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The Indian MF industry AUM has grown by ~9.2x over the last decade and currently stands at Rs 66.7 lac cr (Aug’24).

Despite the stupendous growth witnessed over the last decade, Indian MF industry is relatively under penetrated as compared to the western world. With enormous investment potential, the mutual fund sector in India is poised for rapid expansion. It is expected to play a significant role in asset generation and financial planning due to the country’s growing middle income population, improving financial literacy, and savings culture.

Its potential is further enhanced by constantly evolving regulations, investor protection programmes and increased investor awareness, making it an alluring market for both novice and experienced investors.

What is Mutual Fund?

A mutual fund is an investment vehicle which pools money from multiple investors and invests in a diversified portfolio of stocks, bonds, money market instruments and other securities. These funds are managed by experienced fund managers with the goal of generating returns for investors while managing risks.

Professional fund managers invest the corpus in accordance with the investment objective of the scheme.

Mutual funds started in India in 1963 with the formation of Unit Trust of India. In 1993, Kothari Pioneer (now merged with Franklin Templeton), the first private sector mutual fund was registered in India.

A mutual fund is set up in the form of a trust, which has a sponsor, trustees, asset management company (AMC) and custodian.

Role of various parties involved in mutual fund set up:

• Sponsor – establishes the trust, akin to promoter of a company
• Trustees – hold the property of the mutual fund for benefit of unit holders
• AMC – employs professional money managers to invest and manage the corpus collected
• Custodian – is a SEBI registered entity which holds the securities of mutual funds in its custody

Trustees are vested with general power of superintendence and direction over the AMC and they monitor the performance and compliance with SEBI regulations.

All AMCs are governed by SEBI (Mutual Fund) Regulations 1996.

Features of Mutual Funds

The following are some of the key features of mutual fund investments.

1. Convenience: The rise in popularity of online mutual fund investing has eliminated the necessity for physical visits to fund houses. Using a computer or phone, you can invest in any fund of your choice. To complete a purchase, just go to the AMC website or app and log in.
2. Investment Flexibility: This is one of the appealing features of mutual funds. When investing in mutual funds, you can choose any mode between lumpsum payment and a systematic investment plan (SIP).
3. Minimal Charges: Mutual funds are also affordable, and hence, any individual with little savings can also invest. The fees, known as expense ratio, charged by fund houses are modest. However, do note that the expense ratio varies from scheme to scheme.
4. Returns: Mutual funds returns are subjected to market risks and the regulator does not allow the AMCs to commit any guaranteed returns. However, investing over longer tenures has the potential to generate higher returns.
5. Professional Management: Mutual funds are managed by experienced and skilled fund managers or management teams. These professionals make investment decisions, aiming to achieve the fund’s objectives and maximize returns.

How Mutual Funds Work?

Mutual funds function by pooling the money of numerous investors to form a fund that qualified fund managers oversee.

• Contributions from Investors: Individuals invest money in mutual funds by buying units. Each unit represents a portion of the holdings of the fund.
• Pooling of Funds: The money collected by each investor is pooled to create a large corpus. Through this pooling, investors, even with very little investments, can access a diversified portfolio of stocks, bonds, or other securities.
• Professional Management: Mutual funds are managed by qualified fund managers. These experts make decisions on the purchase and sale of securities within the fund to accomplish its objectives.
• Investment Diversification: The corpus of the fund is spread across a number of securities, which reduces risk. This diversification aids in reducing the impact of potential underperformance of an individual security on the overall portfolio.
• NAV (Net Asset Value): The Net Asset Value (NAV) is the total asset value in the mutual fund minus any liabilities. The NAV per unit is calculated by dividing the total NAV by the number of outstanding units. It represents the market price of one unit in the mutual fund.
• Buying and Selling Shares: Investors can buy or sell mutual fund units at the NAV. The price at which units are bought or sold is determined at the end of each trading day, based on the closing NAV.
• Distribution of Income and Gains: Any income generated by the investments, such as dividends or interestCould be distributed amongst investors or re-invested in the scheme depending on the scheme option investor opts for. Income generated from sale of securities is reinvested in the scheme and is adjusted in the NAV.
• Fees and Expenses: Fees and expenses form a part of the expense ratio of scheme and include charges like management fee, operational fee, etc. These expenses are adjusted in the NAV and post expense NAVs are published.
• Redemption: In open ended MFs, investors have the flexibility to redeem their mutual fund units at any point in time. Close ended MFs and tax savings schemes have a pre-set lock-in period and investors cannot redeem from such schemes till the lock-in period is over.

