What is a Mutual Fund?

A mutual fund is a pool of money contributed by individuals who have similar financial goals. The money collected is then invested in various securities such as equities, debentures/bonds and/or money market instruments.

What is a fund house/family?

A group of funds managed under one umbrella. The most basic fund family would include a stock, bond and money market-portfolio, although many funds have variants like sector funds, balanced funds.

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. NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly - depending on the type of scheme.

What is load?

It is a charge collected by a mutual fund when it sells units. It can be either front-end load (i.e., the charge is collected when an investor buys the units) or back-end load (i.e, the charge collected when the investor sells back the units). Some schemes do not charge any load and are called No Load Schemes


What is a contingent deferred sales charge (or CDSC)?

A back-end load imposed on an investor if he exits from the fund before a pre-determined period (say 3 months). The charges decline the longer an investor stays invested with a fund.

What are a fund’s net assets?

The total value of a fund's cash and securities less its liabilities or obligations.

What is a Portfolio?

A portfolio comprises of investments in a variety of securities and asset classes. This diversification reduces the overall risk. The portfolio risk depends on the nature of each investment in the portfolio and the overall impact (favourable or unfavourable) of the various risk factors on each security. A mutual fund scheme states the kind of portfolio it seeks to construct as well as the risks involved under each asset class.

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.

Who is a registrar?

A Registrar holds and maintains the details of the transactions carried out by each Unitholder in a Mutual Fund scheme. He is appointed by the AMC to serve the Unitholder for the purchases, sales or switching of Units that he may carry out. The dividend distribution, recording of nominations or transfers are some other services rendered by the Registrar. He may also have Investor Service Centres in various cities, where an investor can get over-the-counter service.


What is an Asset Management Company (AMC)?

A highly regulated organisation that pools money from many people into a portfolio structured to achieve certain objectives. Hence it is termed as an Asset Management Company. Typically an AMC manages several funds - open-end /closed-end across several categories - growth, income, balanced. Every mutual fund has an AMC associated with it.

What is an ex-dividend date?

Normally, one business day after the record date. Investors purchasing unit on or after the ex-dividend date are not entitled to collect dividends or bonus units. The NAV falls by the amount of the dividend distributed and/or bonus issued. The terms ex-bonus and ex-dividend often are used synonymously.

For instance, if the record date for dividend is 20 January, then investors who don’t have their names in the list of unitholders as on that day, will not receive dividend. This works very similar to dividend and bonus declarations in the case of stocks.

How does one calculate the expense ratio for a fund?

The expense ratio for a fund is the annual expenses of a fund (at the end of the financial year), including the management fee, administrative costs, divided by the number of units on that day.


What is a daily dividend fund?

A fund (money-market or bond) that calculates dividends daily, paying out or reinvesting the same.

What is an Initial public offering (IPO)?

The sale of a company's shares or a fund house’s mutual fund to investors for the first time.

What is an asset management fee?

The fee charged by the asset management company (AMC) for portfolio management. The fee charged on an annual basis is calculated as percentage of net assets under management.


Where do the Mutual Funds invest?

Mutual Funds invest basically in three types of asset classes. These include:

Stocks: Stocks represent ownership or equity in a company. This asset class has historically outperformed all other asset classes over the long-term but tends to be more volatile in the short-term.
Debt Instruments: This represents debt papers of corporate and government agencies. They provide income in the form of interest payments and principal if held till maturity. There can be price volatility due to interest rate movements as well as economic and political instability.
Money Market Instruments: These are inter-bank Call Money, Commercial Paper, Treasury Bills, Certificates of Deposit (CDs), Bill Rediscounting and short-term bonds. They pay interest and are the least volatile of all the asset classes.


What are the different types of mutual fund schemes?

By scheme type

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.

Open-ended Fund/ Scheme
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.

Close-ended Fund/ Scheme
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 weekly basis.

By Investment Objective:

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 follows:

Growth / Equity Oriented Scheme
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 time.

Income / Debt Oriented Scheme
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.

Balanced Fund
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.

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