A mutual fund is a type of investment vehicle that pools money from a group of investors and uses the funds to purchase a portfolio of securities, such as stocks, bonds, or other assets. Mutual funds are managed by professional fund managers, who use their expertise to make investment decisions on behalf of the investors.
One of the main features of mutual funds is that they provide diversification to investors. Instead of investing in a single stock or bond, investors can buy shares in a mutual fund that holds a diversified portfolio of assets. This helps to spread out the risk and reduce the impact of any single investment’s performance on the overall portfolio.
Another important feature of mutual funds is their liquidity. Investors can buy and sell shares in a mutual fund at any time, and the value of the shares is calculated daily based on the net asset value (NAV) of the underlying assets.
Mutual funds also offer convenience to investors. They provide access to a wide range of investments, even for those with limited capital. Additionally, mutual funds typically have lower minimum investment requirements than other investment vehicles, such as individual stocks or bonds.
Mutual funds also come in different types, such as equity funds, bond funds, money market funds, and more. Each type of fund has its own investment objective, risk profile, and investment strategy, allowing investors to choose the one that best fits their financial goals and risk tolerance.
Concepts and Terms Related to Mutual Funds
a. Investment Objectives:
Investment objectives refer to the goals that mutual funds aim to achieve with their investment strategies. These can include capital appreciation, income generation, preservation of capital, or a combination of these goals.
Units are the equivalent of shares in a mutual fund. When you invest in a mutual fund, you buy units of the fund at the current net asset value (NAV) per unit.
c. Net Assets:
Net assets refer to the total value of a mutual fund’s assets minus its liabilities. The net assets of a mutual fund are what determine its NAV.
d. Net Asset Value (NAV):
NAV is the per-unit price of a mutual fund. It is calculated by dividing the total net assets of the fund by the number of outstanding units. NAV is updated daily at the end of each trading day and is the price at which investors buy or sell units of the mutual fund.
e. Cut-off Timings:
Cut-off timings are deadlines for buying or selling units of a mutual fund. The cut-off time is usually set by the fund company and is the time by which investors need to place their orders to receive the NAV of the same day. Orders placed after the cut-off time receive the NAV of the next trading day.
Mark-to-market is the process of valuing the assets in a mutual fund portfolio at their current market value. This is done on a daily basis to determine the NAV of the fund. The market value of the assets in the portfolio can change from day to day, which is reflected in the daily NAV of the fund. Mark-to-market helps ensure transparency and accuracy in the valuation of mutual fund portfolios.
Features of and differences between Open-ended schemes, Close-ended schemes, Interval schemes and Exchange Traded Funds (ETFs)
|Features||Open-ended schemes||Close-ended schemes||Interval schemes||ETFs|
|Fund Units||Redeemable||Non-Redeemable||Redeemable||Tradable on Exchange|
|Pricing||NAV||Market Price||NAV||Market Price|
|Trading||At any time||Only at listing||Only at specific interval||Throughout the day|
|Exit Option||Always available||Limited||Limited||Always available|
|Redemption price||NAV-based||Market price-based||NAV-based||Market price-based|
|Investor Base||Retail||High Net worth||Retail||Institutional|
Open-ended schemes are funds that are available for subscription and redemption on a continuous basis. These funds do not have a fixed maturity date and investors can buy or sell units at any time at the prevailing NAV. Open-ended schemes have higher liquidity and flexibility but also a higher expense ratio.
Close-ended schemes are funds that are available for subscription only during a specified period and are listed on stock exchanges. The number of units available in close-ended schemes is fixed and cannot be redeemed before maturity. Close-ended schemes have lower liquidity and flexibility but a lower expense ratio.
Interval schemes are funds that combine features of open-ended and close-ended schemes. These funds are open for subscription and redemption only at specific intervals, such as monthly or quarterly. Interval schemes have lower liquidity and flexibility but a lower expense ratio.
