In this section, you will find answers to some of the most frequently asked questions in the areas of personal finance, investing, mutual funds etc. For your convenience, we have organized the questions and answers in different sections. If you have a question that is not covered in this area, please use the feedback button above and let us know.
Basic FAQ
Basic FAQ
What is a mutual fund?
A mutual fund is an investment that allows all investors access a well-diversified portfolio of equities, bonds or other securities. Each investor has a share in the gain or loss of the fund. Units are issued and can be redeemed as needed. The fund's Net Asset Value (NAV) is determined each day.
They are the companies that receive your money and invest it in financial markets. It is an ideal tool for people who want to invest but fear the complexities of the markets or the arcane language experts use. The beauty of mutual funds is that a person with an investible surplus of a few hundred rupees can invest and reap same returns as anyone else.
What are the benefits of investing in mutual funds?
Following are the benefits of investing in mutual funds:
- Small investments: Mutual funds accept investments as low as few thousand rupees, which is invested across the markets. Such a spread is difficult for an investor to do.
- Professionalism: Professionals manage the money collected by a mutual fund. They analyse the markets to pick good investments.
- Spreading risk: An investor with a small amount of money would be able to invest in only one or two stocks / bonds, thus increasing risk. However, a mutual fund will spread its risk by investing in various sound stocks or bonds. A fund normally invests in companies across a wide range of industries, so the risk is spread.
- Transparency and interactivity: Mutual funds provide investors with information on the value of their investments. Mutual funds also provide complete picture of the investments made by their various schemes and the proportion invested in each asset type.
- Liquidity: Open-ended funds can be sold back to mutual funds at NAV based prices subject to exit loads and close-ended funds can be sold at the stock exchanges where they are traded.
- Choice: The funds can be picked from a wide array. This enables the investor to choose what suits him best according to his risk and return expectation.
Who regulates mutual funds?
All mutual funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests of the investor.
Who runs mutual funds?
http://www.amfiindia.com/spages/images/mfconceptorg.gif
In India, MFs are set up as Unit Trusts. An Asset Management Company (AMC), overseen by Trustees, runs a mutual fund.
Could you lose money if you invest in mutual funds?
Yes, most mutual fund products (except capital guaranteed funds) have underlying assets (Equities, Bonds etc.) that fluctuate on a daily basis. Hence capital loss due to lower prices of the underlying assets or default on bonds is possible. Investing according to an asset allocation plan, having enough exposure to other capital guaranteed investment such as FDs, Government Guaranteed bonds etc., can to a large extent mitigate these.
Are there any risks involved in investing in mutual funds?
You may have seen commercials of mutual fund schemes that end with a disclaimer: “Mutual fund investments are subject to market risks ... ". This is true. Like any non- guaranteed financial instrument there are various risks involved in investing in mutual funds such as:
- Price Risks: Fall in the prices of the underlying shares/bonds lead to a lower NAV.
- Liquidity Risks: Markets being shut for a long period could lead to the suspension of repurchase / redemption of investments.
- Default Risk: Bonds of a particular company defaulting on repayment affecting income/debt/hybrid funds.
- Credit Risk: Bonds of a particular company being downgraded by the rating agencies cause lower prices.
The best thing about mutual fund is that in reality most if not all financial instruments carry these risks but public is ignorant about it. For example, bank deposits are guaranteed only up to one lakh rupees. Company FDs carry default risks. Price risk is the only additional risk of investing in a MF. This is true for any investment that has a market price (Real estate, Shares, Gold, etc.,).
If there are risks with mutual funds, can only people with high-risk tolerance invest in it?
No. The biggest risk is not investing at all, as inflation erodes the value of money and the future looks far from certain. Hence proper risk taking and planning are essential.
There are ways and means to mitigate the risks:
- Have equity MF exposure within your risk tolerance.
- Ensure debt MF exposure is well spread out.
- Have adequate exposure to debt assets outside of MFs such as FDs, Govt bond such as PPF, POMIS, NSC, RBI Bonds etc.,
Planning FAQ
Planning FAQ
What is financial planning?
Financial planning is a simple and effective way to plan for your financial future just as you plan for anything else. For example, to watch a movie you need to find the theater where it is playing, the route and the transportation you need to take to reach the theatre and the price of the ticket. Similarly in a rapidly changing world, it is important to know your financial position and gauge how much money is required to realise your dreams including financial freedom.
What is the importance of financial planning? What are the advantages of financial planning?
Importance of Financial Planning
Financial planning helps you:
- Protect yourself and your loved ones against financial risk.
- Provide the best possible lifestyle to your family.
- Impart the best education to your children.
- Buy your dream home.
- Be able to retire as and when you want.
