Things to keep in mind before investing in Mutual funds

Tue, 20 Aug 2024

8 mins

Before you start your investment journey, lets look at some of the basics first.

• What is NAV (Net Asset Value)?

  NAV stands for Net Asset Value. It is a crucial metric used in mutual fund investments to determine the per-unit value of the fund's assets. NAV is calculated by subtracting the fund's liabilities from its total assets and then dividing the result by the number of outstanding units. Essentially, NAV represents the price at which investors can buy or sell units of the mutual fund. It fluctuates daily based on changes in the market value of the fund's underlying assets. NAV is instrumental in assessing the performance and value of mutual fund investments.

• How Net Asset Value (NAV) is calculated?

  NAV is calculated by subtracting the fund's liabilities from its total assets and then dividing the result by the number of outstanding units.
  
  NAV = ( Value of Fund’s Assets − Value of Fund’s Liabilities ) / ( Total Number of Outstanding units )
  
  Here's a breakdown of each component:
  
  1. Value of Fund's Assets: This is the total value of all the investments held by the mutual fund. It includes stocks, bonds, cash, and any other securities owned by the fund.
  2. Value of Fund's Liabilities: These are any debts or obligations the mutual fund owes, such as expenses, fees, or taxes.
  3. Total Number of Outstanding Units: This is the total number of units or shares of the mutual fund that investors own.

• What is Expense ratio?

  The expense ratio is a measure of the total costs associated with managing and operating a mutual fund, expressed as a percentage of the fund's average assets under management (AUM) over a specific period, typically a year. It includes various expenses such as management fees, administrative costs, marketing expenses, and other operational costs.
  
  In simpler terms, the expense ratio tells investors how much of their investment in a mutual fund is being used to cover the fund's operating expenses. A lower expense ratio indicates that a higher percentage of the fund's returns are being passed on to investors, making it more cost-effective. Conversely, a higher expense ratio means that a larger portion of the returns is being used to cover expenses, potentially reducing the net returns for investors.

• What is growth/ regular fund?

  "Growth" and "Regular" are terms often associated with mutual fund plans, indicating different options available to investors regarding how dividends or profits are handled.
  
  Growth Option:
  In a growth option, any dividends or profits earned by the mutual fund scheme are reinvested back into the fund. This means that instead of receiving payouts, the investor's money continues to grow within the fund. The value of the investment increases over time, reflecting the appreciation of the fund's underlying assets.
  
  Regular Option:
  In a regular option, any dividends or profits earned by the mutual fund scheme are distributed to investors periodically, typically in the form of dividends. This option provides regular income to investors in addition to the potential capital appreciation of the fund. It is suitable for investors seeking regular payouts from their investments.

• Modes of investing in Mutual Funds

  SIP (Systematic Investment Plan) and Lumpsum are two different methods of investing in mutual funds:
  
  SIP (Systematic Investment Plan):
  SIP involves investing a fixed amount of money regularly at predetermined intervals, typically monthly or quarterly, into a mutual fund scheme. This systematic approach helps in building wealth gradually over time, regardless of market conditions. SIPs offer benefits such as rupee cost averaging and disciplined investing, making them suitable for investors looking to invest regularly for long-term financial goals.
  
  Lumpsum:
  Lumpsum investment involves investing a single large amount of money into a mutual fund scheme at once, instead of spreading it out over regular intervals. This method is suitable for investors who have a significant amount of money available for investment at a particular time. Lumpsum investments offer the potential for higher returns, but they also carry higher risk compared to SIPs, as they are susceptible to market volatility at the time of investment.

• What are Open and Close-ended Mutual Funds?

  Open-ended Mutual funds:
  An open-ended mutual fund is a scheme that remains open for buying or selling shares at any time, providing investors with a convenient and economical means of pooling their money. Investors have the opportunity to purchase a diversified portfolio tailored to their investment objectives, whether they seek income or growth from investments in organizations of varying sizes. 
  