Exchange Traded Funds (ETFs) are funds that trade on stock exchanges like a stock. ETFs are open-ended funds with high liquidity and flexibility as they can be traded throughout the day. ETFs have a lower expense ratio as compared to open-ended schemes. They are traded at market price, which may be higher or lower than the NAV.
Regulatory Framework of Mutual Funds
The regulatory framework of mutual funds in India is overseen by the Securities and Exchange Board of India (SEBI) through its regulations called the SEBI (Mutual Funds) Regulations, 1996. These regulations cover various aspects of mutual funds such as their structure, launching schemes, managing portfolios, investor protection, and services. The Reserve Bank of India (RBI) is also involved in certain areas, such as foreign exchange transactions.
The Association of Mutual Funds in India (AMFI) is the industry body that oversees the functioning of the mutual fund industry and recommends best practices to be followed by its members. It also represents the industry’s requirements to the regulator, government, and other stakeholders.
To ensure that investors are provided with high-quality services, SEBI has established standards for various transaction/information periods related to mutual funds. These include:
|Allotment of Units in NFO||5 days from closing date|
|Scheme opening for continuous transactions||5 business days from allotment|
|Despatch of consolidated account statement for each calendar month||On or before tenth day of succeeding month if there is a transaction in the folio. Else every six months|
|Confirmation of unit allotment by SMS or Email||5 days from purchase application|
|Despatch of dividend warrants||30 days from dividend declaration|
|Despatch of redemption proceeds||10 business days from redemption request|
|Daily NAV of scheme||Available by 9.00 pm on mutual fund and AMFI’s website|
|Monthly portfolio disclosure||Scheme portfolio at the end of the month made available on the mutual fund’s website on or before 10th of following month|
|Unaudited half-yearly financial results and portfolio||Within one month from the close of each half-year|
|Mutual Fund Products||Description|
|Equity Funds||Equity funds invest primarily in stocks of publicly traded companies. They offer the potential for higher returns but also carry a higher level of risk. There are different types of equity funds, including:|
|Passive & Active Funds||Passive equity funds aim to replicate the performance of a stock market index, such as the Nifty 50 or BSE Sensex, while active equity funds are managed by a fund manager who selects stocks based on their analysis of the market.|
|Diversified Equity Funds||Diversified equity funds invest in a mix of stocks from different sectors and industries to reduce risk and increase the potential for returns.|
|Based on Market Capitalisation||Equity funds can also be classified based on the market capitalisation of the companies they invest in, such as large-cap, mid-cap, or small-cap funds.|
|Based on Sectors and Industries||Some equity funds focus on specific sectors or industries, such as banking, technology, or healthcare.|
|Based on Themes||Theme-based equity funds invest in companies that are part of a specific theme, such as infrastructure, sustainable energy, or emerging markets.|
|Based on Investment Styles||Equity funds can also be classified based on investment styles, such as value, growth, or blend.|
|ELSS||Equity-Linked Saving Scheme (ELSS) is a type of diversified equity mutual fund that offers tax benefits under Section 80C of the Income Tax Act. It has a lock-in period of 3 years.|
|Type of Debt Fund||Description|
|Overnight Funds||Invest in overnight securities with a maturity of 1 day|
|Liquid Funds||Invest in debt and money market securities with a maturity of up to 91 days|
|Ultra Short Duration Funds||Invest in debt and money market securities with a maturity of 3-6 months|
|Low Duration Funds||Invest in debt and money market securities with a maturity of 6-12 months|
|Money Market Funds||Invest in money market instruments with maturity up to 1 year|
|Medium Duration Funds||Invest in debt and money market securities with a maturity of 3-4 years|
|Medium to Long Duration Funds||Invest in debt and money market securities with a maturity of 4-7 years|
|Long Duration Funds||Invest in debt and money market securities with a maturity of more than 7 years|
|Corporate Bond Funds||Invest in highest-rated corporate bonds with a minimum investment of 80% in corporate bonds|
|Credit Risk Funds||Invest in lower-rated corporate bonds with a minimum investment of 65% in AA and below rated bonds|
|Banking and PSU Funds||Invest in debt instruments issued by banks, public sector undertakings, and public financial institutions|
|Gilt Funds||Invest in government securities with a minimum investment of 80% in government securities|
