FAQs regarding MFs and Schemes What is a Mutual Fund? A mutual fund, is a corporation (trust) that pools the savings, which are then invested in money market, debt market and capital market instruments such as shares, debentures and other securities. Thus the MF serves as a link between the public and the capital markets so as to mobilise savings from the investors and invest them in the capital markets to generate returns. What is SEBI? Securities and Exchange Board of India (SEBI) was established in 1992 to regulate and develop the growth of the capital market. SEBI regulates the working of stock exchanges and intermediaries such as stock brokers and merchant bankers, accords approval for mutual funds, and registers Foreign Institutional Investors who wish to trade in Indian scrips. Since 1999, UTI has voluntarily agreed to abide by the SEBI regulations regarding mutual funds for all its schemes/plans except US-64. What is an asset management company (AMC)? The trustee delegates the task of floating schemes and managing the collected money to a company of professionals, usually experts who are known for smart stock picks. This is an asset management company (AMC). AMC charges a fee for the services it renders to the MF trust. Thus the AMC acts as the investment manager of the trust under the broad supervision and direction of the trustees. The AMC must have a net worth of at least Rs10 crores at all times and it can not act as a trustee of any other mutual fund. What is the difference between mutual funds and portfolio management services (PMS)? While the concept remains the same of collecting money from investors, pooling them and investing the funds, the target investors are different. In the case of portfolio management the target investors are high networth investors, while in the case of mutual funds the target investors include the retail investors. Further, in case of PMS the investments of each investor are managed separately, while in the case of MFs the funds collected under a scheme are pooled and the returns are distributed in the same proportion, in which the investments are made by the investors/ unit holders. Moreover, the investments of the PMS are managed taking the risk profile of individuals into account. In mutual fund, the risk is pooled depending on the objective of a scheme. Who is a custodian? The custodian, an independent organisation, has the physical possession of all securities purchased by the mutual fund, and undertakes responsibility for its handling and safekeeping. For instance, the Stock Holding Corporation of India Ltd. (SCHIL) is the custodian for most fund houses in the country. What are the advantages of investing in Mutual Funds? Following are the major advantages: Portfolio Diversification/Risk reduction: - An investor holds a diversified portfolio even with a small amount of investment, which would otherwise require a big capital. Further, the fund invests in diverse portfolios, hence reducing the riskiness of the investments. Reduction of transaction costs: -While investing through the funds, an investor has the benefit of economies of scale; the funds incur lesser costs because of larger volumes, a benefit passed on to its investors. Professional Management: - Mutual funds are managed by professional management who has requisite skills and resources to analyze the various investment options in this fast-moving, global and sophisticated markets. Liquidity:-Often, investors hold shares or bonds they cannot directly, easily and quickly sell. If they invest in the units of a fund, they can generally cash their investment any time, by selling their units to the fund if open-end, or selling them in the market if the fund is close-end. Convenience and flexibility: - Investors have the option of transferring their holdings from one scheme to the other, get updated market information and so on. Tax Benefits-Income tax benefits are granted to investors in mutual funds, making it more tax efficient as compared to other comparable investment avenues. Being the largest mutual fund of the country, UTI endeavors to serve the interests of the investors well when assessed on the aforementioned parameters. What are open-end and close-end mutual fund schemes? Open-end Scheme Open-end schemes can sell/repurchase units as investors' demand. These do not have a fixed maturity period. IPO is open for a period of 30 days and then reopens as an open-end scheme after a period not exceeding 30 days from the date of closure of the IPO. Investors can buy or repurchase units at NAV/NAV-related prices or at a price as decided by the MFs from and to the mutual fund on any business day. E.g. UTI Growth sector funds. Close-end Scheme Closed-end scheme has fixed maturity periods (ranging from 2 to 15 years). One can invest in the scheme at the time of the initial issue, which is open for a period not exceeding 45 days. Thereafter such schemes cannot issue new units. They do not allow investors to buy units directly from the fund. For e.g. UTI Mastershare 1986/MIPs. What are the other classifications of mutual funds schemes? Geographical classification Domestic funds Fund houses launch domestic funds, which mobilize savings from a particular geographic locality, like a country or region. Majority of schemes launched by Indian MFs like UTI, GIC MF, LIC MF, SBI MF, Canbank MF, Bank of Baroda MF, Bank of India MF, Morgan Stanley, Templeton, Alliance etc, are the examples of such a fund. Offshore Funds The objective behind launching offshore funds is to attract foreign capital for investment in the country of the issuing company. These funds facilitate cross border fund flow, which is a direct route for getting foreign currency. From the investment point of view, offshore funds open up domestic capital markets to the international investors