What are the options available to a mutual fund investor?

There are three primary options available:

• ‘growth’,
• ‘dividend’ and
• ‘dividend reinvestment’.

If no choice is exercised at the time of application, the fund house will select the default option for that scheme as mentioned in the application prospectus.

How does the dividend option work?

Under this option, you will get paid from the profits made by the fund. Most debt schemes aim to pay a monthly dividend. In the case of equity-oriented schemes, a dividend is declared as and when there is a surplus. An important point to note: dividends in mutual funds are not guaranteed. In the dividend reinvestment option, dividend is not paid to the investor, but is used to buy more units of the same scheme.

What happens to the NAV when dividend is paid?

This dividend gets deducted from the net asset value (NAV) of the scheme. For example, if your scheme has an NAV of Rs 25 and the fund house declared a 10% dividend (Rs 1 on a face value of Rs 10 per unit), the NAV will decline by Rs 1 to Rs 24 after paying the dividend. The NAV goes down to the extent of dividend paid. Investors, who need a regular income, choose this option. Also, in case of dividend reinvestment, the NAV of the scheme declines after the dividend is paid.

What happens under the growth option?

In this option, the scheme does not pay any dividend but continues to grow. If the fund buys or sells stocks and makes a gain, the amount is reinvested into the scheme. This gain is captured in the NAV, which rises over time. If your aim is to build long-term wealth, then the growth option would be the right choice.

With the tax-saving season having begun, many people are thinking of investing in equity-linked saving schemes (ELSS), where they can get equity-like returns along with the benefit of tax saving.

Here is a look at some of the key characteristics and benefits of ELSS:

Benefit of tax saving: Tax Benefit under section 80c of the Income Tax Act can be availed through ELSS upto Rs 1.5 lakh per year by either SIP or Lumsum

Shortest lock-in period: ELSS has the lowest lock-in period of 3 years as compared to other investment avenues.

Discipline savings & potential of high returns: Besides giving tax benefits, ELSS also leads to ‘forced savings’ because of the lock-in. This allows investors to earn market-based benefits over a longer period of time. Returns are more likely to beat the inflation unlike some of the other tax-saving schemes.

No minimum and maximum investments limit: ELSS funds have a lower threshold of Rs 500. Even a one-time investment of Rs 500 can be held till perpetuity. There is also no maximum limit specified for investing in ELSS. However, the tax savings are available on a maximum of Rs 1.5 lakh per year.

In a nutshell, for wealth enhancement and savings for tax exemptions, ELSS could be a preferred choice.

What is Systematic Transfer Plan (STP)?

BENEFITS OF STP

1. Consistent return – Money invested in debt fund earns interest till the time it is transferred to equity fund. The returns in debt fund are higher than returns from savings bank account and assure relatively better performance

2. Averaging of cost – STP has some integral features of systematic investment plan (SIP). Similar to SIP every month an amount is invested in an equity fund. One of the differences between STP and SIP is the source of investment. In case of the STP, money is being transferred from a debt fund and in case of SIP, from investor’s bank account. Since it is similar to SIP, STP helps in averaging out the cost of investors by purchasing fewer units at a higher NAV and more at a lower price

3. Rebalancing portfolio – An investor’s portfolio should be balanced between equity and debt. STP helps in rebalancing the portfolio by reallocating investments from debt to equity or vice versa. If investment in debt increases money can be reallocated to equity funds through systematic transfer plan and if investment in equity goes up money can be switched from equity to debt fund

How does STP work?

Say if a person wants to invest 60,000 amount in an equity fund through STP, he will have to first select a debt fund which allows STP to invest in that particular equity fund. After selecting the debt fund invest all the money that is 60,000 in the debt fund. Now you have to decide an amount which will be transferred from debt fund to equity fund and the frequency (i.e he may choose 10,000 amount to be transferred in 6 installments on a monthly basis).

Every month on the fixed date amount 10,000 will be transferred from the debt fund to the desired equity fund.

What are types of STP’S?

Fixed STP – In this type of Systematic Transfer Plan the transferable amount will be fixed and predetermined by the investor at the time of investment

Capital Appreciation – The capital appreciated gets transferred to the target fund and the capital part remains safe

Flexi STP – Under Flexi STP investor have a choice to transfer variable amount. The fixed amount will be the minimum amount and the variable amount depends upon the volatility in the market. If the NAV of the target fund falls investment can be increased to take benefit of falling prices and if the market moves up the minimum amount of transfer is invested to take advantage of increasing prices. Transfer facility is available on a daily, weekly monthly and quarterly interval

What is Systematic Withdrawal Plan (SWP)?

A Systematic Withdrawal Plan (SWP) is a facility that allows an investor to withdraw money from an existing mutual fund at predetermined intervals. Systematic withdrawal plans are used by investors to create a regular flow of income from their investments. Investors looking for income at periodical intervals usually invest in these funds. Often, a Systematic Withdrawal Plan is used to fund expenses during retirement.

Systematic Withdrawal Plans is of advantage to investors who require liquidity as it allows account holders to access their money exactly when they need it. This makes it easier for the account holders to carry out their financial plans and meet their goals.

How does SWP work?

When you want to sell mutual fund you usually have two options either sell all at once or opt for a Systematic Withdrawal Plan. Systematic Withdrawal Plan, allows you to withdraw a fixed sum of money every month or quarter depending on the option chosen and instructions given by you.

As per your instructions the Mutual fund will redeem an equivalent amount of mutual funds from your account as per the prevailing Net Asset Value (NAV). This process helps investor to get a fixed amount of money every month or quarter.

Let’s understand this process with the help of an example:-

Let’s say you have 5,000 units in a Mutual Fund scheme. You have given instructions to the fund house that you want to withdraw 8,000 every month through SWP. Now let’s assume that on 1 December, the Net Asset Value (NAV) of the scheme is 20.

