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Session 13: Technicalities you should know about Mutual Funds

We are glad to have you with us for our Thirteenth Session – Technicalities you should know about Mutual Funds

Alright so now let's get started...

In our previous session we told you about an important topic that helped you know more about the mutual fund offer document and KIM, which you need to go through to understand various elements of your mutual fund. But there are many technicalities which you should know while investing your money in mutual funds. Understanding these small but essential points may ease your entire process of investing in mutual funds.

So let us start with...

Process of Investing in a Mutual Fund

Though investing in a mutual fund is a simple task, many investors find it cumbersome due to the lack of knowledge about process and documentation involved. So how should one go about investing in mutual funds?

  • Refer Key Information Memorandum (KIM) to know your fund details (...As we had mentioned in our previous session, you should go through the details of the mutual fund scheme before making your investment decision. Referring to KIM of the mutual fund scheme may help you know various features of the scheme and help you invest with confidence.)

  • Fill a Mutual Fund Application form (...Once you have made your decision to invest, you need to get the right application form and fill it completely by mentioning all the necessary details carefully, so that in future you do not find the need to rectify the error and avoid rejection of the application.)

  • Get your KYC done and attach a Copy of Your KYC and PAN Card (...Copy of the KYC and PAN card are important documents required when investing in mutual funds. If you do not have a KYC, you should get it done immediately. Your application may not be accepted without proper KYC. You should fill the correct details in the right KYC form and attach the copies of the requisite documents like proof of identity, proof of address, PAN card and Photograph. Once you submit the KYC form to the relevant point of acceptance, along with the original documents for over-the-counter verification, you will get the KYC acknowledgement followed by a copy of your KYC. As KYC is a onetime process, you can attach the copy of your KYC with application forms for your future investment in mutual funds.)

  • You can approach a Mutual Fund Distributor or Invest through your Broker using your Demat A/c (...You see, if you the lack time to carry out the process of a mutual fund transaction on your own, you can approach an AMFI Registered mutual fund distributor who can help you complete the process of investment. In case you have a Demat A/c, you can approach your existing stock broker for buying units of mutual funds in your Demat A/c. All you need to do is register with your existing stock broker by filling up the requisite forms. Do not forget that the distributor or broker may charge you a fee to carry out the transactions in mutual funds.)

  • You can even Invest through Online Mode (...If you are tech savvy, then you can choose to invest through the online mode. You can register and buy mutual funds through distributors, broking companies and fund houses offering online services. All you need is a one-time registration through the respective websites of the companies. With online mode, you can easily access and keep track of all your mutual funds.)

  • Submit Application Form to official Point of Acceptance (POA) (...Your process of investment in a mutual fund will be complete once your application form is submitted to the official point of acceptance. While many mutual funds appoint Registrar and Transfer Agents (RTAs) to collect and process mutual fund application forms, some fund houses carry this activity in house. If you are investing directly without taking the help of a distributor, then you need to make a note of the official point of acceptance for the respective mutual funds while submitting your investment form.)

  • Collect Acknowledgement Slip (...Once you submit your application form, the acknowledgement slip will be time stamped and handed over to you. The stamp on the acknowledgment slip reflects the time when you submitted your application form.)

Though filling a mutual fund application form is simple, first time investors may often find it cumbersome. So, here's the ...

Care You Should Take While Filling a Mutual Fund Application Form

  • Check Transaction Charges (...When taking the service of an AMFI registered mutual fund distributor, you may need to write a separate cheque to pay him a fee based on the quality of service and advice rendered to you. For carrying out an investment transaction, there might be a transaction charge in case your investment amount is Rs. 10,000 or more and your distributor has opted in to receive transaction charges. These charges may be deductible from your investment amount and payable to the distributor, while the units will be issued only against the balance amount invested. You need to take care of this point while filling your application form.)