Prices of Mutual Funds

A mutual fund’s price is ascertained by the performance of the underlying securities in which the money is deployed. An investor is buying the performance of the portfolio or, more precisely, a portion of the portfolio’s value when they buy a unit of a mutual fund. Purchasing units of mutual funds is very different from purchasing direct equity shares.

The net asset value (NAV) is the value of the mutual fund unit. The NAV of a fund is determined by dividing the total value of all the securities in the portfolio by the total number of outstanding units. For instance, if you invest INR 500 in a mutual fund with an NAV of INR 10, you will receive (500/10) 50 units of the mutual fund. A mutual fund’s net asset value (NAV) varies every day based on the performance of its underlying securities.

Units of mutual funds are purchased or sold/redeemed at the NAV of the fund. There is no change in the NAV of a scheme during market hours. A closing NAV is published at the end of every trading day and the trades are settled on the basis of closing NAV

Increase in prices of underlying securities leads to an increase in scheme’s NAV. For instance if one invests Rs 500 at a Rs 10 NAV, he gets 50 units. If the NAV increases to Rs 20, the market value of the investment increases to Rs 1,000. Please do note that the NAV of a scheme could also decrease due to mark to market losses.

Therefore, investing in mutual funds is one of the most straightforward strategies for both novice and seasoned investors. Mutual funds not only diversify an investor’s portfolio but also have the potential to generate higher returns than traditional savings schemes. An individual can start investing whenever they want, using a lump sum or a systematic investment plan (SIP). But before investing, people need to decide on their risk tolerance, investment tenure, and financial goals.

How are Profits Made in Mutual Funds?

Investing in mutual funds enables investors to earn dividend income, interest income and capital gains. A capital gain is the profit made when an asset is sold for more than its initial cost. However, capital gains arise only when the mutual fund units are redeemed. As the prices of underlying securities of a mutual fund increase, the NAV of the mutual fund goes up. Upon redemption, if NAV is higher than purchase NAV, it results in capital gains.

Another means for mutual funds investors to get income from a fund is through dividends. The mutual fund declares dividends based on its accumulated distributable surplus. The fund disburses dividends at its discretion and is immediately taxable when distributed to investors. Thus, investors are required to pay tax on any dividends they get from their mutual funds.

Benefits of Investing in Mutual Funds

Mutual fund investments offer several features that make them attractive investment vehicles for a wide range of investors. Here are some key features of mutual funds:

1. Diversification

Mutual funds invest across multiple asset classes such as equity, debt, commodity, gold etc. Within the specific asset class, mutual funds further invest across different issuers and sectors. Together, this helps achieve diversification. Diversification helps spread risk and reduce the impact of poor-performing individual investment/asset class on the overall portfolio.

2. Liquidity

Investors can buy or sell mutual fund units on any business day at the prevailing NAV. This provides liquidity and flexibility unlike certain investments like real estate.

3. Accessibility

Mutual funds allow investors to start with relatively small amounts of money, making them accessible to people of different income groups. SIPs further enhance accessibility by allowing investors to contribute small amounts regularly.

4. Professional Research and Analysis

Fund managers conduct in-depth research and analysis to make informed investment decisions. Investors benefit from the expertise of fund managers who have access to research resources and market insights.