|Fixed Maturity Plans||Closed-end debt funds with a fixed maturity period of typically 1-5 years|
|Hybrid Funds||Brief Description|
|Conservative Hybrid Funds||These funds invest primarily in debt instruments with a small allocation to equity instruments. They are suitable for investors who are risk-averse and seeking stable returns with a lower level of risk.|
|Balanced Hybrid Funds||These funds invest in a mix of equity and debt instruments in a predetermined ratio. They offer moderate returns and are suitable for investors with a balanced approach towards risk and return.|
|Aggressive Hybrid Funds||These funds invest in a higher proportion of equity instruments than debt instruments. They are suitable for investors seeking higher returns with a relatively higher level of risk.|
|Dynamic Asset Allocation Funds||These funds invest in a mix of equity and debt instruments and actively manage the allocation based on market conditions. The fund manager aims to maximize returns by increasing or decreasing the allocation to equity and debt instruments based on market conditions. These funds are suitable for investors who want to participate in equity markets but also want some downside protection.|
|Multi Asset Allocation Funds||These funds invest in a mix of equity, debt, and other asset classes such as gold, real estate, and international equities. The fund manager actively manages the allocation to different asset classes based on market conditions to maximize returns. These funds are suitable for investors who want to diversify their portfolio across different asset classes.|
|Arbitrage Funds||These funds invest in arbitrage opportunities between the cash and derivatives market. The fund manager aims to generate returns by taking advantage of the price difference between the two markets. These funds are relatively low risk and are suitable for investors who want to generate low-risk returns.|
|Close-End Hybrid Funds||These funds have a fixed maturity period, and investors can invest only during the initial offer period. The fund’s investment objective is defined at the time of launch, and the fund manager invests in a mix of equity and debt instruments to achieve the investment objective. These funds are suitable for investors who have a specific investment objective and want to invest for a fixed period.|
|Capital Protection Funds||These funds invest in a mix of debt and equity instruments with the objective of protecting the capital invested while generating moderate returns. The fund manager aims to protect the capital by investing in debt instruments with a lower credit risk and hedging the equity exposure through derivatives. These funds are suitable for investors who want to protect their capital from market volatility while generating moderate returns.|
Solution Oriented Schemes
There are two types of Solution Oriented Schemes:
- Retirement Fund: This scheme is designed for investors who are planning their retirement. These funds invest in a mix of equity, debt and other securities with an aim to provide long-term capital appreciation along with regular income. The investment horizon for such schemes is typically around 5-10 years or longer, depending on the retirement age of the investor.
- Children’s Fund: This scheme is aimed at helping investors save for their children’s future expenses such as education, marriage, etc. These funds invest in a mix of equity, debt and other securities with an aim to provide long-term capital appreciation. The investment horizon for such schemes is typically around 5-15 years, depending on the age of the child and the specific goal that the investor is saving for.
a. Fund of Funds
- These are mutual fund schemes that invest in other mutual fund schemes instead of directly investing in the market.
- Fund of Funds invests in other mutual funds based on the investment objective of the fund.
- It provides investors with diversification benefits and allows them to invest in multiple asset classes with a single investment.
- These funds are usually managed by a professional fund manager, who has expertise in selecting and managing other mutual funds.
- Fund of Funds is available for various asset classes, such as equity, debt, and gold.
- Exchange Traded Funds (ETFs) are a type of mutual fund that trade like stocks on an exchange.
- ETFs invest in a basket of securities, which can be either stocks, bonds, or commodities, and track the performance of an index.
- They are cost-effective, as they have lower expense ratios compared to actively managed mutual funds.
- ETFs provide investors with diversification benefits, as they allow investors to invest in multiple stocks or bonds with a single investment.
- They provide investors with flexibility, as they can be bought and sold throughout the trading day like stocks.
c. Gold ETFs
- Gold ETFs are a type of ETF that invests in gold.