  • Fill correct personal details (...Your personal details like your Name and PAN Number along with details of all the joint holders should be filled in correctly. You also need to mention your Status as an individual or HUF etc. as applicable to you, and mention the correct permanent address along with mailing address for all future communication.)

  • If investing in the name of Minor (...In case you are investing in the name of your child, who is a minor, then you would be investing as a guardian. For investment in the name of a minor you need to mention date of birth of the minor and attach the child's birth certificate, your relationship with the minor, though not compulsory you can even attach the copy of the PAN card of the minor if available, fill the correct bank details of the minor or self where you need the dividend proceeds, if the minor does not have a bank account then you need to provide a third party declaration.)

  • Mode of Holding (...You see, you need to correctly opt for the mode of holding of the investments, as this will decide who all are required to sign for all future transactions in the scheme. You need to decide and mention whether you wish to invest as a single holder or joint holder, or you want to opt in for Either or Survivor i.e. either of the unit holders can sign for future transactions.)

  • Mention the Correct Scheme Name and Plan (....Any discrepancy in the scheme name may lead to confusion and even rejection of the application form. Also mention whether you want to invest in the schemes 'Direct Plan' or 'Regular Plan.' Please note that 'Direct Plans' are more cost effective than 'Regular Plans'.)

  • Choose the Right Options (...Once you have mentioned the scheme name, you need to choose the right scheme option such as Growth, Dividend Payout or Dividend Reinvestment based on your investment objective. If you are looking for long term growth, then you should choose Growth option; while Dividend payout option may help you with intermediate cash flows. However, please consider taxation implication also while deciding on the options. )

  • (You should...) Mention Correct Bank Account Details (...Ideally the bank account where you need your dividends and redemption proceeds to be credited. Mutual funds also offer you an option to provide details of multiple bank accounts, but you should clearly state the preferred bank account for proceeds from future transactions.)

  • Details of ECS Mandate or Post Dated Cheques for SIPs (...If you have opted for SIP, you need to mention details of your bank account in the ECS mandate with proper dates for starting and ending SIP. In case you opt for SIP via post-dated cheques, then mention the details of the cheques with cheque numbers and dates in the SIP form. This will also help you maintain proper track of your SIPs.)

  • Mention Mode of Payment of Redemption and Dividend proceeds (...As a unit holder, you can receive redemption/ dividend proceeds directly into your mentioned bank account via Direct credit/ NEFT/ECS facility. However if you wish to receive the redemption / dividend proceeds (if any) by way of a cheque or demand draft instead of direct credit into your bank account, then you need to mention accordingly.)

  • Appoint a Nominee (...You should pro-actively nominate any person as a nominee for all your investments. This will help your family get your money in case of any unforeseen event.)

What You Get After Investing in Mutual Fund

  • Folio Number (...Once your application form is accepted and processed, an exclusive folio number will be created for your investment with the mutual fund, which you can use for all your future communications and transactions with the fund house. Under a single folio you can invest in multiple schemes from the same fund house. Every new fund house will create a new folio for you. You should avoid having multiple folios from the same fund house, as a single folio helps easily track all your investments with the fund house.)

  • Allotment of Units (...Mutual funds create and allot you units of the respective schemes against the money invested by you. The value of a single unit will be equivalent to the NAV of the scheme. The composite value of all the units will help you arrive at the valuation of your investment in the scheme.)

  • Statement of Account (...Post investment, mutual funds issue a statement of account for your investment in the scheme. The statement reflects your details provided in the application form, along with the number of units you hold, the current valuation of your investment and the transactions executed. As statement of accounts is even available in the online mode, you can easily get a copy of a duplicate or updated account statement directly in your mail box and get a hard copy on request.)

Things to Consider While Transacting in a Mutual Fund Scheme

Buying or Selling units of a mutual fund scheme are the most crucial transactions you do with a mutual fund... So what are the things you should consider while carrying these crucial transaction in a mutual fund scheme...