  Closed-ended Mutual funds:
  Close-ended mutual fund schemes have a stipulated maturity period wherein the investor can invest directly in the scheme at the time of the initial issue and thereafter units of the scheme can be bought or sold on the stock exchanges where the scheme is listed.

• Are Mutual Funds Safe in India?

  Yes, Mutual Funds are safe and reliable means of investing in India. However, they come with some risks:
  
  1. Market Risk: Fluctuations in market conditions can impact returns.
  2. Credit Risk: Potential default by issuers in debt funds.
  3. Interest Rate Risk: Changes in interest rates affect debt fund values.
  4. Liquidity Risk: Difficulty in selling securities may impact returns.

• Can Mutual Funds Be Transferred?

  Yes, mutual funds can be transferred under certain conditions:
  
  Transfer Between Accounts
  
  1. Change of Ownership: Mutual funds can be transferred to another person through a transfer request with the Asset Management Company (AMC), typically involving documentation and legal formalities.
  
  2. Demat Accounts: If held in a demat account, mutual funds can be transferred by instructing the Depository Participant (DP).
  
  Nominee Transfer
  In Case of Death Mutual funds can be transferred to the nominee or legal heir after submitting necessary documents, including a death certificate.
  
  Inter-Folio Transfer
  Units can be transferred between different folios under the same AMC, often for consolidation purposes.
  
  Inter-Account Transfer
  Units can be transferred between different accounts held by the same person, such as from a personal account to a joint account.
  Each transfer process may have specific requirements and might incur charges. Always check with the respective AMC or financial advisor for detailed procedures.

• Can you take a loan against mutual funds?

  Yes, mutual funds can be pledged as collateral for loans. Here's a brief overview:
  
  1.    Loan Against Mutual Funds: Investors can pledge their mutual fund units to secure a loan from banks or financial institutions.
  2.    Procedure:  Submit a pledge request form to the mutual fund house or your depository participant (DP) if units are in demat form.  The lender and the mutual fund house or DP process the request. Upon approval, the pledged units are marked, and the loan is sanctioned.  
  
  Points to Note
  •    Loan Amount: Typically, 50-70% of the value of the pledged units.
  •    Interest Rates: Vary based on the lender’s terms.
  •    Risk: If you default on the loan, the lender can sell the pledged units to recover the debt.
  
  Pledging mutual funds is a viable option to secure short-term liquidity while retaining your investment.   

• What is NFO in mutual fund?

  NFO (New Fund Offer) is the initial subscription offered for a new mutual fund scheme launched by an Asset Management Company. During this time, investors can buy units at a set price, typically nominal (e.g. ₹10). It's an opportunity to invest in a new fund strategy. After the NFO period, the fund is listed and trades at its Net Asset Value (NAV), which changes based on the market value of its assets. 
  
  A New Fund Offer is like getting early access to a new investment opportunity. It's the initial sale of a mutual fund, giving investors a chance to buy in at the starting point and explore fresh avenues for potential growth. NFOs often focus on emerging trends and market demands, making them a hot topic among seasoned investors and newcomers alike.

• What is XIRR in Mutual Fund?

  XIRR, or Extended Internal Rate of Return, is a financial metric that calculates the annualized return of an investment by considering the timing and amount of cash flows. It evaluates the profitability of your investment by factoring in the initial investment and subsequent inflows and outflows over time. This measure offers a more accurate representation of investment returns by accounting for the time value of money and the impact of compounding.

• How mutual funds work?

  Mutual funds pool money from many investors to buy a diversified portfolio of stocks, bonds, or other securities. Professional managers handle the investments, aiming for returns through dividends, interest, and capital gains. Investors buy shares at the fund's Net Asset Value (NAV), which is calculated daily. Mutual funds charge fees that can affect returns and are regulated to ensure transparency and investor protection.

• To bring it to a close

  At InCred Premier, we acknowledge that your hard-earned wealth deserves nothing less than the utmost care and attention. Rest assured, we are committed to providing you with unparalleled investment services.
  
  If you need help or have any questions as you progress, our dedicated team is here for you. You may reach out to us at care@incredpremier.com