5. Regulatory Oversight

Any AMC is required to register with SEBI prior to launching a mutual fund scheme. SEBI oversees the accountability and transparency of AMC, thus protecting investors. Moreover, SEBI prevents the money of investors from being used arbitrarily. Mutual funds are thus protected against malpractice and fraud.

6. Transparency

Mutual funds provide regular reports and updates, including the fund’s performance, portfolio holdings, and financial statements to investors. Investors can track the fund’s progress, and understand where their money is invested.

7. Dividend Reinvestment

Many mutual funds offer the option to automatically reinvest dividends and capital gains back into additional fund shares. This helps in compounding returns over time.

8. Flexibility in Investment Choices

Mutual funds offer a variety of options, including equity funds, debt funds, hybrid funds, and sector-specific funds. Investors can choose funds based on their risk tolerance, investment goals, and time horizon.

9. Tax Benefits

Under section 80C of the Income Tax Act of 1961, investments made in ELSS mutual funds up to INR 1,50,000 are eligible for a tax benefit.

Drawbacks of Investing in Mutual Funds

Although mutual funds have many benefits, they also have certain drawbacks. Before deciding to invest in mutual funds, investors should be aware of these drawbacks. Some drawbacks include:

1. Exit Load

Mutual funds typically charge an exit load, or fee, to investors who redeem their investments within a given time frame—say, a year from the date of purchase for most of the equity funds.

2. Investment Risk

Market risk can affect investments made in mutual funds. Diversification can only help in reducing risk, it cannot mitigate it completely. A multitude of macro and microeconomic factors can give rise to market risks.

For instance, the stock market’s fluctuations may subject equities mutual funds to mark to market risk. whereas debt mutual funds are subject to interest rate risk and credit risk.

Types of Mutual Funds in India

Different types of mutual funds are classified as follows.

1. Types of Schemes Based on Maturity Period

(i) Open-Ended Scheme

Open-ended schemes provide investors with unparalleled flexibility, as they can purchase or sell units at any point in time without any fixed maturity date. One key feature is the liquidity aspect, which enables direct trades with the mutual fund at NAV-related prices. Approximately 59% of mutual funds fall under this category, making it a popular choice.

(ii) Close-Ended Scheme

Close-ended schemes, on the other hand, have a predetermined maturity period. Investing is exclusively permitted during the New Fund Offer (NFO) period. Following the closure of the NFO, no further investments are permitted. Market factors and demand-supply dynamics may cause market prices to differ from NAV. SEBI regulations ensure at least one exit route for investors.

(iii) Interval Funds

Interval funds combine characteristics of open and close-ended schemes, permitting trading at predefined intervals. These intervals could be determined by the fund or occur on the stock exchange, with transactions taking place at NAV-related prices.

2. Types of Schemes Based on Principal Investments

(i). Equity Funds

Equity funds allocate funds to company shares, with returns linked to stock market performance. Even though these funds have the potential to yield large returns, they are regarded as risky. Other subcategories that are distinguished by particular features include focused funds, ELSS, large-cap funds, mid-cap funds, and small-cap funds.

(ii) Debt Funds

Debt funds channel investments into fixed-income securities like corporate bonds, government securities, and treasury bills. Offering stability and a regular income with comparatively lower risk, debt funds can be further classified based on duration. Categories include low-duration funds, liquid funds, overnight funds, credit risk funds, and gilt funds, each catering to specific investor preferences and risk profiles.

(iii) Hybrid Schemes

Hybrid schemes provide a combination of debt and equity instruments. Among the seven categories are Arbitrage Funds, Balanced Hybrid Funds, and Conservative Hybrid Funds. To accommodate varied risk appetites, each category has unique asset allocation ratios.

(iv) Solution Oriented Schemes

These schemes concentrate on particular financial objectives, such as retirement or the education of children. There are lock-in periods for retirement funds and children’s funds that last for at least five years or until the specific event happens.

