Funds -- The aim of Balanced Funds is to provide both growth andregular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. This proportion affects the risks and the returns associated with the balanced fund - in case equities are allocated a higher proportion, investors would be exposed to risks similar to that of the equity market. Balanced funds with equal allocation to equities and fixed income securities are ideal for investors looking for a combination of income and moderate growth.

Money Market Funds -- The aim of Money Market Funds is to provide easyliquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit, Commercial Paper and Inter-Bank Call Money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for corporate and individual investors as a means to park their surplus funds for short periods.

Other Equity Related Schemes :

Tax Saving Schemes -- These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws, as the Government offers
tax incentives for investment in specified avenues. Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction under Section 88 of the Indian Income Tax Act, 1961.

Index Schemes -- Index Funds attempt to replicate the performance of aparticular index such as the BSE Sensex or the NSE S&P CNX 50.

Sectoral Schemes -- Sectoral Funds are those which invest exclusively in specified sector(s) such as FMCG, Information Technology, Pharmaceuticals, etc. These schemes carry higher risk as compared to general equity schemes as the portfolio is less diversified, i.e. restricted to sector(s) / industry (ies). Mutual fund schemes may be classified on the basis of their structure and its investment objective.

What are the different plans that mutual funds offer?
Mutual Funds, in order to cater to a range of investor needs, have various investment plans. Some of the important investment plans include: Growth Plan -- Dividend is not paid-out under a Growth Plan and the investor realises only the capital appreciation on the investment (by an increase in NAV).

Income Plan -- Dividends are paid-out to investors under an Income Plan to the investors. However, the NAV of the mutual fund scheme under an Income Plan falls to the extent of the dividend payout.

Dividend Re-investment Plan -- Here the dividend accrued on mutual funds is automatically re-invested in purchasing additional units in open-ended funds. In
most cases mutual funds offer the investor an option of collecting dividends or re-investing the same.

Retirement Pension Plan -- Some schemes are linked with retirement pension. Individuals participate in these plans for themselves, and corporates participate for their employees.

Insurance Plan -- UTI and LIC Mutual Funds have some schemes that offer insurance cover to investors.

Systematic Investment Plan (SIP) -- Here the investor is given the option ofpreparing a pre-determined number of post-dated cheques in favour of the fund. The investor is allotted units on the date of the respective cheques at the applicable NAV.

Systematic Withdrawal Plan -- As opposed to the Systematic Investment Plan, the Systematic Withdrawal Plan allows the investor the facility to withdraw a pre-determined amount / units from his fund at a pre-determined interval. The investor's units will be redeemed at the applicable NAV as on that day.

What is Net Asset Value (NAV)?
As per SEBI (Securities and Exchange Board of India), NAV of a scheme is determined by dividing the net assets of the scheme by the number of outstanding units on the valuation date. Typically, NAV is calculated by summing the current market values of all securities held by the fund, adding in cash and any accrued income, then subtracting liabilities and dividing the result by the number of units outstanding.

For example :
Total Value of Securities (Equity, Bonds, Debentures etc.)Rs. 1000; Cash Rs. 1500 ; LiabilitiesRs. 500
Total outstanding units 100.
NAV [(1000+1500-500)/100]Rs. 20 per unit
Most funds compute NAVs daily based on closing market prices.

Mutual fund schemes may be classified on the basis of their structure and its investment objective.

What are loads?
Load is a charge collected by a mutual fund when it sells units. It can be levied as an entry load (i.e., the charge is collected when an investor buys the units) and as an exit load (i.e, the charge is collected when the investor sells back the units). Schemes that do not charge any load and are called No Load Schemes.

Can the buy and sell price of units be different from the NAV?
The buy and sell price of schemes can be different from the NAV due to entry / exit loads. For example, if the current NAV of a scheme is Rs. 10 and the entry and exit load is 1.5% then the effective purchase price for the investor per unit will be Rs. 10.15, and the sale price will be Rs. 9.85.

What is Purchase price?
Purchase price is the price paid by a customer to purchase a unit of the fund. If the fund has no entry load, then the sales price is the same as the NAV. If the fund levies an entry load, then the sales price would be higher than the NAV, to the extent of the entry load levied.

What is redemption price?
Redemption price is the price received by the customer on selling units of an open-ended scheme to the fund. If the fund does not levy an exit load, the redemption price will be same as the NAV. The redemption price will be lower than the NAV in case the fund levies an exit load.

What is repurchase price?
Repurchase price is different from redemption price and refers to
the price at which a close-ended scheme repurchases its units.
Repurchase can either be at NAV or can have an exit load.

What is Switch?
Some Mutual Funds provide the investor with an option to shift his investment from one scheme to another within that fund. For this option the fund may levy a switching fee. Switching allows the Investor to alter the allocation of their investment among the schemes in order to meet their changed investment needs, risk profiles or changing circumstances during their lifetime.

Source: HSBC, www.hsbc.co.in

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