- These ETFs are designed to track the performance of gold prices, either by investing in physical gold or gold futures contracts.
- Gold ETFs provide investors with an easy way to invest in gold without the hassle of buying, storing, and insuring physical gold.
- They are cost-effective, as they have lower expense ratios compared to other forms of gold investments, such as gold coins or bars.
d. Real Estate MF
- Real Estate Mutual Funds are mutual fund schemes that invest in Real Estate Investment Trusts (REITs) or Real Estate Operating Companies (REOCs).
- REITs are companies that own and operate income-generating real estate properties, such as office buildings, hotels, or shopping malls.
- REOCs are companies that own and operate real estate properties, but they do not qualify as REITs.
- Real Estate MFs provide investors with an easy way to invest in real estate without the hassle of buying and managing properties.
- They also provide investors with diversification benefits, as they invest in multiple real estate properties.
e. Infrastructure Debt Schemes
- Infrastructure Debt Schemes are mutual fund schemes that invest in debt securities issued by infrastructure companies.
- Infrastructure companies are those companies that are engaged in infrastructure-related activities, such as power generation, telecommunications, or transportation.
- Infrastructure Debt Schemes provide investors with an opportunity to invest in infrastructure-related debt securities, which typically offer higher yields compared to other debt securities.
- These schemes are suitable for investors who are looking for fixed income investments with higher yields and are willing to take on higher credit risks.
Mutual Fund Investment Options
Mutual funds offer various investment options to investors, providing them with flexibility in terms of investment goals, risk appetite, and investment horizon. Here are the most common mutual fund investment options:
- Lump-sum investment: This is a one-time investment in a mutual fund scheme. The investor invests a lump sum amount of money and gets a certain number of units based on the NAV of the scheme at the time of investment.
- Systematic Investment Plan (SIP): This is a method of investing in mutual funds regularly, typically on a monthly basis. The investor invests a fixed amount of money in a mutual fund scheme at regular intervals, usually every month. The amount is automatically deducted from the investor’s bank account and invested in the chosen scheme.
- Systematic Transfer Plan (STP): This is a method of investing in mutual funds where the investor invests a lump sum amount in one scheme and transfers a fixed amount regularly to another scheme, which is usually a more aggressive fund. This helps in investing in a more aggressive fund without taking on too much risk at once.
- Systematic Withdrawal Plan (SWP): This is a method of withdrawing money from mutual funds regularly, typically on a monthly basis. The investor withdraws a fixed amount of money from a mutual fund scheme at regular intervals, usually every month. The amount is automatically deposited into the investor’s bank account.
- Dividend Reinvestment Plan (DRIP): This is a method of reinvesting dividends earned on mutual funds back into the same scheme, rather than receiving the payout in cash.
Triggers in Mutual Fund Investment
Triggers in mutual fund investment are essentially a set of pre-defined instructions given by the investor to the mutual fund house, which allows them to execute certain actions under specific market conditions. These triggers can be set up by investors when they make their investments, and they are designed to help investors take advantage of market fluctuations and make timely investment decisions. Here are some of the most common triggers used in mutual fund investments:
- Stop Loss Trigger: A stop-loss trigger is used to limit the losses in a mutual fund investment. When a stop-loss trigger is set, it automatically sells the mutual fund units if the market price of the units falls below a certain pre-determined level.
- Target Trigger: A target trigger is set to sell the mutual fund units when the market price of the units reaches a specific target price. This helps investors lock in their profits and avoid any further market volatility.
- SIP Trigger: SIP stands for Systematic Investment Plan, and it is a popular investment option in mutual funds. An SIP trigger can be set up to increase the SIP amount if the market price of the units falls below a certain pre-determined level.
- STP Trigger: STP stands for Systematic Transfer Plan, which allows investors to transfer a fixed amount of money from one mutual fund to another over a specific period of time. An STP trigger can be set up to stop the transfer if the market price of the units falls below a certain pre-determined level.
