MUTUAL FUNDS- TOP 8 QUESTIONS AND ANSWERS (Part 2)

MUTUAL FUNDS- TOP 8 QUESTIONS AND ANSWERS.

For those who wish to engage in the stock market but lack the time or knowledge to manage their own portfolios, mutual funds are a popular choice. They are a sort of investment vehicle that collects funds from several participants in order to purchase securities like stocks, bonds, and other assets. Here are the Top 8 Questions And Answers on Mutual Funds (Part 2) :

MUTUAL FUNDS- TOP 8 QUESTIONS AND ANSWERS

5.  What approaches does the fund manager use to build portfolios?

A fund manager uses different technical and fundamental parameters of a stock before making it a part of his portfolio. Therefore, while building their portfolio, the manager can follow any of the two processes given ahead.

 


     Top-Down Approach

MUTUAL FUNDS- TOP-Down

In this approach, the manager starts by studying the macroeconomic scenario from a global and domestic point-of[1]view. After this, he analyses the different sectors of the economy to choose the ones which can perform well in the prevailing economic scenario. For example, if interest rates are bound to fall, the real estate sector will benefit from this, and the manager will choose these stocks to invest in.

 


                                                                    Bottom-Up Approach


MUTUAL FUNDS- Bottom-UP

In this approach, the manager does the above process in reverse. He first selects the companies he wants to invest in. Then he evaluates how the company will perform under the present economic scenario by testing different scenarios on it.

6.  How can a customer invest in a mutual fund?

Mutual funds allow investment in two ways

·        Lump sum

The most basic way to invest in a mutual fund is to do a one-time investment through a lump sum amount and let it grow with time.

Mutual Funds

·        Systematic Investment Plan (SIP)

This method was built for people who prefer periodic investment rather than a big one-time payment. Through an SIP, a person can invest for a minimum of even ₹500 per month in a mutual fund. It is an ideal option for salaried persons.

An SIP gives the investor the benefits of market fluctuations. How?

When you will invest a fixed amount monthly, you will receive different units of the mutual fund every month due to changes in the NAV. You will not have to spend more on the same amounts of units because of a rise in the NAV, which is a big advantage of choosing an SIP.

This benefit is known as rupee cost averaging.

3.      How can a customer redeem their investment?

Like investing, redemption can also be done either in one go or in installments. In case of installments, it is known as systematic withdrawal plan. A customer can give the request to redeem a certain part of the portfolio on a specified date of the month. Similar to an SIP, the customer benefits from market fluctuation since the NAV on the withdrawal date of different months will be different.


7.  What are the fundamental attributes of a mutual fund scheme?

The fundamental attributes of a mutual fund scheme are its basic features that can affect one’s decision to stay invested in a scheme or make fresh investments in a scheme.

 

Examples of Fundamental attributes are:

1. Type of a scheme (change of scheme from equity to debt or change in investment allocation pattern defined in the offer document.)

 2. Investment Objective

 3. Liquidity terms (change in lock-in period / exit load)

 4. Merger of a scheme with another scheme within a single AMC

 5. Buyout of one AMC by another 

For any change in fundamental attributes, SEBI approval is required, but investor approval is not needed. However, each investor must be informed through communication like email / letter and given the option to exit without any exit load within a fix period of time.

                                     Read :MUTUAL FUNDS- TOP 8 QUESTIONS AND ANSWERS.

 

Key Learning Points

  • A mutual fund is a pool of money from different investors who neither have the time nor the knowledge to invest in the stock market.
  • A fund manager is an experienced individual who manages the fund on the behalf of a mutual fund company.
  • The advantages of mutual funds include the opportunity of diversification, professional fund management, etc.
  • When an investor invests in a mutual fund, he/she buys Units at the prevailing market price which is called NAV or the Net Asset Value.
  •  Investment in a mutual fund can be done either as a lump sum or at regular intervals which are known as a systematic investment plan.
  • Similarly, withdrawal from a mutual fund scheme can either be done as a lump sum or as a systematic withdrawal plan.
  •  Fundamental attributes of a mutual fund scheme are its basic features that can affect one’s decision to stay invested in a scheme.

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