Mutual Funds - Investing

Providing access to inaccessible assets - There are many investments you can make only through a mutual fund

Government Securities:
Individuals can't buy government bonds, but they can buy funds that invest in such bonds.

International Stocks:
You can easily invest in global markets by investing in funds that reside in India, but invest in international markets.

Capital Protection:
Mutual Funds do not offer any capital protection in a legally enforceable way. Mutual Funds invest in market-linked investments and losses are always possible. However, AMCs are allowed to run "Capital Protection Oriented Funds". These funds invest in a high proportion of safe fixed-income securities and a small proportion in equities. Investors who stay invested for a fixed period of time are unlikely to suffer any capital loss.

Inflation Protection:
Mutual funds do not offer any kind of a contractual or formal inflation protection. However, when you invest in well-chosen equity funds for a period of several years, your chances of beating inflation are better than any other type of investment.

Liquidity:
As per SEBI's rules, all mutual funds must offer liquidity. However, the liquidity is of a different nature depending on whether a fund is open-ended or closed-end. Open-end funds are perpetual funds that are always available for investment or redemption with the AMC. In the case of open-ended funds, the AMC itself will redeem the money at the NAV-based selling price within three working days.

Closed-end funds are launched for a fixed period (generally three to ten years) and you can invest in them only at the time of the initial offer. For closed-end funds, the AMCs get the fund listed on a stock exchange so that you can sell your units like a stock through a stock broker. However, this is not a great option because the stock-exchange price of a fund is generally a lot less than the NAV. In practice, you should consider closed-end funds to be locked in for their full duration.

Tax-savings funds have a three-year lock-in. These funds help you save tax as per Section 80C of the Income Tax Act but you cannot redeem for three years as per the tax law.

Credit Rating:
There is no credit rating for mutual funds. However, if you need a simple-to-understand rating system that tells you how good or bad a fund is then Value Research's Fund Rating System has been doing that job for knowledgeable investors since early 1990s.

Value Research: follows a range of parameters to evaluate the long-term returns a fund has generated and the risks it has taken in doing so. The funds are then graded along five levels ranging from 1- to 5- star. This is a relative rating that is given in comparison to other funds of the same type.

Where and How to Invest:
You can invest in mutual funds directly through the AMC or through an intermediary.

Directly through the AMC
To invest directly through in AMC, you can get each AMC's details through its website. Most AMCs also have a toll-free phone helpline which can also be a good starting point if you do not use the internet.

Intermediary
There is a wide variety of intermediaries available. These include banks, some stock brokers and a large number of individuals and small financial advisory companies. All intermediaries have to be registered with the Association of Mutual Fund of India (AMFI), which also maintains a searchable online directory at www.amfiindia.com. The website also has a list of intermediaries who have been suspended for some malpractice.

Investing in a fund involves going through a KYC (Know Your Customer) process, much like other financial transactions.
Your will need the following documents for the KYC:
- Individual investors will have to produce their proof of identity (Photo PAN card copy or PAN card copy and copy of the passport, driving license etc) and Proof of Address (any valid documents listed in Section B of the KYC Application Form for individuals)


 

Read More

Benefits of Mutual Funds
Mutual Fund Plans
Mututal Fund-Introduction




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