Question 1

What is a Mutual Fund?

Accepted Answer

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money, thus collected, is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unitholders in proportion to the number of units owned by them

Question 2

What advantages do Mutual Funds have over individual securities?

Accepted Answer

The advantages of investing in a Mutual Fund are: Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulated

Question 3

What are the risks of a Mutual Fund?

Accepted Answer

There are several risks. The first is a credit risk - the companies in which the fund has invested might perform poorly, suffer mismanagement or otherwise meet with misfortune. Another big risk is that some economic, political or other development will cause the overall market to fall, dragging down with it the holdings of your particular fund. These are risks you would face investing in individual stocks as well; at least, mutual funds can offer diversification

Question 4

Who is a sponsor?

Accepted Answer

The sponsor initiates the idea to set-up a mutual fund. It could be a registered company, scheduled bank or financial institution. The sponsor appoints the trustees, AMC(Asset Management Company) and the custodian. Once the AMC is formed, the sponsor is just a stakeholder. However, sponsors could play a key role in bailing out an AMC(Asset Management Company) during a crisis.

Question 5

What is an AMC (asset management company)?

Accepted Answer

The AMC manages your money. It takes investment decisions, compensates investors through dividends, maintains proper accounting and information for pricing of units, calculates the NAV, and provides information on listed schemes and secondary market transactions.

Question 6

What is the role of a trustee?

Accepted Answer

Trustees protect the interests of unitholders. Sometimes, trustees and sponsors are the same. Trustees float and market schemes, and secure necessary approvals. They check if the AMCs investments are within defined limits, whether funds assets are protected, and also ensure that unitholders get their due returns. For major decisions concerning the fund, they have to take unitholders’ consent. They submit reports every six months to SEBI (Securities Exchange Board of India).

Question 7

What are the risks of a Mutual Fund?

Accepted Answer

There are several risks. The first is a credit risk - the companies in which the fund has invested might perform poorly, suffer mismanagement or otherwise meet with misfortune. Another big risk is that some economic, political or other development will cause the overall market to fall, dragging down with it the holdings of your particular fund. These are risks you would face investing in individual stocks as well; at least, mutual funds can offer diversification. There are some risks unique to mutual funds. The fund management, for instance, may be doing things you don't know about. What you think is a conservative diversified equity fund might, in order to boost returns, invest heavily in a particular stock or sector, thereby exposing it to the risk of a downtrend in that particular stock.

Question 8

What kind of income can I expect from a Mutual Fund?

Accepted Answer

Mutual funds can be conveniently used to meet various income needs. You can invest in funds whose only purpose is to deliver regular cash distributions. Several income/ debt oriented funds pay monthly, quarterly, half-yearly or annual dividends.Other funds, whose objective is growth of capital, generally pay much lower income distributions. Since dividends are now tax-free in the hands of investors, such schemes are becoming increasingly popular.

Question 9

What are the tax implications of investing in a Mutual Fund?

Accepted Answer

Dividend income from mutual funds is exempt from tax in the hands of the investor, however the mutual fund pays tax on such distributions if the scheme holds less than 50 per cent in equity. Capital gains tax applies on funds held for more than a year.

Smart Investing Made Simple Through FundsGenie

Smart Investing Made Simple Through FundsGenie

Smart Investing Made Simple Through FundsGenie

Smart Investing Made Simple Through FundsGenie