While Buying

  • Fresh Purchase or Additional Purchase in a Mutual Fund Scheme (...You can invest in mutual funds not only for fresh investment, but you can also choose to make additional investment in a scheme you already hold in your portfolio. While as a fresh investor you need to fill the long application form, you can just use a transaction slip (which may be attached in your account statement) for additional purchase in the scheme.)

  • Lump sum or SIP in a Mutual Fund scheme (...You can either invest all your money together as a lump sum investment in a scheme, or choose to gradually invest in a scheme via the SIP mode. So, you need to accordingly select the right form.)

  • You can pay through Cheque / DD / ECS (...Mutual funds provide you the convenience to pay as per your preference via cheque / DD or ECS. However mutual funds do not accept investment in cash above Rs 20,000 per investor, per mutual fund, per financial year.)

  • Submit Investment form to POA before Cut-off Time (...Your mutual fund application form should reach the official Point of Acceptance on time and your investment in the scheme should happen before the cut-off time. Barring liquid schemes all other categories of mutual funds have a cut-off time of 3:00 pm. Submitting after the cut-off time means your investment will be carried to the next business day and may result in delay of investment by a day.)

  • Collect Acknowledgement Slip (...On submission of the application form, the acknowledgement slip will be time stamped and handed over to you. It is a proof that you have submitted your application form.)

While Selling

In case you need money and decide to sell your investment in a mutual fund scheme, you need to consider these points...

  • Check Folio Number and Scheme Name (...You see, your folio number helps keep a track of your investment and is required to be mentioned for all your future transactions in the scheme. You need to correctly mention the folio number and the scheme name on the transaction slip. Any error in the folio number or scheme name may lead to rejection of your redemption form and cause unnecessary delay in getting your money.)

  • Mention the No. of Units or Amount you wish to Redeem (...You can either withdraw a fixed number of units or all units from the scheme or else choose to withdraw a particular amount from the scheme. So you can withdraw fully or partially based on your requirement.)

  • Signature of the Unit Holders should be as per the Mode of Holding (...Your redemption form may be rejected if there is no proper signature or mismatch in signature as per the mode of holding. In case you are a single holder, your signature will suffice; as a joint holder all the unit holders need to sign the redemption form; while the sales transaction in a folio with either or survivor option may be processed with the signature of any one of the unit holders.)

  • Check Bank Details for Payment of Sales Proceeds (...As you will get your sales proceeds via cheque or direct credit to your bank account, you should be clearly aware of where your money will be credited. In case there is any discrepancy in bank details, you should get it rectified before you submit your redemption request.)

  • Submit Redemption form to the POA before Cut off Time (...Once you are sure that all the details are proper, you should submit your redemption form to the official Point of Acceptance before the cut off time.)

  • Collect Acknowledgement Slip (...Your redemption form will be acknowledged with a time stamp on the acknowledgement slip, confirming the receipt of your redemption request.)

How to keep a Track of Your Mutual Fund Scheme

(Once you are invested in a mutual fund, you need to keep a proper track of your mutual fund scheme. So here's what you should look for in order to keep a proper track of your mutual fund scheme.)

  • Refer Monthly Fact sheets (...Mutual Fund houses publish a monthly report card called Fund Fact Sheets reflecting various facts about your mutual fund. Apart from the investment objective of the scheme, fact sheets can update you with the latest status of your mutual fund scheme like its performance comparison vis-à-vis its benchmark, updated portfolio details like top stock holdings and sector holdings, fund manager details, expenses and load factor etc. You can easily find a copy of these fact sheets on the website of the respective mutual funds. You can refer to these monthly fact sheets for your first hand analysis and make crucial notes of your mutual fund scheme.)

  • Track Fund Manager details (...Fact sheets reflect the name of the fund managers and the time spent managing the scheme. Some fund houses also mention the experience of the fund manager. This point in the fact sheet may help you know about the individual who is managing your money.)

  • Check Holdings in Schemes Investment Portfolio (...As fact sheets reflect the holdings in the schemes investment portfolio, you can make a note of where your money is invested. It may help you form a view on the investment strategy of the fund manager.)