(v) Other Schemes

Index Funds/ETFs and Funds of Funds (FoFs) are included in this category. While index funds replicate specific market indicators, FoFs generally invest in other mutual funds, either domestic or overseas.

Types of Funds Based on Investment Goals

1. Growth Funds

These funds focus on high-performing stocks, aiming for capital appreciation. Ideal for investors seeking substantial returns over an extended period.

2. Tax-saving Funds (ELSS)

Equity-linked saving schemes primarily invest in company securities while qualifying for tax deductions under Section 80C of the Income Tax Act. The minimum investment horizon for these funds is three years.

3. Liquidity-Based Funds

Differentiated by liquidity levels, funds like ultra-short-term and liquid funds are suitable for short-term goals. Meanwhile, retirement funds, with longer lock-in periods, cater to more extended financial objectives.

4. Capital Protection Funds

These funds strategically allocate investments, combining fixed income instruments and equities to ensure capital protection. While minimizing losses, it’s important to note that returns from these funds are taxable.

5. Fixed-Maturity Funds (FMF)

FMFs channel funds into debt market instruments with a maturity period identical or similar to that of the fund itself. For instance, a three-year FMF invests in securities with a maturity of three years or less.

6. Pension Funds

Tailored for long-term investments, pension funds, usually hybrid in nature, prioritize regular returns. Although they yield lower returns, they offer the potential for steady income in the future.

Mutual Fund Charges and Other Fees

When investing in mutual funds, it’s essential to be aware of the different charges and fees that may affect your returns. Here are some common mutual fund charges and fees:

1. Expenses Ratio

The expense ratio is a yearly charge, which is calculated as a percentage of a fund’s daily net assets. An asset management company charges it for overseeing a mutual fund scheme.

Thus, it covers all the costs of managing, overseeing and administering a mutual fund scheme. Expense ratio includes fund manager fees, distribution fees, administrative fees, sales and marketing expenses, etc.

Expense ratio for regular plans is generally higher than that of direct plans. Compared to direct plans, regular plans comprise investments made through intermediaries like distributors, agents, or brokers, which results in commissions that increase the expense ratio. SEBI guidelines dictate maximum expense ratios (TER) for AMCs based on AUM levels, ranging from 0.80% to 2.25%.Furthermore, in order to promote mutual fund investment in Tier 2 and Tier 3 cities, SEBI permits a 0.30% increment in selling commissions above these limitations in cities outside of the top 30 in India.

Moreover, the expense ratio for regular plans is generally higher than that of direct plans. Compared to direct plans, regular plans comprise investments made through intermediaries like distributors, agents, or brokers, which results in commissions that increase the exposure ratio. SEBI guidelines dictate maximum expense ratios (TER) for AMCs based on AUM levels, ranging from 0.80% to 2.25%.Furthermore, in order to promote mutual fund investment in Tier 2 and Tier 3 cities, SEBI permits a 0.30% increment in selling commissions above these limitations in cities outside of the top 30 in India.

2. Transaction Fees

This expenditure is only incurred by an individual once during their investment period. For investments over INR 10,000, a transaction fee in the range of INR 100 to INR 150 may be charged. Similarly, SIP investments over INR 10,000 are subject to this fee as well. There are no transaction fees for investments under INR 10,000.

3. Exit Load

An exit load is levied on investors who exit a mutual fund scheme within a certain period of time after the date of purchase. To prevent investors from exiting a mutual fund scheme too soon, AMCs charge an exit load. In addition, this fee enables fund houses to minimize the volume of withdrawals.

4. Entry Fees

Entry load is the fee levied on investors when they invest in a mutual fund scheme for the first time. This fee covers the asset management company’s distribution expenses for promoting a mutual fund scheme. This fee is no longer charged by MFs because of SEBI regulation that investors can pay this fee directly to distributors from whom they buy the MF units.

5. Stamp Duty

Stamp duty applies on the issuance and transfer of Mutual Funds regardless of whether units are held in physical or demat. The government levies a direct tax referred to as stamp duty.