It’s important to plan so that you are able to realise your dreams such as owning a home, going for a vacation abroad, educating your children well or the biggest dream of all to retire early and enjoy life peacefully.
Advantages of Financial Planning
Financial planning helps you to:
- Calculate how much money you need to earn, save and invest to realise your dreams and goals.
- Realise the value of money and keep track of how it is spent.
- Make money work for you as every rupee saved gives returns.
What is the ideal time to start financial planning?
Right from a young age you have to start financial planning. Many young people make a big mistake by neglecting financial planning.
For example, a 30-year old saving Rs 1000/month at 10% pa interest for the next 35 years would have a balance of Rs. 37,96,640. On the other hand if the same person starts saving from 31st year just because he was too busy would have a balance of Rs. 34, 25,390 when he turns 65.
Starting a year would have cost Rs.3, 71,250!!!
Hence it is very important that financial planning is given highest priority and not postponed.
How to start financial planning?
A person can start financial planning with the help of a financial planning worksheet just like this one (link to the financial planning tool). This worksheet is very simple and gives a map to realise your dreams.
How do I calculate my net worth?
Simply put, your net worth is all your assets (home, investments, deposits, jewelry, RE) – all your liabilities (outstanding loans on your home, education, credit card debt, personal loan etc).
How do you determine my financial goals?
Your financial goals are the derivative of what you want to realise in the future such as an own house, a vacation abroad, a new car or money for retiring peacefully.
With so much uncertainty in the economic climate, what is the use of a plan?
Not planning is not an option anymore. Even though the outlook is uncertain, the expenses are certain. None of us would want our children to get poor education because we could not afford to pay the fees, live in a rented house when we want a dream home or want to postpone retirement.
What is inflation and what is its impact on the financial plan?
Inflation is the silent killer, which eats the value of your money – without you realising it. In other words, it’s the increase in prices that we all talk about. For example, if the inflation is 6%, you need to pay Rs.106 to buy a commodity that would have cost Rs.100 a year ago. (Remember the rise in the price of a movie ticket back from your college days to now – that is inflation).
So if you put all your money in savings account when inflation is 6% and you earn 4% interest you are losing 2% every year, that too before taxes on the interest.
What is an asset allocation plan?
An Asset Allocation Plan (AAP) is about not putting all your eggs in one basket. Recollect the retirees who invested their pension money in chit funds and lost everything or the investors in dot com stocks? AAP is about minimising risk by spreading the investment across classes so that the risk is diversified and reduced to some extent.
The major asset classes are:
- Equity – Representing highest returns historically with the highest risk.
- Debt – Such as FDs, Bonds, Pension / Provident Funds. These investments have a fixed return.
- Cash – Primarily used as a reserve for a rainy day. Cash helps in uncertain times-and is best to invest in short term investments that have capital guarantee and low interest.
- Real Estate – Either as a primary home or land / through RE funds.
- Alternate assets –Commodities like gold.
After a plan is developed, what next?
Map is not the territory. A plan is the first step and should be followed by actual implementation such as apportioning the available money across the assets, determining where to invest according to AAP and finally invest. The plan needs to be then reviewed periodically to make any changes if required.
What is diversification and why is it important?
Diversification is spreading of risk across assets such that investment risk is not high. It is about not putting all your eggs in one basket.
What is tracking and rebalancing?
Tracking is ensuring that the plan is in the right direction.
Ideally, you should review your investment plan once in a month. It is unnecessary to daily check the portfolio if you diligently follow a plan. The media is either euphoric or depressed (They are in the business of making you excited not in the business of making you rich), so an investor could become negative or elated by short-term moves and ignore the long-term growth.
Rebalancing refers to correcting the portfolio if it is out of balance thanks to rising or falling prices of investments.
Rebalancing is how you maintain the portfolio balance. For example if your original AAP was 40% equity and 60% debt and after a year due to market movements it becomes 35% equity and 65% debt, then in order to maintain the original AAP you need to sell 5% from debt investments and buy equity investments. This ensures you follow the basic rule of investing, which is buy low and sell high.
How often should you update your plan?
You should usually update your plan once in year or whenever there is a significant change in your financial position.
Investment FAQ
Investment FAQ
How do I go about choosing a mutual fund?
Once you determine your AAP, you can focus on what funds to invest based on certain criteria including; • Long-term performance record of the fund (whether the fund has delivered better return than its benchmark index). • Pedigree of the fund house (whether the AMC is a new entrant from a reputed corporate with solid trust and expertise).
What is the difference between a mutual fund and portfolio management scheme?
Portfolio Management Schemes (PMS) are claimed to be exclusive and tailor-made whereas mutual funds are ready-made.
A PMS has a high entry barrier such as minimum investment of ten lakh or more whereas MFs take amounts as less as Rs.1000. Since PMS are private the performance is not in public domain. Overall an investor is better off with a mutual fund rather then a PMS unless his needs / the scheme are very unique.
