Mutual Funds Basics

Here is first post in a series covering everything you ever wanted to know about mutual funds. If you are a beginner, I suggest you quickly have a look at commonly used personal finance terms and stock market terms. This will make it easier for you to understand basics of mutual funds.

Let’s get started!

What are mutual funds?

A mutual fund is a pool of money collected from various investors where a professional fund manager invests that money in a pool of well researched stocks, bonds and other securities and tries to maximize the returns.

You can imagine mutual fund schemes like a bucket of different investment options pooled together. Imagine a cutlery set which has different knives, forks and spoons or a fruit plate which has different fruits. You just buy a cutlery set and get different items or you just buy a fruit plate and get all different tastes!

What are AMCs?

There are several mutual fund houses in India which operate different mutual fund schemes. These mutual fund houses are also referred to as AMCs or Asset Management Companies. Each AMC offers different schemes with different investment objectives. Here is a list of all AMCs operating in India.

What is SEBI?

All the AMCs, their schemes and operations are governed and regulated by SEBI (Securities and Exchange Board of India). SEBI reviews the mutual fund industry’s operations from time to time and makes relevant changes in guidelines to keep investors’ interests protected. Hence the mutual fund industry is well regulated and transparent, which makes mutual fund investments safer.

What are Registrar and Transfer Agents (RTAs)?

RTAs are institutions that maintain detailed records of investor KYCs and transactions for AMCs. This saves AMCs on the overheads of record keeping. There are two major RTAs operating in India – CAMS and KARVY. Most of the AMCs are associated with either of the RTAs. You can directly invest in different schemes of multiple AMCs using just one account with CAMS or KARVY.

What are prerequisites for investing in mutual funds?

There are few prerequisites, you need a bank account, PAN (Permanent Account Number) and most importantly you need to be KYC compliant. You can get your KYC done by visiting nearest AMC’s office or nearest RTA’s office (CAMS or KARVY).

SEBI has introduced Central KYC or CKYC for ease of investors. You only need to complete CKYC once with any AMC or RTA and you can invest with any AMC after that, without bothering about KYC again. You can get your KYC completed following the instructions on one of links below –

CAMS CKYC

Karvy CKYC

Once you are KYC compliant, you will need an investor account with any AMC or RTA. I suggest you register for an account online with CAMS or Karvy as it will give you flexibility to invest in direct schemes of different AMCs using only 1/2 accounts. You can register here –

Register account with CAMS

Register account with Karvy

What are benefits of investing in mutual funds?

Mutual funds provide five key benefits –

Professional Management

If you are a know nothing retail investor who doesn’t have time to bother about where and how to invest, then mutual funds are the best bet for you. Mutual funds are managed by professionals who can invest on your behalf based on market research and experience.

Diversification

Diversification helps you reduce risks and mutual funds help you diversify. There are various schemes which allow you to diversify within same asset class or across different asset classes. (Refer types of mutual funds section). Even if you invest in one multicap fund, you are basically diversifying your investment across 100+ stocks.

Liquidity

Mutual funds (except ELSS) are highly liquid investments which means you can redeem your units and access your money anytime.

Tax Benefits

Long term capital gains on mutual fund returns are tax free upto Rs. 1 Lakh in a financial year. Moreover, if you invest in ELSS funds, the amount invested is also tax exempted under section 80C upto a limit of Rs. 1.5 Lakhs.

Ease of Investment

Investing in mutual funds is quite easy, you can buy or sell units for as low as Rs. 500 and do it on a click of mouse.

What are risks involved with mutual funds?

Market Risks

Mutual funds invest in equity and debt market instruments and hence the come with associated market risks. Equity funds invest in stocks and hence the returns are dependent on market movement and volatility. This risk can be mitigated by investing in right scheme which suits your investment goal and staying invested for longer periods.

Credit and Interest Rate Risks

Debt funds and schemes that invest in fixed income securities come with credit and interest rate risks. The bond issuer may turn out to be unable to repay the bond turning the investment worthless or reduced interest rates may impact returns.

Limited or No Control

As an investor you do not have control over the underlying portfolio or composition of a mutual fund scheme. You can not influence the securities a fund manager chooses to invest in.

Hope you were able to understand the very basic of mutual funds and prerequisites for getting started with investing including KYC. To continue learning, please do check my next post in this series about different types of mutual funds.

Your feedback, comments and questions are most welcome!