- SWP Trigger: SWP stands for Systematic Withdrawal Plan, which allows investors to withdraw a fixed amount of money from their mutual fund investments at regular intervals. An SWP trigger can be set up to stop the withdrawal if the market price of the units falls below a certain pre-determined level.
- Reinvestment Trigger: A reinvestment trigger is used to reinvest the dividends earned on the mutual fund units automatically. When a reinvestment trigger is set, the dividend earned is automatically reinvested in the mutual fund units, which helps in building the corpus over the long term.
- Value Trigger: A value trigger is used to buy or sell mutual fund units based on their net asset value (NAV). When a value trigger is set, the mutual fund units are bought when the NAV falls below a certain pre-determined level, and they are sold when the NAV rises above a certain pre-determined level.
Process associated with Investment in Mutual Funds
a. Fresh Purchase of Mutual Fund Units & Purchase of Units in the Continuous Offer Period:
- An investor can purchase mutual fund units by submitting a completed application form and investment amount to the mutual fund house or their authorized agents.
- The application form should have the investor’s name, PAN, bank details, and investment amount.
- The mutual fund house will allot units at the prevailing Net Asset Value (NAV) on the date of receipt of the application and payment.
- Investors can also purchase units in the continuous offer period, which is the period after the new fund offer (NFO) has ended.
- The purchase can be made through the mutual fund house’s website or authorized agents.
b. Additional Purchases in a Mutual Fund:
- An investor can make additional purchases in a mutual fund by submitting a completed application form and investment amount to the mutual fund house or their authorized agents.
- The application form should have the investor’s name, PAN, bank details, and investment amount.
- The mutual fund house will allot additional units at the prevailing NAV on the date of receipt of the application and payment.
c. Redemptions from a Mutual Fund:
- An investor can redeem mutual fund units by submitting a redemption request form to the mutual fund house or their authorized agents.
- The redemption request form should have the investor’s name, folio number, number of units to be redeemed, and bank details.
- The mutual fund house will redeem the units at the prevailing NAV on the date of receipt of the redemption request.
- The redemption proceeds will be credited to the investor’s bank account within the specified time frame.
- An investor can switch from one mutual fund scheme to another by submitting a switch request form to the mutual fund house or their authorized agents.
- The switch request form should have the investor’s name, folio number, number of units to be switched, and details of the target scheme.
- The mutual fund house will redeem units from the source scheme and invest in the target scheme at the prevailing NAV on the date of receipt of the switch request.
- The redemption proceeds and the investment amount will be credited and debited respectively to the investor’s bank account within the specified time frame.
e. Dividend Reinvestment:
- An investor can opt for dividend reinvestment in a mutual fund scheme by indicating the same in the application form.
- The dividend declared by the mutual fund scheme will be reinvested in the same scheme at the prevailing NAV on the record date.
- The units allotted under dividend reinvestment will be reflected in the investor’s folio.
- The dividend reinvestment option can be changed to dividend payout or vice versa by submitting a request to the mutual fund house or their authorized agents.
Systematic Investment Plans (SIP)–
SIP stands for Systematic Investment Plan, which is a type of investment strategy where an investor invests a fixed amount of money at regular intervals in a mutual fund or exchange-traded fund (ETF). SIPs are a popular way of investing in the stock market because they offer a disciplined approach to investing and can help investors avoid the pitfalls of market timing.
For example, let’s say an investor decides to invest Rs. 5,000 per month in a mutual fund through SIP. The investor would submit a mandate to the mutual fund company or its authorized distributor to debit the said amount from his bank account on a particular date every month. The mutual fund company would then allocate units of the mutual fund to the investor at the prevailing Net Asset Value (NAV) of the fund on that particular day.
Here are the steps to enroll in a SIP:
- Choose a mutual fund or ETF: The first step in enrolling in a SIP is to select a mutual fund or ETF that aligns with your investment objectives and risk appetite.