What are the various ways to invest in mutual funds?
Mutual funds can be bought online, through an intermediary such as a broker, advisor or directly from the fund house.
What are the different types of Mutual funds?
Broadly the different types (and sub types) of MFs are:
- Equity Funds
| Sub-type | Investments Made |
|---|---|
Diversified |
Across all industries |
Sector / theme specific |
In that particular sector or its allies such as infrastructure or energy or software |
Dividend yield |
In stocks which pay high dividend |
- Debt Funds
| Sub-type | Investments Made In |
|---|---|
Income Fund / Long term bond |
Bonds of corporate, government and other issuers |
Short Term Income Fund / Short term bonds |
Issuers including corporate, government, banks |
Floating Rate funds |
Bonds whose interests are reset at preset time periods, like your floating rate housing loan interest is reset when interest rates go up or down |
Liquid / Liquid Plus Fund/ Very Short Term Bonds: Is an alternative to short term deposits |
Very short term bonds and money market instruments that mature within a year so that high liquidity can be had |
- Hybrid Funds
|
What are the different plans that mutual funds offer?
The different plans available for the investors are:
Growth –Distribution of profits (dividend) are not given out. Only way an investor can realise profits is through capital gain by selling the units.
- Dividend – There are two sub types in this plan:
- Dividend Payout – Dividend would be paid to the investor periodically depending on available surplus to distribute, either by
direct credit or through a cheque.
For example: If a fund declared Rs 2 / unit (20% dividend) and the investor has 100 units he gets Rs 2 * 100 or Rs 200 as dividend.
- Dividend Reinvestment: Dividend amount declared is used to buy more units of the fund.
For example: A fund declared Rs 2 / unit and the NAV is Rs 12. If the investor has 100 original units and has opted for dividend reinvestment he will have:
Rs 200/12 = 16.67 units
Total units after the dividend is reinvested = 100 original + 16.67 Units reinvested = Total 116.67 Units.
Loads and Expenses
What is Entry / Exit Load?
Entry or a front-end load is a cost charged by funds to cover marketing and other expenses and is usually paid to The Partner or the broker. For example if you invest Rs.100 and the entry load is 2.00% only Rs 98 is invested and units allotted is for Rs 98.
Exit Load or back end load is charged to a fund when the investor exits or sells the funds. For example assume that you have units worth Rs
25,000 and the exit load is 1% then Rs 250 is deducted and you get Rs 24750.
What is a Contingent Deferred Sales Charge (CDSC)?
Sometimes the selling expenses of the fund are not charged to the fund directly but are recovered from the unit holders whenever they redeem their units. This load is called a CDSC. It is inversely proportional to the period of unit holding, ie the longer you stay invested in the fund the lesser CDSC load will be.
What are management fees and expense ratios?
Management Fees
The charge made to a mutual fund for supervision / management of its portfolio, usually expressed as percentage of assets.
Expense Ratio
Expense ratio is the ratio of management fees to the total funds under management. It is usually specified in the offer document as a percentage of the assets under management of the fund.
Transacting
How can you get your money that you have invested in mutual funds?
By selling your units, you can get your money that you have invested in mutual funds. This can be done in the following way:
For an open ended fund you need to submit an letter for redemption before 3.00 PM on a working day. The redemption proceeds shall be sent by cheque within ten working days from the date of redemption. If the investors bank has a tie up with the fund for direct credit, the sale proceeds shall be credited to his account at the end of the fourth working day from redemption date.
For a close-ended fund you need to sell it in the stock exchange where it is listed and receive the payment from your broker after three working days (sale date + 3 working days).
What exactly do you buy when you buy a mutual fund unit?
You buy units of the mutual fund entitling you to profits or loss on a proportional basis to your purchase. You get a statement confirming your personal details as well as the funds details.
What is NAV?
NAV is the asset value per unit of the fund. In simple terms it is the price at which the fund is available for purchase for that particular day. The formula used to calculate NAV is:
What is Sales / Purchase price?
Sale price is NAV plus the front end / entry load added. For example if NAV is Rs 10 and entry load is 2.0% then the sale price is Rs. 10.20/unit.
What is redemption price?
Redemption price is NAV minus the back end / exit load added. For example if NAV is Rs 12 and and exit load is 1% the redemption price is 12-0.12(1% of Rs 12) which is equal to Rs 11.88 .
What is an SIP?
An SIP is an easy way to accumulate wealth over long term, Money is invested monthly / quarterly in the mutual fund at a fixed date for a
fixed number of months. So you can invest as little as Rs 500 or Rs 1000 for one year or more. This helps you accumulate capital. It is less
volatile as investments are spread over several months and is a great way to understand the markets.