and global portfolio investments. Portfolio classification Growth Funds Investment objectives of such funds are capital appreciation through investment in equity shares. They invest in the equity shares of companies with high growth potential. The examples being UTI Growth Sector Funds (software/services/brand value/petrochem) or UGS 10000(MNC sector fund). Income Funds Such funds have the objective of providing safety of investments with regular income. The funds predominantly invested in bonds, debentures and other debt related instruments and to some extent in equity shares of companies with high dividend payouts. E.g. UTI Monthly income plans. Value Funds Such funds invest in the equities that are undervalued today in anticipation of unlocking its value in the near future. E.g. UTI – Master value unit fund. Balanced Funds Balanced Funds have an objective of providing modest risk of investments with reasonable rate of return. The funds are invested in a judicious mix of equity shares, preference shares as well as bonds, debentures and other debt related instruments E.g. UTI US-95. Money Market Mutual Funds (MMMFs) Such funds have an objective of taking advantage of the volatility in interest rates in the money market instruments. The funds are invested in certificate of deposits (CDs), interbank call money market, commercial papers, T-bills and short-term securities with a maturity horizon of less than one year. Investors can participate indirectly in the money market through MMMFs. E.g. UTI Money Market Fund. Index Funds The investment Objective is to increase the value of the portfolio in line with the benchmark index (for e.g. BSE Sensex, SP CNX 50). These funds are invested in the shares of companies as included in the benchmark index in the same proportion.E.g. UTI Nifty Index Fund / Master index fund. Leveraged Funds These funds have an objective of increasing the value of the portfolio and benefit the shareholders by gains exceeding the cost of borrowed funds. The funds are invested in speculative and risky investments like short sales to take advantage of declining market. Such funds are yet not common in India. What are the different plans that mutual funds offer? Income Plan Under the Income Plan, the fund distributes a substantial part of the surplus to investors in the form of dividend (income distribution). Growth Plan Under the Growth Plan, an investor realises only the capital appreciation on the investment (by an increase in NAV) and normally does not get any income in the form of income distribution. Re-investment Plan Here the income distribution accrued on a mutual fund scheme is automatically re-invested in purchasing additional units under the scheme. In most cases mutual funds offer the investors an option of collecting income distribution or re-invest in the same scheme at scheme NAV/NAV based price. Systematic Investment Plan (SIP) Here the investor is given the option of managing his investments on a periodic basis and thus inculcates a regular saving habit. He may issue a pre-determined number of post-dated cheques in favour of the fund. He will get units on the date of the cheque at the NAV of that date. For instance, if on 25th March, he has given a post-dated cheque for June 25th, he will get units on at NAV of 25th June. Systematic Withdrawal Plan As opposed to the Systematic Investment Plan, the Systematic Withdrawal Plan allows an 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 NAV as on that day. This would tantamount to a tax efficient mode of withdrawal, if planned well. Retirement Pension Plan Some schemes are linked with retirement pension. Individuals participate in these plans for themselves and corporates for their employees. Like UTI Retirement Benefit Plan. Insurance Plan Some schemes launched by UTI and LIC offer life/personal accident insurance cover to investors. The example being Unit Linked Insurance Plan of UTI. What is a growth stock? A popular investment style whereby fund managers identify companies showing promise of above-average earnings through capital appreciation. Stocks are held primarily for price appreciation as opposed to dividend income. Thus the fund managers of the growth stocks are willing to pay a premium to acquire a stock if they feel it has the further growth prospects. Growth investing is an alternative to value investing. What is passive investing? This is the investment style espoused by index fund managers who simply invest by benchmarking their portfolio to a common stock market index like the BSE-30 or the SP CNX-50. The fund manager only invests in stocks in the index stocks in exactly the same weightage. The attempt is to simply replicate the benchmark index, as closely as possible and therefore it is called passive investing. What are equity, debt and balanced schemes? Equity schemes are those that invest predominantly in equity shares of companies. Although an equity scheme seeks to provide returns by way of capital appreciation, these schemes are exposed to higher risks and hence the returns may fluctuate. Debt schemes invest mainly in income-bearing instruments like bonds, debentures, government securities, commercial paper, etc. These instruments are much less volatile than equity schemes. Their volatility depends essentially on the health of the economy e.g., rupee depreciation, fiscal deficit, and inflationary pressure. Performance of such schemes also depends on bond ratings. These schemes provide returns generally between 7 to 12% per annum. Balanced schemes invest both in equity shares and in income-bearing instruments in such a proportion that the portfolio is balanced. They aim to reduce the risks of investing in stocks by having a stake in the debt markets.Thus debt and balanced schemes offer a reasonable return with a moderate risk exposure.