  • Check Funds performance (...Your mutual fund schemes performance may reflect whether you are able to make money by staying invested in the scheme. You can compare your schemes performance vis-à-vis its benchmark and its comparable category peers. You should ideally ignore the short term performance and give more weightage to long term performance of the scheme as it reflects fund managers ability to deliver consistent performance in the long run.)

  • (You should also...) Refer Quantitative Indicators (...such as funds standard deviation, its Sharpe ratio, portfolio turnover ratio, expense ratio etc. The standard deviation and Sharpe ratio reflects the risk reward relationship of the scheme. Portfolio turnover reflects the level of churning in the portfolio, while the expense ratio reflects the cost associated with the scheme.

    If you are invested in a debt mutual fund scheme, then you should also refer to indicators like average maturity, modified duration and YTM of the portfolio. Credit quality of the portfolio may be an added indicator to judge your scheme.)

  • Consider Fund NAV for Your Portfolio Valuation (...As we mentioned earlier, NAV reflects the value of each unit of your mutual fund scheme. NAV can help you derive the composite value of all the units held by you and arrive at the valuation of your investment in the scheme. The change in NAV since the time you invested in the scheme may reflect the potential gain or loss you have on your investment in each unit of the scheme.)

  • Refer Exit Load Period (...You need to also consider the exit load in case you are planning to exit your investment from a mutual fund scheme, many equity schemes carry an exit load for holding period of upto 1 year. Exiting before the end of the exit period may be an added cost on your investment.)

  • Fund Expenses can be Crucial (...The expenses of your mutual fund is indirectly borne by you. Higher expenses may eat a portion of your returns. You should judge if your scheme is able to deliver against the level of expenses it is levying.)

So here are some key takeaway points from today's session...

Some Key Take Aways...

  • Key Information Memorandum (KIM) can help you know your scheme better

  • You need to get your KYC done (...Copy of the KYC is an important document required to invest in mutual funds.)

  • Mention correct Scheme Name, Plan and Options of the scheme you wish to Invest in (...Any discrepancy in the scheme name or plan may lead to confusion and even rejection of the application form.)

  • You should mention your Bank Account details correctly

  • (You should pro-actively) Nominate any person as a Nominee for all Your Investments.

  • An exclusive Folio Number will be created for your Investment with the Mutual Fund (...which you can use for all your future communications and transactions with the fund house.)

  • Post Investment, Mutual Funds allot Units and Issue a Statement of Account (...for your investment in the scheme)

  • (You need to...) Submit Investment or Redemption form to POA before Cut-off Time (...because submitting after the cut-off time means your transaction will be carried to the next business day.)

  • Monthly Fact Sheets published by Mutual Fund houses reflect the latest details about your Mutual Fund Scheme

  • (You should...) Compare Your Schemes Performance vis-à-vis its Benchmark Index and its Comparable Category Peers

  • NAV reflects the Value of each Unit of your Mutual Fund Scheme

  • (As fund houses levy exit load...) Exiting before the end of Exit Period may be an Added Cost on Your Investment

  • The Expenses Incurred by the Mutual Fund Schemes are Indirectly borne by the Investors

So to end our today's learning exercise we now invite you to test your learning by taking up this simple quiz (and win exciting prizes!)

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Disclaimer: The contents of this document are only for informative purposes and are not to be used or considered to be an offer to sell or buy units of Franklin Templeton Mutual Fund schemes. This video is for information purposes only, provided on an 'as is' basis. Nothing in it should be construed as personal financial advice. You are responsible for your own investment decisions and you should seek advice concerning suitability from your investment adviser regarding any of the investments mentioned. The video is for personal non-commercial use only and may not be copied, stored, redistributed or broadcast in any way. We recommend you read the complete Terms of Use.

Mutual Fund Investments Are Subject To Market Risks, Read All Scheme Related Documents Carefully.

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