Is investing using SIP a good idea? Why?
The biggest benefit is that you can start small. Another benefit Is rupee cost averaging as SIP helps you lower the cost of purchases by automatically buying lower number of units when NAV is higher, since amount per month is fixed and buying higher number of units when NAV is lower.
What is an SWP?
SWP Is the opposite of SIP when the investment is made one time lump sum and a fixed amount is withdrawn at regular (monthly or quarterly) intervals.
NRI investing
Who is an NRI? Are you an NRI?
A Non-Resident Indian (NRI) is an Indian citizen or a foreign citizen of Indian origin who stays abroad for employment/ business / vocation for 182 days or more or indicating an intention for an uncertain duration of stay abroad.
Those who stay abroad on business visits, for medical treatment, study or such other purposes, which do not indicate an intention to stay there for an indefinite period, are not considered as NRIs.
Can NRIs invest in Indian mutual funds?
Yes, NRI can invest in Indian mutual funds.
Who is not allowed to invest in Indian mutual funds?
Overseas Commercial Bodies (OCBs) are not allowed to invest in Indian mutual funds.
How can an NRI invest in Indian mutual funds?
An NRI can invest in Indian mutual funds by filling up the application form online or with hardcopy and submitting the same at the respective funds or their R&T office. If the investment is with a rupee draft or bankers cheque the rules are as follows:
- A Foreign Inward Remittance Certificate (FIRC) or
- Confirmation letter issued by the bank confirming the source of funds and
- A photocopy of the Rupee draft/Bankers cheque
Do NRIs require a PAN number to invest in Indian mutual funds?
Yes NRIs require a PAN number to invest in Indian mutual funds.
Are NRIs required to comply with Know Your Customer (KYC) process?
Yes NRIs should comply with KYC process.
Can NRIs invest in their resident country's currency?
No, NRI can invest only with their rupee accounts. Foreign exchange needs to be converted to INR before they can invest.
How will an NRI redeem funds?
An NRI can redeem funds by filling out the redemption slip or a letter for redemption and forwarding the same to the R&T or by giving redemption requests online.
Can the proceeds be repatriated back to their country's currency?
Yes they can be repatriated back if the funds for the investment originated from a NRE account.
Can NRIs enroll in SIPs?
Yes NRIs can enroll in SIPs.
What is PFIC?
PFIC or Passive foreign investment company rule is applicable to NRIs residing in USA. An investor could be exposed to potentially severe tax liabilities by not identifying the PFIC status of his equities portfolio. US shareholders of PFIC including regulated investment companies are subject to tax and interest charges on any excess distribution from a PFIC including gain on sale of PFIC stock. (Source: PFICanalyzer.com)
An investment is PFIC if:
- At least 75% of the corporation's income is considered "passive", which is based on investments rather than standard operating business.
- At least 50% of the company's assets are investments that produce interest, dividends and/or capital gains.
PFICs include foreign-based mutual funds, partnerships and other pooled investment vehicles that have at least one U.S. shareholder. Most
investors in PFICs must pay income tax on all distributions and appreciated share values, regardless of whether capital gains tax rates
would normally apply.
(Source: wwww.investopaedia.com)
Taxation FAQ
Taxation FAQ
What are the tax benefits available for investing in mutual funds?
Tax Benefits
| Heads of Income | Tax applicable |
|---|---|
Dividends: Are tax-free in the hands of investors.
|
|
Sale of units: Depending on the period of investments, long-term or short-term capital gains and tax
thereon are applicable on redemption.
|
|
Equity oriented schemes (a) Long Term Capital Gains |
|
All Other Schemes
|
|
Securities Transaction Tax (STT)
|
|
Source: www.reliancemutual.com
What are the tax rates applicable to NRIs?
1.Dividend
- Equity schemes: Tax Free
- Debt schemes: Tax Free
- Dividend Distribution Tax (deducted by the fund and paid directly)
- Equity schemes: NIL
- Debt schemes: 12.5% + 10% Surcharge on the DDT and 3% cess totaling 14.163%
- Liquid or money market schemes: 25% +10% Surcharge on the DDT + 3% cess totaling 28.325%
2.Capital Gains
- A. Long Term Capital Gains
- Equity Schemes: Nil
- Debt Schemes: 11.33 %without indexation 22.66% with indexation
- B. Short Term Capital Gains
- Equity schemes: 15% flat +10% Surcharge + 3% cess
- Debt schemes: 30% flat + 10% Surcharge + 3% cess
3. Securities transaction tax:
- Deducted at 0.25% on equity funds at the time of either redemption or switch
4. Tax deduction at source(TDS)
- Equity Short Term capital gains 11.33%
- Debt Short Term capital gains 33.99%