- Decide on the investment amount and frequency: Next, you need to decide on the amount you want to invest in the mutual fund through SIP and the frequency at which you want to invest. You can choose to invest a fixed amount every month, fortnight, or week.
- Complete the KYC process: To invest in a mutual fund, you need to complete the Know Your Customer (KYC) process. You need to submit your PAN card, address proof, and other details to the mutual fund company or its authorized distributor.
- Submit the SIP mandate: Once you complete the KYC process, you need to submit a SIP mandate to the mutual fund company or its authorized distributor. The SIP mandate authorizes the mutual fund company to debit the investment amount from your bank account at regular intervals.
- Monitor your investment: Once you enroll in a SIP, you need to monitor your investment periodically to ensure that it is aligned with your investment objectives and risk appetite. You can review the performance of your mutual fund and make changes to your SIP, such as increasing or decreasing the investment amount or frequency, based on your investment goals and market conditions.
In summary, SIPs are a popular way of investing in mutual funds or ETFs, providing a disciplined approach to investing and helping investors avoid the pitfalls of market timing. To enroll in a SIP, an investor needs to select a mutual fund or ETF, decide on the investment amount and frequency, complete the KYC process, submit the SIP mandate, and monitor the investment periodically.
Systematic Withdrawal Plan (SWP)
A Systematic Withdrawal Plan (SWP) is a facility provided by mutual funds that allows investors to receive a regular pay-out from their mutual fund investment. The investor specifies the amount to be redeemed, frequency of withdrawal, date of redemption, and period of SWP, and the mutual fund pays out the specified amount on the specified date.
For example, let’s say an investor has invested in a mutual fund with a balance of $100,000. They want to receive a monthly pay-out of $5,000 for the next two years. They can enroll in an SWP by specifying the mutual fund scheme, plan and option, amount to be redeemed, frequency of withdrawal (monthly), date of redemption (1st of every month), period of SWP (24 months) and date of commencement of SWP (1st of next month).
The mutual fund will redeem the specified amount on the 1st of every month and credit it to the investor’s bank account registered with the mutual fund. The investor can cancel the SWP at any time by notifying the mutual fund.
To enroll in an SWP, an investor needs to follow these steps:
- Fill out the SWP form: Investors need to fill out the SWP form provided by the mutual fund. The form requires the investor to provide details such as mutual fund scheme, plan & option, amount to be redeemed, frequency of withdrawal, date of redemption, period of SWP, and date of commencement of SWP.
- Submit the form: After filling out the form, investors need to submit it to the mutual fund along with supporting documents such as a cancelled cheque or bank statement.
- Wait for confirmation: Once the mutual fund receives the SWP form and supporting documents, they will process the request and send a confirmation to the investor.
- Start receiving pay-outs: The mutual fund will start paying out the specified amount on the specified date, as per the SWP request.
It is important to note that an SWP involves redemption from a mutual fund scheme, and hence, there will be exit loads and tax implications on the redemption. Also, the mutual fund may specify a minimum period for the SWP and the SWP will automatically cease if the balance in the folio falls below a specified amount.
Systematic Transfer Plan (STP)
A Systematic Transfer Plan (STP) is a facility offered by mutual fund houses that enables investors to transfer a fixed amount of money from one mutual fund scheme to another on a periodic basis. STP is a convenient way for investors to switch their investments from one mutual fund scheme to another based on their investment goals and risk appetite.
STP helps investors reduce the risk associated with timing the market. Instead of investing a lump sum amount in one go, investors can invest the amount in a liquid or debt fund and set up an STP to transfer a fixed amount to an equity fund or any other fund of their choice. This helps them take advantage of the volatility of the market, which is crucial for long-term wealth creation.
For example, an investor has a lump sum amount of Rs. 10 lakhs and wants to invest in equity mutual funds. Instead of investing the entire amount in equity funds at once, the investor can park the money in a liquid or debt fund and set up an STP to transfer a fixed amount, say Rs. 50,000 every month, to an equity fund. This way, the investor can benefit from the volatility of the market and reduce the risk associated with investing a lump sum amount.