6. Stamp Duty in Various cases

• Purchases, switch-in, dividend reinvestment, and new installment into existing STPs and SIPs: 0.005%.
• Unit transfers between demat accounts in addition to off-market transfers: 0.015%.

Taxes on Mutual Funds

Understanding the taxation of mutual fund returns is crucial for existing and prospective investors. Similar to other asset classes, Mutual Fund gains are subject to taxation. Familiarizing yourself with Mutual Fund tax rules before investing is essential, given the challenge of avoiding taxes. Knowledge empowers you to plan investments strategically, potentially reducing overall tax expenses and utilizing available deductions.

The Finance Act of 2020 brought about a pivotal change in the taxation of dividends from mutual funds by abolishing the dividend distribution tax. Up until March 31, 2020, investors enjoyed tax exemptions on mutual funds dividend income. Post this change, investors are now required to pay taxes on the entire dividend income based on their income tax bracket, categorized under “Income from Other Sources.”

Capita l Gains Taxes on Mutual Funds

The tax rate on capital gains for mutual funds depends on the type of mutual fund and the holding period. The tenure for which an investor held mutual fund units is known as the holding period.

Capital gains on the sale of mutual fund units are categorized as below.

1. Capital gains on equity oriented funds

Equity mutual funds are mutual funds with a minimum 65% equity exposure. Investments in equity oriented funds which are redeemed within 1 year are subject to short term capital gain tax of 20% (plus surcharge & cess).

Investments in equity mutual funds, which are redeemed post the completion of 1 year are subject to long term capital gains of 12.5% (plus surcharge & cess). Long-term capital gains (LTCG), are tax-free up to INR 1.25 lakh/year

2. Capital gains on Debt oriented funds

Post the recent changes in debt MF taxation, capital gains on debt mutual funds are taxed at marginal rate irrespective of the holding period.

3. Hybrid Fund Capital Gains Taxation

Hybrid funds, categorized as equity-focused or debt-focused, follow diverse tax regulations. In simple terms, if a mutual fund is mainly focused on stocks (equity-focused) and has more than 65% of its investments in stocks, it follows the same tax rules as regular equity funds.

On the other hand, hybrid funds that are more focused on debt investments are taxed based on their specific percentage of equity exposure.

4. Securities Transaction Tax (STT)

Distinct from capital gains and dividend taxes, the securities transaction tax (STT) applies to equity and hybrid equity-oriented fund transactions at 0.001%. Debt fund unit sales, however, are exempt from STT.

Factors that Determine the Tax Liability on MF Investments

Four crucial factors determine tax liability:

• Fund Types: For taxation purposes, mutual funds are divided into two categories: equity-oriented and debt-oriented.
• Capital Gains: These are profits from the sale of a capital asset at a price higher than the asset’s original cost.
• Dividend: Mutual Fund houses distribute a portion of accumulated profits to investors as dividends without the need to sell assets.
• Holding Period: The amount of time an asset is held has an impact on the capital gains tax. India’s tax policies favor longer holding periods because they result in lower tax burdens, which incentivize investors to retain their investments for extended periods.

How Can You Save Taxes with Mutual Funds?

You can invest in ELSS funds, which offer tax advantages under Section 80C of the Income Tax Act, 1961, if you want to use mutual funds to save taxes. On your ELSS investments, you are eligible for tax benefits of up to INR 1.5 lakh. But take note that there is a three-year lock-in period for ELSS funds.

Risks Associated with Mutual Funds

Mutual fund investments come with inherent risks that investors should consider:

1. Standard Risk Factors

Mutual fund investments are subject to many risks, including fluctuations in trading volumes, market conditions, liquidity issues, and the likelihood of principal loss. The value of the scheme is affected by changes in the prices of the securities, which are influenced by micro and macro economic factors. Past performance doesn’t assure future returns.

