Mutual Fund FAQ

Mutual funds are investment vehicles that collect money from many investors to invest in a variety of assets such as stocks, bonds, and other securities. Managed by professional fund managers, these funds allow individual investors to own a small part of a diverse portfolio, spreading risk across different assets and potentially providing returns that align with the fund's investment objective, whether that's growth, income, or a mix of both. Investors buy units in the mutual fund, and the value of these units rises or falls based on the performance of the underlying assets, making mutual funds a popular way to access market investments with relatively low minimums and professional oversight.

Mutual funds work by pooling money from multiple investors to create a sizable fund, which is then invested by professional fund managers in a variety of securities such as stocks, bonds, or other assets. Each investor in the fund owns units, representing a share of the total assets. The fund’s managers select and manage these investments according to the fund’s objective, whether it's growth, income, or a balanced approach. The value of each unit, known as the Net Asset Value (NAV), fluctuates based on the performance of the underlying assets. Returns generated from dividends, interest, or capital appreciation are either reinvested into the fund or distributed to investors. This structure allows individual investors to benefit from diversification, liquidity, and professional management, making it a practical choice for achieving various financial goals.

NAV, or Net Asset Value, is the per-unit price or value of a mutual fund. It represents the fund’s total assets minus its liabilities, divided by the total number of units outstanding. NAV is calculated at the end of each trading day, reflecting the current market value of all the securities in the fund's portfolio. For example, if a mutual fund’s total assets are worth ₹100 crore, and it has liabilities worth ₹2 crore with 10 crore units, its NAV would be ₹9.80 (calculated as (100 - 2) / 10). NAV indicates the price at which investors can buy or sell units of the mutual fund and changes daily based on the performance of the underlying assets.

Mutual fund units represent individual shares or portions of ownership in a mutual fund. When an investor invests in a mutual fund, they receive units proportional to the amount they invested and the fund’s Net Asset Value (NAV) at that time. These units reflect an investor's share in the total assets of the fund, and the value of each unit fluctuates with the performance of the underlying investments in the fund's portfolio. For example, if you invest ₹10,000 in a mutual fund with an NAV of ₹50, you would receive 200 units (10,000 ÷ 50). The number of units an investor holds and the current NAV determine the total value of their investment in the fund.

To determine the profit from mutual fund investments, compare the Net Asset Value (NAV) at the time of purchase and sale. For example, let’s say you invested ₹10 lakhs in a mutual fund with a purchase NAV of ₹10 per unit, giving you 1,00,000 units (₹10,00,000 ÷ ₹10). After 15 years, if the NAV rises to ₹100, the value of your investment would become ₹1 crore (1,00,000 units x ₹100). This results in a profit of ₹90 lakhs (₹1 crore - ₹10 lakhs). Any dividends or interest received during these 15 years would further add to your total profit.

You can track your mutual fund investments through several convenient methods. Most mutual fund companies provide online platforms and mobile apps where you can view your portfolio’s performance, check the Net Asset Value (NAV), and see any recent transactions. Additionally, many fund houses send regular account statements via email, providing updates on your investment's growth. You can also use consolidated account statements (CAS) sent by depositories, which summarize all your investments across funds. For even easier tracking, third-party apps and platforms allow you to link multiple funds from different providers into one view, helping you stay updated on your overall investment performance.

A mutual fund distributor plays a crucial role in guiding investors through the process of selecting, investing in, and managing mutual funds. They help by assessing the investor's financial goals, risk tolerance, and investment horizon to recommend suitable mutual funds. Distributors assist with the account opening process, documentation, and initial investment transactions. They also provide ongoing support by offering updates on fund performance, market trends, and any changes in the portfolio or fund management. Additionally, distributors can help investors with portfolio reviews, making recommendations on when to buy, hold, or redeem units based on financial goals and market conditions. Their expertise and personalized service simplify investment management, particularly for those new to mutual funds. The mutual fund distributor receives a commission from the fund house for facilitating the investment. This commission is built into the expense ratio of the fund and can vary between funds. The distributor is paid a trail commission when the investment is based on the assets under management (AUM) in the fund by the AMC.

An RTA (Registrar and Transfer Agent) is a service provider that plays a crucial role in the administration of mutual funds. RTAs are responsible for handling investor records, such as maintaining a database of investor details, processing transactions, and ensuring accurate record-keeping. They facilitate the buying, selling, and transfer of mutual fund units, manage the issuance of account statements, and provide various investor services, such as dividend payouts or redemptions. RTAs work closely with mutual fund companies to ensure smooth processing of transactions and help ensure compliance with regulations. Their role is critical in maintaining transparency and efficiency in mutual fund operations.

1. Karvy Computershare (now rebranded as KFin Technologies)
2. CAMS (Computer Age Management Services)

The expense ratio is the annual fee charged by a mutual fund, expressed as a percentage of its average assets under management, covering management and operational costs.

Exit load is a fee charged by a mutual fund when an investor redeems or sells their units before a specified period, typically to discourage short-term trading. The exit load is calculated as a percentage of the redemption amount and is deducted from the total value when the investor exits the fund. The exit load period and fee structure vary across mutual funds, and it can range from 0% to a few percentage points, depending on the fund’s terms.

A Systematic Investment Plan (SIP) is a method of investing a fixed amount of money regularly (monthly) in mutual funds. SIPs allow investors to invest in a disciplined manner, regardless of market conditions, by spreading the investment over time. If you invest ₹10,000 monthly for 20 years in an SIP with a 15% annual compound growth rate (CAGR), the future value of your investment would indeed be approximately ₹1,51,59,549.75. This example demonstrates the power of compounding over a long period. The amount of SIP and timeline can be customized according to their investor’s goals. Consistent investments, combined with the compounding effect, can lead to significant wealth accumulation, especially over two decades.

Yes, mutual funds are regulated in India. They are governed by the Securities and Exchange Board of India (SEBI), which sets the rules and regulations to ensure transparency, investor protection, and fair practices in the mutual fund industry.

You can redeem mutual fund units either offline by submitting a redemption form to the AMC or the nearest Registrar and Transfer Agent (RTA) office, or online if your distributor or platform offers this facility. Note that some schemes may charge an exit load for early redemption, and tax implications, such as short-term or long-term capital gains tax, will apply based on your holding period.