Providing access to inaccessible assets - There are many investments you can make only through a mutual fund
Individuals can't buy government
bonds, but they can buy funds that invest in such bonds.
You can easily invest in global
markets by investing in funds that reside in India, but
invest in international markets.
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.
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.
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.
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.
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
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)