2. Specific Risk Factors

(i) Risks Associated with Investments in Equities

• Capital risk : Investment in equities are subject to capital risk, implying that investors could loose their principal amount, making them unsuitable for risk averse investors
• Price Risk: Daily volatility in equity shares can lead to price fluctuations.
• Liquidity Risk for Listed Securities: Trading volumes and settlement periods can restrict liquidity. The inability to sell securities promptly may lead to losses.
• Event Risk: Price risk due to company or sector-specific events.

(ii) Risks Associated with Investment in Debt Securities and Money Market Instruments

• Credit Risk: Probability of the issuer of debt defaulting on payments, which could affect the scheme’s net present value.
• Interest Rate Risk: Price of a bond is inversely proportional to interest rates/yields. Falling interest rates lead to an increase in the price of a bond and vice versa.
• Spread Risk: : Debt securities’ market value may be impacted by credit spreads. The credit spread on corporate bonds is subject to change based on market conditions. The market value of debt securities in a portfolio may decrease as the debt spreads widen and vice versa. This also holds true for floating rate securities; if the spread rises above the benchmark security/index, the value of these securities mayfall.
• Liquidity Risk: Market conditions can impact a security’s ease of sale. Selling securities at the right price is difficult in changing markets. Lack of buyers and bid-offer differences can increase selling costs. The liquidity of certain investments can be limited by factors such as trading volumes, settlement periods, and transfer processes.
• Counterparty Risk: Counterparty risk is when the other party fails to fulfill a transaction, either not delivering securities or not paying as agreed. This can result in losses for the fund.
• Prepayment Risk: This occurs when a borrower pays back a loan earlier than expected. People often use lower-interest borrowed funds to settle higher-interest loans when interest rates are low, which lowers the average term of asset-backed securities (ABS). As prepayment risk increases with declining interest rates, it introduces reinvestment risk, which is the likelihood that the repaid amount may only be reinvested at a lower interest rate.

To make well-informed decisions, investors should evaluate their risk tolerance, thoroughly understand these risks, and consult with financial experts. Reading the fund’s offer document for specific risk disclosures and keping up to date on market conditions are essential. HDFC SKY can provide you with expert devise regarding the investment decisions that may be suitable for you.

How to Invest in Mutual Funds?

Those who are unsure about how to begin investing in mutual funds can do so by following these simple steps:

• Step 1: To begin, assess your risk tolerance and capacity by doing a risk profile analysis. Before making a mutual fund investment, it is crucial to understand the amount of risk that one can take.
• Step 2:The second step is asset allocation, which requires you to divide your money among different asset classes. To balance the risk elements, an asset allocation strategy should comprise a combination of debt and equity instruments.
• Step 3: The third step is identifying funds that invest in each asset class. After that, you can compare mutual funds by checking for past performance or investing goals.
• Step 4: Choose and determine which mutual fund plan to invest in. You can then start the application either offline or online.
• Step 5: To achieve better results, diversifying your investments and following up on a frequent basis are crucial.

How to Invest in Funds Online

It is important to comprehend how to invest in mutual funds via online mode. Online mutual fund investing is quite easy to do and can be done in one of two ways:

1)By Registering on an Official Website (the Asset Management Company (AMC) website).

There are numerous mutual funds available for investment in each category on the official websites of AMCs. You must adhere to the guidelines posted on the fund houses’s official website, fill in all the necessary fields, and submit the form.

All that you need to complete the know-your-customer (KYC) process online (e-KYC) is an Aadhar number and PAN. Your submitted information is verified at the back end, and after it passes verification, you can start making investments.

2. Through An App

AMCs permit investors to invest in Mutual Funds through mobile apps quickly and effortlessly. The AMC has a mobile app, and investing in mutual funds can be done through third-party mutual fund aggregators, which provide a platform to invest in mutual funds.Through the app, investors can buy and sell units, see account statements, invest in mutual fund schemes, and check other relevant portfolio details. Additionally, investors have access to a variety of funds offered by different fund houses.

