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FAQs
Frequently Asked Questions
Important Questions About Investing in Mutual Funds
A mutual fund is a trust that pools investors' money. Investors are allotted units of the funds as per their share of investment in the pool of assets. This money is then invested across various types of mutual funds like equity, debt, and other securities by the fund manager appointed by the asset management company.
The objective of the fund manager is to generate good returns. The gains or losses generated by the fund are distributed among the unitholders (investors) in the proportion of the share of investment.
There is no straight answer to this question. Different funds have different risk-return profiles. You need to choose a fund based on your risk-taking capabilities and the time horizon you have in mind for the investment. So, you need to balance your risk tolerance and the risk of the fund you plan to invest in. For example, if you are willing to take high risk but your investment horizon is less than 3 years, you shouldn't invest fully in equity funds.
You may consider investing in a mix of equity and debt with more exposure to debt funds. Therefore, you need to choose the best mutual fund based on your risk appetite and time horizon.
On withdrawal, if your redemption value is higher than the purchase price of a mutual fund, the same will be classified as capital gains. The gains from equity (above a threshold limit) and debt funds are taxable. The gains are classified as short-term capital gains (STCG) or long-term capital gains, depending on the holding period.
In the case of equity funds, if you sell your investments before one year, gains will be classified as STCG otherwise, LTCG. In the case of debt mutual funds, if you sell your funds after 3 years, the gains will be classified as LTCG. However, gains on holdings sold before 3 years will be classified as STCG. You can read in detail about capital gains tax on mutual fund returns here
There are different methods of calculating the returns of a mutual fund, each suited to different types of investments and time frames. Let's understand these methods:
Absolute Return: This is the simplest method. It is the percentage change in the value of your investment over a specific period. It does not consider the time over which this change occurred. Example: If you invested when the NAV was ₹10 and sold when it was ₹12, your absolute return would be 20%
Compound Annual Growth Rate (CAGR): This is the annualized rate of growth of an investment over a specified period, also considering the time taken. For example, if you invested when the NAV was ₹10 and sold when the NAV was ₹20 after 1.5 years, your CAGR would be 15.43% = (12/10)1/1.5
Besides Absolute Return and CAGR, in reality, investments in mutual funds happen in multiple installments over some time. The above two methods do not account for such a scenario. To solve this, we have two more methods:
Time Weighted Rate of Return (TWRR): This method breaks down the investment period into multiple sub-periods based on when cash inflows and outflows happened. Then calculates the absolute return for each sub-period and aggregates them together for the total investment period return. Note that the size of the cash flow is ignored in this method.
Extended Internal Rate of Return (XIRR): This method accounts for both the timing and size of each cash flow in your investment over time. It is the most comprehensive measure of the annual rate of return on an investment. It can also easily support other cash flows like dividends, interest payments, etc in the calculation to give a complete picture of the total return.
Exit Load is a small fee that some AMCs (Asset Management Companies) charge the investor if they choose to withdraw (or redeem) the investment before a specific time period.
The purpose of exit load is to discourage investors from withdrawing investments before a certain time frame. Exit load structure varies from fund to fund. It is usually a percentage of the amount being redeemed/sold. For example, if the exit load is 1% and an investor redeems ₹10,000 worth of units, the fund will deduct ₹100 as the exit load.
Yes, you can invest in mutual funds under your minor child’s name in India. Investing in your child’s name gives them a head start on wealth accumulation and the benefit of compounding and the investment starts much sooner.
To get started, you will be required to set up a Mutual Fund account in your child’s name. This account must be operated by the parent/guardian.
You will need your PAN card, Aadhaar, and KYC verified. For your child - you will be required to show the birth certificate/passport or verify age and relationship with the guardian. The investments can be made as lump sums or through a Systematic Investment Plan (SIP).
Additional guidelines:
- Only the guardian can operate the minor’s account until the child turns 18.
- Upon turning 18, the minor must complete KYC requirements, and the account will be transferred to their name.
- Earnings are clubbed with the guardian’s income unless the minor earns separately through other investments.
- Certain investment options like SIP pause and overdraft against investments may not be available in minor accounts.
A New Fund Offering (NFO) is like the grand opening of a mutual fund. When an asset management company (AMC) launches a new mutual fund, it offers it to the public at a fixed price, typically ₹10 per unit. This process allows the AMC to raise money to start investing according to the fund's strategy. Think of it as similar to a company’s IPO (Initial Public Offering), where shares are introduced to the stock market for the first time. Investors often consider NFOs if the fund's theme or strategy aligns with their goals. For example, a new fund might focus on environmental sustainability, global markets, or a niche sector. However, it’s essential to research the fund’s objectives and potential before investing.
ETFs (Exchange-Traded Funds) and mutual funds might seem similar because both pool money from investors to create a diversified portfolio. However, they have some key differences. ETFs are traded on stock exchanges, just like individual stocks. You can buy or sell them at any time during market hours at a price that fluctuates throughout the day. On the other hand, mutual funds are bought or sold directly through the fund company, and the price is based on the Net Asset Value (NAV), which is calculated at the end of the day.
Another difference lies in management and cost. ETFs are usually passively managed, meaning they aim to match the performance of an index like the Nifty 50 or S&P 500. Mutual funds can be actively managed, where fund managers decide which stocks to buy or sell to outperform the market, but this often makes mutual funds more expensive. Finally, ETFs are more tax-efficient because of how they are structured, while mutual funds may trigger more taxes due to frequent buying and selling of securities within the fund.