Equivalent number of MF units = 8,000 / 20 = 400
400 units would be redeemed from your MF holdings, and 8,000 would be given to you.
Your remaining units = 5,000 – 400 = 4600
Now say, on 1 January, the NAV is Rs. 21.
Equivalent number of units = 8,000 / 21 = 380
380 units would be redeemed from your MF holdings, and 8,000 would be given to you.
Your remaining units = 4600 – 380 = 4220

In this way, units from your mutual fund holdings are redeemed in a systematic way to provide you with continuous income.

What are types of SWP’S?

Under SWP, withdrawals can be fixed or variable amounts at regular intervals. These withdrawals can be made on a monthly, quarterly, semi-annual or annual schedule. The holder of the plan may choose withdrawal intervals based on his or her commitments and needs.

SWP is usually available in two options:

Fixed Withdrawal: Under this you specify amount you wish to withdraw from your investment on a monthly/quarterly basis

Appreciation Withdrawal: Under this you can withdraw your appreciated amount on a monthly/quarterly basis

When it comes to future of your child, you do not think twice. You will do whatever it takes. You can build it brick by brick and one step at a time without hurting your finances. Mutual Funds are a way to go.

Here are 5 steps to secure your child’s future with mutual funds

1. Set Goals

Know the purpose you wish to save for and invest the money accordingly. It could be an international school admission or a professional degree at a university. Set your sight on a figure that will ensure your child gets the education he or she wants.

2. Save First

Once you know your goals, set aside some money before you spend the rest. It is important to get into a good savings habit every month as this is the stepping stone to your child’s secured future.

3. Start with SIPs

A way to get into a discipline of investing is by using SIPs. Systematic investment plans or SIPs help you in ‘rupee cost averaging’. This means you buy more units when markets fall and lesser units when markets rise. You can start with as little as Rs 500 every month.

4. Use SIP Top Up

As your income grows, you could boost your allocation to SIPs by using the SIP top up. This increases the amount you set aside each month for your child’s future. A timely top up can make a significant difference to the final amount you receive when you need it.

5. Do not stop investing

You must continue with your monthly MF investing habit till you meet your goals. If you stop investing for some reason, figure out a way quickly to replenish the child education kitty. The more you stay away, the more you hurt your prospects of reaching your goals on time. It makes sense to allocate your SIPs into diversified equity funds. You money grows along with your child. To reap the benefit, you need to give your money that much time

Nomination facility is offered for the transfer of mutual fund units in case of the unfortunate demise of the unit holder
What is nomination for mutual fund investors?
Nomination is the process of appointing a person to take care of the assets in the event of the investor’s demise. A nominee can be any person — spouse, child, another family member, friend or any other person you trust. Nomination facility is mandatory for new folios/accounts opened by individuals with single holdings. In case of joint holdings where there are more than one holders, it is not mandatory to have a nominee, but financial planners recommend that new folios should always have a nominee.

What if an investor does not wish to appoint a nominee?
If the investor does not wish to nominate, he must sign and indicate the same by signing on the requisite space.

How does a mutual fund investor make a nomination?
When you invest in a mutual fund, there is a column where you can fill the details of the nominee. Individuals holding accounts either singly or jointly can make nomination. But non-individuals including society, trust, body corporate, karta of Hindu undivided family (HUF), holder of power of attorney cannot nominate . Nomination for joint holders is permitted, but in the event of the death of any of the holders, the benefits will be transmitted to the surviving holder’s name. Only in the case of death of all holders will the benefits be transmitted to the nominee.

How many nominees can an investor appoint?
An investor has an option to register up to three nominees in a mutual fund folio. The investor can also specify the percentage of amount that will go to each nominee in case of his death. If the percentage is not specified, each nominee will be eligible for an equal share.

What are the benefits of appointing a nominee for your MF investments?
When a nomination is registered, it facilitates easy transfer of funds to the nominee(s) in the event of demise of the investor. However, in the absence of nominee, the heirs/claimant will have to produce a number of documents like a will, legal heir certificate, no-objection certificate from other legal heirs etc to get the units transferred in his/her name.

Is it possible to change a nominee once an investment is made?
Yes, the nominee can be changed/added/subtracted any time as per the investors wish.

Liquid funds belong to the debt category of mutual funds. They invest in very short-term market instruments like treasury bills, government securities and call money. They are getting popular with retail investors as they offer much higher returns than a savings bank account and because you can cash out in a day

1. When should you invest in liquid funds?
Liquid funds are used by investors to park their money for short periods of time typically 1 day to 3 months. For example, if you are saving money for a vacation to be undertaken three months from now, you could park it in a liquid fund. Many equity investors also use liquid funds to stagger their investments into equity mutual funds using the systematic transfer plan (STP), as they believe this method could yield higher returns and help them beat volatility over a period of time.

2. How fast can such funds be redeemed? What return can an investor expect?
Once an investor gives the redemption request before the cut-off time on a business day, the money reaches their bank account the next working day. There is no entry or exit load by fund houses in liquid funds. As per data, the category of liquid funds has given a return of 6.84% over the past year. This is higher than the 3.5-6% offered by banks on their savings account.

3. What is the risk of investing in liquid funds?
Financial planners consider liquid funds to carry lowest risk as well as least volatility in the category of mutual funds. This is because they generally invest in instruments with high credit rating (P1+). The net asset value of these funds sees a change to the extent of interest income accrued, including on weekends.

4. How are liquid funds taxed?
Liquid funds held for more than three years are eligible for long-term capital gains tax with indexation. If you sell before three years, you have to pay tax as per your tax slab. If you opt for the dividend option, the fund will be subject to a dividend-distribution tax of 28.84%.

Welcome to world of investment.