The process of enrolling in an STP is simple. Investors need to follow these steps:
- Choose the mutual fund schemes: The investor needs to choose the mutual fund scheme from which they want to transfer the money and the mutual fund scheme to which they want to transfer the money.
- Decide the amount and frequency of transfer: The investor needs to decide on the amount and frequency of transfer. The minimum amount and frequency of transfer may differ from one mutual fund house to another.
- Set up the STP: Once the investor has decided on the mutual fund schemes, amount, and frequency of transfer, they need to fill out the STP mandate form and submit it to the mutual fund house. The form can be submitted physically or online through the mutual fund house’s website or mobile app.
- Start the transfer: Once the mutual fund house receives the STP mandate form, the STP will be activated as per the instructions given by the investor. The transfer will take place on the specified date and the specified amount will be transferred from one mutual fund scheme to another.
In conclusion, an STP is a useful facility offered by mutual fund houses that can help investors achieve their investment goals while minimizing the risk associated with timing the market. Investors can enroll in an STP by choosing the mutual fund schemes, deciding the amount and frequency of transfer, setting up the STP, and starting the transfer.
Direct Transfer Plan (DTP)
A Dividend Transfer Plan (DTP) is a facility offered by mutual funds that enables investors to transfer the dividend payout from one scheme to another scheme within the same fund house. With a DTP, the dividend amount from one scheme is automatically transferred to another scheme chosen by the investor without any intervention from the investor. This is particularly useful for investors who have invested in multiple schemes of a mutual fund and want to receive dividends in a specific scheme or want to reinvest dividends in another scheme to accumulate wealth.
Here’s an example of how a Dividend Transfer Plan works:
Suppose an investor has invested in two schemes of a mutual fund – Scheme A and Scheme B. The investor has opted for the Dividend Transfer Plan and wants to transfer the dividend payout from Scheme A to Scheme B.
When the dividend is declared in Scheme A, the mutual fund will automatically transfer the dividend payout to Scheme B without any action required from the investor. The transferred amount will be invested in Scheme B at the prevailing NAV on the date of transfer. The investor will receive the dividend payout in Scheme B, and it will be reflected in their account statement.
To enroll in a Dividend Transfer Plan, investors need to fill out the application form provided by the mutual fund and select the source scheme and the target scheme. The investor must ensure that both the schemes belong to the same fund house. Once the DTP is registered, the dividend payout from the source scheme will be automatically transferred to the target scheme, and the investor will receive the dividend payout in the target scheme. The investor can also cancel the DTP by submitting a written request to the mutual fund.
It is important to note that the dividend payout from the source scheme will still be subject to tax implications, and investors should consult their financial advisors before investing in mutual funds.
Value Averaging Investment Plan
Value Averaging Investment Plan (VAIP) is an investment strategy that helps investors to achieve a predetermined investment target by adjusting the amount of investment in a systematic manner. Unlike a Systematic Investment Plan (SIP), where a fixed amount is invested at regular intervals, in VAIP, the investment amount varies based on the market movements.
In VAIP, an investor sets a target value for their investments and calculates the monthly investment required to reach that target value. The investor then adjusts the monthly investment amount based on the market conditions. If the market is performing well and the investment has exceeded the target value, the investor reduces the monthly investment amount. Similarly, if the market is underperforming and the investment is below the target value, the investor increases the monthly investment amount.
The primary objective of VAIP is to help investors maximize returns while minimizing the risk associated with market volatility. It ensures that the investor invests more when the market is low and invests less when the market is high. This approach helps to reduce the overall cost of investment and achieve the investment target in a more efficient manner.
For example, let’s say an investor wants to achieve a target investment value of $100,000 in five years through VAIP. Based on the current market conditions, the investor decides to invest $1,000 per month in the first year. At the end of the first year, if the investment value is $15,000 more than the target value, the investor may reduce the monthly investment amount to $800 in the second year. However, if the investment value is $5,000 less than the target value, the investor may increase the monthly investment amount to $1,200 in the second year.