3. Invest in Mutual Funds with HDFC Sky

Eligibility for Investing in Mutual Funds

• Age: The investor must be 18 years of age or older. It is possible for legal guardians or parental guardians to invest on behalf of minors.
• Residency: Both residents and non-resident Indians (NRIs) are eligible to invest in mutual funds in India. Mutual fund investments may also be made by Persons of Indian Origin (PIO) and Overseas Citizens of India (OCI).
• Bank Account: A functional bank account is a prerequisite for investment in NREs or NRO accounts are required for NRIs.
• PAN Card: In India, a current PAN card is necessary in order to transact in mutual For NRIs, the PAN card and the foreign address should be linked.
• KYC Compliance: It is essential to follow Know Your Customer (KYC) regulations. This includes verification of identity, address, and signature.
• KYC Compliance: Adherence to Know Your Customer (KYC) requirements is necessary. This includes verification of address, identity, and signature.
• Payment Options: Only Indian bank accounts may be used to pay for the investment. NRIs are allowed to make investments through their NRO/NRE account.

Document Required to Invest in Mutual Funds

Required documentation for mutual fund investments are as follows.

Mutual Funds Application Form

Initiating a mutual fund investment may require filling out multiple application forms. This comprises the main application for opening a mutual fund account, an additional application for taking part in a systematic investment plan, and an electronic money transfer form (ECS). Additionally, some asset management companies may require a risk profile form.

KYC Form

As part of the KYC regulations enforced by the Indian government, investments in mutual funds require PAN verification. The website of CDSL Ventures Limited (CVL) makes it easier to verify KYC compliance or start KYC registration. Submission of the KYC acknowledgment letter or a copy of the KYC-compliant page is necessary if the account is already KYC-compliant.

Proof of Identity

• Aadhaar card
• Driving license
• PAN card with photograph
• Passport
• Voter’s ID card
• A photo-containing identity card or document issued by one or more authorities, such as the central or state government, statutory/regulatory authorities, public sector undertakings,scheduled commercial banks, public financial institutions, and professional associations/colleges.

Proof of Address

• Aadhaar card
• Driving license
• Passport
• Voter’s ID card
• Ration card
• Registered lease/sale agreement of residence
• Flat maintenance bill
• Insurance copy
• Utility bills (gas, electricity, landline telephone, all less than three months old)
• Passbook or bank account statement (less than three months old)
• Self-declaration by High Court and Supreme Court judges indicating the new address for their account
• Proof of address issued by Bank Managers of scheduled commercial banks/multinational foreign banks/gazetted officer/notary public/elected representatives to the legislative assembly or parliament/a document issued by any government or statutory
• Identity card/document with address, issued by various authorities such as central/state government, statutory/regulatory authorities, public sector undertakings, public financial institutions, scheduled commercial banks, colleges affiliated to universities, and professional bodies like ICWAI, ICAI, ICSI, Bar Council, etc.
• For foreign institutional investors (FII)/sub-account, a notarised and/or apostilled or consularised Power of Attorney given by FII/sub-account to the Custodians
• Proof of address in the spouse’s name is also acceptable.

Modes of Investing in Mutual Funds

In mutual fund investing, there are two primary modes of investing: lump sum investment and Systematic Investment Plan (SIP)

1. Lump Sum Investment

A lump sum investment is when a sizable sum of money is invested in a mutual fund in a single transaction. Investors make a one-time investment by buying mutual fund units on the day of investment at the current Net Asset Value (NAV).

One benefit of investing in lump sums is the possibility of higher returns. If the market does well, the investor gains from the growth. Moreover, there is no commitment to make regular investments. However lump sum investment may suffer relatively higher drawdowns if the markets correct significantly post investing.

2. Systematic Investment Plan (SIP):

SIP is a mode of investing in mutual funds where investors regularly invest a fixed amount at predefined intervals (usually monthly). Investors set up an SIP, and a fixed amount is deducted from their bank account at regular intervals. This amount is then used to purchase mutual fund units at the prevailing NAV.

The advantage of SIP is the concept of rupe cost averaging, where investors buy more units when prices are low and fewer units when prices are high, potentially reducing the overall average cost. Also, SIP promoted discipline investing. SIP encourages regular and disciplined investing, irrespective of market conditions.

SIPs help reduce the impact of short-term market fluctuations as investments are spread over time. SIPs allow investors to start with a relatively small amount, making it more accessible for those with limited funds.

Choosing Between Lump Sum and SIP

The choice between lump sum and SIP depends on factors such as investor risk tolerance, financial goals, and market conditions.

Lump sum may be suitable for those with a high-risk tolerance and a favorable market outlook.

SIP is often recommended for investors seeking a disciplined and less volatile approach to investing, especially during uncertain market conditions.

It’s crucial to carefully assess your financial goals, risk appetite, and investment horizon before deciding on the mode of investment in mutual funds. Additionally, consulting with a financial advisor can provide personalized guidance based on your individual circumstances.

How to Sell Mutual Funds

Investors can redeem their mutual funds. In case of MFs that are listed on stock exchanges, units of MFs can be sold just like stocks. Investors must pay any exit loads at the time of redeeming their units with the Mutual Fund. Before choosing to redeem their units, investors should carefully consider all associated costs

Determining the Right Time to Redeem

Selling or redeeming mutual funds depends on investors’ financial goals, which might range from long-term ones like purchasing a home to short-term ones like buying a car. Regardless of market conditions, investors may consider redeeming their fund units as they get closer to their financial milestones.

Types of Mutual Fund Redemption

• Unit-Based Redemption: This type of redemption allows investors to select the number of mutual fund units they wish to redeem. The redemption amount of the mutual fund is calculated by multiplying the specified units by its current Net Asset Value (NAV).
• Amount-Based Redemption: Using this redemption option, investors can choose exactly what amount of money they want to take out. Based on the current NAV, the system automatically determines how many units to be deducted in order to match the predetermined redemption
• Redeem All: This redemption category gives investors the option to redeem their entire investment from the mutual fund in a straightforward way

Factors Affecting Redemption

There are several reasons why investors can choose to redeem their mutual funds.

• Unmet Fund Objectives: Investors may decide to redeem their units if their investment objectives are not being met.
• Market Conditions: It is not recommended to rely solely on market highs for redeeming. Timing the market is difficult, and making impulsive decisions after a market peak might not be a wise course of
• Underperformance Schemes: Consistent underperformance within a scheme may prompt investors to consider redemption, particularly if there are changes in objectives or portfolio mix that are not in line with their goals.
• Unexpected Economic Crisis: An expected economic crisis may cause investors to redeem their MF investments.

Exit Methods from Mutual Funds

1. Redemption through a Demat or Trading Account:

If Investors have purchased mutual fund units through a demat or trading account, they must submit a sell order via the same broker. The redemption amount will be credited to their linked to the demat account.

2. Redemption through Asset Management Company (AMC)

For their investors, the majority of AMCs (companies who are the sponsors of MFs and manage them) have a specific website, mobile app, and relationship manager. If the mutual fund units were acquired through an AMC, all investors need to do is log in to the portal or app, choose the mutual fund, and redeem the units. Investors can opt to sell a portion or all of the units.

After reviewing all the details, investors must submit their redemption request. The redemption amount will be electronically transferred to their bank account by the fund house. Online redemptions usually result in faster crediting—the money is usually credited within a day or two.

3. Redemption through an Agent or Distributor

Investors have the option to use a third party to redeem their mutual funds online. For mutual fund transactions, a lot of mutual fund distributors provide their investors with a mobile app or web interface. Investors associated with these third parties can easily redeem their mutual fund units; however, there might be fees for their services.